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
SECURITIESEXCHANGE ACT OF 1934




For
the quarterly period ended June 30, 2009




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


For the
transition period from ________________ to _______________




000-27763


(Commission
file number)




SITESTAR
CORPORATION


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




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




7109
Timberlake Road, Lynchburg, VA  24502


(Address
of principal executive offices)




(434)
239-4272


(Issuer's
telephone number)


N/A


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




Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  Yes x No  ̈





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





Large
Accelerated Filer  ̈ Accelerated Filer
 ̈ Non-Accelerated
Filer (Do not check if a smaller reporting Company)  ̈ Smaller Report
Company x





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  xYes ̈No





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







SITESTAR
CORPORATION




EXPLANATORY
NOTE





This Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009 initially filed with the Securities and
Exchange Commission on August 14, 2009 is being filed to reflect
restatements of Sitestar Corporation‘s Consolidated Balance Sheets as of
June 30, 2009, and December 31, 2008 and the related Consolidated
Statements of Income and Cash Flows for the three and six months ended
March 31, 2009 and 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 June 30, 2009 (unaudited) and December
      31, 2008 (audited)
                                                      4-5Condensed
      Consolidated Statements of Income for the three months ended June 30, 2009
      and 2008 (unaudited)
                                                      6Condensed
      Consolidated Statements of Income for the six months ended June 30, 2009
      and 2008 (unaudited)
                                                      7Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2009 and 2008 (unaudited)
                                                      8-9Notes
      to unaudited Condensed Consolidated Financial Statements
                                                      10-30Item
      2.  Management's Discussion and Analysis
                                                      31-38Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                                                      38Item
      4.  Controls and Procedures
                                                      38-41Part
      II.  OTHER INFORMATION
                                                      42Item
      1.  Legal Proceedings
                                                      42Item
      1A. Risk Factors
                                                      42Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                                                      42Item
      3.  Defaults Upon Senior Securities
                                                      42Item
      4.  Submission of Matters to a Vote of Security
      Holders
                                                      42Item
      5.  Other Information
                                                      42Item
      6.  Exhibits
                                                      42-43SIGNATURES
                                                      43




3


PART
I. FINANCIAL INFORMATION




Item 1.     Financial
Statements





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


JUNE
30, 2009 AND DECEMBER 31, 2008




ASSETS


2009
                
                
                2008(Unaudited)
                
                
                (Audited)Restated
                
                
                RestatedCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                888,167
                
                
                $
                527,553Accounts
      receivable, net of allowance of $53,527 and $26,764
                
                
                938,502
                
                
                
                738,824Prepaid
      expenses
                
                
                1,297
                
                
                
                1,227Total
      current assets
                
                
                1,827,966
                
                
                
                1,267,604PROPERTY
      AND EQUIPMENT, net
                
                
                210,984
                
                
                
                225,212CUSTOMER
      LIST, net of accumulated amortization of $9,129,655 and
      $7,973,341
                
                
                3,105,498
                
                
                
                4,224,414GOODWILL,
      net of impairment
                
                
                1,288,559
                
                
                
                1,288,559DEFERRED
      INCOME TAXES
                
                
                811,161
                
                
                
                421,031OTHER
      ASSETS
                
                
                501,290
                
                
                
                583,637TOTAL
      ASSETS
                
                $
                7,745,458
                
                
                $
                8,010,457





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


4


SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS, continued


JUNE
30, 2009 AND DECEMBER 31, 2008




LIABILITIES
AND STOCKHOLDERS’ EQUITY




2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Audited)Restated
                  
                  
                  RestatedCURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  149,747
                  
                  
                  $
                  80,892Accrued
      income taxes
                  
                  
                  637,929
                  
                  
                  
                  339,016Accrued
      expenses
                  
                  
                  87,500
                  
                  
                  
                  94,882Deferred
      revenue
                  
                  
                  1,173,076
                  
                  
                  
                  1,157,597Notes
      payable
                  
                  
                  417,114
                  
                  
                  
                  569,372Total
      current liabilities
                  
                  
                  2,465,366
                  
                  
                  
                  2,241,759NOTES
      PAYABLE, less current portion
                  
                  
                  750,615
                  
                  
                  
                  915,615NOTES
      PAYABLE - STOCKHOLDERS, less current portion
                  
                  
                  484,296
                  
                  
                  
                  539,281TOTAL
      LIABILITIES
                  
                  
                  3,700,277
                  
                  
                  
                  3,696,655STOCKHOLDERS'
      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 June 30, 2009 December 31,
      2008 respectively
                  
                  
                  91,326
                  
                  
                  
                  91,326Additional
      paid-in capital
                  
                  
                  13,880,947
                  
                  
                  
                  13,880,947Treasury
      stock, at cost, 13,507,963 and 8,237,805 common shares on June
      30,  2009 and December 31, 2008
                  
                  
                  (657,876
                  )
                  
                  
                  (64,220
                  )Accumulated
      deficit
                  
                  
                  (9,269,216
                  )
                  
                  
                  (9,594,251
                  )Total
      stockholders’ equity
                  
                  
                  4,045,181
                  
                  
                  
                  4,313,802TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  7,745,458
                  
                  
                  $
                  8,010,457




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 JUNE 30, 2009 AND 2008


(UNAUDITED)




2009
                
                
                2008Restated
                
                
                RestatedREVENUE
                
                $
                2,291,192
                
                
                $
                2,614,699COST
      OF REVENUE
                
                
                846,685
                
                
                
                562,583GROSS
      PROFIT
                
                
                1,444,507
                
                
                
                2,052,116OPERATING
      EXPENSES:Selling
      general and administrative expenses
                
                
                1,363,384
                
                
                
                1,618,940INCOME
      FROM OPERATIONS
                
                
                81,123
                
                
                
                433,176OTHER
      INCOME (EXPENSES)
                
                
                (29,288
                )
                
                
                (36,297
                )INCOME
      BEFORE INCOME TAXES
                
                
                51,835
                
                
                
                396,879INCOME
      TAXES (EXPENSE) BENEFIT
                
                
                (27,688
                )
                
                
                73,477NET
      INCOME
                
                $
                24,147
                
                
                $
                470,356BASIC
      AND DILUTED EARNINGS PER SHARE
                
                $
                0.00
                
                
                $
                0.00WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
                
                
                91,326,463
                
                
                
                91,326,463





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


6


SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(UNAUDITED)




2009
                  
                  
                  2008Restated
                  
                  
                  RestatedREVENUE
                  
                  $
                  4,832,611
                  
                  
                  $
                  5,159,244COST
      OF REVENUE
                  
                  
                  1,672,721
                  
                  
                  
                  1,387,801GROSS
      PROFIT
                  
                  
                  3,159,890
                  
                  
                  
                  3,771,443OPERATING
      EXPENSES:Selling
      general and administrative expenses
                  
                  
                  2,875,491
                  
                  
                  
                  2,984,032INCOME
      FROM OPERATIONS
                  
                  
                  284,399
                  
                  
                  
                  787,411OTHER
      INCOME (EXPENSES)
                  
                  
                  (50,581
                  )
                  
                  
                  (86,532
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  233,818
                  
                  
                  
                  700,879INCOME
      TAXES (EXPENSE) BENEFIT
                  
                  
                  91,218
                  
                  
                  
                  (11,277
                  )NET
      INCOME
                  
                  $
                  325,036
                  
                  
                  $
                  689,602BASIC
      AND DILUTED EARNINGS PER SHARE
                  
                  $
                  0.00
                  
                  
                  $
                  0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
                  
                  
                  91,326,463
                  
                  
                  
                  91,326,463





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


7


SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(UNAUDITED)


2009
                
                
                2008Restated
                
                
                RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                325,036
                
                
                $
                689,602Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
                
                
                1,287,293
                
                
                
                1,486,286Bad
      debt expense
                
                
                4,119
                
                
                
                38,914(Increase)
      decrease in:Accounts
      receivable
                
                
                (203,799
                )
                
                
                (419,398
                )Prepaid
      expenses
                
                
                (71
                )
                
                
                (27,376
                )Deferred
      tax asset
                
                
                (390,130
                )
                
                
                (158,231
                )Increase
      (decrease) in:Accounts
      payable
                
                
                68,856
                
                
                
                (43,686
                )Accrued
      expenses
                
                
                (7,382
                )
                
                
                (17,474
                )Deferred
      revenue
                
                
                15,481
                
                
                
                4,207Accrued
      income taxes
                
                
                298,912
                
                
                
                169,508Net
      cash provided by operating activities
                
                
                1,398,315
                
                
                
                1,722,352CASH
      FLOWS FROM INVESTING ACTIVITIES:Other
      assets held for resale
                
                
                (403
                )
                
                
                500Purchase
      of property and equipment
                
                
                (3,000
                )
                
                
                (12,000
                )Purchase
      of non-compete
                
                
                (1,000
                )
                
                
                (70,000
                )Purchase
      of customer list
                
                
                (67,398
                )
                
                
                (648,875
                )Net
      cash (used in) investing activities
                
                
                (71,801
                )
                
                
                (730,375
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from notes payable
                
                
                -
                
                
                
                350,855Repayment
      of notes payable – stockholders
                
                
                (54,984
                )
                
                
                (87,010
                )Purchase
      treasury stock
                
                
                (593,657
                )Repayment
      of notes payable
                
                
                (317,259
                )
                
                
                (1,140,680
                )Net
      cash (used in) financing activities
                
                
                (965,900
                )
                
                
                (876,835
                )NET
      INCREASE (DECREASE) IN CASH AND
CASH  EQUIVALENTS
                
                
                360,614
                
                
                
                115,142CASH
      AND CASH EQUIVALENTS –BEGINNING OF  PERIOD
                
                
                527,553
                
                
                
                232,249CASH
      AND CASH EQUIVALENTS -END OF  PERIOD
                
                $
                888,167
                
                
                $
                347,391


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


8


SITESTAR CORPORATION AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (continued)


(UNAUDITED)




SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:




During
the six months ended June 30, 2009 and 2008, the Company accrued income taxes
(benefit) expense of $(91,218) and $11,277 and paid interest expense of
approximately $48,000 and $111,000, respectively.




NON-CASH
INVESTING AND FINANCING TRANSACTIONS:




During
the six months ended June 30, 2009, the Company issued no shares of common
stock.


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 June
30, 2009 and December 31, 2008, results of operations and cash flows for the
three and six months ended June 30, 2009 and 2008 are summarized
below.





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


JUNE 30,
2009 AND DECEMBER 31, 2008





ASSETS





Previously
                    
                    
                    Net
                    
                    
                    
                    
                    
                    Previously
                    
                    
                    NetReported
                    
                    
                    Change
                    
                    
                    Restated
                    
                    
                    Reported
                    
                    
                    Change
                    
                    
                    Restated2009
                    
                    
                    2009
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2008
                    
                    
                    2008Total
      current assets
                    
                    $
                    1,827,966
                    
                    
                    $
                    -
                    
                    
                    $
                    1,827,966
                    
                    
                    $
                    1,267,604
                    
                    
                    $
                    -
                    
                    
                    $
                    1,267,604PROPERTY
      AND EQUIPMENT, net
                    
                    
                    210,984
                    
                    
                    
                    -
                    
                    
                    
                    210,984
                    
                    
                    
                    225,212
                    
                    
                    
                    -
                    
                    
                    
                    225,212CUSTOMER
      LIST, net of accumulated amortization of $8,146,728 and
      $7,973,341
                    
                    
                    3,105,498
                    
                    
                    
                    -
                    
                    
                    
                    3,105,498
                    
                    
                    
                    4,224,414
                    
                    
                    
                    -
                    
                    
                    
                    4,224,414GOODWILL,
      net of impairment
                    
                    
                    1,288,559
                    
                    
                    
                    -
                    
                    
                    
                    1,288,559
                    
                    
                    
                    1,288,559
                    
                    
                    
                    -
                    
                    
                    
                    1,288,559DEFERRED
      INCOME TAXES
                    
                    
                    811,161
                    
                    
                    
                    -
                    
                    
                    
                    811,161
                    
                    
                    
                    421,031
                    
                    
                    
                    -
                    
                    
                    
                    421,031OTHER
      ASSETS
                    
                    
                    501,290
                    
                    
                    
                    -
                    
                    
                    
                    501,290
                    
                    
                    
                    583,637
                    
                    
                    
                    -
                    
                    
                    
                    583,637TOTAL
      ASSETS
                    
                    $
                    7,745,458
                    
                    
                    
                    -
                    
                    
                    $
                    7,745,458
                    
                    
                    $
                    8,010,457
                    
                    
                    $
                    -
                    
                    
                    $
                    8,010,457




10


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS, continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


JUNE 30,
2009 AND DECEMBER 31, 2008





LIABILITIES
AND STOCKHOLDERS' EQUITY





Previously
                    
                    
                    Net
                    
                    
                    
                    
                    
                    Previously
                    
                    
                    NetReported
                    
                    
                    Change
                    
                    
                    Restated
                    
                    
                    Reported
                    
                    
                    Change
                    
                    
                    Restated2009
                    
                    
                    2009
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2008
                    
                    
                    2008CURRENT
      LIABILITIESAccrued
      income taxes
                    
                    $
                    555,505
                    
                    
                    $
                    82,424
                    
                    
                    $
                    637,929
                    
                    
                    $
                    754,777
                    
                    
                    $
                    (415,761
                    )
                    
                    $
                    339,016Total
      current liabilities
                    
                    
                    2,382,942
                    
                    
                    
                    82,424
                    
                    
                    
                    2,465,366
                    
                    
                    
                    2,657,520
                    
                    
                    
                    (415,761
                    )
                    
                    
                    2,241,759TOTAL
      LIABILITIES
                    
                    
                    3,617,853
                    
                    
                    
                    82,424
                    
                    
                    
                    3,700,277
                    
                    
                    
                    4,112,416
                    
                    
                    
                    (415,761
                    )
                    
                    
                    3,696,655STOCKHOLDERS’
      EQUITYAccumulated
      deficit
                    
                    
                    (9,186,792
                    )
                    
                    
                    (82,424
                    )
                    
                    
                    (9,269,216
                    )
                    
                    
                    (10,010,012
                    )
                    
                    
                    415,761
                    
                    
                    
                    (9,594,251
                    )Total
      stockholders' equity
                    
                    
                    4,127,605
                    
                    
                    
                    (82,424
                    )
                    
                    
                    4,045,181
                    
                    
                    
                    3,898,041
                    
                    
                    
                    415,761
                    
                    
                    
                    4,313,802TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                    
                    $
                    7,745,458
                    
                    
                    $
                    -
                    
                    
                    $
                    7,745,458
                    
                    
                    $
                    8.010,457
                    
                    
                    $
                    -
                    
                    
                    $
                    8,010,457




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 JUNE 30, 2009 AND 2008





Previously
                  
                  
                  Net
                  
                  
                  
                  
                  
                  Previously
                  
                  
                  NetReported
                  
                  
                  Change
                  
                  
                  Restated
                  
                  
                  Reported
                  
                  
                  Change
                  
                  
                  Restated2009
                  
                  
                  2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008REVENUE
                  
                  $
                  2,291,192
                  
                  
                  $
                  -
                  
                  
                  $
                  2,291,192
                  
                  
                  $
                  2,614,699
                  
                  
                  $
                  -
                  
                  
                  $
                  2,614,699COST
      OF REVIENUE
                  
                  
                  846,685
                  
                  
                  
                  -
                  
                  
                  
                  846,685
                  
                  
                  
                  562,583
                  
                  
                  
                  -
                  
                  
                  
                  562,583GROSS
      PROFIT
                  
                  
                  1,444,507
                  
                  
                  
                  -
                  
                  
                  
                  1,444,507
                  
                  
                  
                  2,052,116
                  
                  
                  
                  -
                  
                  
                  
                  2,052,116OPERATING
      EXPENSES
                  
                  
                  1,363,384
                  
                  
                  
                  -
                  
                  
                  
                  1,363,384
                  
                  
                  
                  1,618,940
                  
                  
                  
                  -
                  
                  
                  
                  1,618,940INCOME
      FROM OPERATIONS
                  
                  
                  81,123
                  
                  
                  
                  -
                  
                  
                  
                  81,123
                  
                  
                  
                  433,176
                  
                  
                  
                  -
                  
                  
                  
                  433,176OTHER
      INCOME (EXPENSE)
                  
                  
                  (29,288
                  )
                  
                  
                  -
                  
                  
                  
                  (29,288
                  )
                  
                  
                  (36,297
                  )
                  
                  
                  -
                  
                  
                  
                  (36,297
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  51,835
                  
                  
                  
                  -
                  
                  
                  
                  51,835
                  
                  
                  
                  396,879
                  
                  
                  
                  -
                  
                  
                  
                  396,879INCOME
      TAX (EXPENSE) BENEFIT
                  
                  
                  562,992
                  
                  
                  
                  (590,680
                  )
                  
                  
                  (27,688
                  )
                  
                  
                  -
                  
                  
                  
                  73,477
                  
                  
                  
                  73,477NET
      INCOME
                  
                  $
                  614,827
                  
                  
                  
                  (590,680
                  )
                  
                  
                  24,147
                  
                  
                  
                  396,879
                  
                  
                  
                  73,477
                  
                  
                  
                  470,356BASIC
      AND DILUTED EARNINGS PER SHARE
                  
                  $
                  0.00
                  
                  
                  
                  -
                  
                  
                  
                  0.00
                  
                  
                  
                  0.00
                  
                  
                  
                  0.00
                  
                  
                  
                  0.00WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
                  
                  
                  91,326,463
                  
                  
                  
                  -
                  
                  
                  
                  91,326,463
                  
                  
                  
                  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
SIX MONTHS ENDED JUNE 30, 2009 AND 2008





Previously
                  
                  
                  Net
                  
                  
                  
                  
                  
                  Previously
                  
                  
                  NetReported
                  
                  
                  Change
                  
                  
                  Restated
                  
                  
                  Reported
                  
                  
                  Change
                  
                  
                  Restated2009
                  
                  
                  2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008REVENUE
                  
                  $
                  4,832,611
                  
                  
                  $
                  -
                  
                  
                  $
                  4,832,611
                  
                  
                  $
                  5,159,244
                  
                  
                  $
                  -
                  
                  
                  $
                  5,159,244COST
      OF REVIENUE
                  
                  
                  1,672,721
                  
                  
                  
                  -
                  
                  
                  
                  1,672,721
                  
                  
                  
                  1,387,801
                  
                  
                  
                  -
                  
                  
                  
                  1,387,801GROSS
      PROFIT
                  
                  
                  3,159,890
                  
                  
                  
                  -
                  
                  
                  
                  3,159,890
                  
                  
                  
                  3,771,443
                  
                  
                  
                  -
                  
                  
                  
                  3,771,443OPERATING
      EXPENSES
                  
                  
                  2,875,491
                  
                  
                  
                  -
                  
                  
                  
                  2,875,491
                  
                  
                  
                  2,984,032
                  
                  
                  
                  -
                  
                  
                  
                  2,984,032INCOME
      FROM OPERATIONS
                  
                  
                  284,399
                  
                  
                  
                  -
                  
                  
                  
                  284,399
                  
                  
                  
                  787,411
                  
                  
                  
                  -
                  
                  
                  
                  787,411OTHER
      INCOME (EXPENSE)
                  
                  
                  (50,581
                  )
                  
                  
                  -
                  
                  
                  
                  (50,581
                  )
                  
                  
                  (86,532
                  )
                  
                  
                  -
                  
                  
                  
                  (86,532
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  233,818
                  
                  
                  
                  -
                  
                  
                  
                  233,818
                  
                  
                  
                  700,879
                  
                  
                  
                  -
                  
                  
                  
                  700,879INCOME
      TAX (EXPENSE) BENEFIT
                  
                  
                  589,402
                  
                  
                  
                  (498,184
                  )
                  
                  
                  91,218
                  
                  
                  
                  -
                  
                  
                  
                  (11,277
                  )
                  
                  
                  (11,277
                  )NET
      INCOME
                  
                  $
                  823,220
                  
                  
                  
                  (498,184
                  )
                  
                  
                  325,036
                  
                  
                  
                  700,879
                  
                  
                  
                  (11,277
                  )
                  
                  
                  689,602BASIC
      AND DILUTED EARNINGS PER SHARE
                  
                  $
                  0.01
                  
                  
                  
                  (0.01
                  )
                  
                  
                  0.00
                  
                  
                  
                  0.01
                  
                  
                  
                  -
                  
                  
                  
                  0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
                  
                  
                  91,326,463
                  
                  
                  
                  -
                  
                  
                  
                  91,326,463
                  
                  
                  
                  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
SIX MONTHS ENDED JUNE 30, 2009 AND 2008





Previously
                  
                  
                  Net
                  
                  
                  
                  
                  
                  Previously
                  
                  
                  NetReported
                  
                  
                  Change
                  
                  
                  Restated
                  
                  
                  Reported
                  
                  
                  Change
                  
                  
                  Restated2009
                  
                  
                  2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  823,220
                  
                  
                  $
                  (498,184
                  )
                  
                  $
                  325,036
                  
                  
                  
                  700,879
                  
                  
                  $
                  (11,277
                  )
                  
                  $
                  689,602(Increase)
      in deferred tax asset
                  
                  
                  (199,272
                  )
                  
                  
                  (190,858
                  )
                  
                  
                  (390,130
                  )
                  
                  
                  -
                  
                  
                  
                  (158,231
                  )
                  
                  
                  (158,231
                  )Increase
      in accrued income taxes
                  
                  
                  (390,130
                  )
                  
                  
                  689,042
                  
                  
                  
                  298,912
                  
                  
                  
                  -
                  
                  
                  
                  169,508
                  
                  
                  
                  169,508Net
      cash provided by operating activities
                  
                  
                  1,398,315
                  
                  
                  
                  -
                  
                  
                  
                  1,398,315
                  
                  
                  
                  1,722,352
                  
                  
                  
                  -
                  
                  
                  
                  1,722,352Net
      cash (used in) investing activities
                  
                  
                  (71,801
                  )
                  
                  
                  -
                  
                  
                  
                  (71,801
                  )
                  
                  
                  (730,375
                  )
                  
                  
                  -
                  
                  
                  
                  (730,375
                  )Net
      cash (used in) financing activities
                  
                  
                  (965,900
                  )
                  
                  
                  -
                  
                  
                  
                  (965,900
                  )
                  
                  
                  (876,835
                  )
                  
                  
                  -
                  
                  
                  
                  (876,835
                  )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                  
                  
                  360,614
                  
                  
                  
                  -
                  
                  
                  
                  360,614
                  
                  
                  
                  115,142
                  
                  
                  
                  -
                  
                  
                  
                  115,142CASH
      AND CASH EQUIVALENTS – BEGINNING OF PERIOD
                  
                  
                  527,553
                  
                  
                  
                  -
                  
                  
                  
                  527,553
                  
                  
                  
                  232,249
                  
                  
                  
                  -
                  
                  
                  
                  232,249CASH
      AND CASH EQUIVALENTS – END OF PERIOD
                  
                  $
                  888,167
                  
                  
                  $
                  -
                  
                  
                  $
                  888,167
                  
                  
                  $
                  347,391
                  
                  
                  $
                  -
                  
                  
                  $
                  347,391




14


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





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 Generally Accepted Accounting
Principles (GAAP) have been omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended December 31,
2008 included in the Company’s Annual Report on Form 10-K.  The results for
the six months ended June 30, 2009 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2009.





NOTE
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
six months ended June 30, 2009 and June 30, 2008:


2009
                
                
                2008Net
      income available to common shareholders
                
                $
                325,036
                
                
                $
                689,602Weighted
      average number of common shares
                
                
                91,326,463
                
                
                
                91,326,463Basic
      and diluted income per share
                
                $
                0.00
                
                
                $
                0.01




15


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
4 – COMMON STOCK





During
the six months ended June 30, 2009, the Company issued no shares of common
stock.




NOTE
5 – SEGMENT INFORMATION





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





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





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




Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the three months ended June 30, 2009 and
2008:





June 30, 2009Corporate
                  
                  
                  Internet
                  
                  
                  ConsolidatedRestated
                  
                  
                  Restated
                  
                  
                  RestatedRevenue
                  
                  $
                  -
                  
                  
                  $
                  2,291,192
                  
                  
                  $
                  2,291,192Operating
      Income (loss)
                  
                  $
                  (52,500
                  )
                  
                  $
                  133,623
                  
                  
                  $
                  81,123Depreciation
      and amortization
                  
                  $
                  -
                  
                  
                  $
                  624,409
                  
                  
                  $
                  624,409Interest
      expense
                  
                  $
                  -
                  
                  
                  $
                  26,567
                  
                  
                  $
                  26,567Intangible
      assets
                  
                  $
                  -
                  
                  
                  $
                  4,624,501
                  
                  
                  $
                  4,624,501Total
      assets
                  
                  $
                  -
                  
                  
                  $
                  7,745,458
                  
                  
                  $
                  7,745,458




16


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED




NOTE 5 –
SEGMENT INFORMATION, continued




June 30, 2008Corporate
                  
                  
                  Internet
                  
                  
                  ConsolidatedRestated
                  
                  
                  Restated
                  
                  
                  RestatedRevenue
                  
                  $
                  -
                  
                  
                  $
                  2,614,699
                  
                  
                  $
                  2,614,699Operating
      Income (loss)
                  
                  $
                  (26,239
                  )
                  
                  $
                  459,415
                  
                  
                  $
                  433,176Depreciation
      and amortization
                  
                  $
                  -
                  
                  
                  $
                  763,876
                  
                  
                  $
                  763,876Interest
      expense
                  
                  $
                  -
                  
                  
                  $
                  38,832
                  
                  
                  $
                  38,832Intangible
      assets
                  
                  $
                  -
                  
                  
                  $
                  6,427,429
                  
                  
                  $
                  6,427,429Total
      assets
                  
                  $
                  -
                  
                  
                  $
                  8,157,205
                  
                  
                  $
                  8,157,205





Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the six months ended June 30, 2009 and
2008:




June 30, 2009Corporate
                  
                  
                  Internet
                  
                  
                  ConsolidatedRestated
                  
                  
                  Restated
                  
                  
                  RestatedRevenue
                  
                  $
                  -
                  
                  
                  $
                  4,832,611
                  
                  
                  $
                  4,832,611Operating
      Income (loss)
                  
                  $
                  (79,615
                  )
                  
                  $
                  364,014
                  
                  
                  $
                  284,399Depreciation
      and amortization
                  
                  $
                  -
                  
                  
                  $
                  1,287,293
                  
                  
                  $
                  1,287,293Interest
      expense
                  
                  $
                  -
                  
                  
                  $
                  48,451
                  
                  
                  $
                  48,451Intangible
      assets
                  
                  $
                  -
                  
                  
                  $
                  4,624,501
                  
                  
                  $
                  4,624,501Total
      assets
                  
                  $
                  -
                  
                  
                  $
                  7,745,458
                  
                  
                  $
                  7,745,458




17


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE 5 –
SEGMENT INFORMATION, continued





June 30, 2008Corporate
                    
                    
                    Internet
                    
                    
                    ConsolidatedRestated
                    
                    
                    Restated
                    
                    
                    RestatedRevenue
                    
                    $
                    -
                    
                    
                    $
                    5,159,244
                    
                    
                    $
                    5,159,244Operating
      Income (loss)
                    
                    $
                    (69,708
                    )
                    
                    $
                    857,119
                    
                    
                    $
                    787,411Depreciation
      and amortization
                    
                    $
                    -
                    
                    
                    $
                    1,486,286
                    
                    
                    $
                    1,486,286Interest
      expense
                    
                    $
                    -
                    
                    
                    $
                    110,518
                    
                    
                    $
                    110,518Intangible
      assets
                    
                    $
                    -
                    
                    
                    $
                    6,427,429
                    
                    
                    $
                    6,427,429Total
      assets
                    
                    $
                    -
                    
                    
                    $
                    8,157,205
                    
                    
                    $
                    8,157,205





NOTE
6 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS




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




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




In May
2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles.  This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP in the United States (the GAAP
hierarchy).  The Board concluded that the GAAP hierarchy should reside
in the accounting literature established by the FASB and is issuing this
Statement to achieve that result.  This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company is currently evaluating
the effect the adoption of FASB No. 162, but believes it will not have a
material impact on its financial position or on the results of
operations.


18


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED




NOTE
6 – 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
7 – ACQUISITIONS





Comcation,
Inc.


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





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





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





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


19


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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





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





N2 the Net,
LLC


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





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





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





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


20


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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





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





Dial Assurance,
Inc.


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





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





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





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


21




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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





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





United
Systems Access, Inc.


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





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





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





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


22





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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





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





AdaNet


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





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





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





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


23





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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


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





Velocity West,
Inc.


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





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





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




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


24





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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




ISP Holding Company,
LLC


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





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





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





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


25





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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


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





Pulaski Networks,
LLC


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





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





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





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


26





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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


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





NOTE
8 — PROVISION FOR INCOME TAXES





The
provision for federal and state income taxes for the six months ended June 30,
2009 and 2008 included the following:





2009
                          
                          
                          2008Current
      provision:Federal
                          
                          $
                          254,075
                          
                          
                          $
                          144,082State
                          
                          
                          44,837
                          
                          
                          
                          25,426Deferred
      provision:Federal
                          
                          
                          (331,611
                          )
                          
                          
                          (134,496
                          )State
                          
                          
                          (58,519
                          )
                          
                          
                          (23,735
                          )Total
      income tax provision
                          
                          $
                          (91,218
                          )
                          
                          $
                          11,277





Deferred
tax assets and liabilities reflect the net effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.  Significant components
of the Company's deferred tax assets and liabilities at June 30, 2009 and
December 31, 2008 are as follows:





2009
                            
                            
                            2008Accounts
      receivable
                            
                            $
                            21,416
                            
                            
                            $
                            19,762Amortization
      of Intangible assets
                            
                            
                            3,342,165
                            
                            
                            
                            2,953,689Less
      valuation allowance
                            
                            
                            2,552,420
                            
                            
                            
                            2,552,420Deferred
      tax asset
                            
                            $
                            811,161
                            
                            
                            $
                            421,031




27





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
8 — PROVISION FOR INCOME TAXES, continued





At June
30, 2009 and December 31, 2008, the Company has provided a valuation allowance
for the deferred tax asset since management has not been able to determine that
the realization of that asset is more likely than not.  Net operating loss
carry forwards was entirely applied as of the year ended December 31,
2008.  Loss carry forwards are set to begin expiring in 2021 for both
federal and state purposes.





NOTE
9 – INTANGIBLE ASSETS





The
Company continually monitors its intangible assets to determine whether any
impairment has occurred.  In making such determination with respect to
these assets, the Company evaluates the performance, on an undiscounted cash
flow basis, of the intangible assets or group of assets.  Should impairment
be identified, a loss would be reported to the extent that the carrying value of
the related intangible asset exceeds its fair value using the discounted cash
flow method.  The Company's customer lists are being amortized over three
years. Amortization expense was $1,270,065 and $1,467,168 for the six
months ended June 30, 2009 and 2008.





NOTE
10 – DEFERRED REVENUE





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





Revenue
Recognition





The
Company 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.


28





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
11 - NOTES PAYABLE




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


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





The
future principal maturities of these notes are as follows:




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




29




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
12 - NOTES PAYABLE - STOCKHOLDERS




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




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





The
future principal maturities of these notes are as follows:




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





30





SITESTAR
CORPORATION





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




General




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





Overview




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





The
products and services that the Company provides include:


·
   Internet access services;


·
   Web acceleration services;


·
   Web hosting services;


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


·
   Toner and ink cartridge remanufacturing services.





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





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





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


31





SITESTAR
CORPORATION





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





Results
of operations




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





For the six months ended June 30, 2009 (unaudited)Corporate
                
                
                Internet
                
                
                TotalRevenue
                
                $
                -
                
                
                $
                4,832,611
                
                
                $
                4,832,611Cost
      of revenue
                
                
                -
                
                
                
                1,672,721
                
                
                
                1,672,721Gross
      profit
                
                
                -
                
                
                
                3,159,890
                
                
                
                3,159,890Operating
      expenses
                
                
                79,615
                
                
                
                2,795,876
                
                
                
                2,875,491Income
      (loss) from operations
                
                
                (79,615
                )
                
                
                364,014
                
                
                
                284,399Other
      income (expense)
                
                
                -
                
                
                
                (50,581
                )
                
                
                (50,581
                )Income
      (loss) before income taxes
                
                
                (79,615
                )
                
                
                313,433
                
                
                
                233,818Income
      taxes
                
                
                (91,218
                )
                
                
                -
                
                
                
                (91,218
                )Net
      income (loss)
                
                $
                11,603
                
                
                $
                313,433
                
                
                $
                325,036




32





SITESTAR
CORPORATION





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





For the six months ended June 30, 2008 (unaudited)Corporate
                
                
                Internet
                
                
                TotalRevenue
                
                $
                -
                
                
                $
                5,159,244
                
                
                $
                5,159,244Cost
      of revenue
                
                
                -
                
                
                
                1,387,801
                
                
                
                1,387,801Gross
      profit
                
                
                -
                
                
                
                3,771,443
                
                
                
                3,771,443Operating
      expenses
                
                
                69,708
                
                
                
                2,914,324
                
                
                
                2,984,032Income
      (loss) from operations
                
                
                (69,708
                )
                
                
                857,119
                
                
                
                787,411Other
      income (expense)
                
                
                -
                
                
                
                (86,532
                )
                
                
                (86,532
                )Income
      (loss) before income taxes
                
                
                (69,708
                )
                
                
                770,587
                
                
                
                700,879Income
      taxes
                
                
                11,277
                
                
                
                -
                
                
                
                11,277Net
      income (loss)
                
                $
                (80,985
                )
                
                $
                770,587
                
                
                $
                689,602





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





The
following tables show a reconciliation of EBITDA to the GAAP presentation of net
income for the six months ended June 30, 2009 and 2008.





For the six months ended June 30, 2009Corporate
                  
                  
                  Internet
                  
                  
                  TotalEBITDA
                  
                  $
                  (79,615
                  )
                  
                  $
                  1,649,177
                  
                  
                  $
                  1,569,562Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (48,451
                  )
                  
                  
                  (48,451
                  )Taxes
                  
                  
                  91,218
                  
                  
                  
                  -
                  
                  
                  
                  91,218Depreciation
                  
                  
                  -
                  
                  
                  
                  (17,228
                  )
                  
                  
                  (17,228
                  )Amortization
                  
                  
                  -
                  
                  
                  
                  (1,270,065
                  )
                  
                  
                  (1,270,065
                  )Net
      income (loss)
                  
                  $
                  11,603
                  
                  
                  $
                  313,433
                  
                  
                  $
                  325,036




33





SITESTAR
CORPORATION





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





For the six months ended June 30, 2008Corporate
                  
                  
                  Internet
                  
                  
                  TotalEBITDA
                  
                  $
                  (69,708
                  )
                  
                  $
                  2,367,391
                  
                  
                  $
                  2,297,683Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (110,518
                  )
                  
                  
                  (110,518
                  )Taxes
                  
                  
                  (11,277
                  )
                  
                  
                  -
                  
                  
                  
                  (11,277
                  )Depreciation
                  
                  
                  -
                  
                  
                  
                  (19,118
                  )
                  
                  
                  (19,118
                  )Amortization
                  
                  
                  -
                  
                  
                  
                  (1,467,168
                  )
                  
                  
                  (1,467,168
                  )Net
      income (loss)
                  
                  $
                  (80,985
                  )
                  
                  $
                  770,587
                  
                  
                  $
                  689,602





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




REVENUE





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





COST
OF REVENUE





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


34





SITESTAR
CORPORATION





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





OPERATING
EXPENSES




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




INCOME
TAXES





For the
six months ended June 30, 2009 and June 30, 2008 corporate income tax (expense)
benefit of $91,218 and $(11,277) were accrued.




INTEREST
EXPENSE





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





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





FINANCIAL
CONDITION





Net
accounts receivable increased $199,678 or 27.0% from $738,824 on December 31,
2008 to $938,502 on June 30, 2009.  This increase is substantially due to
the addition of customers from acquisitions.  Due to the slow moving
nature of inventory, management has reclassified it on the balance sheets from
current assets to other assets held for resale which increased by $607 or 0.9%
from $70,239 on December 31, 2008 to $70,846 on June 30,
2009.  Accounts payable increased by $68,855 or 85.1% from $80,892 on
December 31, 2008 to $149,747 on June 30, 2009. Accrued expenses decreased by
$7,382 or 1.3% from $94,882 on December 31, 2008 to $87,500 on June 30,
2009.


35





SITESTAR
CORPORATION





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





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





LIQUIDITY AND CAPITAL
RESOURCES




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





2009
                  
                  
                  2008_EBITDA
      for the six months ended June 30,
                  
                  $
                  1,569,562
                  
                  
                  $
                  2,297,683Interest
      expense
                  
                  
                  (48,451
                  )
                  
                  
                  (110,518
                  )Taxes
                  
                  
                  91,218
                  
                  
                  
                  (11,277
                  )Depreciation
                  
                  
                  (17,228
                  )
                  
                  
                  (19,118
                  )Amortization
                  
                  
                  (1,270,065
                  )
                  
                  
                  (1,467,168
                  )Net
      income for the six months ended June 30,
                  
                  $
                  325,036
                  
                  
                  $
                  689,602





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





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




36





SITESTAR
CORPORATION





OFF-BALANCE
SHEET TRANSACTIONS




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




Forward-looking
statements




This
report contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the Company’s ability to expand the Company’s customer base, make
strategic acquisitions, general market conditions and competition and
pricing.





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


37





SITESTAR
CORPORATION





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





CRITICAL
ACCOUNTING POLICY AND ESTIMATES





The
Company’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations section discusses its condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America as promulgated by the Public
Company Accounting Oversight Board. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. On an ongoing basis, management evaluates its estimates and judgments,
including those related to revenue recognition, accrued expenses, financing
operations, and contingencies and litigation.  Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions and conditions. The most
significant accounting estimates inherent in the preparation of the Company’s
financial statements include estimates as to the appropriate carrying value of
certain assets and liabilities which are not readily apparent from other
sources. These accounting policies are described at relevant sections in this
discussion and analysis and in the condensed consolidated financial statements
included in this quarterly report.




Item
3.    Quantitative and Qualitative Disclosures About Market
Risk




Item
4.    Controls and Procedures




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.


38





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.


39





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.


40





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.


41





SITESTAR
CORPORATION





PART
II.  OTHER INFORMATION




Item
1.     Legal Proceedings





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





Item
1A.   Risk Factors




None.




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




None.





Item
3.     Defaults Upon Senior Securities




None.




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




None.





Item
5.     Other Information




None





Item
6.     Exhibits




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


31.1
                    
                    Certification
      of President Pursuant to the Securities Exchange Act of 1934, Rules 13a-14
      and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.31.2
                    
                    Certification
      of Chief Financial Officer Pursuant to the Securities Exchange Act of
      1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of
2002.




42




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)




43