UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q/A




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




For
the quarterly period ended March 31, 2009




o    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 o





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.





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).  oYes     oNo





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




Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes oNo x







SITESTAR
CORPORATION




EXPLANATORY
NOTE





This Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2009 initially filed with the Securities and
Exchange Commission on May 20, 2009 is being filed to reflect restatements
of Sitestar Corporation‘s Consolidated Balance Sheets as of March 31, 2009,
and December 31, 2008 and the related Consolidated Statements of Income and Cash
Flows for the three 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 March 31, 2009 (unaudited) and December
      31, 2008 (audited)
                    
                    4-5Condensed
      Consolidated Statements of Income for the three months ended March 31,
      2009 and 2008 (unaudited)
                    
                    6Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2009 and 2008 (unaudited)
                    
                    7-8Notes
      to unaudited Condensed Consolidated Financial Statements
                    
                    9-26Item
      2.   Management's Discussion and Analysis
                    
                    27-34Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                    
                    34Item
      4.   Controls and Procedures
                    
                    34-37Part
      II.  OTHER INFORMATION
                    
                    38Item
      1.  Legal Proceedings
                    
                    38Item
      1A. Risk Factors
                    
                    38Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                    
                    38Item
      3.  Defaults Upon Senior Securities
                    
                    38Item
      4.  Submission of Matters to a Vote of Security
    Holders
                    
                    38Item
      5.  Other Information
                    
                    38Item
      6.  Exhibits
                    
                    38SIGNATURES
                    
                    39


3





PART
I. FINANCIAL INFORMATION




Item 1.     Financial
Statements




SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


MARCH
31, 2009 AND DECEMBER 31, 2008




ASSETS


2009
                                
                                
                                2008(Unaudited)
                                
                                
                                (Audited)Restated
                                
                                
                                RestatedCURRENT
      ASSETSCash
      and cash equivalents
                                
                                $
                                456,289
                                
                                
                                $
                                527,553Accounts
      receivable, net of allowance of $51,411and
      $26,764
                                
                                
                                868,533
                                
                                
                                
                                738,824Prepaid
      expenses
                                
                                
                                1,201
                                
                                
                                
                                1,227Total
      current assets
                                
                                
                                1,326,023
                                
                                
                                
                                1,267,604PROPERTY
      AND EQUIPMENT, net
                                
                                
                                219,619
                                
                                
                                
                                225,212CUSTOMER
      LIST, net of accumulatedamortization
      of $8,146,728 and $7,973,341
                                
                                
                                3,679,523
                                
                                
                                
                                4,224,414GOODWILL,
      net of impairment
                                
                                
                                1,288,559
                                
                                
                                
                                1,288,559DEFERRED
      INCOME TAXES
                                
                                
                                689,393
                                
                                
                                
                                421,031OTHER
      ASSETS
                                
                                
                                542,606
                                
                                
                                
                                583,637TOTAL
      ASSETS
                                
                                $
                                7,745,723
                                
                                
                                $
                                8,010,457




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


4





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS, continued


MARCH
31, 2009 AND DECEMBER 31, 2008




LIABILITIES
AND STOCKHOLDERS’ EQUITY




2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)Restated
                    
                    
                    RestatedCURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    14,595
                    
                    
                    $
                    80,892Accrued
      income taxes
                    
                    
                    488,473
                    
                    
                    
                    339,016Accrued
      expenses
                    
                    
                    99,826
                    
                    
                    
                    94,882Deferred
      revenue
                    
                    
                    1,271,448
                    
                    
                    
                    1,157,597Notes
      payable
                    
                    
                    485,084
                    
                    
                    
                    569,372Total
      current liabilities
                    
                    
                    2,359,426
                    
                    
                    
                    2,241,759NOTES
      PAYABLE, less current portion
                    
                    
                    825,615
                    
                    
                    
                    915,615NOTES
      PAYABLE - STOCKHOLDERS, less current portion
                    
                    
                    539,281
                    
                    
                    
                    539,281TOTAL
      LIABILITIES
                    
                    
                    3,724,322
                    
                    
                    
                    3,696,655STOCKHOLDERS'
      EQUITYPreferred
      Stock, $.001 par value, 10,000,000 sharesauthorized, 0 shares
      issued and outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $.001 par value, 300,000,000 sharesauthorized,
      91,326,463 and 91,326,463 shares issued andoutstanding
      on March 31, 2009 December 31,2008 respectively
                    
                    
                    91,326
                    
                    
                    
                    91,326Additional
      paid-in capital
                    
                    
                    13,880,947
                    
                    
                    
                    13,880,947Treasury
      stock, at cost, 13,500,963 and 8,237,805common
      shares on March 31,  2009 and December 31,
      2008
                    
                    
                    (657,509
                    )
                    
                    
                    (64,220
                    )Accumulated
      deficit
                    
                    
                    (9,293,363
                    )
                    
                    
                    (9,594,251
                    )Total
      stockholders’ equity
                    
                    
                    4,021,401
                    
                    
                    
                    4,313,802TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                    
                    $
                    7,745,723
                    
                    
                    $
                    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 MARCH 31, 2009 AND 2008


(UNAUDITED)




2009
                    
                    
                    2008Restated
                    
                    
                    RestatedREVENUE
                    
                    $
                    2,541,419
                    
                    
                    $
                    2,544,545COST
      OF REVENUE
                    
                    
                    826,037
                    
                    
                    
                    825,218GROSS
      PROFIT
                    
                    
                    1,715,382
                    
                    
                    
                    1,719,327OPERATING
      EXPENSES:Selling
      general and administrative expenses
                    
                    
                    1,512,106
                    
                    
                    
                    1,365,092INCOME
      FROM OPERATIONS
                    
                    
                    203,276
                    
                    
                    
                    354,235OTHER
      INCOME (EXPENSES)
                    
                    
                    (21,293
                    )
                    
                    
                    (50,235
                    )INCOME
      BEFORE INCOME TAXES
                    
                    
                    181,983
                    
                    
                    
                    304,000INCOME
      TAXES (EXPENSE) BENEFIT
                    
                    
                    118,906
                    
                    
                    
                    (84,754
                    )NET
      INCOME
                    
                    $
                    300,888
                    
                    
                    $
                    219,246BASIC
      AND DILUTED EARNINGS PER SHARE
                    
                    $
                    0.00
                    
                    
                    $
                    0.00WEIGHTED
      AVERAGE SHARESOUTSTANDING - BASIC AND
DILUTED
                    
                    
                    91,326,463
                    
                    
                    
                    91,326,463





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


6





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008


(UNAUDITED)


2009
                
                
                2008Restated
                
                
                RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                300,888
                
                
                $
                219,246Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
                
                
                662,882
                
                
                
                722,410Bad
      debt expense
                
                
                7,846
                
                
                
                31,907(Increase)
      decrease in:Accounts
      receivable
                
                
                (137,555
                )
                
                
                (354,088
                )Prepaid
      expenses
                
                
                26
                
                
                
                (4,938
                )Deferred
      tax asset
                
                
                (268,362
                )
                
                
                -Increase
      (decrease) in:Accounts
      payable
                
                
                (66,297
                )
                
                
                15,564Accrued
      expenses
                
                
                4,945
                
                
                
                25,922Deferred
      revenue
                
                
                113,852
                
                
                
                14,341Accrued
      income taxes
                
                
                149,456
                
                
                
                84,754Net
      cash provided by operating activities
                
                
                767,681
                
                
                
                755,118CASH
      FLOWS FROM INVESTING ACTIVITIES:Other
      assets held for resale
                
                
                31
                
                
                
                292Purchase
      of property and equipment
                
                
                (3,000
                )
                
                
                -Purchase
      of non-compete
                
                
                (1,000
                )
                
                
                (5,000
                )Purchase
      of customer list
                
                
                (67,398
                )
                
                
                (52,333
                )Net
      cash (used in) investing activities
                
                
                (71,367
                )
                
                
                (57,041
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from notes payable
                
                
                -
                
                
                
                27,683Repayment
      of notes payable – stockholders
                
                
                -
                
                
                
                (87,010
                )Purchase
      treasury stock
                
                
                (593,290
                )Repayment
      of notes payable
                
                
                (174,288
                )
                
                
                (635,068
                )Net
      cash (used in) financing activities
                
                
                (767,578
                )
                
                
                (694,395
                )NET
      INCREASE (DECREASE) IN CASH AND
CASH  EQUIVALENTS
                
                
                (71,264
                )
                
                
                3,682CASH
      AND CASH EQUIVALENTS –BEGINNING OF  PERIOD
                
                
                527,553
                
                
                
                232,249CASH
      AND CASH EQUIVALENTS -END OF  PERIOD
                
                $
                456,289
                
                
                $
                235,931


See the
accompanying notes to the unaudited condensed consolidated financial
statements


7





SITESTAR CORPORATION AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (continued)


(UNAUDITED)




SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:




During
the three months ended March 31, 2009 and 2008, the Company accrued income taxes
(benefit) expense of $(118,906) and $84,754 and paid interest expense of
approximately $22,000 and $72,000, respectively.




NON-CASH
INVESTING AND FINANCING TRANSACTIONS:




During
the three months ended March 31, 2009, the Company issued no shares of common
stock.


8




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED




NOTE 1 – RESTATEMENT OF
FINANCIAL STATEMENTS




Subsequent to the issuance of the 2008 financial statements, Sitestar
Corporation determined that the income tax provision should have been included
in the financial statements and adopted the recommendation of the Board of
Directors and determined that previously reported results should be
restated.  The restatement resulted from a material weakness in
internal control over financial reporting, namely, that we did not have
adequately designed procedures to calculate or review the tax
provision.  The effects of the restatement adjustments on Sitestar
Corporation’s originally reported financial position for the periods ended March
31, 2009 and December 31, 2008, results of operations and cash flows for the
three months ended March 31, 2009 and 2008 are summarized
below.





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


MARCH 31,
2009 AND DECEMBER 31, 2008





ASSETS





Previously
                      
                      
                      Net
                      
                      
                      
                      
                      
                      Previously
                      
                      
                      NetReported
                      
                      
                      Change
                      
                      
                      Restated
                      
                      
                      Reported
                      
                      
                      Change
                      
                      
                      Restated2009
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2008
                      
                      
                      2008Total
      current assets
                      
                      $
                      1,326,023
                      
                      
                      $
                      -
                      
                      
                      $
                      1,326,023
                      
                      
                      $
                      1,267,604
                      
                      
                      $
                      -
                      
                      
                      $
                      1,267,604PROPERTY
      AND EQUIPMENT, net
                      
                      
                      219,619
                      
                      
                      
                      -
                      
                      
                      
                      219,619
                      
                      
                      
                      225,212
                      
                      
                      
                      -
                      
                      
                      
                      225,212CUSTOMER
      LIST, net of accumulated amortization of $8,146,728 and
      $7,973,341
                      
                      
                      3,679,523
                      
                      
                      
                      -
                      
                      
                      
                      3,679,523
                      
                      
                      
                      4,224,414
                      
                      
                      
                      -
                      
                      
                      
                      4,224,414GOODWILL,
      net of impairment
                      
                      
                      1,288,559
                      
                      
                      
                      -
                      
                      
                      
                      1,288,559
                      
                      
                      
                      1,288,559
                      
                      
                      
                      -
                      
                      
                      
                      1,288,559DEFERRED
      INCOME TAXES
                      
                      
                      615,321
                      
                      
                      
                      74,072
                      
                      
                      
                      689,393
                      
                      
                      
                      421,031
                      
                      
                      
                      -
                      
                      
                      
                      421,031OTHER
      ASSETS
                      
                      
                      542,606
                      
                      
                      
                      -
                      
                      
                      
                      542,606
                      
                      
                      
                      583,637
                      
                      
                      
                      -
                      
                      
                      
                      583,637TOTAL
      ASSETS
                      
                      $
                      7,671,651
                      
                      
                      $
                      74,072
                      
                      
                      
                      7,745,723
                      
                      
                      $
                      8,010,457
                      
                      
                      $
                      -
                      
                      
                      $
                      8,010,457


9





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED




NOTE 1 – RESTATEMENT OF
FINANCIAL STATEMENTS, continued




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


MARCH 31,
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
                          
                          $
                          922,657
                          
                          
                          $
                          (434,184
                          )
                          
                          $
                          488,473
                          
                          
                          $
                          754,777
                          
                          
                          $
                          (415,761
                          )
                          
                          $
                          339,016Total
      current liabilities
                          
                          
                          2,793,610
                          
                          
                          
                          (434,184
                          )
                          
                          
                          2,359,426
                          
                          
                          
                          2,657,520
                          
                          
                          
                          (415,761
                          )
                          
                          
                          2,241,759TOTAL
      LIABILITIES
                          
                          
                          4,158,506
                          
                          
                          
                          (434,184
                          )
                          
                          
                          3,724,322
                          
                          
                          
                          4,112,416
                          
                          
                          
                          (415,761
                          )
                          
                          
                          3,696,655STOCKHOLDERS’
      EQUITYAccumulated
      deficit
                          
                          
                          (9,801,619
                          )
                          
                          
                          508,256
                          
                          
                          
                          (9,293,363
                          )
                          
                          
                          (10,010,012
                          )
                          
                          
                          415,761
                          
                          
                          
                          (9,594,251
                          )Total
      stockholders' equity
                          
                          
                          3,513,145
                          
                          
                          
                          508,256
                          
                          
                          
                          4,021,401
                          
                          
                          
                          3,898,041
                          
                          
                          
                          415,761
                          
                          
                          
                          4,313,802TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                          
                          $
                          7,671,651
                          
                          
                          $
                          -
                          
                          
                          $
                          7,745,723
                          
                          
                          
                          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
STATEMENT OF INCOME


FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008





Previously
                        
                        
                        Net
                        
                        
                        
                        
                        
                        Previously
                        
                        
                        NetReported
                        
                        
                        Change
                        
                        
                        Restated
                        
                        
                        Reported
                        
                        
                        Change
                        
                        
                        Restated2009
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2008
                        
                        
                        2008REVENUE
                        
                        $
                        2,541,419
                        
                        
                        $
                        -
                        
                        
                        $
                        2,541,419
                        
                        
                        $
                        2,544,545
                        
                        
                        $
                        -
                        
                        
                        $
                        2,544,545COST
      OF REVIENUE
                        
                        
                        826,037
                        
                        
                        
                        -
                        
                        
                        
                        826,037
                        
                        
                        
                        825,218
                        
                        
                        
                        -
                        
                        
                        
                        825,218GROSS
      PROFIT
                        
                        
                        1,715,382
                        
                        
                        
                        -
                        
                        
                        
                        1,715,382
                        
                        
                        
                        1,719,327
                        
                        
                        
                        -
                        
                        
                        
                        1,719,327OPERATING
      EXPENSES
                        
                        
                        1,512,106
                        
                        
                        
                        -
                        
                        
                        
                        1,512,106
                        
                        
                        
                        1,365,092
                        
                        
                        
                        -
                        
                        
                        
                        1,365,092INCOME
      FROM OPERATIONS
                        
                        
                        203,276
                        
                        
                        
                        -
                        
                        
                        
                        203,276
                        
                        
                        
                        354,235
                        
                        
                        
                        -
                        
                        
                        
                        354,235OTHER
      INCOME (EXPENSE)
                        
                        
                        (21,293
                        )
                        
                        
                        -
                        
                        
                        
                        (21,293
                        )
                        
                        
                        (50,235
                        )
                        
                        
                        -
                        
                        
                        
                        (50,235
                        )INCOME
      BEFORE INCOME TAXES
                        
                        
                        181,983
                        
                        
                        
                        -
                        
                        
                        
                        181,983
                        
                        
                        
                        304,000
                        
                        
                        
                        -
                        
                        
                        
                        304,000INCOME
      TAX (EXPENSE) BENEFIT
                        
                        
                        26,410
                        
                        
                        
                        92,496
                        
                        
                        
                        118,906
                        
                        
                        
                        (121,600
                        )
                        
                        
                        36,846
                        
                        
                        
                        (84,754
                        )NET
      INCOME
                        
                        $
                        208,393
                        
                        
                        
                        92,496
                        
                        
                        
                        300,888
                        
                        
                        
                        182,400
                        
                        
                        
                        36,846
                        
                        
                        
                        219,246BASIC
      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


11





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED




NOTE 1 – RESTATEMENT OF
FINANCIAL STATEMENTS, continued




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS


FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008





Previously
                      
                      
                      Net
                      
                      
                      
                      
                      
                      Previously
                      
                      
                      NetReported
                      
                      
                      Change
                      
                      
                      Restated
                      
                      
                      Reported
                      
                      
                      Change
                      
                      
                      Restated2009
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2008
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      208,393
                      
                      
                      $
                      92,495
                      
                      
                      $
                      300,888
                      
                      
                      
                      182,400
                      
                      
                      $
                      36,846
                      
                      
                      $
                      219,246(Increase)
      in deferred tax asset
                      
                      
                      167,879
                      
                      
                      
                      (436,241
                      )
                      
                      
                      (268,362
                      )
                      
                      
                      316,443
                      
                      
                      
                      (316,443
                      )
                      
                      
                      -Increase
      in accrued income taxes
                      
                      
                      (194,290
                      )
                      
                      
                      343,746
                      
                      
                      
                      149,456
                      
                      
                      
                      (194,843
                      )Net
      cash provided by operatingactivities
                      
                      
                      767,681
                      
                      
                      
                      -
                      
                      
                      
                      767,681
                      
                      
                      
                      755,118
                      
                      
                      
                      279,597
                      
                      
                      
                      84,754Net
      cash (used in) investingactivities
                      
                      
                      (71,367
                      )
                      
                      
                      -
                      
                      
                      
                      (71,367
                      )
                      
                      
                      (57,041
                      )
                      
                      
                      -
                      
                      
                      
                      (57,041
                      )Net
      cash (used in) financingactivities
                      
                      
                      (767,578
                      )
                      
                      
                      -
                      
                      
                      
                      (767,578
                      )
                      
                      
                      (694,395
                      )
                      
                      
                      -
                      
                      
                      
                      (694,395
                      )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      (71,264
                      )
                      
                      
                      -
                      
                      
                      
                      (71,264
                      )
                      
                      
                      3,682
                      
                      
                      
                      -
                      
                      
                      
                      3,682CASH
      AND CASH EQUIVALENTS – BEGINNING OF PERIOD
                      
                      
                      527,553
                      
                      
                      
                      -
                      
                      
                      
                      527,553
                      
                      
                      
                      232,249
                      
                      
                      
                      -
                      
                      
                      
                      232,249CASH
      AND CASH EQUIVALENTS – END OF PERIOD
                      
                      $
                      456,289
                      
                      
                      $
                      -
                      
                      
                      $
                      456,289
                      
                      
                      $
                      235,931
                      
                      
                      $
                      -
                      
                      
                      $
                      235,931


12





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 three months ended March 31, 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
three months ended March 31, 2009 and March 31, 2008:


2009
                            
                            
                            2008Restated
                            
                            
                            RestatedNet
      income available to common shareholders
                            
                            $
                            300,888
                            
                            
                            $
                            219,246Weighted
      average number of common shares
                            
                            
                            91,326,463
                            
                            
                            
                            91,326,463Basic
      and diluted income per share
                            
                            $
                            0.00
                            
                            
                            $
                            0.00


13





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
4 – COMMON STOCK





During
the three months ended March 31, 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 units. The Corporate group also arranges financing for the entire
organization. The Company’s Internet group consists of multiple sites of
operation and services customers throughout the U.S. and Canada.





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




Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the three months ended March 31, 2009 and
2008:




March31,
  2009Corporate
                                              
                                              
                                              Internet
                                              
                                              
                                              ConsolidatedRestated
                                              
                                              
                                              Restated
                                              
                                              
                                              RestatedRevenue
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              2,541,419
                                              
                                              
                                              $
                                              2,541,419Operating
      Income (loss)
                                              
                                              $
                                              (27,115
                                              )
                                              
                                              $
                                              230,391
                                              
                                              
                                              $
                                              203,276Depreciation
      and amortization
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              662,882
                                              
                                              
                                              $
                                              662,882Interest
      expense
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              21,884
                                              
                                              
                                              $
                                              21,884Intangible
      assets
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              5,267,248
                                              
                                              
                                              $
                                              5,267,248Total
      assets
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              7,745,723
                                              
                                              
                                              $
                                              7,745,723




March31,
  2008Corporate
                                              
                                              
                                              Internet
                                              
                                              
                                              ConsolidatedRestated
                                              
                                              
                                              Restated
                                              
                                              
                                              RestatedRevenue
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              2,544,545
                                              
                                              
                                              $
                                              2,544,545Operating
      Income (loss)
                                              
                                              $
                                              (43,469
                                              )
                                              
                                              $
                                              397,704
                                              
                                              
                                              $
                                              354,235Depreciation
      and amortization
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              722,410
                                              
                                              
                                              $
                                              722,410Interest
      expense
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              71,686
                                              
                                              
                                              $
                                              71,686Intangible
      assets
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              5,876,029
                                              
                                              
                                              $
                                              5,876,029Total
      assets
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              7,897,316
                                              
                                              
                                              $
                                              7,897,316


14





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
6 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS





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





In
December 2007, the FASB issued FASB Statement No. 141, Business Combinations
(“FAS 141”).  This Statement establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree, recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, and determines what
information to disclose. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  The Company may not apply it before that date. The Company is
currently evaluating the effect the adoption of FAS No. 141, but believes
it will not have a material impact on its financial position or on the results
of operations.




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




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


15





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




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




NOTE
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.


16





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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 three months ended March 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 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
                  
                  $
                  2,558,382Gross
      profit
                  
                  $
                  1,731,296Selling,
      general and administrative expenses
                  
                  $
                  1,370,519Net
      income
                  
                  $
                  186,325Basic
      income per share
                  
                  $
                  0.00





N2 the Net,
LLC


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





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


17





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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





Because
the acquisition of N2 the Net was consummated effective April 1, 2008, there are
no results of operations of Comcation in the consolidated financial statements
for the three months ended March 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 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
                  
                  $
                  2,570,335Gross
      profit
                  
                  $
                  1,737,193Selling,
      general and administrative expenses
                  
                  $
                  1,374,109Net
      income
                  
                  $
                  187,492Basic
      income per share
                  
                  $
                  0.00





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.


18





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued




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 no results of operations of Dial Assurance in the consolidated financial
statements for the three months ended March 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 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
                  
                  $
                  2,603,170Gross
      profit
                  
                  $
                  1,759,939Selling,
      general and administrative expenses
                  
                  $
                  1,372,915Net
      income
                  
                  $
                  202,073Basic
      income per share
                  
                  $
                  0.00





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.


19





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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
no results of operations of USA Telephone in the consolidated financial
statements for the three months ended March 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 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
                  
                  $
                  2,681,839Gross
      profit
                  
                  $
                  1,814,437Selling,
      general and administrative expenses
                  
                  $
                  1,421,916Net
      income
                  
                  $
                  205,372Basic
      income per share
                  
                  $
                  0.00





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.


20




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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 no
results of operations of AdaNet in the consolidated financial statements for the
three months ended March 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 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
                  
                  $
                  2,551,259Gross
      profit
                  
                  $
                  1,723,978Selling,
      general and administrative expenses
                  
                  $
                  1,369,569Net
      income
                  
                  $
                  182,504Basic
      income per share
                  
                  $
                  0.00





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.




21




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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





Because
the acquisition of Velocity West was consummated effective August 1, 2008, there
are no results of operations of Velocity West in the consolidated financial
statements for the three months ended March 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 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.




2008Net
      sales
                  
                  $
                  2,717,676Gross
      profit
                  
                  $
                  1,839,263Selling,
      general and administrative expenses
                  
                  $
                  1,400,133Net
      income
                  
                  $
                  233,337Basic
      income per share
                  
                  $
                  0.00





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.




22





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – ACQUISITIONS, continued





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 three months ended March 31,
2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 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
                  
                  $
                  2,816,990Gross
      profit
                  
                  $
                  1,907,263Selling,
      general and administrative expenses
                  
                  $
                  1,426,907Net
      income
                  
                  $
                  249,190Basic
      income per share
                  
                  $
                  0.00





NOTE
8 — PROVISION FOR INCOME TAXES





The
provision for federal and state income taxes for the three months ended March
31, 2009 and 2008 included the following:





2009
                            
                            
                            2008Current
      provision:Federal
                            
                            $
                            127,038
                            
                            
                            $
                            72,041State
                            
                            
                            22,418
                            
                            
                            
                            12,713Deferred
      provision:Federal
                            
                            
                            (228,108
                            )
                            
                            
                            -State
                            
                            
                            (40,254
                            )
                            
                            
                            -Total
      income tax provision
                            
                            $
                            (118,906
                            )
                            
                            $
                            84,754





23


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
8 — PROVISION FOR INCOME TAXES, continued





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





2009
                        
                        
                        2008RestatedAccounts
      receivable
                        
                        $
                        22,901
                        
                        
                        $
                        19,762Amortization
      of Intangible assets
                        
                        
                        3,218,912
                        
                        
                        
                        2,953,689Loss
      carry-forward
                        
                        
                        -
                        
                        
                        
                        -Less
      valuation allowance
                        
                        
                        2,552,420
                        
                        
                        
                        2,552,420Deferred
      tax asset
                        
                        $
                        689,393
                        
                        
                        $
                        421,031





At March
31, 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 $654,290 and $713,117 for the three months
ended March 31, 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.


24


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
10 – DEFERRED REVENUE, continued





Revenue
Recognition





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





NOTE
11 - NOTES PAYABLE




Notes
payable at March 31, 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
                                          
                                          
                                          185,084
                                          
                                          
                                          
                                          257,451Non-interest
      bearing amount due on acquisition of USA Telephone payable in thirty six
      monthly installments starting January 2008
                                          
                                          
                                          1,125,615
                                          
                                          
                                          
                                          1,215,615Less
      current portion
                                          
                                          
                                          (485,084
                                          )
                                          
                                          
                                          (569,372
                                          )Long-term
      portion
                                          
                                          $
                                          825,615
                                          
                                          
                                          $
                                          915,615





The
future principal maturities of these notes are as follows:




Twelve
      months ending March 31, 2010
                      
                      $
                      485,084Twelve
      months ending March 31, 2011
                      
                      
                      300,000Twelve
      months ending March 31, 2012
                      
                      
                      300,000Twelve
      months ending March 31, 2013
                      
                      
                      225,615Twelve
      months ending March 31, 2014
                      
                      
                      -Thereafter
                      
                      
                      -Total
                      
                      $
                      1,310,699





25


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
12 - NOTES PAYABLE - STOCKHOLDERS




Notes
payable - stockholders at March 31, 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 is payable on January 1, 2012 and bears
      interest at an annual rate of 8.0%.
                  
                  
                  54,985
                  
                  
                  
                  54,985Less
      current portion
                  
                  
                  -
                  
                  
                  
                  -Long-term
      portion
                  
                  $
                  539,281
                  
                  
                  $
                  539,281





The
future principal maturities of these notes are as follows:




Year
      ending March 31, 2010
                              
                              $
                              -Year
      ending March 31, 2011
                              
                              
                              -Year
      ending March 31, 2012
                              
                              
                              539,281Year
      ending March 31, 2013
                              
                              
                              -Year
      ending March 31, 2014
                              
                              
                              -Total
                              
                              $
                              539,281


26


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, cable and wireless), and
supports these products utilizing its own infrastructure and
affiliations.  Value-added services include web acceleration, spam and
virus filtering, as well as, spyware protection.





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





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


27


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 three months ended March 31, 2009
and 2008. Operating results for any period are not necessarily indicative of
results for any future period.





For the three months ended March 31, 2009(unaudited)Corporate
                      
                      
                      Internet
                      
                      
                      TotalRevenue
                      
                      $
                      -
                      
                      
                      $
                      2,541,419
                      
                      
                      $
                      2,541,419Cost
      of revenue
                      
                      
                      -
                      
                      
                      
                      826,037
                      
                      
                      
                      826,037Gross
      profit
                      
                      
                      -
                      
                      
                      
                      1,715,382
                      
                      
                      
                      1,715,382Operating
      expenses
                      
                      
                      27,115
                      
                      
                      
                      1,484,991
                      
                      
                      
                      1,512,106Income
      (loss) from operations
                      
                      
                      (27,115
                      )
                      
                      
                      230,391
                      
                      
                      
                      203,276Other
      income (expense)
                      
                      
                      -
                      
                      
                      
                      (21,294
                      )
                      
                      
                      (21,294
                      )Income
      (loss) before income taxes
                      
                      
                      (27,115
                      )
                      
                      
                      209,097
                      
                      
                      
                      181,982Income
      taxes
                      
                      
                      (118,906
                      )
                      
                      
                      -
                      
                      
                      
                      (118,906
                      )Net
      income (loss)
                      
                      $
                      91,791
                      
                      
                      $
                      209,097
                      
                      
                      $
                      300,888


28




SITESTAR
CORPORATION




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




For the three months ended March 31, 2008(unaudited)Corporate
                      
                      
                      Internet
                      
                      
                      TotalRestated
                      
                      
                      Restated
                      
                      
                      RestatedRevenue
                      
                      $
                      -
                      
                      
                      $
                      2,544,545
                      
                      
                      $
                      2,544,545Cost
      of revenue
                      
                      
                      -
                      
                      
                      
                      825,218
                      
                      
                      
                      825,218Gross
      profit
                      
                      
                      -
                      
                      
                      
                      1,719,327
                      
                      
                      
                      1,719,327Operating
      expenses
                      
                      
                      43,469
                      
                      
                      
                      1,321,623
                      
                      
                      
                      1,365,092Income
      (loss) from operations
                      
                      
                      (43,469
                      )
                      
                      
                      397,704
                      
                      
                      
                      354,235Other
      income (expense)
                      
                      
                      -
                      
                      
                      
                      (50,235
                      )
                      
                      
                      (50,235
                      )Income
      (loss) before income taxes
                      
                      
                      (43,469
                      )
                      
                      
                      347,469
                      
                      
                      
                      304,000Income
      taxes
                      
                      
                      84,754
                      
                      
                      
                      -
                      
                      
                      
                      84,754Net
      income (loss)
                      
                      $
                      (128,223
                      )
                      
                      $
                      347,469
                      
                      
                      $
                      219,246





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





The
following tables show a reconciliation of EBITDA to the GAAP presentation of net
income for the three months ended March 31, 2009 and 2008.





For
      the three months ended March 31, 2009Corporate
                  
                  
                  Internet
                  
                  
                  TotalRestated
                  
                  
                  Restated
                  
                  
                  RestatedEBITDA
                  
                  $
                  (27,115
                  )
                  
                  $
                  893,863
                  
                  
                  $
                  866,748Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (21,884
                  )
                  
                  
                  (21,884
                  )Taxes
                  
                  
                  118,906
                  
                  
                  
                  -
                  
                  
                  
                  118,906Depreciation
                  
                  
                  -
                  
                  
                  
                  (8,592
                  )
                  
                  
                  (8,592
                  )Amortization
                  
                  
                  -
                  
                  
                  
                  (654,290
                  )
                  
                  
                  (654,290
                  )Net
      income (loss)
                  
                  $
                  91,791
                  
                  
                  $
                  209,097
                  
                  
                  $
                  300,888


29


SITESTAR
CORPORATION





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





For
      the three months ended March 31, 2008Corporate
                  
                  
                  Internet
                  
                  
                  TotalRestated
                  
                  
                  Restated
                  
                  
                  RestatedEBITDA
                  
                  $
                  (43,469
                  )
                  
                  $
                  1,141564
                  
                  
                  $
                  1,098,095Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (71,686
                  )
                  
                  
                  (71,686
                  )Taxes
                  
                  
                  (84,754
                  )
                  
                  
                  -
                  
                  
                  
                  (84,754
                  )Depreciation
                  
                  
                  -
                  
                  
                  
                  (9,292
                  )
                  
                  
                  (9,292
                  )Amortization
                  
                  
                  -
                  
                  
                  
                  (713,117
                  )
                  
                  
                  (713,117
                  )Net
      income (loss)
                  
                  $
                  (128,223
                  )
                  
                  $
                  347,469
                  
                  
                  $
                  219,246





THREE MONTHS ENDED MARCH 31,
2009 COMPARED TO MARCH 31, 2008 (Unaudited)




REVENUE





Revenue
for the three months ended March 31, 2009 decreased by $3,126 or 0.1% from
$2,544,545 for the three months ended March 31, 2008 to $2,541,419 for the same
period in 2009.  Internet sales remained relatively flat primarily due
to the addition of Internet customers from the asset acquisitions and offset by
additional attrition to broadband service.  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 three months ended March 31, 2009 increased by $819 or 0.1% from
$825,218 for the three months ended March 31, 2008 to $826,037 for the same
period in 2009.  Cost of revenue remained steady with sales volume
reflecting consistency in the costs of providing services to
customers.


30





SITESTAR
CORPORATION





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





OPERATING
EXPENSES




Operating
expenses for the three months ended March 31, 2009 increased $147,014 or 10.8%
from $1,365,092 for the three months ended March 31, 2008 to $1,512,106 for the
same period in 2009.  Bad debt expense increased $227,818 or 73.3% from
$310,993 for the three months ended March 31, 2008 to $538,811 for the same
period in 2009 resulting from recent acquisitions. Corporate expenses for the
three months ended March 31, 2009 and March 31, 2008 consisted primarily of
professional fees of $25,781 and 41,700.




INCOME
TAXES





For the
three months ended March 31, 2009 and March 31, 2008 corporate income tax
(expense) benefit of $118,906 and $(84,754) were accrued.




GAIN
ON SALE OF ASSETS





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





INTEREST
EXPENSE





Interest
expense for the three months ended March 31, 2009 decreased by $49,801 or 69.5%
from $71,686 for the three months ended March 31, 2008 to $21,885 for the same
period in 2009.  This decrease is a result of reducing debt to finance the
acquisition of additional customers.





MARCH 31, 2009 (Unaudited)
COMPARED TO DECEMBER 31, 2008 (Audited)





FINANCIAL
CONDITION





Net
accounts receivable increased $124,709 or 17.6% from $738,824 on December 31,
2008 to $868,533 on March 31, 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 decreased by $31 or 0.04%
from $70,443 on December 31, 2008 to $70,412 on March 31,
2009.  Accounts payable decreased by $66,297 or 82.0% from $80,892 on
December 31, 2008 to $14,595 on March 31, 2009. Accrued expenses increased by
$4,944 or 5.2% from $94,882 on December 31, 2008 to $99,826 on March 31,
2009.




31




SITESTAR
CORPORATION





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





Deferred
revenue increased by $113,851 or 9.8% from $1,157,597 on December 31, 2008 to
$1,271,448 on March 31, 2009 representing increased volume of customer accounts
that have been prepaid. The current portion of notes payable decreased $84,288
or 4.8% from $569,372 on December 31, 2008 to $485,084 on March 31,
2009.  This is due to the curtailment of term notes financing the
purchase of customer bases.  Long-term notes payable decreased $90,000
or 9.8% from $915,615 on December 31, 2008 to $825,615 on March 31, 2009. This
is due to the curtailment of term notes financing the purchase of customer
bases.





LIQUIDITY AND CAPITAL
RESOURCES




Cash and
cash equivalents totaled $456,289 and $527,553 at March 31, 2009 and at December
31, 2008.  EBITDA was $866,749 for the three months ended March 31,
2009 as compared to $1,098,095 for the same period in 2008.





2009
                        
                        
                        2008Restated
                        
                        
                        RestatedEBITDA
      for the three months ended March 31,
                        
                        $
                        866,749
                        
                        
                        $
                        1,098,095Interest
      expense
                        
                        
                        (21,884
                        )
                        
                        
                        (71,686
                        )Taxes
                        
                        
                        118,906
                        
                        
                        
                        (84,754
                        )Depreciation
                        
                        
                        (8,592
                        )
                        
                        
                        (9,292
                        )Amortization
                        
                        
                        (654,290
                        )
                        
                        
                        (713,117
                        )Net
      income for the three months ended March 31,
                        
                        $
                        300,888
                        
                        
                        $
                        219,246





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





2009
                    
                    
                    2008Current
                    
                    $
                    527,838
                    
                    
                    
                    61
                    %
                    
                    $
                    433,518
                    
                    
                    
                    59
                    %30
      < 60
                    
                    
                    179,128
                    
                    
                    
                    21
                    %
                    
                    
                    159,585
                    
                    
                    
                    22
                    %60
      +
                    
                    
                    161,567
                    
                    
                    
                    18
                    %
                    
                    
                    145,721
                    
                    
                    
                    19
                    %Total
                    
                    $
                    868,533
                    
                    
                    
                    100
                    %
                    
                    $
                    738,824
                    
                    
                    
                    100
                    %


32


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.


33


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.


34





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.


35





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.


36


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.


37





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 complaint demands judgment of
approximately $150,000.  The Company will vigorously defend this
claim.  A pre-trial or scheduling conference will be scheduled in the
second quarter of 2009.





Item
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 2002.32
                
                Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002




38




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)


39