10Q
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2008
 
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)
 
Indicate by check mark whether registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No 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” in Rule 12b-2 of the Exchange Act. Yes o  No x
 
Large Accelerated Filer o             Accelerated Filer o       Non-Accelerated Filer o        Smaller Report Company x
(Do not check if a smaller reporting Company) 
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
As of May 20, 2008, the issuer had 91,326,463 shares of common stock issued and outstanding.
 
 
 

SITESTAR CORPORATION
 
Index
   
Page Number
   
       
   
       
   
3-4
     
 
   
5
     
 
   
6-7
     
 
   
8-19
       
 
20-25
     
 
 
26-27
     
 
 
28
     
 
 
28
     
 
 
28
     
 
 
28
     
 
 
28
     
 
 
28
     
 
 
28
       
 
29
 
 
- 2 -

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND DECEMBER 31, 2007
 
ASSETS
 
 
  
2008
  
2007
  
 
  
(Unaudited)
  
 (Audited)
  
CURRENT ASSETS
  
 
  
 
  
   Cash and cash equivalents
  
$
235,931
  
$
232,249
  
   Accounts receivable, net of allowance of $54,548 and $22,641                
    
622,044
    
299,863
  
Prepaid expenses
    
21,467
    
16,529
  
      Total current assets
    
879,442
   
548,641
  
 
          
PROPERTY AND EQUIPMENT, net
    
227,489
   
236,782
  
CUSTOMER LIST, net of accumulated amortization of $5,901,699 and $5,237,054
    
4,868,323
    
5,480,635
  
GOODWILL, net of impairment
    
1,288,559
   
1,288,559
  
OTHER ASSETS
    
633,502
   
677,267
  
 
          
TOTAL ASSETS
  
$
7,897,315
  
$
8,231,884
  
 
 
See the accompanying notes to the unaudited condensed consolidated financial statements.

 
- 3 -

SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
MARCH 31, 2008 AND DECEMBER 31, 2007
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
  
2008
  
2007
  
 
  
(Unaudited)
  
(Audited)
  
CURRENT LIABILITIES
  
 
  
 
  
 
  
 
  
 
  
Accounts payable
  
$
94,277
  
$
78,713
  
Accrued expenses
    
163,943
   
138,021
  
Deferred revenue
    
1,375,947
   
1,361,606
  
Notes payable
    
1,051,996
    
1,268,866
  
 
          
Total current liabilities
    
2,686,163
    
2,847,206
  
 
          
NOTES PAYABLE, less current portion                                  
    
1,304,320
    
1,694,836
  
NOTES PAYABLE - STOCKHOLDERS
    
599,677
    
686,687
  
 
          
TOTAL LIABILITIES
    
4,590,160
    
5,228,729
  
 
          
STOCKHOLDERS' EQUITY
         
Preferred Stock, $.001 par value, 10,000,000 shares
          
authorized, 0 shares issued and outstanding
    
—
    
—
 
Common stock, $.001 par value, 300,000,000 shares
authorized, 91,326,463 and 91,326,463 shares issued and
outstanding on March 31, 2008 December 31,
2007
    
91,326
    
91,326
  
Additional paid-in capital
    
13,880,947
    
13,880,947
  
Treasury stock, $.001 par value, 2,955,147 common shares
on March 31,  2008 and December 31, 2007
    
(63,030
)
  
(63,030
)
Accumulated deficit
    
(10,602,088
)
  
(10,906,088
)
 
          
Total stockholders’ equity
   
3,307,155
    
3,003,155
  
 
          
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
$
7,897,315
  
$
8,231,884
  
 
 
See the accompanying notes to the unaudited condensed consolidated financial statements.

 
- 4 -
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
 
 
  
2008
 
2007
 
 
  
 
  
 
  
REVENUE
  
$
2,544,545
  
$
1,439,981
  
 
          
COST OF REVENUE
    
825,218
    
391,026
 
 
          
GROSS PROFIT
    
1,719,327
    
1,048,955
 
 
          
OPERATING EXPENSES:
          
Selling general and administrative expenses
    
1,365,092
    
708,395
 
 
          
INCOME FROM OPERATIONS
    
354,235
    
340,560
 
 
          
OTHER (EXPENSE)
    
(50,235
)
  
(31,992
)
 
          
INCOME BEFORE INCOME TAXES
    
304,000
    
308,568
  
 
          
INCOME TAXES
    
—
    
—
  
 
          
NET INCOME
 
$
304,000
  
$
308,568
  
 
          
BASIC AND DILUTED EARNINGS PER SHARE
  
$
0.00
  
$
0.00
  
 
          
WEIGHTED AVERAGE SHARES
          
OUTSTANDING - BASIC AND DILUTED
    
91,326,463
    
88,013,305
 


See the accompanying notes to the unaudited condensed consolidated financial statements.
 
 
- 5 -
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED) 

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


 See the accompanying notes to the unaudited condensed consolidated financial statements. 
 
 
- 6 -

 SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (continued)
(UNAUDITED)
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 
 
During the three months ended March 31, 2008 and 2007, the Company paid no income taxes and paid interest expense of approximately $72,000 and $35,000.
 
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
During the three months ended March 31, 2008, the Company issued no shares of common stock.
 
 
 
- 7 -
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION
 
The unaudited condensed consolidated financial statements have been prepared by Sitestar Corporation (the “Company” or “Sitestar”), pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-KSB.  The results for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

NOTE 2 - EARNINGS PER SHARE
 
The Financial Accounting Standards (FAS) No. 128, "Accounting for Earnings Per Share" requires dual presentation of basic and diluted earnings per share on the face of the statements of income and requires a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation. Basic earnings per share are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted income per share is computed using weighted average shares outstanding adjusted to reflect the dilutive effect of all potential common shares that were outstanding during the period.

   
 
  
   
March 31, 2008
  
March 31, 2007
  
Net income available to common shareholders
  
$
304,000
  
$
308,568
  
Weighted average number of common shares
    
91,326,463
    
88,013,305
  
Basic and diluted income per share
  
$
.00
  
$
.00
  
 
NOTE 3 - COMMON STOCK
 
During the three months ended March 31, 2008, the Company issued no shares of common stock.
 
 
- 8 -
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 4 - SEGMENT INFORMATION
 
The Company has two business units that have been aggregated into two reportable segments: Corporate and Internet.

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

The Company evaluates the performance of its operating segments based on income from operations before income taxes, accounting changes, non-recurring items and interest income and expense.
 
Summarized financial information concerning the Company's reportable segments is shown in the following table for the three months ended March 31, 2008 and 2007:

 March 31, 2008
        
 
 
  
Corporate
  
Internet
  
Consolidated
  
Revenue
  
$
—
  
$
2,544,545
  
$
2,544,545
  
Operating Income (loss)
  
$
(43,416
)
$
397,651
  
$
354,235
  
Depreciation and amortization
  
$
—
  
$
722,410
  
$
722,410
  
Interest expense
  
$
—
  
$
71,686
  
$
71,686
  
Intangible assets
  
$
—
  
$
6,519,938
  
$
6,519,938
  
Total assets
  
$
—
  
$
7,897,316
  
$
7,897,316
  
 
March 31, 2007
       
 
 
  
Corporate
  
Internet
  
Consolidated
  
Revenue
  
$
—
  
$
1,439,981
  
$
1,439,981
  
Operating Income (loss)
  
$
(3,479
)
$
344,039
  
$
340,560
  
Depreciation and amortization
  
$
—
  
$
305,855
  
$
305,855
  
Interest expense
  
$
—
  
$
35,469
  
$
35,469
  
Intangible assets
  
$
—
  
$
3,837,442
  
$
3,837,442
  
Total assets
  
$
—
  
$
4,864,042
  
$
4,864,042
  
 
 
- 9 -
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
 
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits companies to choose to measure, on an instrument-by-instrument basis, financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company currently is evaluating whether to elect the option provided for in this standard.
 
In December 2007, the FASB issued FASB Statement No. 141, Business Combinations (“FAS 141”). This Statement establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, determines what information to disclose. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company may not apply it before that date. The Company is currently evaluating the effect the adoption of FAS No. 141, but believes it will not have a material impact on its financial position or on the results of operations.

In December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests in Consolidated Financial Statements (“FAS 160”). This Statement establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the effect the adoption of FAS No. 141, but believes it will not have a material impact on its financial position or on the results of operations.
 
NOTE 6 - ACQUISITIONS

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

The definitive agreement states that in the event that actual annualized revenue differs more than three percent from estimates used at closing, the purchase price will be adjusted accordingly. The purchase price has been adjusted down to $108,470 as of September 30, 2007. Because the acquisition of Magnolia Internet Services was consummated on February 1, 2007, there are limited results of operations of this company for the three months ended March 31, 2007 included in the accompanying March 31, 2008 and 2007 consolidated financial statements.
 
 
- 10 -
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 6 - ACQUISITIONS, continued

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

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

The following table presents the unaudited pro forma condensed statement of operations for the three months ended March 31, 2007 and reflects the results of operations of the Company as if the acquisition of Magnolia Internet Services had been effective January 1, 2007.  The pro forma amounts are not necessarily indicative of the combined results of operations had the acquisitions been effective as of that date, or of the anticipated results of operations, due to cost reductions and operating efficiencies that are expected as a result of the acquisitions.

 
  
2007
  
Net sales
  
$
1,469,629
  
Gross profit
  
$
1,069,014
  
Selling, general and administrative expenses
  
$
724,298
  
Net income
  
$
312,724
  
Basic income per share
  
$
0.00
  

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

 
- 11 -
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 6 - ACQUISITIONS, continued

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

Because the acquisition of OW Holdings, Inc. was consummated on February 28, 2007, there are limited results of operations of this company for the three months ended March 31, 2007 included in the accompanying March 31, 2008 and 2007 consolidated financial statements.

The following table presents the unaudited pro forma condensed statement of operations for the three months ended March 31, 2007 and reflects the results of operations of the Company as if the acquisition of OW Holdings had been effective January 1, 2007.  The pro forma amounts are not necessarily indicative of the combined results of operations had the acquisitions been effective as of that date, or of the anticipated results of operations, due to cost reductions and operating efficiencies that are expected as a result of the acquisitions.

 
  
2007
  
Net sales
  
$
1,710,942
  
Gross profit
  
$
1,235,309
  
Selling, general and administrative expenses
  
$
824,830
  
Net income
  
$
378,487
  
Basic income per share
  
$
0.00
  

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

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

 
- 12 -
 
 SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 6 - ACQUISITIONS, continued

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

Because the acquisition of AlaNet Internet Services was consummated on June 21, 2007, there are no results of operations of this company for the three months ended March 31, 2007 included in the accompanying March 31, 2008 and 2007 consolidated financial statements.

The following table presents the unaudited pro forma condensed statement of operations for the three months ended March 31, 2007 and reflects the results of operations of the Company as if the acquisition of AlaNet had been effective January 1, 2007.  The pro forma amounts are not necessarily indicative of the combined results of operations had the acquisitions been effective as of that date, or of the anticipated results of operations, due to cost reductions and operating efficiencies that are expected as a result of the acquisitions.

 
  
2007
  
Net sales
  
$
1,463,483
  
Gross profit
  
$
1,065,112
  
Selling, general and administrative expenses
  
$
719,129
  
Net income
  
$
313,535
  
Basic income per share
  
$
0.00
  

UNITED SYSTEMS ACCESS, Inc.
Effective November 1, 2007, the Company entered into an Asset Purchase Agreement pursuant to which it acquired the Internet related assets of United Systems Access, Inc. (d/b/a USA Telephone), a corporation with headquarters in Maine. The total purchase price was $3,750,000 representing the fair value of the assets acquired which consisted of a $1,000,000 cash payment at closing with a second $1,000,000 in 30 days with the remaining balance due in 36 monthly installments beginning January 2008.

 
- 13 -

 SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 6 - ACQUISITIONS, continued

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

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

Because the acquisition of USA Telephone was consummated effective November 1, 2007, there are no results of operations of this company for period ended March 31, 2007 and included in the accompanying March 31, 2008 and 2007 consolidated financial statements.

The following table presents the unaudited pro forma condensed statement of operations for the three months ended March 31, 2007 and reflects the results of operations of the Company as if the acquisition of USA Telephone had been effective January 1, 2007. The pro forma amounts are not necessarily indicative of the combined results of operations had the acquisitions been effective as of that date, or of the anticipated results of operations, due to cost reductions and operating efficiencies that are expected as a result of the acquisitions.

 
  
2007
  
Net sales
  
$
2,746,814
  
Gross profit
  
$
1,937,351
  
Selling, general and administrative expenses
  
$
1,180,851
  
Net income
  
$
670,499
  
Basic income per share
  
$
0.01
  
 
Comcation, Inc.
Effective March 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to which it acquired the Internet related assets of Comcation, Inc., a Pennsylvania ISP. The total purchase price was $38,500 representing the fair value of the assets acquired which consisted of a $9,135 cash payment at closing with the remaining balance due in 5 monthly installments beginning April 2008. The purchase price has been subsequently adjusted down to $36,818.

 
- 14 -
 
 SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 6 - ACQUISITIONS, continued

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

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

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

The following table presents the unaudited pro forma condensed statement of operations for the three months ended March 31, 2007 and reflects the results of operations of the Company as if the acquisition of Comcation had been effective January 1, 2007.  The pro forma amounts are not necessarily indicative of the combined results of operations had the acquisitions been effective as of that date, or of the anticipated results of operations, due to cost reductions and operating efficiencies that are expected as a result of the acquisitions.

 
  
2007
  
Net sales
  
$
1,451,570
  
Gross profit
  
$
1,056,932
  
Selling, general and administrative expenses
  
$
745,287
  
Net income
  
$
279,653
  
Basic 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.

 
- 15 -
 
 SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 6 - ACQUISITIONS, continued

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

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

Because the acquisition of N2 the Net was consummated effective April 1, 2008, there are no results of operations of this company for periods ended March 31, 2007 and March 31, 2008.

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

NOTE 7 -- PROVISION FOR INCOME TAXES

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes related to differences between the basis of assets and liabilities for financial and income tax reporting will either be taxable or deductible when the assets or liabilities are recovered or settled. The difference between the basis of assets and liabilities for financial and income tax reporting are not material therefore, the provision for income taxes from operations consist of income taxes currently payable.

The nature of the timing difference generating the deferred tax asset, are the accumulated net operating loss carry forwards that can be applied towards mitigating future tax liabilities of the Company. The Company has established a valuation account at the full value of the tax deferred asset as of March 31, 2008 and December 31, 2007. The Company’s operations have generated federal, state income taxes payable which have been offset by the operating loss carry forwards. The Company does not have an effective tax rate due to the Company’s lack of taxable income to date.

 
- 16 -
 
 SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 7 -- PROVISION FOR INCOME TAXES, continued

At March 31, 2008 and December 31, 2007, the Company had accumulated deficits of $10,602,088 and $10,906,088, available to offset future taxable income. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the operating losses in future periods.

There was no provision for income taxes for the three months ended March 31, 2008 and 2007.

NOTE 8 - INTANGIBLE ASSETS

The Company continually monitors its intangible assets to determine whether any impairment has occurred.  In making such determination with respect to these assets, the Company evaluates the performance, on an undiscounted cash flow basis, of the intangible assets or group of assets.  Should impairment be identified, a loss would be reported to the extent that the carrying value of the related intangible asset exceeds its fair value using the discounted cash flow method.  The Company's customer lists are being amortized over three years. Amortization expense was $713,118 and $291,105 for the three months ended March 31, 2008 and 2007.

NOTE 9 - DEFERRED REVENUE

Deferred revenue represents collections from customers in advance for services not yet performed and are recognized as revenue in the period service is provided.
 
Revenue Recognition
The Company recognizes revenue related to software licenses and software maintenance in compliance with the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 97-2, “Software Revenue Recognition.” Product revenue is recognized when the Company delivers the product to the customer and the Company believes that collecting the revenue is probable.  The Company usually has agreements with its customers to deliver the requested product for a fixed price.  Any insignificant post-contract support (PCS) obligations are accrued for at the time of the sale. PCS that is bundled with an initial licensing fee and is for one year or less is recognized at the time of the initial licensing, if collecting the resulting receivable is probable. The estimated cost to the Company to provide such services is minimal and historically, the enhancements offered during the PCS period have been minimal. The Company sells PCS under a separate agreement.  The agreements are for one to two years with a fixed number of hours of service for each month of the contract.  The contract stipulates a fixed monthly payment, non-refundable, due each month and any service hours incurred above the contractual amount are billed as incurred.  Revenue is recognized under these agreements ratably over the term of the agreement.  Revenue for services rendered in excess of the fixed monthly hours contained in the contracts are recognized as revenue as incurred.
 
 
- 17 -
 
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 10 - NOTES PAYABLE
 
Notes payable at March 31, 2008 and December 31, 2007 consist of the following:
 
  
March 31, 2008
  
December 31, 2007
  
Bank note payable in monthly interest and principal payments of $1,784. Interest is payable prime plus 4.5%, (9.75% and 9.75% as of March 31, 2008 and December 31, 2007 respectively).  The note is guaranteed by a stockholder of the Company and secured by a deed of trust against personal residences of three stockholders.  Also, the bank has a blanket lien against all other current and future assets of Sitestar.net.
  
$
54,342
  
$
58,242
  
               
Bank line of credit issued on April 12, 2007 with a principal limit of $300,000. Interest is payable at an annual rate of prime plus .25% (5.50% as of March 31, 2008 and 7.50% as of December 31, 2007). The note is secured by a deed of trust on the Company’s building and is personally guaranteed by officers and directors of the Company. In April 2008 the principal balance was zero.
    
100,000
    
300,000
  
 
          
Non-interest bearing amount due on acquisition of AlaNet Internet Services payable in eleven monthly installments of $4,276 through April 2008.
    
8,436
    
20,807
  
               
Bank note payable in twelve monthly interest and principal payments of $30,650. Interest is payable at an annual rate of 9.25%.  The note is guaranteed by stockholders of the Company and secured by shares of Company stock owned by the stockholders.
    
236,894
    
322,048
  
 
          
Bank note payable in twenty four monthly interest and principal payments of $21,167. Interest is payable at an annual rate of 8.5%.  The note is guaranteed by stockholders of the Company and secured by shares of Company stock owned by the stockholders.
    
383,691
    
438,264
  
 
 
- 18 -
 
Bank bridge note payable on February 1, 2008. Interest is payable at an annual rate of 8.5%. The note was refinanced on February 21, 2008 at an annual interest rate of 8.5% and is payable in twelve payments of $21,760 and is personally guaranteed by stockholders of the Company and secured by real estate owned by stockholders of the Company.
    
229,656
    
250,000
  
               
Non-Interest bearing amount due on acquisition of Comcation payable in five monthly installments starting April 2008    
27,682
    
—
  
               
Non-interest bearing amount due on acquisition of USA Telephone payable in thirty six monthly installments starting January 2008.
   
1,315,615
    
1,574.341
 
               
Less current portion
    
(1,051,996
)
  
(1,268,866
)
 
          
Long-term portion
  
$
1,304,320
  
$
1,694,836
  

 The future principal maturities of these notes are as follows:
 
Twelve months ending March 31, 2009
 
$
1,051,996
  
Twelve months ending March 31, 2010
    
172,955
  
Twelve months ending March 31, 2011
    
15,751
  
Twelve months ending March 31, 2012
    
73,907
  
Twelve months ending March 31, 2013
    
1,041,708
  
Thereafter
    
-
  
Total
  
$
2,356,317
  
 
 
NOTE 11 - ALLEVIATION OF GOING CONCERN

At September 30, 2007, the Company reported that it had a working capital deficiency of $566,269. This condition raised substantial doubt about the Company's ability to continue as a going concern at that time.
 
The Company had income from operations for each of the two years ended December 31, 2007 of $956,170 and $1,179,677. The Company also had positive cash flows from operations of $2,812,829 and 2,465,289 for the two years ended December 31, 2007. In addition, the Company projects positive cash flows for the next twelve months. With this positive trend of operating income, cash flows, and projected cash flow over the next twelve months, the Company’s management considers the facts and circumstances, which raised substantial doubt about the Company’s ability to continue as a going concern, to be alleviated.
 
The Company also plans to continue to increase revenue by acquiring customers in target markets at competitive prices and selling value-added products and services to the existing customer base to maximize average revenue per user (ARPU). The Company will continue to reduce overall operating expenses by leveraging economies of scale, deployment of new technologies, and reducing supplier costs by securing more favorable rates and terms through wholesale partnerships and other methods.
 
 
- 19 -
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related footnotes for the year ended December 31, 2007 included in the Annual Report on Form 10-KSB.  The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.
 
Overview
 
The Company is a national Internet Service Provider and computer services company offering a broad range of services to business and residential customers.  In November 2003, the Company announced the launch of the national dial-up Internet service that made service available to thousands of cities throughout the United States.  This expanded service features web acceleration, e-mail acceleration and pop-up ad blocking. Spam and virus filtering are also included.  The Company utilizes its own infrastructure, as well as, affiliations that allow it to expand its network and services to most of the United States.

The products and services that the Company provides include:
·
Internet access services;
·
Web acceleration services;
·
Web hosting services;
·
End-to-end e-commerce solutions; and
·
Toner and ink cartridge remanufacturing services.

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

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

Through its Internet division, the Company sells and manufactures computer systems, computer hardware, computer software, networking services, repair services and toner and ink cartridge remanufacturing services from the Lynchburg, Virginia location.

The Company is a factory authorized service center for many national-brand computer equipment companies. The Company’s toner and ink cartridge remanufacturing service utilizes empty toner cartridges and remanufactures them to provide savings to customers over buying brand new cartridges. This service is available locally and nationwide.

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

 
- 20 -
 
Results of operations
 
The following tables show financial data for the three months ended March 31, 2008 and 2007. Operating results for any period are not necessarily indicative of results for any future period. 

 
  
For the three months ended March 31, 2008 (unaudited)
  
 
  
Corporate
  
Internet
  
Total
  
Revenue
  
$
—
  
$
2,544,545
  
$
2,544,545
  
Cost of revenue
    
—
    
825,218
   
825,218
  
 
              
Gross profit
    
—
    
1,719,327
   
1,719,327
  
 
              
Operating expenses
    
43,416
   
1,321,676
   
1,365,092
  
Income (loss) from operations
    
(43,416
)
  
397,651
    
354,235
  
Other income (expense)
    
—
    
(50,235
)
  
(50,235
)
                     
Net income (loss)
  
$
(43,416
)
$
347,416
  
$
304,000
  

 
  
For the three months ended March 31, 2007 (unaudited)
  
 
  
Corporate
 
Internet
 
Total
  
Revenue
  
$
—
  
$
1,439,981
  
$
1,439,981
  
Cost of revenue
    
—
    
391,026
   
391,026
  
 
              
Gross profit
    
—
    
1,048,955
   
1,048,955
  
 
              
Operating expenses
    
3,479
   
704,916
   
708,395
  
Income (loss) from operations
    
(3,479
)
  
344,039
    
340,560
  
Other income (expense)
    
—
    
(31,992
)
  
(31,992
)
                     
Net income (loss)
  
$
(3,479
)
$
312,047
  
$
308,568
  
 
 
- 21 -
 
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) consists of revenue less cost of revenue and operating expense.  EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is presented to enhance an understanding of the Company’s operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures for other companies. See the Liquidity and Capital Resource section for further discussion of cash generated from operations.

The following tables show a reconciliation of EBITDA to the GAAP presentation of net income for the three months ended March 31, 2008 and 2007. Cash and cash equivalents totaled $235,931 and $232,249 at March 31, 2008 and December 31, 2007. EBITDA was $1,098,096 for the three months ended March 31, 2008 and 2007.
 
   
For the three months ended March 31, 2008
  
 
  
Corporate
 
Internet
 
Total
  
EBITDA
  
$
(43,416
)
$
1,141,512
  
$
1,098,096
  
Interest expense
    
—
    
(71,686
)
  
(71,686
)
Taxes
    
—
    
—
    
—
  
Depreciation
    
—
    
(9,292
)
  
(9,292
)
Amortization
    
—
    
(713,118
)
  
(713,118
)
Net income (loss)
  
$
(43,416
)
$
347,416
  
$
304,000
  
 
   
For the three months ended March 31, 2007
  
 
  
Corporate
 
Internet
 
Total
  
EBITDA
  
$
(3,479
)
$
653,361
  
$
649,882
  
Interest expense
    
—
    
(35,469
)
  
(35,469
)
Taxes
    
—
    
—
    
—
  
Depreciation
    
—
    
(14,740
)
  
(14,740
)
Amortization
    
—
    
(291,105
)
  
(291,105
)
Net income (loss)
  
$
(3,479
)
$
312,047
  
$
308,568
  
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash and cash equivalents totaled $235,931 and $232,249 at March 31, 2008 and at December 31, 2007. EBITDA was $1,098,096 for the three months ended March 31, 2008 as compared to $649,882 for the three months ended March 31, 2007.
 
Sales of Internet services which are not automatically processed via credit card or bank account drafts have been the company’s highest exposure to collection risk. To help offset this exposure, the Company has added a late payment fee to encourage timely payment by customers. Another effort to improve customer collections was the implementation of a uniform manual invoice processing fee, which has also helped to speed up the collections procedures. These steps and more aggressive collection efforts have shifted accounts receivable to a more current status which is easier to collect. The balance in the Current category decreased from 66.3% to 48.0% of total accounts receivable from December 31, 2007 to March 31, 2008.  The balance in the 30+ day category increased from 18.3% to 31.1% of total accounts receivable from December 31, 2007 to March 31, 2008.  The balance in the 60+ day category increased from 15.4% to 20.9% of total accounts receivable from December 31, 2007 to March 31, 2008. 
The aging of accounts receivable as of March 31, 2008 and December 31, 2007 is as shown:
 
 
  
March 31, 2008
  
December 31, 2007
  
Current
  
$
298,276
    
48.0
%
$
198,757
    
66.3
%
30 +
    
193,406
    
31.1
%
  
54,768
    
18.3
%
60 +
    
130,362
    
20.9
%
  
46,338
    
15.4
%
90 +
    
—
    
—
%
  
—
    
—
%
Total
  
$
622,044
    
100.0
%
$
299,863
    
100.0
%

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 its customer base, make strategic acquisitions, general market conditions, 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.
 
THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO MARCH 31, 2007 (Unaudited)
 
REVENUE.

Revenue for the three months ended March 31, 2008 increased by $1,104,564 or 76.7% from $1,439,981 for the three months ended March 31, 2007 to $2,544,545 for the same period in 2008. Internet sales increased primarily due to the addition of Internet customers from the asset acquisition of USA Telephone These acquisitions, for the three months ended March 31, 2008, yielded approximately $1,307,000 in additional net revenues. This increase from acquisitions was offset by additional attrition to broadband service. Sitestar focuses on marketing and selling Internet access to second-tier markets where broadband is not prevalent. The Company’s strategy is to leverage operational economies of scale to provide dial-up service in these markets where it will continue to be the core method for connecting to the Internet.
 
 
- 22 -

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

COST OF REVENUE.

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

OPERATING EXPENSES.

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

GAIN ON SALE OF ASSETS.

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

INTEREST EXPENSE.

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

 
- 23 -
 
MARCH 31, 2008 (Unaudited) COMPARED TO DECEMBER 31, 2007 (Audited)

FINANCIAL CONDITION. 

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

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

   
2008
  
2007
  
EBITDA for the three months ended March 31,
  
$
1,098,096
  
$
649,882
  
Interest expense
    
(71,686
)
  
(35,469
)
Taxes
    
—
    
—
  
Depreciation
    
(9,292
)
  
(14,740
)
Amortization
    
(713,118
)
  
(291,105
)
Net income for the three months ended March 31,
  
$
304,000
  
$
308,568
  

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

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

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

Forward-looking statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, our ability to expand our customer base, make strategic acquisitions, general market conditions, and competition and pricing. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements contained in the report will prove to be accurate.

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.

 
- 25 -
 
Item 3.
Controls and Procedures

We have evaluated the effectiveness of our disclosure controls and procedures and internal controls over financial reporting as of March 31, 2008. 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. There were no changes in internal control over financial reporting during the last fiscal quarter ended March 31, 2008 that materially affected, or is reasonably likely to materially affect internal control over financial reporting.
 
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.

Disclosure Controls and Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Management did not use a framework to conduct the required evaluation of the effectiveness of our internal control over financial reporting since, in the view of management, comparison with a framework was unwarranted because the size of the Company's current operations are such that management is aware of all current transactions. An evaluation was conducted under the supervision and with the participation of the Company's management, including the President (Principal Executive Officer) and CFO (Principal Accounting and Financial Officer), of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the quarter ended March 31, 2008 covered by this Annual Report on Form 10-QSB.

 
- 26 -
 
Inherent Limitations of the Effectiveness of Internal Control

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

The Company's management, including the President (Principal Executive Officer) and Treasurer (Principal Accounting and Financial Officer), confirm that there was no change in the Company's internal control over financial reporting during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 
- 27 -
 
PART II.  OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
None.
 
Item 2.
Unregistered Sales of Equity Securities and use of Proceeds
 
None.
 
Item 3.
Defaults Upon Senior Securities
 
None.
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
None.

Item 5.
Other Information
 
None
 
Item 6.
Exhibits
 
(a)
The following are filed as exhibits to this form 10-QSB:
 
21
Subsidiaries of Sitestar.
 
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
 
 
- 28 -

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 CORPORATION
 
    
Date: May 20, 2008
    
 
By:
  /s/ Frank Erhartic, Jr.
   
Frank Erhartic, Jr.
   
President, Chief Executive Officer
   
(Principal Executive Officer and
   
Principal Accounting Officer)
     
Date: May 20, 2008
    
 
By:
  /s/ Daniel A. Judd.
   
Daniel A. Judd
   
Chief Financial Officer
   
(Principal Financial Officer)
 
 
- 29 -