**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





ANNUAL
      REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**





**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, Suite 201, Lynchburg, VA 24502**


(Address
      of principal executive offices) (Zip Code)





**(434)
      239-4272**


(Issuer's
      telephone number)





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:





TITLE
      OF
      EACH CLASS


COMMON
      STOCK, $.001 PAR VALUE




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been Subject to
      such filing requirements for the past 90 days. Yes [X] No [ ]




Indicate
      by check mark if there is no disclosure of delinquent filers in response to
      Item
      405 of Regulation S-B is not contained in this form, and no disclosure will
      be
      contained, to the best of registrant's knowledge, in definitive proxy or
      information statements incorporated by referenced in Part III of this Form
      10-KSB or any amendment to this Form 10-KSB. [X]




Revenue
      for the year ended December 31, 2006:  $5,597,330




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates (for purposes of this calculation, “affiliates” are considered to
      be the directors and executive officers of the issuer) is approximately
      $7,617,519 (based on the March 26, 2007 trade price of $0.12 per
      share).









**DOCUMENTS
      INCORPORATED BY REFERENCE**




The
      following documents are incorporated herein by reference:





None




Transitional
      Small Business Disclosure Format (check one):  Yes [ ]   No
      [X]







2




**PART
      I**




This
      Annual Report on Form 10-KSB contains statements that are forward-looking,
      including statements relating to anticipated operating results, growth,
      financial resources, the development of new markets, the development and
      acceptance of the Company’s business strategy and new applications for Sitestar
      Corporation's existing products. Readers are cautioned that, although the
      Company believes that its expectations are based on reasonable assumptions,
      forward-looking statements involve risks and uncertainties which may affect
      the
      Company's business and prospects, including changes in economic and market
      conditions, acceptance of the Company’s products, maintenance of strategic
      alliances and other factors discussed elsewhere in this Form
      10-KSB.




**ITEM
      1. DESCRIPTION OF BUSINESS**




**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’s national Internet service is marketed under the brand name
      SurfWithUs.net to differentiate the Company’s national Internet service from its
      local Internet service.  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 design and programming services;


·
         Web hosting services;


·
         End-to-end e-commerce solutions;


·
         Online marketing consulting;


·
         Toner and ink cartridge remanufacturing services;
      and


·
         Computer programming and consulting services.




The
      Company’s ISP division consists of multiple sites of operation and services
      customers throughout the U.S. and Canada, with concentrations in customers
      in
      the Mid-Atlantic, Ohio Valley and Rocky Mountain regions in the U.S. and in
      Ontario, Canada. Sitestar products include narrow band and broadband services,
      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.





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 computer sales and service 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.


3




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.




**Corporate
      History**




The
      Company was incorporated under the name White Dove Systems, Inc. in December
      1992 under the laws of the State of Nevada.




Effective
      December 15, 1999, the Company consummated the acquisition of Neocom
      Microspecialists, Inc. (“Neocom”) in exchange for 6,782,353 shares of the
      Company’s common stock for 100% of the outstanding shares of Neocom. Effective
      upon the closing of the acquisition, the Company issued 4,782,353 shares of
      its
      common stock and reserved 2,000,000 shares of common stock to issue on the
      second anniversary of the acquisition based on certain contingencies related
      to
      potential unrecorded liabilities.  As of January 2002, the remaining
      2,000,000 shares were issued to the former shareholders of Neocom.




Neocom
      is
      an ISP and web development company based in Martinsville, Virginia.  Neocom
      provides Internet access and other Internet services to its customers in the
      Southern Virginia area.  Neocom has since changed its name to Sitestar.net,
      Inc.




Effective
      November 22, 2000, the Company consummated the acquisition of FRE Enterprises,
      Inc., a Virginia corporation (doing business as “Lynchburg.net” and “Computers
      by Design”) in exchange for 16,583,980 shares of its common stock for 100% of
      the outstanding shares of Lynchburg.net. Effective upon the closing of the
      acquisition, the Company issued 12,437,985 shares of its common stock and
      reserved 4,145,995 shares of its common stock that the Company had agreed
      to issue on the third anniversary of the acquisition based on certain
      contingencies related to potential unrecorded and unknown liabilities.  On
      the third anniversary, November 22, 2003, there were no contingencies that
      had
      not been satisfied and the shares were issued on that date. The Company used
      the
      market price of its common stock at the acquisition date to determine the
      acquisition price of $2,487,597.




Lynchburg.net
      is an ISP and web development company.  Computers by Design is a computer
      sales and service company. In addition, Computers by Design has a division
      that
      remanufactures ink and toner cartridges under the name of CBD Toner Recharge.
      This company is based in Lynchburg, Virginia and provides products and services
      to its customers in the central and southwestern part of Virginia, as well
      as,
      nationwide.




On
      July
      1, 2001, the Company acquired 100% of the equity and voting interest of Advanced
      Internet Services, Inc., a North Carolina corporation (“ADVI”).  ADVI is an
      Internet and computer Service Provider located in Mt. Airy, North Carolina.
       The purchase price was $965,980, which consisted of $150,000 in cash,
      transaction costs of $30,000, 6,021,818 of the Company’s common shares valued at
      $301,091 and a non-interest bearing promissory note for $1,199,990 (the present
      value was $484,889) payable in 24 quarterly installments of $51,078.  Due
      to the non-interest bearing nature of the note, the Company imputed a discount
      rate of 36% to calculate the present value of the note.  This discount rate
      was an estimate of the Company’s current cost of capital.  This acquisition
      included goodwill of $702,642 that was the premium the Company paid to have
      the
      opportunity to generate revenues and earnings in this market.




Effective
      October 16, 2002, Sitestar reorganized and the Board named Frank R. Erhartic,
      Jr. as the new Chairman and CFO to replace Clinton Sallee and Eric Manlunas,
      who
      resigned. Mr. Erhartic later entered into a contract with the former management
      of Sitestar to buy out their shares of the Company to reduce the number of
      shares outstanding by approximately 32.5%.  Mr. Sallee was retained as a
      paid consultant for one year.


4




Effective
      December 31, 2002, the Company acquired the Internet assets and Internet
      customer list of Digital Data Connections, Inc., a local competitor in
      Martinsville, Virginia. This deal consisted of a cash payment of $50,000 and
      a
      promise to pay a certain percentage of revenues generated by their customers
      for
      ten months. The Company also accepted a non-compete agreement restricting
      competition in the Company’s existing markets for a period of three
      years.





On
      June
      30, 2004 the Company acquired 100% of the Internet-related assets of Virginia
      Link Internet and Network Management, Inc., a Virginia corporation and ISP
      located in Galax, Virginia and Mt. Airy Networks, LLC, a North Carolina limited
      liability company, an ISP located in Mount Airy, North Carolina. The total
      purchase price was $226,314, representing the fair value of the assets acquired,
      less $50,000 for deferred revenues and less a 10% discount, for a purchase
      price
      of $176,314 which consisted of a non-interest bearing note payable over 30
      months.




Effective
      August 31, 2004 the Company entered into a Definitive Agreement to sell the
      assets of Sitestar Applied Technologies (SAT), the software development division
      of the Company. Thomas Albanese, the former manager of the SAT division,
      purchased the assets. The new company is subsequently doing business as Servatus
      Development, LLC. (Servatus). The agreement consisted of Albanese surrendering
      1,460,796 shares of the Company’s common stock and the Company receiving a 20%
      share in the gross revenues of Servatus over a period of four years and
      maintaining the rights to the crisis management software system that was shortly
      thereafter completed. The Company provided office space, occupancy costs and
      Internet services for one year. The Company has recognized a gain from this
      transaction of $54,198 through the fourth quarter of 2006, representing the
      excess of the value of the common stock received and the shared revenue over
      the
      recorded basis of the assets sold.





Effective
      November 22, 2004, the Company entered into a Definitive Agreement acquiring
      the
      Internet related assets of Exchange Computers, Inc. and Exis.net, Inc. Both
      are
      Virginia corporations. The deal consisted of the acquisition of the dial-up
      customers, the related internet assets and non-compete agreements from the
      principal officers of the companies. The total purchase was $150,000,
      representing the fair value of the assets acquired, which consisted of $30,000
      in cash at closing and a non-interest bearing promissory note of $120,000 that
      was paid over twelve months.





Effective
      September 16, 2005, the Company entered into a Definitive Agreement pursuant
      to
      which it acquired the Internet related assets of Idacomm, an Idaho corporation.
      The transaction consisted of the acquisition of the dial-up customers, the
      related Internet assets and non-compete agreements from company. The total
      purchase price was $1,698,430 representing the fair value of the assets
      acquired, less $112,735 for deferred revenues and less a 10% discount, for
      a net
      purchase price of $1,545,304 which consisted of a down payment of $250,000
      with
      the balance was paid by a non-interest bearing note payable over 7 months.
      The
      transaction was accounted for by the purchase method of accounting.
 Accordingly, the purchase price was allocated to the assets acquired based
      on the estimated fair values at the date of acquisition.  The excess of the
      purchase price over the estimated fair value of tangible assets acquired was
      attributed to the customer list and non-compete agreement, which are being
      amortized over the estimated three-year life and contractual three-year life,
      respectively.  The value of the customer list was determined by multiplying
      the current market value per customer times the number of customers purchased
      at
      the time of the acquisition.





Effective
      January 1, 2006, with a closing date of January 6, 2006, the Company entered
      into a Definitive Agreement acquiring the Common Stock of NetRover, Inc. a
      Canadian corporation. The Definitive Agreement consisted of the acquisition
      of
      all of the issued and outstanding shares of , Inc.’s stock and a non-compete
      agreement of the company. The total purchase price was $604,535 which
      represented the fair value of the stock acquired. The transaction also consisted
      of a non-interest bearing promissory note of $403,551


5




payable
      over twelve months, amortized over twenty four months with a balloon payment
      in
      the twelfth month and a down payment consisting of 2,000,000 shares of the
      Registrant’s common stock at Closing.





Effective
      March 16, 2006, the Company entered into a Definitive Agreement pursuant to
      which it acquired the Internet related assets of Prolynx, Inc., a Colorado-based
      Internet Service Provider. The acquisition further increases the Company's
      dial-up and DSL Internet customer base in the Rocky Mountain region. The total
      purchase price was $90,000 representing the fair value of the net assets
      acquired paid in the form of the Company’s assumption of $90,000 in operating
      expenses accrued by Prolynx.





Effective
      July 1, 2006, the Company entered into a Definitive Agreement pursuant to which
      it acquired the Internet related assets of First USA, Inc., an Ohio-based
      Internet Service Provider. The acquisition establishes the company's dial-up
      Internet customer presence in the Ohio Valley region. The total purchase price
      was $725,000 representing the fair value of the assets acquired which consisted
      of a $250,000 cash payment at closing with the balance paid in six equal monthly
      payments beginning August 2006.





Effective
      January 31, 2007, the Company entered into a Definitive Agreement pursuant
      to
      which it acquired the Internet related assets of Magnolia Internet Services,
      an
      Arkansas-based Internet Service Provider. The acquisition establishes the
      Company's Internet the presence in Arkansas. 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 to be paid in twelve equal
      monthly payments beginning March 2007.





Effective
      February 28, 2007, the Company entered into a Definitive Agreement pursuant
      to
      which it acquired the Internet related assets of OW Holdings, Inc., a
      Wyoming-based Internet Service Provider. The acquisition further increases
      the
      company's dial-up Internet presence in 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 with the balance to be
      paid in ninety days with a bank loan that is currently in place.





**Sitestar’s
      Business Strategy**




The
      Company’s growth strategy is to expand its business by increasing its customer
      base, services and coverage area. The Company uses marketing, acquisitions
      and
      partnerships to accomplish this. Sitestar’s mission is to increase stockholder
      value by increasing revenues, consolidating costs and increasing profits, while
      maintaining superior products and customer service.




**Key
      elements of Sitestar’s strategy include:**





**Increasing
      the Dial-up Customer Base.** The
      Company intends to retain its large regional customer base plus continue to
      expand its services to a broader geographic market. The Company maintains its
      existing customers by offering them a high quality service at a reasonable
      price
      and value-added services such as free anti-virus and spam filtering. To address
      the broader market potential, the Company has expanded its local coverage areas
      and has leased infrastructure from its partners which enables the Company to
      provide service to nearly 100% of the people in the United States and Canada.




**Increasing
      the Broadband Customer Base.** The
      Company offers broadband within its regional and national footprint. The Company
      shall continue to expand its market footprint through partnerships. The Company
      markets Broadband Internet Access through its DSLNOW.COM website and through
      traditional sales channels.


6




**Increasing
      the Toner and Ink Cartridge Remanufacturing Business.** Sitestar
      markets this service under the name CBD Toner Recharge and through its website,
      RECHARGE.NET. The Company currently offers this service both locally and
      nationally via mail and Internet. The Company intends to increase this business
      by marketing this cost-saving service by creating affiliate relationships and
      increasing its use of traditional advertising.





**Increasing
      the Product Offerings.** The
      Company shall continue to offer new products and services, as they become
      available, through its retail stores and to its existing Internet customer
      base.
      The Company views Voice Over Internet Protocol (VOIP), services that allow
      accepting and originating phone calls through an Internet connection, to be
      value-added service for both business and residential customers, and is one
      of
      the primary new product offerings the Company is currently
      exploring.





**Strategic
      Relationships and Acquisitions.** The
      Company has many strategic relationships that allow it to expand its products
      and services to a wider range of customers. The Company has historically
      acquired companies, assets and customer bases and intends to continue to
      consider and execute similar opportunities to help grow its
      business.





**Increasing
      the Economies of Scale.** As
      the Company expands, it is committed to managing costs and maximizing
      efficiencies. To optimize its operations, the Company has leveraged the services
      offered by Competitive Local Exchange Carriers (CLECs) - not offered by local
      phone companies - to reduce costs and consolidate its network infrastructure.
      Similarly, the Company has integrated its offices by deploying VOIP services
      to
      better utilize its human resources and provide more efficient customer
      service.




**Marketing
      Channels**




The
      Company deploys a variety of marketing strategies and tactics to promote its
      products and services, including print, radio, TV, billboard, Web advertisement,
      direct mail, affiliate and referral programs. The Company’s portfolio of
      websites generates new business on a consistent and daily basis. In addition,
      the Company sells its products to customers who visit its retail store
      locations.  The Company’s indirect sales channel strategy consists of
      affiliates such as sales agents, as well as, companies that market and sell
      the
      Company’s services under their own brand. To date, the Company’s most effective
      sales lead generation has been through its customer referral program. To capture
      greater market share, the Company has utilizes the position of Vice President
      of
      Marketing and Business Development. Key initiatives include increasing affiliate
      relationships, partnering with leading national retailers and strategic
      acquisitions.





**Competition**




The
      Internet services market is extremely competitive and highly fragmented.
 The Company faces competition from numerous types of ISPs,
      including other national ISPs, and anticipates that competition will
      only intensify in the future as the ISP industry consolidates and the market
      becomes further commoditized. The Company believes that the primary competitive
      factors in the Internet services market include:


o Pricing;


o Quality
      and breadth of products and
      services;


o Ease
      of use;


o Personal
      customer support and
      service; and


o Brand
      awareness.


7




The
      Company believes that it competes favorably based on these factors, particularly
      due to:


o National
      brand name;


o Highly
      responsive customer support
      and service;


o High
      reliability; and


o Competitive
      pricing.





The
      Company currently competes, or expects to compete, with the following types
      of
      companies:




o
            Local
                and regional ISPs and Computer Companies;o
            National
                Internet Service Providers, such as, AOL Time Warner, MSN (Microsoft
                Network) and EarthLink;





o
            Local,
                regional and national broadband cable providers, such as Comcast
                Roadrunners and Cox Communications;o
            Providers
                of Web hosting, co-location and other Internet-based business
                services;





o
            Computer
                hardware and other technology companies that provide Internet connectivity
                with their own or other products, including IBM and
                Microsoft;o
            National
                telecommunication providers, such as Verizon, AT&T and
                Qwest;





o
            Regional
                Bell Operating Companies and local telephone companies;o
            Providers
                of free or discount Internet service, including United Online;





o
            Terrestrial
                wireless and satellite providers, such as Hughes DIRECWAY;
                ando
            Non-profit
                or educational ISPs.




The
      Company’s primary competitors include large companies that have substantially
      greater market presence, brand-name recognition and financial resources than
      the
      Company presently enjoys. Secondary competitors include local or regional ISPs
      that may benefit from relationships within a particular community.





The
      residential broadband Internet access market is fast-becoming dominated by
      cable
      companies, telecommunications companies and CLECs who respectively offer
      Internet connectivity through the use of cable modems or Digital Subscriber
      Line
      (DSL) programs that provide high speed Internet access using the existing copper
      wire telephone infrastructure. Other alternative service companies provide
      Internet connectivity via wirelesses terrestrial and satellite-based service
      technologies. These competitors enjoy the advantage of being able to leverage
      their existing relationships with customers to promote high-speed Internet
      services. In addition, they provide incentives for customers to purchase
      Internet access by offering discounts for bundled service offerings. While
      the
      Company is a reseller of DSL services, its profit margin is influenced by the
      aforementioned threats. Thus, should the Company be unable to provide
      technologically competitive service in the marketplace or compete with companies
      bundling Internet service with their products, its revenues and profit margins
      may decline.





Additionally,
      a new dial-up Internet access market segment has been created similar to the
      discount or “no frills” airlines. These ISPs deliver dial-up Internet access at
      substantially discounted rates with complimentary spam and virus protection.
      Unlike traditional service plans, these discount ISPs charge their customers
      for
      technical support. Many ISPs have responded in turn by creating similar service
      and pricing plans and or reducing the cost of their traditional service plans
      to
      remain competitively viable. Similarly, a second dial-up market segment has
      emerged where value-added services including web acceleration, spyware and
      pop-up ad protection are delivered at a premium price. Thus, the Company
      believes that if it is unable to compete with lower-cost and premium service
      providers, its revenues and profit margins may decline.




To
      address these competitive challenges, the Company will continue to distinguish
      itself by offering competitively priced and packaged products, value-added
      services and proven customer support. The Company also believes that its ability
      to respond quickly and adroitly in providing solutions to its customers’
Internet needs will be a key advantage.


8




**Government
      Regulations**




There
      is
      currently only a small body of laws and regulations directly applicable to
      access to or commerce on the Internet. However, due to the increasing popularity
      and use of the Internet, it is possible that a number of laws


and
      regulations may be adopted at the international, federal, state and local levels
      with respect to the Internet, covering issues such as user privacy, freedom
      of
      expression, pricing, characteristics and quality of products and services,
      taxation, advertising, intellectual property rights, information security and
      the convergence of traditional telecommunications services with Internet
      communications. Moreover, a number of laws and regulations have been proposed
      and are currently being considered by federal, state and foreign legislatures
      with respect to these issues. The nature of any new laws and regulations and
      the
      manner in which existing and new laws and regulations may be interpreted and
      enforced cannot be fully determined.




In
      addition, there is substantial uncertainty as to the applicability to the
      Internet of existing laws governing issues such as property ownership,
      copyrights and other intellectual property issues, taxation, libel, obscenity
      and personal privacy.  The vast majorities of these laws were adopted prior
      to the advent of the Internet and, as a result, did not contemplate the unique
      issues and environment of the Internet.  Future developments in the law
      might decrease the growth of the Internet, impose taxes or other costly
      technical requirements, create uncertainty in the market or in some other manner
      have an adverse effect on the Internet.  These developments could, in turn,
      have a material adverse effect on the Company’s business, prospects, financial
      condition and results of operations.




The
      Company provides its services through data transmissions over public telephone
      lines and other facilities provided by telecommunications companies.  These
      transmissions are subject to regulation by the Federal Communications Commission
      (“FCC”), state public utility commissions and foreign governmental authorities.
      However, the Company is not subject to direct regulation by the FCC or any
      other
      governmental agency, other than regulations applicable to businesses generally.
      Nevertheless, as Internet services and telecommunications services converge
      or
      the services the Company offers expand, there may be increased regulation of
      its
      business, including regulation by agencies having jurisdiction over
      telecommunications services.  Additionally, existing telecommunications
      regulations affect the Company’s business through regulation of the prices it
      pays for transmission services, and through regulation of competition in the
      telecommunications industry.





The
      FCC
      has ruled that calls to Internet service providers are jurisdictionally
      interstate and that ISPs should not pay access charges applicable to
      telecommunications carriers.  Several telecommunications carriers are
      advocating that the FCC regulate the Internet in the same manner as other
      telecommunications services by imposing access fees on ISPs.  The FCC is
      examining inter-carrier compensation for calls to ISPs, which could affect
      ISPs'
      costs and consequently substantially increase the costs of communicating via
      the
      Internet.  This increase in costs could slow the growth of Internet use and
      thereby decrease the demand for the Company’s services.




The
      Company purchases some components of its broadband services from local carriers
      and from other DSL providers that purchase components from local carriers.
      In
      November 1999, the FCC issued a ruling that allowed competitive local phone
      companies to “line-share” their broadband DSL services over a phone customer’s
      local phone line. The U.S. Court of Appeals changed this decision in May 2002
      and in February 2003, the FCC decided to eliminate “line-sharing” over a
      three-year phase out. Although the inability to buy these discounted lines
      could
      affect a very small part of the Company’s business, it could cause the growth of
      its broadband business to slow if some of its partners, like Covad
      Communications Group, Inc., have to pay full-price for their lines.  On the
      other-hand, however, this may cause less competition in the Company’s local
      markets where it offers broadband services.


9




**Employees**




As
      of
      March 26, 2006, the Company employed twenty four full-time individuals.  Of
      these, the Company has three in management, one in sales and marketing, five
      in
      administration, and fifteen technicians.  The Company also employed three
      part-time individuals.  Of these, the Company has two technicians and
      one in management. The Company’s employees are not unionized, and it considers
      its relations with its employees to be favorable.





**Available
      Information**




Sitestar
      Corporation files annual, quarterly, and current reports and other documents
      with the Securities and Exchange Commission (SEC) under the Securities Exchange
      Act.  The public may read and copy any materials that Sitestar files with
      the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington,
      DC 20549. The public may obtain information on the operation of the Public
      Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains
      an
      Internet web site that contains reports, proxy and information statements,
      and
      other information regarding issuers, including Sitestar, that file
      electronically with the SEC.  The public can obtain any documents that
      Sitestar files with the SEC at http://www.sec.gov.




Sitestar
      also has available though Edgar its Annual Report on Form 10-KSB, Quarterly
      Reports on Form 10-QSB, Current Reports on Form 8-K, and, if applicable,
      amendments to those reports filed or furnished pursuant to Section 13(a) of
      the
      Securities Exchange Act as soon as reasonably practicable after Sitestar
      electronically files such material with, or furnishes it to, the
      SEC.




**ITEM
      2. DESCRIPTION OF PROPERTY**




The
      Company owns a 12,000 square feet office building in Martinsville, Virginia
      located at 29 West Main Street, Martinsville, VA 24112, which was acquired
      along
      with the acquisition of Neocom.  This facility houses a portion of the
      Company’s customer service, web design and technical support functions.
 Also located here is equipment needed to service many of its customers.
 Neocom's principal note holders had a senior lien on the property, which
      has been lifted. This bank note was payable in monthly principal and interest
      installments of approximately $6,400 or $76,800 per annum with the balance
      due
      September 2003. This note has been refinanced into a term loan and has
      subsequently been converted to a line of credit, which is used to facilitate
      the
      cash flows of the Company.





The
      Company leases a 7,200 square feet office facility in Lynchburg, Virginia which
      serves as its corporate office.  Here the Company handles the executive,
      marketing, corporate accounting functions, customer service, technical support,
      and billing and houses Internet equipment. In addition, the Company markets
      local Internet service under the Lynchburg.net and SurfWithUs.net, sells
      computer hardware and services under the name Computers by Design and
      remanufactures toner and ink cartridges under the name CBD Toner Recharge at
      this location. This facility has an annual rent of $46,200. The facility is
      located at 7109 Timberlake Road, Lynchburg, VA 24502, is leased from Frank
      R.
      Erhartic, Jr. a Company Director and Officer and this lease expires on November
      1, 2008.





The
      Company cancelled the lease of a 2,500 square foot office facility in Mt. Airy,
      North Carolina effective October 31, 2005 where it sold computer hardware and
      services under the name of Computers by Design and sold Internet services under
      the name of Sitestar Advanced Internet Services. The Company also housed
      Internet equipment there to serve its customers in the Mt. Airy, North Carolina
      area. This facility had an annual rent of $6,000. The facility is located at
      327
      West Lebanon Street, Mt. Airy, NC 27030. It was leased from Nick Epperson on
      a
      month-to-month lease. The Company now out-sources the services to provide
      internet service for the customers in this area and the Company’s other offices
      provide technical and billing support for those customers previously provided
      at
      this location.


10




The
      Company leases a 950 square foot office facility in Virginia Beach, Virginia
      where it sells computer hardware and services and sells Internet services under
      the name of Sitestar Exis.net. The Company also houses Internet equipment there
      to serve its customers in the Virginia Beach, Virginia area. This facility
      has
      an annual rent of $7,600 and is located at 333 Office Square Lane, Suite 103,
      Virginia Beach, VA 23462 and is leased from Kempsville Commons on a
      month-to-month lease.





The
      Company leases a 2,000 square foot office facility in Chatham, Ontario where
      it
      sells Internet services under the name of NetRover. The Company also houses
      Internet equipment there to serve its customers in Canada. This facility has
      an
      annual rent of $18,000 Canadian or approximately $15,500 in US dollars. The
      facility is located at 48 Fifth Street, Chatham, Ontario N7M 4V8 and is leased
      from Duff Enterprises on a two year lease.





The
      Company anticipates that it may require additional space for its ISP operations
      as it expands, and it believes that it will be able to obtain suitable space
      as
      needed on commercially reasonable terms.




**ITEM
      3. LEGAL PROCEEDINGS**





The
      Company is not aware of any other pending or threatened litigation that could
      have a material adverse effect on its business.





**ITEM
      4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS**




None





**PART
      II**




**ITEM
      5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**


****


**MARKET
      FOR COMMON EQUITY**





Set
      forth
      below are the high and low closing bid prices for the Company’s common stock on
      the Over-the-Counter Bulletin Board for each quarterly period commencing March
      31, 2005:




High
            
            Low2005For
                the quarter ended March 31, 2005
            
            $
            0.04
            
            $
            0.03For
                the quarter ended June 30, 2005
            
            $
            0.03
            
            $
            0.03For
                the quarter ended September 30, 2005
            
            $
            0.06
            
            $
            0.05For
                the quarter ended December 31, 2005
            
            $
            0.06
            
            $
            0.062006For
                the quarter ended March 31, 2006
            
            $
            0.11
            
            $
            0.10For
                the quarter ended June 30, 2006
            
            $
            0.07
            
            $
            0.06For
                the quarter ended September 30, 2006
            
            $
            0.07
            
            $
            0.07For
                the quarter ended December 31, 2006
            
            $
            0.07
            
            $
            0.07




Such
      quotations reflect inter-dealer prices, without retail mark-up, markdown or
      commissions and may not necessarily represent actual transactions.


11




**RECORD
      HOLDERS**




The
      closing bid price for the Company’s common stock was $0.12 on March  26,
      2007.
 As of March 26, 2006 the Company had 120 shareholders of record.
 Additional holders of the Company’s Common Stock hold such stock in street
      name with various brokerage firms.




**DIVIDENDS**




The
      Company has never declared or paid any cash dividends on its common stock.
       The Company currently intends to retain all available funds for use in its
      business and therefore does not anticipate paying any cash dividends in the
      foreseeable future. Any future determination relating to dividend policy will
      be
      made at the discretion of the Board of Directors and will depend on a number
      of
      factors, including the future earnings, capital requirements, financial
      condition and future prospects and such other factors, as the Board of Directors
      may deem relevant.




**RECENT
      SALES OF UNREGISTERED SECURITIES**





The
      Company issued 2,050,000 shares of its common stock in connection with the
      purchase of NetRover Inc. effective January 1, 2006 as reflected in the Form
      8-K
      filed with the Securities and Exchange Commission dated January 6, 2006. The
      Company is currently reacquiring 2,000,000 of these shares to be placed in
      treasury.





**PURCHASES
      OF EQUITY SECURITIES BY THE COMPANY AND AFFILIATED
      PURCHASERS**





The
      following chart provides information regarding purchases of Company equities
      by
      the Company and affiliated purchasers over the last year:




PURCHASES
                OF EQUITY SECURITIESPeriod
            (a)
                Total Number of Shares (or Units) Purchased
            (b)
                Average Price Paid per Share (or Unit)
            (c)
                Total Number of Shares (or Units) Purchased as Part of Publicly Announced
                Plans or Programs
            (d)
                Maximum Number (or Approximate Dollar Value) of Shares (or Units)
                that May
                Yet Be Purchased Under the Plans or ProgramsDecember
                31, 2006
            2,000,000
            $0.10





**ITEM
      6.  MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN 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, 2006 and December 31, 2005 included in this 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


12




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’s national Internet service is marketed under the
      brand name SurfWithUs.net to differentiate the Company’s national Internet
      service from its local Internet service.  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 design and programming services;


·
         Web hosting services;


·
         End-to-end e-commerce solutions;


·
         Online marketing consulting;


·
         Toner and ink cartridge remanufacturing services;
      and


·
         Computer programming and consulting services.




The
      Company’s ISP division consists of multiple sites of operation and services
      customers throughout the U.S. and Canada, with concentrations in customers
      in
      the Mid-Atlantic, Ohio Valley and Rocky Mountain regions in the U.S. and in
      Ontario, Canada. Sitestar products include narrow-band and broadband services,
      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.





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 computer sales and service division, the Company sells and manufactures
      computer systems, computer hardware, computer software, networking services,
      repair services and toner and ink cartridge remanufacturing services from the
      Lynchburg, Virginia location.  The Company is a factory authorized service
      center for many national-brand computer equipment companies. The Company’s toner
      and ink cartridge remanufacturing service utilizes empty toner cartridges and
      remanufactures them to provide savings to customers over buying brand new
      cartridges. This service is available locally and nationwide.





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




**RESULTS
      OF OPERATIONS**




The
      following tables show financial data for the years ended December 31, 2006
      and
      2005.  Operating results for any period are not necessarily indicative of
      results for any future period.


13




For
                the year ended December 31, 2006Corporate
            
            Internet
            
            Retail
            
            TotalRevenue
            
            $
            —
            
            $
            5,510,324
            
            $
            87,006
            
            $
            5,597,330Cost
                of revenue
            
            
            —
            
            
            1,504,519
            
            
            97,661
            
            
            1,602,180Gross
                profit
            
            
            —
            
            
            4,005,805
            
            
            (10,655
            )
            
            3,995,150Operating
                expenses
            
            
            77,616
            
            
            2,669,189
            
            
            68,668
            
            
            2,815,473Income
                (loss) from operations
            
            
            (77,616
            )
            
            1,336,616
            
            
            (79,323
            )
            
            1,179,677Other
                income (expense)
            
            
            —
            
            
            (187,292
            )
            
            —
            
            
            (187,292
            )Net
                income (loss)
            
            $
            (77,616
            )
            $
            1,149,324
            
            $
            (79,323
            )
            $
            992,385




For
                the year ended December 31, 2005Corporate
            
            Internet
            
            Retail
            
            TotalRevenue
            
            $
            —
            
            $
            3,527,148
            
            $
            152,834
            
            $
            3,679,982Cost
                of revenue
            
            
            —
            
            
            974,547
            
            
            77,911
            
            
            1,052,458Gross
                profit
            
            
            —
            
            
            2,552,601
            
            
            74,923
            
            
            2,627,524Operating
                expenses
            
            
            60,721
            
            
            1,655,859
            
            
            83,552
            
            
            1,800,132Income
                (loss) from operations
            
            
            (60,721
            )
            
            896,742
            
            
            (8,629
            )
            
            827,392Other
                income (expense)
            
            
            —
            
            
            (187,278
            )
            
            —
            
            
            (187,278
            )Net
                income (loss)
            
            $
            (60,721
            )
            $
            709,464
            
            $
            (8,629
            )
            $
            640,114





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 Generally
      Accepted Accounting Principals (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 years ended December 31, 2006 and 2005.





For
                the year ended December 31, 2006Corporate
            
            Internet
            
            Retail
            
            TotalEBITDA
            
            $
            (77,616
            )
            $
            2,398,977
            
            $
            (77,440
            )
            $
            2,243,921Interest
                expense
            
            
            -
            
            
            (206,854
            )
            
            -
            
            
            (206,854
            )Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (69,804
            )
            
            (1,883
            )
            
            (71,687
            )Amortization
            
            
            -
            
            
            (972,995
            )
            
            -
            
            
            (972,995
            )Net
                income (loss)
            
            $
            (77,616
            )
            $
            1,149,324
            
            $
            (79,323
            )
            $
            992,385




14




For
                the year ended December 31, 2005Corporate
            
            Internet
            
            Retail
            
            TotalEBITDA
            
            $
            (60,721
            )
            $
            1,485,833
            
            $
            (5,795
            )
            $
            1,419,317Interest
                expense
            
            
            -
            
            
            (209,056
            )
            
            -
            
            
            (209,056
            )Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (101,985
            )
            
            (2,834
            )
            
            (104,819
            )Amortization
            
            
            -
            
            
            (465,328
            )
            
            -
            
            
            (465,328
            )Net
                income (loss)
            
            $
            (60,721
            )
            $
            709,464
            
            $
            (8,629
            )
            $
            640,114





**YEAR
      ENDED DECEMBER 31, 2006 COMPARED TO DECEMBER 31, 2005**




**REVENUE.** Revenue
      for the year ended December 31, 2006 increased by $1,917,348 or 52.1% from
      $3,679,982 for the year ended December 31, 2005 to $5,597,330 for the same
      period in 2006.  Internet sales increased $1,983,173 or 56.2% from
      $3,527,148 for the year ended December 31, 2005 to $5,510,324 for the same
      period in 2006.  Internet sales increased due to the acquisition of dial—up
      customers.  While the Company continues to sign up new customers, the trend
      is moving towards growth in broadband internet connections resulting in the
      impairment of dial-up customers.  To insure continued strength in revenues,
      the Company has acquired and plans to continue to acquire the assets of Internet
      Service Providers, folding them into operations to provide future revenues.
      These new acquisitions, for the year ended December 31, 2006, yielded
      approximately $1,477,000 in additional net revenues. The Company also plans
      to
      market more aggressively on a national level utilizing scalable tactics and
      targeting a much larger Internet customer base. Retail sales decreased by
      $65,828 or 43.1% from $152,834 for the year ended December 31, 2005 to $87,006
      for the same period ended in 2006. Decreases in retail sales of new hardware
      reflect competition from large retail establishments and the change in focus
      of
      this division. The Company is focusing more on providing professional computer
      service and repair which carries lower volume of revenue but a higher profit
      margin.




**COST
      OF REVENUE.** Costs
      of revenue for the year ended December 31, 2006 increased by $549,722 or 52.2%
      from $1,052,458 for the year ended December 31, 2005 to $1,602,180 for the
      same
      period in 2006. Internet cost of revenue increased $529,972 or 54.4% from
      $974,547 for the year ended December 31, 2005 to $1,504,519 for the same period
      in 2006.  The increase is due primarily to providing services to recent
      customers acquired. Telecommunication expenses increased by $580,725 or 80.0%
      from $725,563 for the year ended December 31, 2005 to $1,306,287 for the same
      period in 2006. The Company is continuing to attempt to negotiate more favorable
      contracts with telecommunication vendors and making the network capacity more
      efficient. The Company expects to continue creating these efficiencies.  
Retail cost of revenue increased $19,750 or 25.3% from $77,911 for the year
      ended December 31, 2005 to $97,661 for the same period in 2006.  The
      primary reason for the increase is a lower level of retail sales of new hardware
      and the liquidation of slower moving inventory.




**OPERATING
      EXPENSES.** Selling,
      general and administrative expenses increased $1,015,341 or 56.4% from
      $1,800,132 for the year ended December 31, 2005 to $2,815,473 for the same
      period in 2006.  This is due primarily to an increase in amortization
      expense and wages. Amortization expense increased $507,667 or 109.1% from
      $465,328 for the year ended December 31, 2005 to $972,995 for the same period
      in
      2006. Wages increased $357,656 or 106.0% from $337,484 for the year ended
      December 31, 2005 to $695,140 for the same period in 2006.  These increases
      are directly related to servicing recently acquired customers. Operating
      expenses for the year ended December 31, 2006 increased by $1,066,845 or 59.3%
      from $1,800,132 for the year ended December 31, 2005 to $2,866,977 for the
      same
      period in 2006. The difference in selling, general and administrative expenses
      is due to the write down of intangible assets for the year ended December 31,
      2006 of $51,504 related to customer list impairment.


15




Corporate
      expenses of $77,616 for the year ended December 31, 2006 consisted of
      professional fees of $70,779 and other expenses of $6,837. Corporate expenses
      of
      $60,721 for the year ended December 31, 2005 consisted of professional fees
      of
      $56,039 and other expenses of $4,682.




**INTEREST
      EXPENSE.** Interest
      expense for the year ended December 31, 2006 decreased by $2,202 or 1.1% from
      $209,056 for the year ended December 31, 2005 to $206,854 for the same period
      in
      2006.  This decrease was a result of an average lower level of borrowing
      and more favorable interest rates.




**BALANCE
      SHEET** .
        Net accounts receivable increased $26,709 or 18.6% from $143,917 on
      December 31, 2005 to $170,626 on the same date in 2006.  This increase is
      substantially due to the addition of the customer base from recent acquisitions.
      Inventory decreased $4,000 or 3.2% from $123,586 on December 31, 2005 to
      $119,586 on December 31 2006.  This decrease is primarily a result of
      consuming inventory used in repairs services and the liquidation of slower
      moving items. The retail sales are focusing more on providing technical and
      repair services to customers as opposed to selling new hardware with lower
      profit margins.  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. Accounts payable decreased by $87,934 or 45.4% from $193,748 on
      December 31, 2005 to $105,814 for the same period in 2006. Accrued expenses
      increased by $247,826 or 138.9% from $178,390 on December 31, 2005 to $426,216
      on December 31, 2006.  This net increase of $247,826 or 138.9% is primarily
      the result of the purchase of treasury shares of $125,000.  Deferred
      revenue increased by $267,211 or 83.1% from $321,555 on December 31, 2005 to
      $588,766 on December 31, 2006 representing primarily new customers that have
      prepaid for services on December 31, 2006. Total notes payable, including
      notes payable to shareholders, decreased $716,401 or 37.2% from $1,927,435
      on
      December 31, 2005 to $1,211,034 on December 31, 2006.  This is a primarily
      result of servicing debt associated with financing acquisitions.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Cash
      and
      cash equivalents totaled $129,453 and $36,047 at December 31, 2006 and at
      December 31, 2005, respectively. EBITDA (Earnings Before Interest, Taxes,
      Depreciation, and Amortization) was $2,243,921 for the year ended December
      31,
      2006 as compared to $1,419,317 for the year ended December 31, 2005.




2006
            
            2005EBITDA
                for the year ended December 31,
            
            $
            2,243,921
            
            $
            1,419,317Interest
                expense
            
            
            (206,854
            )
            
            (209,056
            )Taxes
            
            
            -
            
            
            -Depreciation
            
            
            (71,687
            )
            
            (104,819
            )Amortization
            
            
            (972,995
            )
            
            (465,328
            )Net
                income for the year ended December 31,
            
            $
            992,385
            
            $
            640,114




The
      accompanying consolidated financial statements have been prepared in accordance
      with U.S. GAAP, which contemplate continuation of the Company as a going
      concern.  As shown in the consolidated financial statements, the Company
      had a working capital deficiency of $1,130,016 as of December 31, 2006.
 That condition raises substantial doubt about the Company's ability to
      continue as a going concern. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty. However
      the
      Company believes that existing cash, cash equivalents and cash flow from
      operations and the Company’s ability to obtain favorable financing will be
      sufficient to meet the Company’s working capital and capital expenditure
      requirements for the next twelve months. Sitestar Corporation should not have
      the need to raise any additional material funds for working capital. Growth
      in
      revenues is expected to be derived from acquisitions of customers


16




and
      financing is one of the tools to accomplish this growth. Acquisitions of
      additional customers in the past few years have been accomplished primarily
      with
      seller financing and it is management’s belief that this is a repeatable, though
      not exclusive method of financing for similar acquisitions in the near
      future.





In
      October 2002, new management was installed.  New management has taken the
      following steps that it believes will be sufficient to provide the Company
      with
      the ability to continue in existence and mitigate the concerns:


a)
            Increase
                revenue by acquiring customers in target markets at competitive
                prices;


b)
            Up
                sell value-added products and services to existing customer base
                to
                maximize average revenue per customer
                (ARPU).


c)
            Leverage
                economies of scale to reduce overall operating
                expenses;


d)
            Maximize
                operational efficiency through the deployment of
                technology;


e)
            Reduce
                supplier costs by securing more favorable rates and terms through
                wholesale partnerships and other methods.





The
      Company believes that its existing cash, cash equivalents, cash flow from
      operations and its ability to obtain favorable financing will be sufficient
      to
      meet its working capital and capital expenditure requirements for at least
      the
      next 12 months.  If such sources of financing are insufficient or
      unavailable, or if the Company experiences shortfalls in anticipated revenue
      or
      increases in anticipated expenses, it may need to slow down or reduce its
      marketing and development efforts. Any of these events could harm the business,
      financial condition or results of operations.




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 increased from
      43.2% to 51.2% of total accounts receivable from December 31, 2005 to December
      31, 2006.  The balance in the 30+ day category decreased from 33.1% to
      26.1% of total accounts receivable from December 31, 2005 to December 31, 2006.
       The balance in the 60+ day category decreased from 23.7% to 22.7% of total
      accounts receivable from December 31, 2005 to December 31,
      2006.





The
      aging
      of accounts receivable as of December 31, 2006 and 2005 is as
      shown:




2006
            
            2005Current
            
            $
            87,399
            
            
            51.2
            %
            $
            62,096
            
            
            43.2
            %30
                +
            
            
            44,574
            
            
            26.1
            %
            
            47,670
            
            
            33.1
            %60
                +
            
            
            38,653
            
            
            22.7
            %
            
            34,151
            
            
            23.7
            %90
                +
            
            
            -
            
            
            -
            %
            
            -
            
            
            -
            %Total
            
            $
            170,626
            
            
            100.0
            %
            $
            143,917
            
            
            100.0
            %





17
 
  **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.




18




ITEM
      7.
 FINANCIAL STATEMENTS





INDEX


PageREPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            20FINANCIAL
                STATEMENTSConsolidated
                Balance Sheets as of December 31, 2006 and 2005
            21-22Consolidated
                Statements of Income for the Years Ended December 31, 2006 and
                2005
            23Consolidated
                Statements of Stockholders' Equity for the Years Ended December 31,
                2006
                and 2005
            24Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006 and
                2005
            25Notes
                to Consolidated Financial Statements
            26-44




19




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors and Stockholders


SiteStar
      Corporation


7109
      Timberlake Road, Suite 201


Lynchburg,
      VA 24502





We
      have
      audited the accompanying consolidated balance sheets of SiteStar Corporation,
      (the “Company”) as of December 31, 2006, and the related consolidated statements
      of income, stockholders’ equity (deficit) and cash flows for each of the
      years in the two-year period ended December 31, 2006. These financial statements
      are the responsibility of the Company's management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of SiteStar Corporation, as
      of
      December 31, 2006, and the results of its operations and its cash flows for
      each
      of the years in the two-year period ended December 31, 2006 in conformity with
      accounting principles generally accepted in the United States of
      America.





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. As discussed in Note 1 to the
      consolidated financial statements, the Company had negative net working capital
      of $1,130,016. Unless the Company is successful in generating new sources of
      revenue, or obtaining debt or equity financing, or restructuring its business,
      the Company is likely to deplete its working capital during 2007. These matters
      raise substantial doubt about the Company’s ability to continue as a going
      concern. Management’s plan in regard to these matters is also described in Note
      1. The consolidated financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.





/s/
      BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.


Bagell,
      Josephs, Levine & Company, L.L.C.


Gibbsboro,
      NJ 08026





March
      24,
      2007


20




SITESTAR
      CORPORATION AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS


DECEMBER
      31, 2006 and 2005








ASSETS




CURRENT
                ASSETS
            
            2006
            
            2005Cash
                and cash equivalents
            
            $
            129,453
            
            $
            36,047Accounts
                receivable, net of allowance of $15,695 and $13,834
              as
                of December 31, 2006 and December 31, 2005 respectively
            
            
            170,626
            
            
            143,917Prepaid
                expenses
            
            
            23,676
            
            
            -Total
                current assets
            
            
            323,755
            
            
            179,964PROPERTY
                AND EQUIPMENT, net
            
            
            274,269
            
            
            311,781CUSTOMER
                LIST, net of accumulated amortization of $3,716,215
              and
                $2,765,104 as of December 31, 2006 and December 31,
              2005
                respectively
            
            
            1,721,233
            
            
            1,421,170GOODWILL,
                net of impairment
            
            
            1,288,559
            
            
            1,288,559OTHER
                ASSETS
            
            
            437,197
            
            
            289,586TOTAL
                ASSETS
            
            $
            4,045,013
            
            $
            3,491,060





The
      accompanying notes are an integral part of these consolidated financial
      statements.




21




SITESTAR
      CORPORATION AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS


DECEMBER
      31, 2006 and 2005




LIABILITIES
      AND STOCKHOLDERS' EQUITY





CURRENT
                LIABILITIES
            
            2006
            
            2005Accounts
                payable
            
            $
            105,814
            
            $
            193,748Accrued
                expenses
            
            
            426,216
            
            
            178,390Deferred
                revenue
            
            
            588,766
            
            
            321,555Notes
                payable, current portion
            
            
            286,114
            
            
            959,344Note
                payable - stockholders, current portion
            
            
            46,861
            
            
            242,724Total
                current liabilities
            
            
            1,453,771
            
            
            1,895,761NOTES
                PAYABLE, less current portion
            
            
            63,113
            
            
            74,847NOTES
                PAYABLE - STOCKHOLDERS, less current portion
            
            
            814,946
            
            
            650,520TOTAL
                LIABILITIES
            
            
            2,331,830
            
            
            2,621,128STOCKHOLDERS'
                EQUITYPreferred
                Stock, $0.001 par value, 10,000,000 shares authorized, 0
                shares
              issued
                and outstanding
            
            
            —
            
            
            —Common
                Stock, $0.001 par value, 300,000,000 shares authorized,
              86,063,305
                and 86,013,305 shares issued and outstanding on December
              31,
                2006 and December 31, 2005 respectively
            
            
            88,063
            
            
            86,013Additional
                paid-in capital
            
            
            13,651,157
            
            
            13,450,207Treasury
                Stock, $0.001 par value, 8,218,305 and 6,218,305 common
                shares
              on
                December 31, 2006 and December 31, 2005 respectively
            
            
            (329,977
            )
            
            (129,977
            )Accumulated
                deficit
            
            
            (11,696,060
            )
            
            (12,536,311
            )Total
                stockholders' equity
            
            
            1,713,183
            
            
            869,932TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            4,045,013
            
            $
            3,491,060







The
      accompanying notes are an integral part of these consolidated financial
      statements.


22




SITESTAR
      CORPORATION AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF INCOME


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 AND 2005




2006
            
            2005REVENUEInternet
                service revenue
            
            $
            5,510,324
            
            $
            3,527,148Retail
                revenue
            
            
            87,006
            
            
            152,834TOTAL
                REVENUE
            
            
            5,597,330
            
            
            3,679,982COST
                OF REVENUECost
                of Internet service revenue
            
            
            1,504,519
            
            
            974,547Cost
                of retail revenue
            
            
            97,661
            
            
            77,911TOTAL
                COST OF REVENUE
            
            
            1,602,180
            
            
            1,052,458GROSS
                PROFIT
            
            
            3,995,150
            
            
            2,627,524OPERATING
                EXPENSESSelling,
                general and administrative expenses
            
            
            2,763,969
            
            
            1,800,132Write-down
                of customer list
            
            
            51,504
            
            
            -TOTAL
                OPERATING EXPENSES
            
            
            2,815,473
            
            
            1,800,132INCOME
                FROM OPERATIONS
            
            
            1,179,677
            
            
            827,392OTHER
                INCOME (EXPENSES)Gain
                on disposal of assets
            
            
            19,562
            
            
            21,778Interest
                expense
            
            
            (206,854
            )
            
            (209,056
            )TOTAL
                OTHER INCOME (EXPENSES)
            
            
            (187,292
            )
            
            (187,278
            )INCOME
                BEFORE INCOME TAXES
            
            
            992,385
            
            
            640,114INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            992,385
            
            $
            640,114BASIC
                AND DILUTED INCOME PER SHARE
            
            $
            0.01
            
            $
            0.01WEIGHTED
                AVERAGE SHARES
              OUTSTANDING
                - BASIC AND DILUTED
            
            
            88,050,778
            
            
            83,481,798




The
      accompanying notes are an integral part of these consolidated financial
      statements.


23




SITESTAR
      CORPORATION AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 AND 2005




Common
                Stock
            
            AdditionalPaid-in
            
            Treasury
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Stock
            
            Deficit
            
            TotalBalances
                at December 31, 2004
            
            
            82,013,305
            
            $
            82,013
            
            $
            13,334,207
            
            $
            (129,977
            )
            $
            (13,176,425
            )
            $
            109,818
            )Issuance
                of shares per Debt
              Conversion
                Agreement
            
            
            4,000,000
            
            
            4,000
            
            
            116,000
            
            
            -
            
            
            -
            
            
            120,000Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            640,114
            
            
            640,114Balance
                at December 31, 2005
            
            
            86,013,305
            
            
            86,013
            
            
            13,450,207
            
            
            (129,977
            )
            
            (12,536,311
            )
            
            869,932
            )Issuance
                of shares for
              acquisition
            
            
            2,050,000
            
            
            2,050
            
            
            200,950
            
            
            -
            
            
            -
            
            
            203,000Repurchase
                shares issued for
              acquisition
            
            
            -
            
            
            -
            
            
            -
            
            
            (200,000
            )
            
            -
            
            
            (200,000
            )Purchase
                of
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (152,134
            )
            
            (152,134
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            992,385
            
            
            992,385Balance
                at December 31, 2006
            
            
            88,063,305
            
            $
            88,063
            
            $
            13,651,157
            
            $
            (329,977
            )
            $
            (11,696,060
            )
            $
            1,713,183






The
      accompanying notes are an integral part of these consolidated financial
      statements.


24




SITESTAR
      CORPORATION AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 AND 2005








2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            992,385
            
            $
            640,114Adjustments
                to reconcile net income tonet
                cash provided by operating activities:Depreciation
                and amortization expense
            
            
            1,096,186
            
            
            570,147Bad
                debt expense
            
            
            1,860
            
            
            1,842(Increase)
                decrease in accounts receivable
            
            
            (28,569
            )
            
            60,581(Increase)
                decrease in prepaid expenses
            
            
            (23,676
            )
            
            -Increase
                (decrease) in accounts payable
            
            
            25,630
            
            
            (69,489Increase
                (decrease) in accrued expenses
            
            
            134,262
            
            
            42,076Increase
                (decrease) in deferred revenue
            
            
            267,211
            
            
            95,245Net
                cash provided by operating activities
            
            
            2,465,289
            
            
            1,340,516CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (31,175
            )
            
            (7,315
            )Purchase of customer list
            
            
            (1,251,173
            )
            
            (250,000
            )(Purchase) sale of assets held for resale
            
            
            4,000
            
            
            (17,198
            )Purchase
                of subsidiary
            
            
            (152,134
            )
            
            -Purchase
                of domain name for resale
            
            
            (200,000
            )
            
            -Purchase of non-competition agreements
            
            
            (25,000
            )
            
            -Net
                cash used in investing activities
            
            
            (1,655,482
            )
            
            (274,513
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from notes payable - stockholders
            
            
            136,287
            
            
            385,000Net
                proceeds from notes payable
            
            
            887,488
            
            
            -Repayment of convertible debentures
            
            
            -
            
            
            (259,734
            )Repayment
                of notes payable
            
            
            (1,572,452
            )
            
            (1,006,029
            )Repayment
                of notes payable - stockholders
            
            
            (167,724
            )
            
            (197,726
            )Net
                cash used in financing activities
            
            
            (716,401
            )
            
            (1,078,489
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            93,406
            
            
            (12,486
            )CASH
                AND CASH EQUIVALENTS - BEGINNING OF YEAR
            
            
            36,047
            
            
            48,533CASH
                AND CASH EQUIVALENTS - END OF YEAR
            
            $
            129,453
            
            $
            36,047





The
      accompanying notes are an integral part of these consolidated financial
      statements.


25




SITESTAR
      CORPORATION AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 AND 2005





**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:**




During
      the years ended December 31, 2006 and 2005, the Company paid no income taxes
      and
      paid interest of approximately $207,000 and $209,000, respectively.




**SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:**




During
      the year ended December 31, 2005 the Company issued 4,000,000 shares of common
      stock in accordance with a Debt Conversion Agreement. During the year ended
      December 31, 2006 the Company issued 2,050,000 shares of common stock in
      connection with the acquisition of Inc. and subsequently repurchased 2,000,000
      shares and placed them in treasury.













The
      accompanying notes are an integral part of these consolidated financial
      statements.




26




SITESTAR
      CORPORATION AND SUBSIDIARIES


NOTES
      TO
      CONSOLIDATED STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 AND 2005




**NOTE
      1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES**




**Organization
      and Line of Business**


Sitestar
      Corporation (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc.,
      and prior to that, was formerly known as Holland American International
      Specialties (“HAIS”)), (the “Company”), began operations on June 1, 1997, under
      a partnership agreement, and was incorporated in California on November 4,
      1997.
 On July 26, 1999, the Company restated its Articles of Incorporation to
      change the name of the Company to “Sitestar Corporation.” The Company was in the
      international specialty foods distribution business.  In 1999, through the
      acquisition of two Internet Service Providers, the Company changed its focus
      from a food distribution company to an Internet holding company.  The
      operations of the Company's Internet subsidiaries are located primarily in
      Mid-Atlantic, Ohio Valley and Rocky Mountain regions in the U.S. and in Ontario,
      Canada, and the corporate office is located in Lynchburg, Virginia.




**Basis
      of Presentation**


The
      accompanying consolidated financial statements have been prepared in accordance
      with U.S. GAAP, which contemplate continuation of the Company as a going
      concern.  As shown in the consolidated financial statements, the Company
      had a working capital deficiency of $1,130,016 as of December 31, 2006.
 That condition raises substantial doubt about the Company's ability to
      continue as a going concern. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty. However
      the
      Company believes that existing cash, cash equivalents and cash flow from
      operations and the Company’s ability to obtain favorable financing will be
      sufficient to meet the Company’s working capital and capital expenditure
      requirements for the next twelve months. Sitestar Corporation should not have
      the need to raise any additional material funds for operating expenses; however,
      as stated elsewhere in this filing, growth in revenues is expected to be derived
      from acquisitions of customers and financing is one of the tools to accomplish
      this growth. Acquisitions of additional customers in the past few years have
      been accomplished primarily with seller financing and it is the Company’s belief
      that this is a repeatable method of financing for similar acquisitions in the
      near future. In October 2002, new management was installed.  New management
      has taken the following steps that it believes will be sufficient to provide
      the
      Company with the ability to continue in existence and mitigate the
      concerns:





a)
            Increase
                revenue by acquiring customers in target markets at competitive
                prices;


b)
            Up
                sell value-added products and services to existing customer base
                to
                maximize average revenue per customer
                (ARPU);


c)  Leverage economies of scale to reduce overall operating
      expenses;


d)  Maximize operational efficiency through the deployment of
      technology;


e)  Reduce supplier costs by securing more favorable rates and terms
      through wholesale partnerships and other
      methods.




**Principles
      of Consolidation**


The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly-owned subsidiaries including:  Sitestar.net, Inc.
      (formerly know as Neocom Microspecialists, Inc.), FRE Enterprises, Inc.,
      Advanced Internet Services, Inc. and NetRover Inc.  All intercompany
      accounts and transactions have been eliminated.





**Use
      of Estimates**


The
      Company’s Management’s Discussion and Analysis of Financial Condition and
      Results of Operations


27




section
      discusses its 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 report.





**Fair
      Value of Financial Instruments**


For
      certain of the Company's assets and liabilities, including cash, accounts
      receivable, accounts payable, accrued expenses and deferred revenue, the
      carrying amounts approximate fair value due to their short maturities.  The
      amounts shown for notes payable also approximate fair value because current
      interest rates and terms offered to the Company for similar debt are
      substantially the same.




**Cash
      and Cash Equivalents**


For
      purposes of the statements of cash flows, the Company defines cash equivalents
      as all highly liquid instruments purchased with a maturity of three months
      or
      less.





**Concentration
      of Credit Risk**


Financial
      instruments, which potentially subject the Company to concentrations of credit
      risk, consist of cash and accounts receivable.  The Company places its cash
      with high quality financial institutions and, at times, may exceed the FDIC
      $100,000 insurance limit.  The Company extends credit based on an
      evaluation of the customers’ financial condition, generally without collateral.
 Exposure to losses on receivables is principally dependent on each
      customer's financial condition.  The Company monitors its exposure for
      credit losses and maintains allowances for anticipated losses.





**Accounts
      Receivable**


The
      Company grants credit in the form of unsecured accounts receivable to its
      customers.  The estimate of the allowance for doubtful accounts, which is
      charged off to bad debt expense, is based on management’s assessment of current
      economic conditions and historical collection experience with each customer.
       Specific customer receivables are considered past due when they are
      outstanding beyond their contractual terms and are charged off to the allowance
      for doubtful accounts when determined uncollectible.




For
      the
      years ended December 31, 2006 and 2005, bad debt expense was $435,506 and
      $465,996 respectively. As of December 31, 2006 and 2005, accounts receivable
      consists of the following:





2006
            
            2005Gross
                accounts receivable
            
            $
            186,321
            
            $
            157,751Less
                allowance for doubtful accounts
            
            
            (15,695
            )
            
            (13,834
            )$
            170,626
            
            $
            143,917




28




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 payments 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 process. Accounts over 90
      days
      past due are no longer included in accounts receivable and are turned over
      to a
      collection agency.





**Property
      and Equipment**


Property
      and equipment are stated at cost.  Depreciation is computed using the
      declining balance method based on estimated useful lives from 3 to 7 years
      for
      equipment and 39 years for buildings.  Expenditures for maintenance and
      repairs are charged to operations as incurred while renewals and betterments
      are
      capitalized. Gains and losses on disposals are included in the results of
      operations.




**Impairment
      of Long-Lived Assets**


In
      accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived
      assets to be held and used are analyzed for impairment whenever events or
      changes in circumstances indicate that the related carrying amounts may not
      be
      recoverable.




The
      Company evaluates at each balance sheet date whether events and circumstances
      have occurred that indicate possible impairment.  If there are indications
      of impairment, the Company uses future undiscounted cash flows of the related
      asset or asset grouping over the remaining life in measuring whether the assets
      are recoverable.  In the event such cash flows are not expected to be
      sufficient to recover the recorded asset values, the assets are written down
      to
      their estimated fair value.  Long-lived assets to be disposed are reported
      at the lower of carrying amount or fair value of the asset less cost to
      sell.





The
      sale
      of the assets associated with Sitestar Applied Technologies does not fall under
      the reporting requirements of SFAS No. 144. The Company is maintaining a
      financial interest in the operations of Servatus Development LLC, the purchasing
      entity, and in addition, still maintains programming services for its customers.
      Per the Definitive Agreement to sell the assets, the Company is entitled to
      20%
      of the gross revenue of Servatus Development, LLC for the first four years
      of
      operations. Also per the Definitive Agreement, the Company maintains the rights
      to the crisis management software developed by Sitestar Applied
      Technologies.




**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 for the customer lists was $951,111 and $429,538
      for the years ended December 31, 2006 and 2005, respectively. Amortization
      of
      customer lists for the years ended December 31, 2007, 2008 and 2009 is expected
      to be $938,929, $716,762 and $65,542, respectively.  In accordance
      with SFAS No. 142, amortization of goodwill ceased effective January 1, 2002.
       For the year ended December 31, 2006 there was no impairment of
      goodwill.


29





The
      changes in goodwill for the years ended December 31, 2006 and 2005 are as
      follows:




2006
            
            2005Goodwill,
                at beginning of year
            
            $
            1,288,559
            
            $
            1,122,719Goodwill
                recognized with issuance of shares of stock
            
            
            -
            
            
            165,840Goodwill,
                at end of year
            
            $
            1,288,559
            
            $
            1,288,559





**Inventory**


Inventory
      consists principally of products purchased for resale and are maintained at
      the
      lower of cost (first in - first out basis) or market. 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. The retail operations of
      Sitestar Corporation, Computers by Design, has changed the focus of generating
      revenue from building new equipment to providing professional services,
      repairing and maintaining customers’ systems. This shift in direction,
      precipitated by eroding profit margins resulting from intense competition,
      has
      slowed inventory turns of hardware used in building equipment for resale. While
      inventory maintains a marketable value, it is integrated into sales at a reduced
      rate as repairs to equipment as opposed to becoming a component in a constructed
      system. Consumers will reasonably continue to use the technology level of
      equipment represented by Sitestar Corporation’s inventory and therefore, will
      continue for the near future to be required components in the repair and
      maintenance of their systems. It is for these reasons that inventory was
      reclassified from current assets to other assets held for resale to more
      properly reflect its use. Inventory was valued on December 31, 2006 and 2005
      at
      $119,586 and $123,586 respectively.





**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 obligations are accrued for at the time of the sale. Post-contract
      customer support (“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.




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.




**Advertising
      and Marketing Costs**


The
      Company expenses costs of advertising and marketing as they are incurred.
 These expenses for the years ended December 31, 2006 and 2005 were
      approximately $76,000 and $90,000, respectively.




30




**Income
      Taxes**


The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
      for Income Taxes.” Deferred taxes are provided on the liability method, whereby
      deferred tax assets are recognized for deductible temporary differences and
      deferred tax liabilities are recognized for taxable temporary differences.
       Temporary differences are the differences between the reported amounts of
      assets and liabilities and their tax bases. Deferred tax assets are reduced
      by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will be realized.
 Deferred tax assets and liabilities are adjusted for the effects of
      changes in tax laws and rates on the date of enactment.




**Income
      Per Share**


In
      accordance with SFAS No. 128, “Earnings Per Share,” the basic income per common
      share is computed by dividing net income available to common stockholders by
      the
      weighted average number of common shares outstanding.  Diluted income per
      common share is computed similar to basic income per common share except that
      the denominator is increased to include the number of additional common shares
      that would have been outstanding if the potential common shares had been issued
      and if the additional common shares were dilutive. The Company has no
      potentially dilutive securities.





**Comprehensive
      Income**


SFAS
      No.
      130, “Reporting Comprehensive Income,” establishes standards for the reporting
      and display of comprehensive income and its components in the financial
      statements.  As of and for the years ended December 31, 2005 and 2004, the
      Company had no items that represent other comprehensive income and therefore,
      has not included a schedule of comprehensive income in the consolidated
      financial statements.




**Recently
      Issued Accounting Pronouncements**


On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
      Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based
      Payment (“SFAS 123R”). SFAS 123R requires that compensation cost related to
      share-based payment transactions be recognized in the financial statements.
      Share-based payment transactions within the scope of SFAS 123R include stock
      options, restricted stock plans, performance-based awards, stock appreciation
      rights, and employee share purchase plans. The provisions of SFAS 123R are
      effective for small business issuers as of the first interim period that begins
      after December 15, 2005. The implementation of this standard did not have a
      material impact on its financial position, results of operations or cash
      flows.




On
      December 16, 2004, FASB issued Financial Accounting Standards No. 153, Exchanges
      of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
      Nonmonetary Transactions (“FAS 153”). This statement amends APB Opinion 29 to
      eliminate the exception for nonmonetary exchanges of similar productive assets
      and replaces it with a general exception for exchanges of nonmonetary assets
      that do not have commercial substance. Under FAS 153, if a non-monetary exchange
      of similar productive assets meets a commercial-substance criterion and fair
      value is determinable, the transaction must be accounted for at fair value
      resulting in recognition of any gain or loss. FAS 153 is effective for
      non-monetary transactions in fiscal periods that begin after June 15, 2005.
      The
      implementation of this standard did not have a material impact on its financial
      position, results of operations or cash flows.





In
      March
      2005, the FASB issued Statement of Financial Accounting Standards Interpretation
      Number 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations.”
FIN 47 provides clarification regarding the meaning of the term “conditional
      asset retirement obligation” as used in SFAS 143, “Accounting for Asset
      Retirement Obligations.” FIN 47 is effective for the year ended December 31,
      2005. The effect of FIN 47 on the Company’s financial position, results of
      operations and cash flows is immaterial.


31





In
      May
      2005, the FASB issued SFAS 154, “Accounting for Changes and Error Corrections—a
      replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154
      changes the requirements with regard to the accounting for and reporting a
      change in an accounting principle. The provisions of SFAS 154 require, unless
      impracticable, retrospective application to prior periods presented in financial
      statements for all voluntary changes in an accounting principle and changes
      required by the adoption of a new accounting pronouncement in the unusual
      instance that the new pronouncement does not indicate a specific transition
      method. SFAS 154 also requires that a change in depreciation, amortization
      or
      depletion method for long-lived, non-financial assets be accounted for as a
      change in an accounting estimate, which requires prospective application of
      the
      new method. SFAS 154 is effective for all changes in an accounting principle
      made in fiscal years beginning after December 15, 2005. The Company plans
      to adopt SFAS 154 beginning January 1, 2006. Because SAS 154 is directly
      dependent upon future events, the Company cannot determine what effect, if
      any,
      the expected adoption of SFAS 154 will have on its financial condition, results
      of operations or cash flows.





In
      February 2006, the FASB issued FAS No. 155, “Accounting for Certain
      Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
      140.” FAS No. 155 resolves issues addressed in FAS No. 133
      Implementation Issue No. D1, “Application of Statement 133 to Beneficial
      Interests in Securitized Financial Assets,” and permits fair value remeasurement
      for any hybrid financial instrument that contains an embedded derivative that
      otherwise would require bifurcation, clarifies which
      interest-only strips and principal-only strips are not subject to the
      requirements of FAS No. 133, establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation, clarifies that concentrations
      of
      credit risk in the form of subordination are not embedded derivatives and amends
      FAS No. 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial instrument. FAS
      No. 155 is effective for all financial instruments acquired or issued after
      the beginning of the first fiscal year that begins after September 15,
      2006. The Company is currently evaluating the effect the adoption of FAS
      No. 155 but believes it will not have a material impact on its financial
      position or results of operations.





In
      March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of
      Financial Assets, an amendment of FASB Statement No. 140.” FAS No. 156
      requires an entity to recognize a servicing asset or liability each time it
      undertakes an obligation to service a financial asset by entering into a
      servicing contract under a transfer of the servicer’s financial assets that
      meets the requirements for sale accounting, a transfer of the servicer’s
      financial assets to a qualified special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale or trading securities in
      accordance with FAS No. 115, “Accounting for Certain Investments in Debt
      and Equity Securities” and an acquisition or assumption of an obligation to
      service a financial asset that does not relate to financial assets of the
      servicer or its consolidated affiliates.





Additionally,
      FAS No. 156 requires all separately recognized servicing assets and
      servicing liabilities to be initially measured at fair value, permits an entity
      to choose either the use of an amortization or fair value method for subsequent
      measurements, permits at initial adoption a one-time reclassification of
      available-for-sale securities to trading securities by entities with recognized
      servicing rights and requires separate presentation of servicing assets and
      liabilities subsequently measured at fair value and additional disclosures
      for
      all separately recognized servicing assets and liabilities. FAS No. 156 is
      effective for transactions entered into after the beginning of the first fiscal
      year that begins after September 15, 2006. The Company is currently
      evaluating the effect the adoption of FAS No. 156, but believes it will not
      have a material impact on its financial position or on the results of
      operations.


32




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) ratified the consensus
      reached in Emerging Issues Task Force (“EITF”) Issue No. 06-2, “Accounting for
      Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No.
      43.”
EITF Issue No. 06-2 provides recognition guidance on the accrual of employees’
rights to compensated absences under a sabbatical or other similar benefit
      arrangement. EITF Issue No. 06-2 is effective for the Company for all financial
      statements after December 31, 2006. The Company is currently assessing the
      impact of the adoption of EITF Issue No. 06-2 on its financial
      statements.




In
      July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive
      model for how a company should recognize, measure, present and disclose in
      its
      financial statements uncertain tax positions that the company has taken or
      expects to take on a tax return (including a decision whether to file or not
      to
      file a return in a particular jurisdiction). The accounting provisions of FIN
      No. 48 are effective for fiscal years beginning after December 15, 2006. The
      Company is in the process of determining the effect, if any, the adoption of
      FIN
      No. 48 will have on its financial statements.




In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” which
      provides a definition of fair value establishes a framework for measuring fair
      value and requires expanded disclosures about fair value measurements. SFAS
      No.
      157 is effective for the financial statements issued for the fiscal years
      beginning after


November
      15, 2007 and the interim periods within those fiscal years. The provisions
      of
      SFAS No. 157 should be applied prospectively. Management is assessing the
      potential impact on the Company’s financial condition and results of
      operations.





In
      September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans”, which amends SFAS No. 87
“Employer’s Accounting for Pensions” (SFAS No. 87), SFAS No. 88 “Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
      and
      for Termination Benefits” (SFAS No. 88), SFAS No. 106 “Employers’ Accounting for
      Postretirement Benefits Other Than Pensions” (SFAS No. 106), and SFAS No. 132R
“Employers’ Disclosures about Pensions and Other Postretirement Benefits
      (revised 2003)” (SFAS No. 132R). This Statement requires companies to recognize
      an asset or liability for the over funded or under funded status of their
      benefit plans in their financial statements. SFAS No. 158 also requires the
      measurement date for plan assets and liabilities to coincide with the sponsor’s
      year end. The standard provides two transition alternatives related to the
      change in measurement date provisions. The recognition of an asset and liability
      related to the funded status provision is effective for fiscal year ending
      after
      December 15, 2006 and the change in measurement date provisions is effective
      for
      the fiscal years ending after December 15, 2008. The Company is currently
      evaluating the effect the adoption of FAS No. 158, but believes it will not
      have a material impact on its financial position or on the results of
      operations.





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.





**NOTE
      2 - ACQUISITIONS**




**Virginia
      Link Internet and Network Management, Inc. and Mount Airy Networks,
      LLC**


On
      June
      30, 2004, the Company acquired 100% of the Internet-related assets of Virginia
      Link Internet and Network Management, Inc., a Virginia corporation and an
      Internet Service Provider located in Galax, Virginia, and Mount Airy Networks,
      LLC, a North Carolina limited liability company, an Internet Service Provider
      located in Mount Airy, North Carolina.  The total purchase price was
      $226,314 representing the fair value of the assets acquired, less $50,000 for
      deferred revenues and less a 10% discount, for a purchase price of $176,314
      which consisted of a non-interest bearing note payable over 30
      months.


33




The
      transaction was accounted for by the purchase method of accounting.
 Accordingly, the purchase price was allocated to the assets acquired based
      on the estimated fair values at the date of acquisition.  The excess of the
      purchase price over the estimated fair value of tangible assets acquired was
      attributed to the customer list and non-compete agreement, which are being
      amortized over the estimated three year life and contractual three year life,
      respectively.  The value of the customer list was determined by multiplying
      the current market value per customer times the number of customers purchased
      at
      the time of the acquisition.





The
      fair
      value of assets acquired is summarized as follows:





Equipment
            
            $
            42,689Customer
                list
            
            
            159,625Non-compete
                agreement
            
            
            24,000Deferred
                revenue
            
            
            (50,000
            )Purchase
                price
            
            $
            176,314




**Exchange
      Computers, Inc. and Exis.net, Inc.**


Effective
      November 22, 2004, the Company entered into a Definitive Agreement acquiring
      the
      Internet related assets of Exchange Computers, Inc. and Exis.net, Inc. Both
      are
      Virginia corporations. The transaction consists of the acquisition of the
      dial-up customers, the related Internet assets and non-compete agreements from
      the principal officers of the companies. The total purchase price was $216,187
      representing the fair value of the assets acquired, less $66,187 for deferred
      revenues and less a 10% discount, for a purchase price of $143,745 which
      consisted of a down payment of $30,000 and a non-interest bearing note payable
      over 12 months.




The
      transaction was accounted for by the purchase method of accounting.
 Accordingly, the purchase price was allocated to the assets acquired based
      on the estimated fair values at the date of acquisition.  The excess of the
      purchase price over the estimated fair value of tangible assets acquired was
      attributed to the customer list and non-compete agreement, which are being
      amortized over the estimated three-year life and contractual three-year life,
      respectively.  The value of the customer list was determined by multiplying
      the current market value per customer times the number of customers purchased
      at
      the time of the acquisition.




The
      fair
      value of assets acquired is summarized as follows:





Equipment
            
            $
            59,755Accounts
                receivable
            
            
            2,284Customer
                list
            
            
            69,706Non-compete
                agreement
            
            
            12,000Purchase
                price
            
            $
            143,745




**Idacomm,
      a wholly owned subsidiary of Idacorp**


Effective
      September 16, 2005, the Company entered into a Definitive Agreement pursuant
      to
      which it acquired the Internet related assets of Idacomm, an Idaho corporation.
      The transaction consists of the acquisition of the dial-up customers, the
      related Internet assets and non-compete agreements from Idacomm. The total
      purchase





price
      was
      $1,698,430 representing the fair value of the assets acquired, less $112,735
      for
      deferred revenues and less a 10% discount, for a net purchase price of
      $1,545,304, paid by a down payment of $250,000 with the balance represented
      by a
      non-interest bearing note payable by the Company to Idacomm over 7
      months.


34




The
      fair
      value of assets acquired is summarized as follows:




Equipment
            
            $
            50,000Accounts
                receivable
            
            
            13,990Customer
                list
            
            
            1,316,314Non-compete
                agreement
            
            
            165,000Purchase
                price
            
            $
            1,545,304





The
      transaction was accounted for by the purchase method of accounting.
 Accordingly, the purchase price was allocated to the assets acquired based
      on the estimated fair values at the date of acquisition.  The excess of the
      purchase price over the estimated fair value of tangible assets acquired was
      attributed to the customer list and non-compete agreement, which are being
      amortized over the estimated three-year life and contractual three-year life,
      respectively.  The value of the customer list was determined by multiplying
      the current market value per customer times the number of customers purchased
      at
      the time of the acquisition.





Because
      the acquisition of Idacomm was consummated on September 16, 2005, there are
      no
      results of operations for these companies for the six months ended June 30,
      2005
      included in the accompanying December 31, 2006 and 2005 consolidated financial
      statements.




The
      following table presents the unaudited pro forma condensed statement of
      operations for the year ended December 31, 2005 and reflects the results of
      operations of the Company as if the acquisition of Idacomm had been effective
      January 1, 2005. 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.





2005Net
                sales
            
            $
            3,744,274Gross
                profit
            
            $
            2,727,404Selling,
                general and administrative expenses
            
            $
            1,895,428Net
                income
            
            $
            686,934Basic
                income per share
            
            $
            0.01





**NetRover
      Inc.**


Effective
      January 1, 2006, the Company entered into a Definitive Agreement pursuant to
      which it acquired 100% of the issued and outstanding shares of stock of NetRover
      Inc., a Canadian corporation. The transaction consists of the acquisition of
      customers including dial-up and DSL Internet subscribers, web hosting and other
      business accounts. The total purchase price was $604,544 representing the fair
      value of the company, paid by a down payment of 2,000,000 shares of the
      Company’s common stock, with the balance represented by a non-interest bearing
      note payable by the Company to Isomedia, Inc. with the note paid in full by
      a
      balloon payment on January 6, 2007.


35




The
      fair
      value of assets acquired is summarized as follows:




Customer
                list
            
            $
            594,535Non-compete
                agreement
            
            
            10,000Purchase
                price
            
            $
            604,535





Because
      the acquisition of NetRover Inc. was consummated on January 1, 2006, there
      are
      no results of operations of this company for the year ended December 31, 2005
      included in the accompanying December 31, 2006 and 2005 consolidated financial
      statements.




The
      following table presents the unaudited pro forma condensed statement of
      operations for the year ended December 31, 2005 and reflects the results of
      operations of the Company as if the acquisition of NetRover Inc. had been
      effective January 1, 2005. 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.





2005Net
                sales
            
            $
            4,581,354Gross
                profit
            
            $
            3,157,000Selling,
                general and administrative expenses
            
            $
            2,325,277Net
                income
            
            $
            621,374Basic
                income per share
            
            $
            0.01





**Prolynx**


Effective
      March 16, 2006, the Company entered into a Definitive Agreement pursuant to
      which it acquired the Internet related assets of Prolynx, Inc., a Colorado-based
      Internet Service Provider. The acquisition further increases the company's
      dial-up and DSL Internet customer base in the Rocky Mountain region. The total
      purchase price was $90,000 representing the fair value of the net assets
      acquired paid in the form of the Company’s assumption of $90,000 in operating
      expenses accrued by Prolynx.





The
      fair
      value of assets acquired is summarized as follows:





Accounts
                receivable
            
            $
            4,310Fixed
                assets
            
            
            5,500Customer
                list
            
            
            92,029Non-compete
                agreement
            
            
            5,000Deferred
                revenue
            
            
            (16,839
            )Purchase
                price
            
            $
            90,000





Because
      the acquisition of Prolynx was consummated on March 16, 2006, there are no
      results of operations of this company for the year ended December 31, 2005
      included in the accompanying December 31, 2006 and 2005 consolidated financial
      statements.


36





The
      following table presents the unaudited pro forma condensed statement of
      operations for the year ended December 31, 2005 and reflects the results of
      operations of the Company as if the acquisition of Prolynx had been effective
      January 1, 2005.  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.





2005Net
                sales
            
            $
            3,815,049Gross
                profit
            
            $
            2,757,191Selling,
                general and administrative expenses
            
            $
            1,871,485Net
                income
            
            $
            698,408Basic
                income per share
            
            $
            0.01





**First
      Net**


Effective
      July 1, 2006, the Company entered into a Definitive Agreement pursuant to which
      it acquired the Internet related assets of First Net, an Ohio-based Internet
      Service Provider. The acquisition establishes the Company's Internet presence
      in
      the Ohio Valley region. The total purchase price was $725,000 representing
      the
      fair value of the assets acquired which consisted of a $250,000 cash payment
      at
      closing with the balance to be paid in six equal monthly payments beginning
      August 2006.





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
      $590,810 as of September 30, 2006. Because the acquisition of First Net was
      consummated on July 1, 2006, there are no results of operations of these
      companies for the year ended December 31, 2005 included in the accompanying
      December 31, 2006 and 2005 consolidated financial statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the year ended December 31, 2005 and reflects the results of
      operations of the Company as if the acquisition of First Net had been effective
      January 1, 2005.  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.





2005Net
                sales
            
            $
            4,120,083Gross
                profit
            
            $
            2,961,816Selling,
                general and administrative expenses
            
            $
            1,972,355Net
                income
            
            $
            781,635Basic
                income per share
            
            $
            0.01





37




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.





Domain
                name
            
            $
            200,000Accounts
                receivable
            
            
            31,732Customer
                list
            
            
            564,425Non-compete
                agreement
            
            
            10,000Deferred
                revenue
            
            
            (231,815
            )Purchase
                price
            
            $
            574,342





**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-based Internet Service Provider. The acquisition establishes
      the Company's Internet presence in Arkansas. 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 to be 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
      March 30, 2007. Because the acquisition of Magnolia Internet Services was
      consummated on February 1, 2007, there are no results of operations of this
      company for the years ended December 31, 2005 and December 31, 2006 included
      in
      the accompanying December 31, 2006 and 2005 consolidated financial statements.





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





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





**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., a
      Wyoming-based Internet Service Provider. The acquisition further increases
      the
      Company's Internet presence in 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 with the balance to be paid
      in
      ninety days.





Because
      the acquisition of OW Holdings, Inc. was consummated on February 28, 2007,
      there
      are no results of operations of this company for the years ended December 31,
      2005 and December 31, 2006 included in the accompanying December 31, 2006 and
      2005 consolidated financial statements. Because the consummation of the Internet
      assets of OW Holdings was on February 28, 2007, the valuation allocations of
      the
      purchase price are pending continuing due diligence to establish the respective
      values.


38




**NOTE
      3 - SALE OF ASSETS**





**Sitestar
      Applied Technologies, Inc.**


Effective
      August 31, 2004, the Company entered into a Definitive Agreement selling the
      assets of Sitestar Applied Technologies (SAT), the software development division
      of Sitestar.  Thomas Albanese, the former manager of the SAT division,
      purchased the assets.  The new company is now doing business as Servatus
      Development, LLC (Servatus).  The agreement consists of Albanese
      surrendering 1,460,796 shares of Sitestar stock and Sitestar receiving
      a 20% share in the gross revenues of Servatus over a period of four
      years and maintaining the rights to the crisis management system.  Sitestar
      provided office space, occupancy costs, and Internet services for one year.
       The Company recognized a gain from this transaction of $14,714 in the
      current reporting period, representing the excess of the shared revenue received
      over the recorded basis of the assets sold.





**NOTE
      4 - PROPERTY AND EQUIPMENT**




The
      cost
      of property and equipment at December 31, 2006 and December 31, 2005 consisted
      of the following:





2006
            
            2005Land
            
            $
            10,000
            
            $
            10,000Building
            
            
            213,366
            
            
            213,366Automobile
            
            
            9,500
            
            
            9,500Computer
                equipment
            
            
            1,108,028
            
            
            633,753Furniture
                and fixtures
            
            
            59,862
            
            
            42,9091,400,756
            
            
            909,528Less
                accumulated depreciation
            
            
            (1,126,487
            )
            
            (597,747
            )$
            274,269
            
            $
            311,781




Depreciation
      expense was $71,687 and $104,819 for the years ended December 31, 2006 and
      2005,
      respectively.


39




**NOTE
      5 - NOTES PAYABLE**




Notes
      payable at December 31, 2006 and 2005 consist of the following:


2006
            
            2005Bank
                note payable in monthly interest and principal payments of $2,215
                and due
                on August 6, 2005.  Interest is payable at an annual rate of 6.25%.
                 The note is secured by inventory, equipment and accounts receivable
                of Advanced Internet Services, Inc.  This note was refinanced March
                18, 2004 with monthly principal payments of $2,952 plus interest
                at prime
                plus .5% (8.75% and 6.75% as of December 31,
                2005).
            
            $
            -
            
            $
            8,855Bank
                note payable in monthly interest and principal payments of $1,784.
                Interest is payable prime plus 4.5%, (9.75% and 12.75% as of December
                31,
                2006 and 2005 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.
            
            
            74,573
            
            
            86,007Bank
                note payable in monthly interest and principal payments of $2,400
                and due
                November 2008.  Interest is payable at an annual rate of prime plus
                1.5% (6.75% as of December 31, 2004).  The note was secured by a
                deed of trust against personal residences of three stockholders and
                the
                Company’s building.  Also, the bank has a blanket lien against all
                other current and future assets of Sitestar.net. This note was refinanced
                on February 9, 2004 into a line of credit due on February 1, 2005
                with a
                principal limit of $165,000 and daily deposit account sweeps. On
                February
                1, 2005, February 1, 2006 the note was renewed for another year.
                Interest
                is payable at an annual rate of prime plus .75% (9.0% and 8.0% as of
                December 31, 2006 and 2005 respectively). 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.
            
            
            57,362
            
            
            43,158Non-interest
                bearing amount due on acquisition of Virginia Link Internet and
                Network Management, Inc. and Mount Airy Networks, LLC payable in
                thirty
                monthly installments of $6,667.
            
            
            -
            
            
            75,830Non-interest
                bearing amount due on acquisition of NetRover Inc. payable in eleven
                monthly installments of $16,856 with a balloon payment paid in January
                2007 of $217,292.
            
            
            217,292
            
            
            -Non-interest
                bearing note due on acquisition of Idacomm’s customer base payable in
                seven monthly installments of $250,000.
            
            
            -
            
            
            820,341349,227
            
            
            1,034,191Less
                current portion
            
            
            (286,114
            )
            
            (959,344
            )Long-term
                portion
            
            $
            63,113
            
            $
            74,847





40




The
      future principal maturities of these notes are as follows:




Year
                ending December 31, 2007
            
            $
            286,114Year
                ending December 31, 2008
            
            
            11,460Year
                ending December 31, 2009
            
            
            11,460Year
                ending December 31, 2010
            
            
            11,460Year
                ending December 31, 2011
            
            
            11,460Thereafter
            
            
            17,273Total
            
            $
            349,227




**NOTE
      6 - NOTES PAYABLE - STOCKHOLDERS**




Notes
      payable - stockholders at December 31, 2006 and 2005 consist of the
      following:




2006
            
            2005Note
                payable to officer and stockholder on a line of credit of $750,000
                at 10%
                interest.  The accrued interest and principal are due on December 31,
                2008.
            
            $
            663,242
            
            $
            603,659Note
                payable to stockholder assumed in connection with the acquisition
                of
                Sitestar.net.  The note was payable upon demand and bore interest at
                9.0% per annum. In February 2004 the terms were changed to 36 monthly
                installments at 5.5%.
            
            
            -
            
            
            15,909Note
                payable to stockholders issued as part of the Purchase price of Advanced
                Internet Services, Inc.  The note is to be repaid in 24 quarterly
                installments of $51,078 beginning in September 2001 and is non-interest
                bearing.  The imputed interest rate for this note is
                36%.
            
            
            46,861
            
            
            198,676Note
                payable to stockholder. The note is payable on October 13, 2008 and
                bears
                interest at 8.0%.
            
            
            96,720
            
            
            25,000Note
                payable to stockholder. The note is payable on October 13, 2008 and
                bears
                interest at 8.0%.
            
            
            54,984
            
            
            50,000861,807
            
            
            893,244Less
                current portion
            
            
            (46,861
            )
            
            (242,724
            )Long-term
                portion
            
            $
            814,946
            
            $
            650,520





41




The
      future principal maturities of these notes are as follows:




Year
                ending December 31, 2007
            
            $
            46,861Year
                ending December 31, 2008
            
            
            814,946Year
                ending December 31, 2009
            
            
            -Year
                ending December 31, 2010
            
            
            -Year
                ending December 31, 2011
            
            
            -Total
            
            $
            861,807





**NOTE
      7 - COMMITMENTS AND CONTINGENCIES**




The
      Company leases certain facilities for its corporate offices and retail stores
      under non-cancelable operating leases. Total rent expense for the years ended
      December 31, 2006 and 2005 was $97,775 and $74,277, respectively.  Future
      minimum lease payments under operating leases with initial or remaining terms
      of
      one year or more are as follows:





Year
                ended December 31,2007
            
            $
            73,4492008
            
            
            15,444Total
            
            $
            88,893




**Litigation**





None





**NOTE
      8 - STOCKHOLDERS' EQUITY**




**Classes
      of Shares**


The
      Company's Articles of Incorporation authorize 310,000,000 shares, consisting
      of
      10,000,000 shares of preferred stock, which have a par value of $0.001 per
      share
      and 300,000,000 shares of common stock, which have a par value of $0.001.





**Preferred
      Stock**


Preferred
      stock, any series, shall have the powers, preferences, rights, qualifications,
      limitations and restrictions as fixed by the Company's Board of Directors in
      its
      sole discretion.  As of December 31, 2006, the Company's Board of Directors
      has not issued any Preferred Stock.





**Common
      Stock**


During
      the year ended December 31, 2005 the Company issued 4,000,000 shares of common
      stock in accordance with a Debt Conversion Agreement. During the year ended
      December 31, 2006 the Company issued 2,050,000 shares of common stock in
      connection with the acquisition of Inc. and subsequently repurchased 2,000,000
      shares and placed them in treasury.


42




**NOTE
      9 - INCOME TAXES**




The
      reconciliation of the effective income tax rate to the federal statutory rate
      as
      of December 31, 2006 and 2004 is as follows:





2006
            
            2005Federal
                income tax rate
            
            
            34.0
            %
            
            34.0
            %Effect
                of net operating loss
            
            
            (34.0
            )%
            
            (34.0
            )%Effective
                income tax rate
            
            
            0.0
            %
            
            0.0
            %





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 December 31, 2006 and
      2004 are as follows:





2006
            
            2005Accounts
                receivable
            
            $
            4,000
            
            $
            4,000Intangible
                assets
            
            
            1,747,000
            
            
            1,747,000Loss
                carry forwards
            
            
            1,298,000
            
            
            1,298,000Less
                valuation allowance
            
            
            (3,049,000
            )
            
            (3,049,000
            )$
            -
            
            $
            -





At
      December 31, 2006, 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 of approximately $1,300,000 expire starting in 2012.





**NOTE
      10 - RELATED PARTY TRANSACTIONS**




The
      Company leases its office building in Lynchburg, Virginia from a stockholder
      of
      the Company on a three year term basis.  The date for renewal of the lease
      is November 1, 2008.  For the years ended December 31, 2006 and 2005, the
      Company paid this stockholder $46,200 and $46,200, respectively, for rent on
      this office building.





**NOTE
      11 - SEGMENT INFORMATION**




The
      Company has three business units with separate management and reporting
      infrastructures that offer different products and services.  The business
      units have been aggregated into three reportable segments: Corporate, Internet
      and Retail.  The Corporate group is the holding company and oversees the
      operating of the other business units.  The Corporate group also arranges
      financing for the entire organization.  The Internet group provides
      Internet access to customers throughout the U.S. and Canada, with concentrations
      in customers in the  Mid-Atlantic,
      Ohio Valley and Rocky Mountain regions in the U.S. and in Ontario, Canada.
       The Retail group operates a retail computer store in Lynchburg, Virginia,
      as well as, providing toner cartridge remanufacturing services in Lynchburg,
      Virginia.





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.


43





Summarized
      financial information concerning the Company's reportable segments is shown
      in
      the following table for the years ended December 31, 2006 and 2005:




December
                31, 2006Corporate
            
            
            Internet
            
            
            Retail
            
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            5,510,324
            
            $
            87,006
            
            $
            5,597,330


Operating
                income (loss)
            
            $
            (77,616
            )
            $
            1,336,616
            
            $
            (79,323
            )
            $
            1,179,677Depreciation
                and amortization
            
            $
            -
            
            $
            1,042,799
            
            $
            1,883
            
            $
            1,044,682Interest
                expense
            
            $
            -
            
            $
            (206,854
            )
            $
            -
            
            $
            (206,854
            )Goodwill
            
            $
            -
            
            $
            1,288,559
            
            $
            -
            
            $
            1,288,559Identifiable
                assets
            
            $
            -
            
            $
            4,284,998
            
            $
            99,041
            
            $
            4,384,039







December
                31, 2005Corporate
            
            
            Internet
            
            
            Retail
            
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            3,527,148
            
            $
            152,834
            
            $
            3,679,982


Operating
                income (loss)
            
            $
            (60,721
            )
            $
            896,742
            
            $
            (8,629
            )
            $
            827,392Depreciation
                and amortization
            
            $
            -
            
            $
            567,313
            
            $
            2,834
            
            $
            570,147Interest
                expense
            
            $
            -
            
            $
            (209,056
            )
            $
            -
            
            $
            (209,056
            )Goodwill
            
            $
            -
            
            $
            1,288,559
            
            $
            -
            
            $
            1,288,559Identifiable
                assets
            
            $
            -
            
            $
            3,381,529
            
            $
            109,531
            
            $
            3,491,060





**NOTE
      12 - SUBSEQUENT EVENTS**





Effective
      February 1, 2007, the Company entered into a Definitive Agreement acquiring
      the
      Internet based assets of Magnolia Internet Services an Arkansas corporation.
      The
      Definitive Agreement consisted of the acquisition of the Internet related assets
      and a non-compete agreement of the company. Effective February 28, 2007, the
      Company entered into a Definitive Agreement acquiring the Internet based assets
      of OW Holdings, Inc. a Wyoming corporation. The Definitive Agreement consisted
      of the acquisition of the Internet related assets and a non-compete agreement
      of
      the company.





**NOTE
      13 - CONTINUATION OF THE COMPANY AS A GOING CONCERN**





The
      accompanying consolidated financial statements have been prepared in accordance
      with U.S. generally accepted accounting principles, which contemplate
      continuation of the Company as a going concern.  As shown in the
      consolidated financial statements, the Company had a working capital deficiency
      of $1,130,016 as of December 31, 2006.  That condition raises substantial
      doubt about the Company's ability to continue as a going concern. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty. However the Company believes that existing cash, cash
      equivalents and cash flow from operations and the Company’s ability to obtain
      favorable financing will be sufficient to meet the Company’s working capital and
      capital expenditure requirements for the next twelve months. In October 2002,
      new management was installed.  New management has taken the following steps
      that it believes will be sufficient to provide the Company with the ability
      to
      continue in existence and mitigate the concerns:




a) 
      Increase revenue through mergers and acquisitions and aggressive marketing
      of
      Internet services in a nationwide
      campaign;


b)  Continue
      to cut costs by securing more favorable telecommunications
      rates;


c)  Continue
      to cut operating expenses in payroll and related expenses; and


d)
      Offering new products to reduce the impairment of intangible assets and expand
      the Company’s markets


44




**ITEM
      8A.  CONTROLS AND PROCEDURES**




We
      have
      evaluated the effectiveness of our disclosure controls and procedures and
      internal controls over financial reporting as of December 31, 2006. 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 significant
      changes to our internal controls over financial reporting that could
      significantly affect internal controls during the last fiscal quarter ended
      December 31, 2006.




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.





**ITEM
      8B.  CONTROLS AND PROCEDURES OTHER INFORMATION**





None


45




**PART
      III**





**ITEM
                9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTER AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(A) OF THE EXCHANGE ACT**




The
      following table sets forth the name, age and position with the Company of each
      officer and director as of the date of this Report.




Our
      current directors, executive officers and key employees are as
      follows:




Name
            
            Age
            
            Position
            
            Director
                sinceFrank
                R. Erhartic, Jr.
            
            38
            
            President,
                CEO, Director
            
            October
                2001Julie
                E. Erhartic
            
            39
            
            Secretary,
                Director
            
            October
                2001Daniel
                Judd
            
            50
            
            CFO,
                Director
            
            June
                2004





Frank
      Erhartic, Jr., 38, Mr.
      Erhartic guides Sitestar’s long-term market strategies and investments, oversees
      all product research and development, and leads the company’s day-to-day
      operations.  An entrepreneur, Mr. Erhartic founded Computers by Design, a
      Sitestar subsidiary, in 1985 as a software development and computer services
      company while pursuing his high school diploma and later created a toner
      remanufacturing division called CBD Toner Recharge.  In 1996, Mr. Erhartic
      started Lynchburg.net an Internet Service Provider which was acquired by
      Sitestar in 2000.  He was named President and CEO in 2002, and has led the
      growth of the Company’s customer base through as series of acquisitions. 
Mr. Erhartic has MCSE, Novell Netware and A+ certifications, and is a graduate
      of Virginia Tech with degrees in both Management and Finance.




Julie
      Erhartic ,
      39, Ms.
      Erhartic graduated from Virginia Tech in 1990 with a major in Psychology and
      a
      minor in Communications Studies with an emphasis in Public Relations. Ms.
      Erhartic was the store manager of Computers by Design from 1991 through 1996.
      While also the Vice President of Computers by Design, she helped co-found the
      Internet division of Lynchburg.net in 1996 and then shifted her focus to public
      relations, accounting and customer service issues.




Mr.
      and
      Mrs. Erhartic are related by marriage.  None of the other executive
      officers or key employees is related to any other of our directors, executive
      officers or key employees.





Dan
      Judd ,
      50, with over twenty years of experience in accounting and management, Mr.
      Judd oversees financial reporting, planning, mergers and acquisitions, and
      finance support for all business operations.  Before joining Sitestar, Mr.
      Judd ran his own accounting firm, Judd Enterprises, Inc., specializing in both
      taxes and accounting.  He also held management positions at several
      manufacturing and wholesale companies.  Mr. Judd is a Certified Public
      Accountant and holds a Bachelor of Science degree in Commerce from the
      University of Virginia.


46




**TERM
      OF DIRECTORS:**




**Director**
            **Expiration
                of term**Frank
                R. Erhartic, Jr.
            December
                31, 2007Julie
                Erhartic
            December
                31, 2007Dan
                Judd
            December
                31, 2007








Section
      16(a) Beneficial Ownership Reporting Compliance Pursuant to Section 16 (a)
      of
      the Securities Exchange Act of 1934, and the rules issued there under, our
      directors and executive officers are required to file with the Securities and
      Exchange Commission and the National Association of Securities Dealers, Inc.
      ownership and changes in ownership of common stock and other equity securities
      of the Company.  Copies of such reports are required to be furnished to us.
 Based solely on a review of the copies of such reports furnished to us, or
      written representations that no other reports were required, we believe that,
      during our fiscal year ended December 31, 2006 all of our executive officers
      and
      directors complied with the requirements of
      Section 16 (a).





The
      Company has adopted a code of ethics and is available on the Company’s website www.sitestar.com under
      Investor Relations.




**ITEM
      10.  EXECUTIVE COMPENSATION**




The
      following table sets forth the annual compensation paid to our executive
      officers for the two fiscal years ended December 31st.




**SUMMARY
      COMPENSATION TABLE**





Name
                and Principal Position
            Year
            Salary
                ($)
            Bonus
                ($)
            Stock
                Awards ($)
            Option
                Awards ($)
            Non-Equity
                Incentive Plan Compen-sation ($)
            Change
                in Pension Value and Non-qualified Deferred Compen-sation Earnings
                ($)
            All
                Other Compen-sation ($)
            Total
                ($)Frank
                R, Erhartic, Jr., Principal Executive Officer (PEO)
            2006
            72,500
            
            
            
            
            
            
            72,5002005
            67,885
            
            
            
            
            
            
            67,885Daniel
                Judd,
              Principal
                Financial Officer (PFO)
            2006
            40,000
            
            
            
            
            
            
            40,0002005
            38,846
            
            
            
            
            
            
            38,846Julie
                E. Erhartic, (Officer)
            2006
            13,000
            
            
            
            
            
            
            13,0002005
            13,000
            
            
            
            
            
            
            13,000







47





Frank
      R.
      Erhartic, Jr., President, CEO and Director, earned a salary of $72,500 and
      $67,885 for the years ended December 31, 2006 and 2005, respectively. He
      received no other compensation. Daniel Judd, CFO and Director earned a salary
      of
      $40,000 and $38,846 for the years ended December 31, 2006 and 2005,
      respectively. He received no other compensation. Julie E. Erhartic, Secretary
      and Director, earned a salary of $13,000 and $13,000 for the years ended
      December 31, 2006 and 2005, respectively. She received no other
      compensation.





**GRANTS
      OF PLAN-BASED AWARDS**





Name
            Grant
              Date
            Estimated
                Future Payouts
              Under
                Non-Equity Incentive Plan Awards
            Estimated
                Future Payouts
              Under
                Equity Incentive Plan Awards
            All
                Other Stock Awards:
              Number
                of Shares
              Of
                Stock or Units (#)
            All
                other
              Option
                Awards: Number of Securities Under-Lying Options (#)
            Exercise
                of Base
              Price
                of Option Awards ($/Sh)Threshold
                ($)
            Target
                ($)
            Maximum
              ($)
            Threshold
              ($)
            Target
              ($)
            Maximum
              (#)PEO
            N/APFO
            N/AOfficer
            N/A





There
      were no Equity Incentive Plans, Non-Equity Incentive Plans or Stock Awards
      for
      the years ended December 31, 2006 and 2005.





**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**





Option
                Awards
            Stock
                AwardsName
            Number
                of securities Underlying Unexercised Options
              (#)
              Exercisable
            Number
                of securities
              Underlying
              Unexercised
                Options (#)
              Unexercisable
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options (#)
            Option
                Exercise Price ($)
            Option
                Expiration Date
            Number
                of Shares of Units of Stock that have not vested
              (#)
            Market
                Value of Shares or Units of Stock that have not vested ($)
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or other
                rights
                that have not vested (#)
            Equity
                Incentive Plan Awards Market or Payout Value of Unearned Shares,
                Units of
                other rights that have not vested
              ($)PEO
            N/APFO
            N/AOfficer
            N/A





48




There
      were no Equity Incentive Plans, Non-Equity Incentive Plans or Stock Awards
      for
      the years ended December 31, 2006 and 2005.





**DIRECTOR
      COMPENSATION**





Name
            Fees
                Earned or Paid in Cash ($)
            Stock
              Awards
                ($)
            Option
                Awards ($)
            Non-Equity
                Incentive Plan Compensation
              ($)
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
                ($)
            All
                Other Compensation ($)
            Total
              ($)Frank
                R, Erhartic, Jr., Director
            
            
            
            
            
            
            $0.00Daniel
                Judd,
              Director
            
            
            
            
            
            
            $0.00Julie
                E. Erhartic, Director
            
            
            
            
            
            
            $0.00





There
      were no Director compensation other than salary for the years ended December
      31,
      2006 and 2005.





**ITEM
      11.  SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**




The
      following table sets forth certain information as of March 26, 2007 regarding
      the record and beneficial ownership of our common stock by: (i) any individual
      or group (as that term is defined in the federal securities laws) of affiliated
      individuals or entities who is known by us to be the beneficial owner of more
      than five percent of the outstanding shares of our common stock; (ii) each
      of
      our executive officers and directors; and (iii) our executive officers and
      directors as a group.





Name
                and Address of
              Beneficial
                Owner
            
            Number
                of Shares
              Beneficially
                Owned (1)
            
            Percent
              Of
                Class (2)Frank
                and Julie Erhartic
              7109
                Timberlake Road
              Lynchburg,
                VA 24502
            
            24,583,980
            
            27.92%Daniel
                A. Judd
              7109
                Timberlake Road
              Lynchburg,
                VA 24502
            
            0
            
            0%All
                directors and officers
              As
                a group (3 persons)
            
            24,583,980
            
            27.92%




(1)
      Except as otherwise indicated, we believe that the beneficial owners of our
      common stock listed above, based on information furnished by such owners, have
      sole investment and voting power with respect to such shares, subject to
      community property laws where applicable.





(2)
      Percent of class is based on 88,063,305 shares of common stock outstanding
      as of
      March 26, 2007.


49





(3)
      Frank
      and Julie Erhartic, Jr. failed to timely file one Form 4 in reference to the
      Debt Conversion agreement dated August 19, 2005. The Form 4 was filed on August
      26, 2005.





**ITEM
      12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




The
      Company leases its corporate headquarters located at 7109 Timberlake Road,
      Suite
      201, Lynchburg, VA 24502 from Frank R. Erhartic, Jr., a stockholder of the
      Company pursuant to a lease agreement entered into on November 23, 2003.
      Pursuant to the lease agreement, the Company pays Mr. Erhartic rent in the
      amount of $46,200 per year. The lease agreement expires on November 1, 2008.


50




**ITEM
      13.  EXHIBITS AND REPORTS ON FORM 8-K**




(1)
      The
      following exhibits are filed as part of this Annual Report on Form 10-KSB or
      are
      incorporated herein by reference:




Exhibit
              
              Description
              
              Filed3.1(i)
              
              Articles
                  of Incorporation of the Registrant (December 17, 1992)
              
              a3.1(ii)
              
              Amended
                  Articles of Incorporation (July 29, 1998)
              
              a3.1(iii)
              
              Amended
                  Articles of Incorporation (October 26, 1998)
              
              a3.1(iv)
              
              Amended
                  Articles of Incorporation (July 14, 1999)
              
              a3.1(v)
              
              Amended
                  Articles of Incorporation (July 28, 1999)
              
              a3.2(i)
              
              By-laws
                  of the Registrant (December 17, 1992)
              
              a4.2
              
              Convertible
                  Debenture Purchase Agreement dated as of May 11, 2000 between the
                  investors named therein and the Registrant
              
              c4.3
              
              12%
                  Convertible Debenture due May 11, 2001 made by the Registrant in
                  favor of
                  New Millenium Capital Partners II, L.L.C.
              
              c4.4
              
              12%
                  Convertible Debenture due May 11, 2001 made by the Registrant in
                  favor of
                  AJW Partners, L.L.C.
              
              c4.5
              
              Stock
                  Purchase Warrant dated as of May 11, 2000 issued by Registrant
                  to New
                  Millenium Capital Partners, L.L.C.
              
              c4.6
              
              Stock
                  Purchase Warrant dated as of May 11, 2000 issued by Registrant
                  to AJW
                  Partners, L.L.C
              
              c4.7
              
              Registration
                  Rights Agreement dated as of May 11, 2000 by and between the Registrant
                  and the investors named therein.
              
              c10.1
              
              Lease
                  for Corporate Office
              
              b10.13
              
              Statement
                  of changes in beneficial ownership of securities.
              
              k10.14
              
              Definitive
                  Purchase Agreement to acquire certain assets of Idacomm, Inc, effective
                  September 16, 2005.
              
              l10.15
              
              Definitive
                  Purchase Agreement to acquire Inc, effective January 1,
                  2006
              
              m10.16
              
              Amendment
                  to report audited financial statements for Definitive Purchase
                  Agreement
                  to acquire Inc.
              
              n10.17
              
              Definitive
                  Purchase Agreement to acquire certain assets of First USA, Inc,
                  effective
                  July 1, 2006.
              
              o10.18
              
              Definitive
                  Purchase Agreement to acquire certain assets of OW Holdings, Inc,
                  effective February 28, 2007.
              
              p31.1
              
              Certification
                  of Chief Executice 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 of2002.31.2
              
              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 of2002.
              
              q32.1
              
              Certification
                  Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
              
              q




51
 
 
 a
              Filed
                  as an exhibit to the Registrant's Form-10SB, as amended, initially
                  filed
                  with the Securities and Exchange Commission on October 22, 1999
                  and
                  incorporated herein by
                  reference.




b
            Filed
                as an exhibit to the Registrant's Form-10SB filed with the Securities
                and
                Exchange Commission on October 28, 2006 and incorporated herein by
                reference.




c
            Filed
                as an exhibit to the Registrant's SB-2 Registration Statement, File
                No.
                333-39660, filed on June 20, 2000 and incorporated herein by
                reference.




k
            Filed
                as an exhibit to Registrant’s Form SC 13G/A filed with the Securities and
                Exchange Commission on February 9,
                2005





l
            Filed
                as an exhibit to Registrant’s Form 8-K filed with the Securities and
                Exchange Commission on September 16,
                2005





m
            Filed
                as an exhibit to Registrant’s Form 8-K filed with the Securities and
                Exchange Commission on January 1,
                2006





n
            Filed
                as an exhibit to Registrant’s Form 8-K/A filed with the Securities and
                Exchange Commission on March 22,
                2006





o
            Filed
                as an exhibit to Registrant’s Form 8-K filed with the Securities and
                Exchange Commission on July 6, 2006





p
            Filed
                as an exhibit to Registrant’s Form 8-K filed with the Securities and
                Exchange Commission on March 2,
                2007




q
            Filed
                herewith




52




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





**BAGELL,
      JOSEPHS, LEVINE & COMPANY, L.L.C.**





On
      March  22,
      2007,
      the Company retained Bagell, Josephs, Levine & Company, L.L.C. as the
      Company's independent auditor and to examine the financial statements of the
      Company for the fiscal year ending December 31, 2006. Bagell, Josephs, Levine
      & Company, L.L.C. performed the services listed below and was paid the fees
      listed below for the fiscal year ended December 31, 2005.





**Audit
      Fees**





Bagell,
      Josephs, Levine & Company, L.L.C. will be paid aggregate fees of
      approximately $30,000 for the fiscal year ended December 31, 2006 for
      professional services rendered for the audit of the Company's annual financial
      statements and for the reviews of the financial statements included in the
      Company's quarterly reports on Form 10-QSB during the fiscal year ended December
      31, 2007.




**Audit
      Related Fees**





Bagell,
      Josephs, Levine & Company, L.L.C. is engaged for aggregate fees of
      approximately $30,000 for the fiscal year ended December 31, 2006 and for the
      first three quarters of 2007 for assurance and related services reasonably
      related to the performance of the audit or review of the Company's financial
      statements.





**All
      Other Fees**





Bagell,
      Josephs, Levine & Company, L.L.C. was not paid any other fees for
      professional services during the fiscal years ended December 31, 2006 and
      December 31, 2005.




**AUDIT
      COMMITTEE**





The
      Company does not have an audit committee.





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Action
      of
      1934, as amended, the registrant has duly caused this amended Report to be
      signed on its behalf by the undersigned, thereunto duly authorized.




April
      2,
      2007




SITESTAR
                CORPORATIONBy:
                /s/ Frank Erhartic, Jr.Frank
                Erhartic, Jr.
              President,
                Chief Executive OfficerBy:
                /s/ Daniel A. JuddDaniel
                A. Judd
              Chief
                Financial Officer




53




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      Report has been signed below by the following persons on behalf of the
      registrant and in the capacities and on the dates indicated.




Signature
            
            Title
            
            Date/s/
                Frank Erhartic, Jr.
            
            President,
                Chief Executive Officer,
                Director
            
            April
                2, 2007Frank
                Erhartic, Jr.
            
            (Principal
                Executive Officer)





/s/
                Daniel A. Judd
            
            Chief
                Financial Officer
            
            April
                2, 2007Daniel
                A. Judd
            
            (Principal
                Financial Officer,Principal
                  Accounting Officer)





/s/
                Julie Erhartic
            
            Secretary,
                Director
            
            April
                2, 2007Julie
                Erhartic




54