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, 2005





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 o




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. o




Revenue
      for the year ended December 31, 2005:  $3,679,982




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
      $6,757,291 (based on the March 24, 2006 trade price of $0.11 per
      share).




1




**DOCUMENTS
      INCORPORATED BY REFERENCE**




The
      following documents are incorporated herein by reference: (i) the Company’s
      Form-10SB, as amended, initially filed with the Securities and Exchange
      Commission on October 22, 1999, (ii) the Company’s Form-10SB filed with the
      Securities and Exchange Commission on January 7, 2000, (iii) the Company’s SB-2
      Registration Statement, File No. 333-39660, filed on June 20, 2000, (iv) the
      Company’s Form 8-K, filed on December 7, 2000 and incorporated herein by
      reference, (v) the Company's Current Report on Form 8-K, filed on February
      23,
      2004, (vi) the Company's Quarterly Report on Form 10-QSB, filed on August 16,
      2004 and the Company’s Form 10-KSB filed with the Securities and Exchange
      Commission on May 19, 2003.




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 10KSB.




**ITEM
      1. DESCRIPTION OF BUSINESS**




**Overview**




The
      Company is a national Internet Service Provider (ISP) and Computer Services
      company offering a broad range of services to business and residential
      customers. The Company serves primarily markets in Mid Atlantic and Northwestern
      states. 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 was enhanced with the
      acquisition of the Idacomm customer base, and features value-added services,
      including web acceleration, e-mail acceleration and pop-up ad blocking and
      spam
      and virus filtering.  The Company’s national Internet service is marketed
      under the brand name SurfWithUs.net. 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:




o    Internet
      access
      services;


o    Web
      acceleration
      services;


o    Web
      design and
      programming services;


o    Web
      hosting
      services;


o    End-to-end
      e-commerce solutions;


o    Online
      marketing
      consulting;


o    Toner
      and ink
      cartridge remanufacturing services; and


o    Computer
      programming and consulting services.




The
      Company’s Internet Service Provider (ISP) division has six sites of operation
      (http://www.surfwithus.net, http://www.sitestar.net, http://www.lynchburg.net, http://www.advi.net ,
      http://www.valink.com, http://www.exis.net
      and http://www.velocitus.com).  These are located in  Martinsville,
      Galax, Virginia Beach, Shenandoah Valley and Lynchburg, Virginia; Mt. Airy,
      North Carolina; and the Idaho, Washington, Utah, Nevada and Arizona areas.  The
      Company provides both narrow-band (dial-up) services and broadband services
      (ISDN, DSL, satellite, cable and wireless) utilizing its own infrastructure
      and
      affiliations to provide services to thousands of service locations throughout
      the United States.





The
      Company’s web design, web hosting and related services enable businesses to
      market their products and services over the Internet. Through its computer
      sales
      and service division http://www.computersbydesign.com), the Company sells and
      manufactures computer systems, computer hardware, computer software, networking
      services, repair services and toner and ink cartridge remanufacturing services
      from the office locations noted above. The Company is a factory authorized
      service center for many national-brand computer equipment companies. The
      Company’s toner and ink cartridge remanufacturing service
      (http://www.recharge.net) uses empty toner cartridges and remanufactures them
      to
      provide savings to customers over buying 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 and retained 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 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.




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 Mount Airy Networks, LLC, a North




4




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 $39,484 through the fourth quarter of 2005, 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 payable 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 to be 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 Netrover, 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 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.





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.




5





Increasing
      the Broadband Customer Base.  The Company offers broadband services
      including ISDN, Landline DSL, Wireless DSL, Satellite DSL and cable access
      within its regional and national footprint. The Company will increase its
      regional wireless DSL coverage area through additional towers and relay points
      of presence. 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.





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 created a new 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:




· Pricing;


· Quality
      and breadth of products and services;


· Ease
      of use;


· Personal
      customer support and service; and


· Brand
      awareness.




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




6




·   National brand
      name;


· Highly
      responsive customer support and service;


· High
      reliability; and


· Competitive
      pricing.




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




·
            Local
                and regional ISPs and Computer
                Companies;


·
            National
                Internet Service Providers, such as, AOL Time Warner, MSN (Microsoft
                Network) and EarthLink;


·
            Local,
                regional and national broadband providers, such as Adelphia and Cox
                Communications;


·
            Providers
                of Web hosting, co-location and other Internet-based business
                services;


·
            Computer
                hardware and other technology companies that provide Internet connectivity
                with their own or other products, including IBM and
                Microsoft;


·
            National
                long distance carriers, such as Qwest and
                Sprint;


·
            Regional
                Bell operating companies and local telephone
                companies;


·
            Providers
                of free or discount Internet service, including United Online;


·
            Terrestrial
                wireless and satellite ISPs; and


·
            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 greater mindshare within a particular community.





The
      residential broadband Internet access market is fast-becoming dominated by
      cable
      companies and Competitive Local Exchange Carriers (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. Similarly, even though the Company has partnered with
      cable operators, industry consolidation threatens to displace them. 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.





**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,




7




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.




**Employees**




As
      of February
      28, 2006 ,
      the
      Company employed twenty
      two full-time individuals.  Of these, the Company has two in management, two in
      sales and marketing, six in administration, and twelve technicians.  The
      Company also employed seven part-time individuals.  Of these, the Company
      has six  technicians
      and one in administration.  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, proxy statements
      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




8




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 here.
       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,
      2006.





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.





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 here
      to serve its customers in the Virginia Beach, Virginia area. This facility
      has
      an annual rent of $7,600.The facility is located at 333 Office Square Lane,
      Suite 103, Virginia Beach, VA 23462, is leased from Kempsville Commons on a
      month-to-month 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**




On
      December 31, 2002, New Millennium Capital Partners II, LLC and AJW Partners,
      LLC
      (the “Convertible Debenture Holders”) filed a complaint against the Company, its
      former officers and its current officers at the Supreme Court of the State
      of
      New York in the county of Nassau. The complaint alleged the Company breached
      their contract and fiduciary duties.  This proceeding was a dispute over
      the amount the Company owed on a convertible debenture. The dispute arose over
      a
      significant payment issued by a conversion of stock that was neither applied
      to
      the principal or interest balance. Effective January 31, 2004, the Company
      entered into a Settlement Agreement with the Convertible Debenture Holders
      whereby all legal action pending regarding the convertible debentures held
      by the Convertible Debenture Holders was dismissed.  The terms of the
      agreement included a cash payment of $100,000 plus 4,000,000 shares of stock
      valued at $.02 per share.  The Convertible Debenture Holders agreed to
      receive a limited amount of stock from their Escrow Agent each month
      with limits on how much could be sold.  In exchange, the Company
      agreed to guarantee a certain average price for the stock that was sold and
      gross up the balance, if any, the following year.  The Settlement Agreement
      is an




9




exhibit
      to Form 8-K filed with the Securities and Exchange Commission dated February
      23,
      2004. Demand for payment, per the terms of the settlement agreement, was made
      for the gross up balance on January 11, 2004 for $259,734.00. This amount is
      reflected in the December 31, 2004 balance sheet as a current liability and
      was
      subsequently paid in full on February 28, 2005.





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, 2004:




**High**
            
            **Low****2004**For
                the quarter ended March 31, 2004
            
            $
            0.02
            
            $
            0.02For
                the quarter ended June 30, 2004
            
            $
            0.01
            
            $
            0.01For
                the quarter ended September 30, 2004
            
            $
            0.01
            
            $
            0.01For
                the quarter ended December 31, 2004
            
            $
            0.03
            
            $
            0.03**2005**For
                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
            
            $
            0.06




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




**RECORD
      HOLDERS**




The
      closing bid price for the Company’s common stock was $0.08 on February 28, 2006.
 As of February 28, 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.




10




**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.








**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 SECURITIES****Period**
            **(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 Programs**October
                1, 2004
            1,460,796
            .01








**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, 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. The
      Company primarily serves markets in Mid Atlantic and Northwestern states. 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 was enhanced with the acquisition of the
      Idacomm customer base, 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.  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:




o    Internet
      access
      services;


o    Web
      acceleration
      services;


o    Web
      design and
      programming services;


o    Web
      hosting
      services;


o    End-to-end
      e-commerce solutions;


o    Online
      marketing
      consulting;


o    Toner
      and ink
      cartridge remanufacturing services; and


o    Computer
      programming and consulting services.




11




The
      Company’s Internet Service Provider (ISP) division has six sites of operation
      (http://www.sitestar.net, http://www.lynchburg.net, http://www.advi.net ,
      http://www.valink.com, http://www.exis.net ,
      and
      http://www.velocitus.com).  These are located in  Martinsville,
      Galax, Virginia Beach, Shenandoah Valley and Lynchburg, Virginia; Mt. Airy,
      North Carolina; and the Idaho, Washington, Utah, Nevada and Arizona areas.  The
      Company provides both narrow-band (dial-up) services and broadband services
      (ISDN, DSL, satellite, cable and wireless) utilizing its own infrastructure
      and
      affiliations to provide services to thousands of service locations throughout
      the United States.





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 (http://www.computersbydesign.com), the
      Company sells and manufactures computer systems, computer hardware, computer
      software, networking services, repair services and toner and ink cartridge
      remanufacturing services from the office locations noted above. The Company
      is a
      factory authorized service center for many national-brand computer equipment
      companies. The Company’s toner and ink cartridge remanufacturing service
      (http://www.recharge.net) processes empty toner cartridges and remanufactures
      them to provide savings to customers over buying 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, 2005
      and
      2004.  Operating results for any period are not necessarily indicative of
      results for any future period.








**For
                the year ended December 31, 2005****Corporate**
            
            **Internet**
            
            **Development**
            
            **Retail**
            
            **Total**Revenue
            
            $
            —
            
            $
            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
            )
            $
            640,114EBITDA(1)
            
            $
            (60,721
            )
            $
            1,485,833
            
            $
            —
            
            $
            (5,795
            )
            $
            1,419,317




**For
                the year ended December 31, 2004****Corporate**
            
            **Internet**
            
            **Development**
            
            **Retail**
            
            **Total**Revenue
            
            $
            —
            
            $
            2,790,342
            
            $
            81,430
            
            $
            262,432
            
            $
            3,134,204Cost
                of revenue
            
            
            —
            
            
            997,069
            
            
            71,830
            
            
            117,067
            
            
            1,185,966Gross
                profit
            
            
            —
            
            
            1,793,273
            
            
            9,600
            
            
            145,365
            
            
            1,948,238Operating
                expenses
            
            
            71,785
            
            
            1,477,110
            
            
            —
            
            
            82,369
            
            
            1,631,264Income
                (loss) from operations
            
            
            (71,785
            )
            
            316,163
            
            
            9,600
            
            
            62,996
            
            
            316,974Other
                income (expense)
            
            
            (34,018
            )
            
            (200,036
            )
            
            —
            
            
            —
            
            
            (234,054
            )Net
                income (loss)
            
            $
            (105,803
            )
            $
            116,127
            
            $
            9,600
            
            $
            62,996
            
            $
            82,920EBITDA(1)
            
            $
            (90,001
            )
            $
            786,753
            
            $
            9,600
            
            $
            67,296
            
            $
            773,648





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




12




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.





**YEAR
      ENDED DECEMBER 31, 2005 COMPARED TO DECEMBER 31, 2004**




REVENUE.
       Revenue for the year ended December 31, 2005 increased by $545,778 or
      17.4% from $3,134,204 for the year ended December 31, 2004 to $3,679,982 for
      the
      same period in 2005.  Internet sales increased $736,806 or 26.4% from
      $2,790,342 for the year ended December 31, 2004 to $3,527,148 for the same
      period in 2005.  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, 2005, yielded
      approximately $673,000 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
      $109,598 or 41.8% from $262,432 for the year ended December 31, 2004 to $152,834
      for the same period ended in 2005. 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, 2005 decreased
      by $133,508 or 11.3% from $1,185,966 for the year ended December 31, 2004 to
      $1,052,458 for the same period in 2005.  Internet cost of revenue decreased
      $22,522 or 2.3% from $997,069 for the year ended December 31, 2004 to $974,547
      for the same period in 2005.  The decrease is due primarily to decreases in
      telecommunication expenses. Telecommunication expenses decreased by $20,562
      or
      2.8% from $746,125 for the year ended December 31, 2004 to $725,563 for the
      same
      period in 2005. The Company is continuing 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 decreased $39,156 or 33.4% from $117,067 for the year ended December
      31, 2004 to $77,911 for the same period in 2005.  The primary reason for
      the decrease is a lower level of retail sales of new hardware.




OPERATING
      EXPENSES.     Selling, general and administrative expenses
      increased $199,255 or 12.4% from $1,600,877 for the year ended December 31,
      2004
      to $1,800,132 for the same period in 2005.  This is due primarily to an
      increase in bad debts, offset in part by decreases in professional fees and
      insurance. Bad debts increased $189,844 or 68.7% from $276,152 for the year
      ended December 31, 2004 to $465,996 for the same period in 2005 . This was
      offset in part by decreases in professional fees of $13,447 or 19.4% from
      $69,486 for the year ended December 31, 2004 to $56,039 for the same period
      ended in 2005. Insurance expenses decreased $26,279 or 48.5% from $54,244 for
      the year ended December 31, 2004 to $27,965 for the same period in 2005.
 Operating expenses for the year ended December 31, 2005 increased by
      $168,868 or 10.4% from $1,631,264 for the year ended December 31, 2004 to
      $1,800,132 for the same period in 2005. The difference in selling, general
      and
      administrative expenses is due to the write down of intangible assets for the
      year ended December 31, 2004 of $30,387 related to customer list
      impairment.




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. Corporate expenses
      of
      $105,803 for the year ended December 31, 2004 consisted of professional fees
      of
      $69,261, expenses from financing settlement of $18,216, interest expense of
      $15,802 and other expenses of $2,524.




INTEREST
      EXPENSE.  Interest expense for the year ended December 31, 2005 decreased
      by $24,542 or 10.5% from $233,598 for the year ended December 31, 2004 to
      $209,056 for the same period in 2005.  This decrease was a result of an
      average lower level of borrowing and more favorable interest rates.




BALANCE
      SHEET.   Net accounts receivable decreased $48,433 or 25.2% from
      $192,350 on December 31, 2004 to $143,917 on the same date in 2005.
 Included in the net accounts receivable balance of $192,350 on December
      31, 2004 is $77,386 due from telecommunication companies. Excluding the
      telecommunication receivables, net accounts receivable on December 31, 2005
      increased by $28,953 or 25.2% from the same date in 2004. This increase is
      substantially due to the addition of the customer base from Idacomm. Inventory
      increased $17,198 or 16.2% from $106,388 on December 31, 2004 to $123,586 on
      December 31 2005.  This increase is primarily a result of restocking of
      inventory used in repairs




13




services.
      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 $66,751 or 25.6% from $260,499 on December 31, 2004 to $193,748
      for
      the same period in 2005. Accrued expenses increased by $36,415 or 25.6% from
      $141,975 on December 31, 2004 to $178,390 on December 31, 2005.  This net
      decrease of $30,336 or 7.5% reflects the Company’s improved cash flow.
 Deferred revenue decreased by $44,756 or 12.2% from $366,311 on December
      31, 2004 to $321,555 on December 31, 2005 representing a lower volume of
      customer accounts that have been prepaid.  Total
      notes payable, including notes payable to shareholders, increased $612,209
      or
      46.5% from $1,315,226 on December 31, 2004 to $1,927,435 on December 31, 2005.
       This is a primarily result of financing the acquisition of the Idacomm’s
      customers. This note, with terms of seven months, had a principal balance of
      $820,341 as of December 31, 2005. This increase in borrowing was offset in
      part
      by decreases in long-term notes payable, as well as, long-term notes payable
      to
      shareholders of $142,409 or 16.4% from $867,776 on December 31, 2004 to $725,367
      on December 31, 2005.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Cash
      and
      cash equivalents totaled $36,047 and $48,533 at December 31, 2005 and at
      December 31, 2004, respectively. EBITDA (Earnings Before Interest, Taxes,
      Depreciation, and Amortization) was $1,419,317 for the year ended December
      31,
      2005 as compared to $773,648 for the year ended December 31, 2004.





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 $1,715,797 as of December 31, 2005.  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.





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.





On
      May
      11, 2000, the Company issued two convertible debentures aggregating $500,000.
       The debentures bore interest at 12% per annum and were due on May 1, 2001.
       The debenture holders voluntarily decided to hold on to the debentures.
      The debentures were convertible into shares of the Company's common stock at
      a
      rate equal to the lowest of $.70 or 60% of the average of the three lowest
      closing bid prices for the Company's common stock during the 20 trading days
      immediately preceding the conversion date.  In addition, the Company also
      issued three-year warrants to purchase an aggregate of 250,000 shares of common
      stock at an initial exercise price of $0.77 per share.  Due to the
      preferential conversion feature of these debentures the Company recognized
      a
      financing charge of $242,857 (which represented the value of additional shares
      issuable upon conversion at the $.70 conversion price versus the number of
      shares issuable upon conversion at the market value at the date of issuance).
       In addition, the warrants issued in connection with these debentures were
      valued at $121,543 using the Black-Scholes model.  Since these debentures
      were convertible on issuance, preferential conversion costs were expensed
      immediately and the value of the warrants were recognized as financing costs
      over the term of the debentures.





14




On
      August
      14, 2000, the Company issued two additional convertible debentures aggregating
      $500,000 to the holders of the above-mentioned debentures for the same terms
      described above, except for the due date of August 14, 2001.  In connection
      with these debentures, the Company recognized a financing charge in 2000 in
      connection with the preferential conversion feature of $333,333 and valued
      the
      250,000 warrants issued in connection with these debentures at $13,332 using
      the
      Black-Scholes model.  Since these debentures were convertible on issuance,
      the preferential conversion costs were expensed immediately and the value of
      the
      options was recognized as financing costs over the term of the
      debentures.





During
      the year ended December 31, 2002, the holders of the debentures converted
      $12,200 of principal and $9,000 of accrued interest into 1,218,255 and
      1,500,000, respectively, shares of the Company’s common stock.   In
      addition, during the year ended December 31, 2002, the Company repaid $325,000
      of these debentures in cash.





On
      a
      cumulative basis through December 31, 2002, the holders of the debentures
      converted $525,588 of principal and $99,820 of accrued interest into 14,319,156
      and 5,176,352, respectively, shares of the Company’s common stock.  Also as
      of December 31, 2002, the Company had repaid $335,000 of these debentures in
      cash.





On
      December 31, 2002, New Millennium Capital Partners II, LLC and AJW Partners,
      LLC
      (the “Convertible Debenture Holders”) filed a complaint against the Company, its
      former officers and its current officers at the Supreme Court of the State
      of
      New York. The complaint alleged the Company breached its contractual and
      fiduciary duties.  This proceeding was a dispute over the amount owed on
      the convertible debentures. The original dispute arose over a significant
      payment issued by a conversion of stock that was neither applied to the
      principal or interest balance by the Convertible Debenture Holders.





Effective
      January 31, 2004, the Company entered into a Settlement Agreement and Mutual
      Release (the Agreement) with the Convertible Debenture Holders whereby all
      legal
      action pending regarding the convertible debentures held by the Convertible
      Debenture Holders was dismissed.  The Settlement Agreement is an exhibit to
      Form 8-K filed with the Securities and Exchange Commission dated February 23,
      2004.





The
      terms
      of the Agreement include a cash payment of $100,000 plus the issuance of
      4,000,000 shares of the Company’s common stock at a conversion price of $.02 per
      share. The Agreement limited the number of shares the Convertible Debenture
      Holders could sell in any calendar month to 500,000 shares, beginning in May
      2004.   In exchange, the Company agreed to guarantee an average price
      of $.08 per share for the stock that sold.  To the extent that there was a
      differential between the actual selling price and the guaranteed selling price,
      the Company was obligated to pay the differential to the Convertible Debenture
      Holders within thirty days of receiving a request for payment.  However,
      the request for payment could only have been made between January 1, 2005 and
      February 28, 2005. This request was made on February 1, 2005 and was payable
      no
      later than February 28, 2005. The Company has settled this request in cash
      in a
      timely manner.





As
      a
      result of signing the Agreement, the Company has recognized a contingent
      liability of $220,000 as of December 31, 2003 and a short-term liability of
      $259,734 as of December 31, 2004, representing the additional payment that
      was
      required under the terms of the Agreement related to the stock price guarantee.





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
      28.4% to 43.2% of total accounts receivable from December 31, 2004 to December
      31, 2005.  The balance in the 30+ day category decreased from 56.2% to
      33.1% of total accounts receivable from December 31, 2004 to December 31, 2005.
       The balance in the 60+ day category increased from 15.4% to 23.7% of total
      accounts receivable from December 31, 2004 to December 31, 2005.





The
      aging
      of accounts receivable as of December 31, 2005 and 2004 is as
      shown:




15


**2005**
            
            **2004**Current
            
            $
            62,096
            
            
            43.2
            %
            $
            54,677
            
            
            28.4
            %30
                +
            
            
            47,670
            
            
            33.1
            %
            
            108,087
            
            
            56.2
            %60
                +
            
            
            34,151
            
            
            23.7
            %
            
            29,586
            
            
            15.4
            %90
                +
            
            
            0
            
            
            0
            %
            
            0
            
            
            0
            %Total
            
            $
            143,917
            
            
            100.0
            %
            $
            192,350
            
            
            100.0
            %








**Forward-looking
      statements**




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







**ITEM
      7.  FINANCIAL STATEMENTS**





**INDEX**


**Page****REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
            17**FINANCIAL
                STATEMENTS**Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            18-19Consolidated
                Statements of Operations for the Years Ended December 31, 2005 and
                2004
            20Consolidated
                Statements of Stockholders' Equity for the Years Ended December 31,
                2005
                and 2004
            21Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2005 and
                2004
            22-23Notes
                to Consolidated Financial Statements
            24-37




16




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




**To
      The Board of Directors and Stockholders**


**Sitestar
      Corporation and Subsidiaries**


**Lynchburg,
      Virginia**






We
      have
      audited the accompanying consolidated balance sheets of Sitestar Corporation
      and
      subsidiaries as of December 31, 2005 and December 31, 2004 and the related
      consolidated statements of operations, stockholders' equity and cash flows
      for
      the year ended December 31, 2005 and December 31, 2004.  These consolidated
      financial statements are the responsibility of the Company's management.
 Our responsibility is to express an opinion on these consolidated
      financial statements based on our audit.




We
      conducted our audits in accordance with standards established by the Public
      Company Accounting Oversight Board (United States). Those standards require
      that
      we plan and perform the audits to obtain reasonable assurance about whether
      the
      consolidated financial statements are free of material misstatement.  An
      audit includes examining, on a test basis, evidence supporting the amounts
      and
      disclosures in the consolidated financial statements.  An audit also
      includes 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 consolidated financial position of Sitestar
      Corporation and subsidiaries as of December 31, 2005 and December 31, 2004
      and
      the results of their consolidated operations and their consolidated cash flows
      for the years then ended, in conformity with accounting principles generally
      accepted in the United States of America.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern.  As shown in the consolidated
      financial statements, the Company had a working capital deficiency of
      $1,715,797.  That condition raises substantial doubt about the Company’s
      ability to continue as a going concern. Management’s plans regarding those
      matters are 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 & Company, L.L.C.Bagell,
              Josephs & Company, L.L.C.Gibbsboro,
                NJ
              March
                24, 2006








17




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**DECEMBER
      31, 2005 and 2004**








ASSETS




CURRENT
                ASSETS
            
            **2005**
            
            **2004**Cash
                and cash equivalents
            
            $
            36,047
            
            $
            48,533Accounts
                receivable, less allowance for doubtful accounts
              of
                $13,834 and $11,992 as of December 31, 2005 and
              December
                31, 2004 respectively
            
            
            143,917
            
            
            192,350Total
                current assets
            
            
            179,964
            
            
            240,883PROPERTY
                AND EQUIPMENT, net
            
            
            311,781
            
            
            359,284CUSTOMER
                LIST, net of accumulated amortization of $2,765,104
              and
                $2,335,566 as of December 31, 2005 and December 31
              2004
                respectively
            
            
            1,421,170
            
            
            421,659GOODWILL,
                net of impairment
            
            
            1,288,559
            
            
            1,288,559OTHER
                ASSETS
            
            
            289,586
            
            
            143,178TOTAL
                ASSETS
            
            $
            3,491,060
            
            $
            2,453,563





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




18




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**DECEMBER
      31, 2005 and 2004**











**LIABILITIES
      AND STOCKHOLDERS' EQUITY**





CURRENT
                LIABILITIES
            
            **2005**
            
            **2004**Accounts
                payable
            
            $
            193,748
            
            $
            260,499Accrued
                expenses
            
            
            178,390
            
            
            141,975Deferred
                revenue
            
            
            321,555
            
            
            366,311Settlement of convertible debentures
            
            
            —
            
            
            259,734Notes
                payable, current portion
            
            
            959,344
            
            
            323,434Note
                payable - stockholders, current portion
            
            
            242,724
            
            
            124,016Total
                current liabilities
            
            
            1,895,761
            
            
            1,475,969NOTES
                PAYABLE, less current portion
            
            
            74,847
            
            
            171,482NOTES
                PAYABLE - STOCKHOLDERS, less current portion
            
            
            650,520
            
            
            696,294TOTAL
                LIABILITIES
            
            
            2,621,128
            
            
            2,343,745COMMITMENTS
                AND CONTINGENCIES (Note 8)STOCKHOLDERS'
                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,
                86,013,305 and 82,013,304 shares issued and
              outstanding on December 31, 2005 and December 31, 2004
                respectively
            
            
            86,013
            
            
            82,013Additional
                paid-in capital
            
            
            13,450,207
            
            
            13,334,207Treasury
                Stock, $0.001 par value, 6,218,305 and 6,218,305 common
                shares
              on December 31, 2005 and December 31, 2004 respectively
            
            
            (129,977
            )
            
            (129,977
            )Accumulated
                deficit
            
            
            (12,536,311
            )
            
            (13,176,425
            )Total
                stockholders' equity
            
            
            869,932
            
            
            109,818TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            3,491,060
            
            $
            2,453,563







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




19




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005 AND 2004**










**2005**
            
            **2004**REVENUEInternet
                service revenue
            
            $
            3,527,148
            
            $
            2,790,342Retail
                revenue
            
            
            152,834
            
            
            262,432Development revenue
            
            
            -
            
            
            81,430TOTAL
                REVENUE
            
            
            3,679,982
            
            
            3,134,204COST
                OF REVENUECost
                of Internet service revenue
            
            
            974,547
            
            
            997,069Cost
                of retail revenue
            
            
            77,911
            
            
            117,067Cost of development revenue
            
            
            -
            
            
            71,830TOTAL
                COST OF REVENUE
            
            
            1,052,458
            
            
            1,185,966GROSS
                PROFIT
            
            
            2,627,524
            
            
            1,948,238OPERATING
                EXPENSESSelling,
                general and administrative expenses
            
            
            1,800,132
            
            
            1,600,877Write-down
                of customer list
            
            
            -
            
            
            30,387TOTAL
                OPERATING EXPENSES
            
            
            1,800,132
            
            
            1,631,264INCOME
                FROM OPERATIONS
            
            
            827,392
            
            
            316,974OTHER
                INCOME (EXPENSES)Gain
                on disposal of assets
            
            
            21,778
            
            
            17,760Interest
                expense
            
            
            (209,056
            )
            
            (233,598
            )Expense
                from financing settlement
            
            
            -
            
            
            (18,216
            )TOTAL
                OTHER INCOME (EXPENSES)
            
            
            (187,278
            )
            
            (234,054
            )INCOME
                BEFORE INCOME TAXES
            
            
            640,114
            
            
            82,920INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            640,114
            
            $
            82,920BASIC
                AND DILUTED INCOME PER SHARE
            
            $
            0.01
            
            $
            0.00WEIGHTED
                AVERAGE SHARES
              OUTSTANDING
                - BASIC AND DILUTED
            
            
            83,481,798
            
            
            75,619,483




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




20




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005 AND 2004**










**Common
                Stock**
            
            **Additional****Paid-in**
            
            **Treasury**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Capital**
            
            **Stock**
            
            **Deficit**
            
            **Total**Balances
                at December 31, 2003
            
            
            69,109,801
            
            $
            101,594
            
            $
            13,635,272
            
            $
            (681,854
            )
            $
            (13,259,345
            )
            $
            (204,333
            )Issuance
                of shares per
              settlement
                of convertible debentures.
            
            
            4,000,000
            
            
            4,000
            
            
            76,000
            
            
            
            
            
            
            
            
            80,000Cancellation
                of shares per redemption agreement
            
            
            *6,218,305
            
            
            (26,266
            )
            
            (525,611
            )
            
            551,877
            
            
            
            
            
            -Cancellation
                of shares per sale of Sitestar Applied Technologies’
assets
            
            
            (1,460,796
            )
            
            (1,461
            )
            
            (13,147
            )
            
            
            
            
            
            
            
            (14,608
            )Issuance
                of shares per
              purchase
                agreement of Lynchburg.net.
            
            
            4,145,995
            
            
            4,146
            
            
            161,693
            
            
            
            
            
            
            
            
            165,839Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            82,920
            
            
            82,920Balances
                at December 31, 2004
            
            
            82,013,305
            
            $
            82,013
            
            $
            13,334,207
            
            $
            (129,977
            )
            $
            (13,176,425
            )
            $
            109,818Issuance
                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






*
      Restated shares deducted from the issued and outstanding status for the year
      ended December 31, 2002 shares not cancelled for the period then ended. See SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS.




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




21




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005 AND 2004**








**2005**
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            640,114
            
            $
            82,920Adjustments
                to reconcile net income tonet
                cash provided by operating activities:Depreciation
                and amortization expense
            
            
            570,147
            
            
            468,335Bad
                debt expense
            
            
            1,842
            
            
            276,152Write-down
                of customer list
            
            
            -
            
            
            30,387Expense from financing settlement
            
            
            -
            
            
            18,216Gain on sale of assets
            
            
            -
            
            
            (17,760
            )(Increase)
                decrease in accounts receivable
            
            
            60,581
            
            
            (91,739
            )Increase
                (decrease) in accounts payable
            
            
            (69,489
            )
            
            30,008Increase
                (decrease) in accrued expenses
            
            
            42,076
            
            
            (52,015
            )Increase
                (decrease) in deferred revenue
            
            
            95,245
            
            
            49,526Increase
                (decrease) in contingent liability
            
            
            -
            
            
            (220,000
            )Net
                cash provided by operating activities
            
            
            1,340,516
            
            
            574,030CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (7,315
            )
            
            (35,456
            )Purchase of customer list
            
            
            (250,000
            )
            
            -Purchase of assets held for resale
            
            
            (17,198
            )Sale of assets held for resale
            
            
            -
            
            
            12,404Net
                cash used in investing activities
            
            
            (274,513
            )
            
            (23,052
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from notes payable - stockholders
            
            
            385,000
            
            
            100,000Repayment of convertible debentures
            
            
            (259,734
            )
            
            (100,000
            )Repayment
                of notes payable
            
            
            (1,006,029
            )
            
            (164,387
            )Repayment
                of notes payable - stockholders
            
            
            (197,726
            )
            
            (385,922
            )Net
                cash used in financing activities
            
            
            (1,078,489
            )
            
            (550,309
            )NET
                INCREASE (DECREASE) IN CASH
              AND
                CASH EQUIVALENTS
            
            
            (12,486
            )
            
            669CASH
                AND CASH EQUIVALENTS -
              BEGINNING
                OF YEAR
            
            
            48,533
            
            
            47,864CASH
                AND CASH EQUIVALENTS -
              END
                OF YEAR
            
            $
            36,047
            
            $
            48,533





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




22




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005 AND 2004**





**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:**




During
      the years ended December 31, 2005 and 2004, the Company paid no income taxes
      and
      paid interest of approximately $ 209,000
      and $234,000 ,
      respectively.




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




During
      the year ended December 31, 2004 the Company issued 4,000,000 shares of common
      stock as part of a settlement agreement for the convertible debentures and
      issued 4,145,995 shares of common stock per the purchase of Lynchburg.net.
      The
      company also cancelled 1,460,796 shares of the Company’s common stock in
      connection to the sale of assets of the Sitestar Applied Technologies, Inc.. Certain
      restricted shares were restated to the issued and outstanding status to more
      accurately reflect their status on December 31, 2004. During the year ended
      December 31, 2005 the Company issued 4,000,000 shares of common stock in
      accordance with a Debt Conversion Agreement.




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




23




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005 AND 2004**




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




Organization
      and Line of Business


Sitestar
      Corporation (formerly 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 the Mid Atlantic and Northwestern states of the
      United States 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. 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 $1,715,797 as of December 31, 2005.  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.





Principles
      of Consolidation


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





Use
      of
      Estimates


The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosures of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenue and expenses during the reporting periods.
      At
      December 31, 2005, the significant estimates used by management include the
      allowance for doubtful accounts, the valuation of its customer lists and
      goodwill.  Actual results could differ from these estimates.





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.




24




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, 2005 and 2004, bad debt expense was $465,996 and
      $276,152 respectively.  As of December 31, 2005 and 2004, accounts
      receivable consists of the following:


****  ****


**2005**
            
            **2004**Gross
                accounts receivable
            
            $
            157,751
            
            $
            204,342Less
                allowance for doubtful accounts
            
            
            (13,834
            )
            
            (11,992
            )$
            143,917
            
            $
            192,350




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.





25




For
      the
      year ended December 31, 2004 the Company recognized an impairment of its
      customer list of $30,387 as a result of reduced customer original base in excess
      of amortization for two of the Company’s internet divisions.





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 and five years.
 Amortization expense for the customer lists was $429,538  and
      $373,629 for the
      years ended December 31, 2005 and 2004, respectively.  Customer lists were
      impaired $30,387 for the year ended December 31, 2004. Amortization of customer
      lists for the years ended December 31, 2006, 2007 and 2008 is expected to be $581,732,  $521,871
      and $317,567, respectively.  In accordance with SFAS No. 142, amortization of goodwill
      ceased effective January 1, 2002.  For the year ended December 31, 2005 there
      was
      no impairment of goodwill.





The
      changes in goodwill for the years ended December 31, 2005 and 2004 are as
      follows:




**2005**
            
            **2004**Goodwill,
                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





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.




26




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.
 Advertising and marketing expenses for the years ended December 31, 2005
      and 2004 were approximately $90,000
      and $84,000 , respectively.




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


In
      April
      2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4,
      44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”
 This Statement rescinds FASB Statement No. 4, “Reporting Gains and Losses
      from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement
      No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and
      FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.”
 This Statement amends FASB Statement No. 13, “Accounting for Leases,” to
      eliminate an inconsistency between the required accounting for sale-leaseback
      transactions and the required accounting for certain lease modifications that
      have economic effects that are similar to sale-leaseback transactions.  The
      statement was effective for the Company beginning in 2003.  The Company
      currently does not have any transactions that are within the scope of this
      statement.





In
      June
      2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit
      or Disposal Activities.”  This statement nullifies Emerging Issues Task
      Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination
      Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
      in a Restructuring).”  This statement requires that a liability for costs
      associated with an exit or disposal activity be recognized when the liability
      is
      incurred instead of at the date an entity commits to an exit plan.  The
      statement was effective for the Company
      beginning in 2003. The Company currently does not have any transactions that
      are
      within the scope of this statement.




In
      November 2002, the FASB issued Interpretation No. 45, “Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others.”  This interpretation sets forth
      expanded disclosure requirements in the financial statements about a guarantor’s
      obligations under certain guarantees that it has issued.  It also




27




clarifies
      that, under certain circumstances, a guarantor is required to recognize a
      liability for the fair value of the obligation at the inception of the
      guarantee.  Certain types of guarantees, such as product warranties,
      guarantees accounted for as derivatives, and guarantees related to
      parent-subsidiary relationships are excluded from the liability recognition
      provisions of Interpretation No. 45, however, they are subject to the
      disclosure requirements. The statement was effective for the Company beginning
      in 2003.  The Company currently does not have any transactions that are
      within the scope of this statement.




In
      December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
      Compensation - Transition and Disclosure an amendment of FASB Statement No.
      123.”  This statement amends SFAS 123, “Accounting for Stock-Based
      Compensation” to allow for alternative methods of transition for a voluntary
      change to the fair value based method of accounting for stock issued to team
      members.  This statement also amends FASB No. 123 to require disclosure of
      the accounting method used for valuation in both annual and interim financial
      statements.  This statement permits an entity to recognize compensation
      expense under the prospective method, modified prospective method or the
      retroactive restatement method. If an entity elects to adopt this statement,
      fiscal years beginning after December 15, 2003 must include this change in
      accounting for stock-based team member compensation.  The Company currently
      does not have any transactions that are within the scope of this
      statement.




In
      January 2003, the FASB issued Interpretation No. 46, “Consolidation of
      Variable Interest Entities,” an interpretation of Accounting Research Bulletin
      No. 51, “Consolidated Financial Statements.”  Interpretation No. 46
      prescribes how to identify variable interest entities and how an enterprise
      assesses its interests in a variable interest entity to decide whether to
      consolidate that entity.  This interpretation requires existing
      unconsolidated variable interest entities to be consolidated by their primary
      beneficiaries if the entities do not effectively disperse risks among parties
      involved. Interpretation No. 46 is effective immediately for variable interest
      entities created after January 31, 2003, and to variable interest entities
      in which an enterprise obtains an interest after that date.  The
      interpretation applies in the first fiscal year or interim period beginning
      after June 15, 2003, to variable interest entities in which an enterprise
      holds a variable interest that it acquired before February 1, 2003.
 The Company does not have interests in variable interest entities and it
      does not believe the adoption of Interpretation No. 46 will have a material
      impact on its financial position or results of operations.




In
      April
      2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative
      Instruments and Hedging Activities.”  This statement amends and clarifies
      financial accounting and reporting for derivative instruments including certain
      derivative instruments embedded in other contracts (collectively referred to
      as
      derivatives) and for hedging activities under FASB Statement No. 133 “Accounting
      for Derivative Instruments and Hedging Activities.”  The Company currently
      does not have any transactions that are within the scope of this
      statement.





In
      May
      2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and Equity.” This statement
      establishes standards for the classification and measurement of certain
      financial instruments with characteristics of both liabilities and equity.
      The
      Statement also includes required disclosures for financial instruments within
      its scope. The Statement was effective for instruments entered into or modified
      after May 31, 2003 and otherwise was effective as of January 1, 2004, except
      for
      mandatorily redeemable financial instruments.  For certain mandatorily
      redeemable financial instruments, the statement was effective as of January
      1,
      2005. The effective date has been deferred indefinitely for certain other types
      of mandatorily redeemable financial instruments.  The Company currently
      does not have any financial instruments that are within the scope of this
      Statement.





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.





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




28




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.





**NOTE
      2 - ACQUISITIONS**




Sitestar.net
      (formerly Neocom Microspecialists, Inc.)


On
      December 15, 1999, the Company completed the acquisition of 100% of the
      outstanding common stock of Neocom Microspecialists, Inc. (NEOCOM), a Virginia
      corporation now known as Sitestar.net, Inc., in exchange for 6,782,353
      shares of the Company's common stock. Effective upon the closing of the
      acquisition, the Company issued 4,782,353 shares of its common stock.  In
      addition, the Company was required to issue an additional 2,000,000 shares
      of
      its common stock on the second anniversary of the acquisition date.  The
      shares were held back for any potential unrecorded liabilities.  In January
      2002, the Company issued 2,000,000 shares of this common stock to the original
      Sitestar.net shareholders that represented the contingent shares.  The
      value of these additional shares issued was $60,000, based on the market value
      of the shares at the date of issuance, and was recorded as additional goodwill
      in the accompanying consolidated financial statements.




Lynchburg.net


On
      November 22, 2000, the Company acquired 100% of the outstanding shares of FRE
      Enterprises, Inc., a Virginia corporation (doing business as “Lynchburg.net” and
“Computers by Design”) in exchange for 16,583,980 shares of the Company’s common
      stock.  Effective upon the closing of the acquisition, the Company issued
      12,437,985 shares of common stock and reserved 4,145,995 shares of common stock
      to issue on the third anniversary of the acquisition (November 22, 2003) based
      on certain contingencies related to potential unrecorded and unknown
      liabilities.  The value of these additional shares issued was $165,840,
      based on the market value of the shares at the date of issuance and was recorded
      as additional goodwill in the accompanying consolidated financial
      statements.





Advanced
      Internet Services, Inc .


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
      ISP 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 at the date of acquisition.





Digital
      Data Connections, Inc.


On
      December 31, 2002, the Company acquired 100% of the Internet-related assets
      of
      Digital Data Connections, Inc. (DigDat), a Virginia corporation and an ISP
      located in Martinsville, Virginia.  The purchase price was $161,523, which
      consisted of $50,000 in cash and a commitment to provide to the seller 80%
      of
      the collected Internet revenues for a period of ten months beginning January
      1,
      2003.  The contingent consideration of $111,523 was estimated based on the
      anticipated monthly collections.  Subsequent payments of contingent
      consideration have been applied to reduce the recorded liability.





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 was amortized
      over an 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.




29




The
      fair
      value of assets acquired is summarized as follows:




Equipment
            
            $
            41,447Customer
                list
            
            
            103,707Non-compete
                agreement
            
            
            16,369Purchase
                price
            
            $
            161,523







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.





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







Since
      the
      acquisition of Virginia Link Internet and Network Management, Inc. and Mount
      Airy Networks, LLC was consummated on June 30, 2004, there are results of
      operations of these companies for the year ended December 31, 2004 included
      in
      the accompanying December 31, 2005 and 2004 consolidated financial
      statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the years ended December 31, 2005 and 2004 and reflects the
      results of operations of the Company as if the acquisition of Virginia Link
      and
      Network Management, Inc. and Mount Airy Networks, LLC had been effective January
      1, 2004.  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.





**2005**
            
            **2004**Net
                sales
            
            $
            3,679,982
            
            $
            3,279,798Gross
                profit
            
            
            2,627,524
            
            
            2,077,321Selling,
                general and administrative
                expenses
            
            
            1,800,132
            
            
            1,646,329Net
                income
            
            
            640,114
            
            
            178,848Basic
                income per share
            
            $
            0.01
            
            $
            0.00




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 deal consists of the acquisition of




30




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




Since
      the
      acquisition of Exchange Computers, Inc. and Exis.net, Inc. was consummated
      on
      November 22, 2004, there are results of operations of these companies for the
      year ended December 31, 2004 included in the accompanying December 31, 2005
      and
      2004 consolidated financial statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the years ended December 31, 2005 and 2004 and reflects the
      results of operations of the Company as if the acquisition of Exchange
      Computers, Inc. and Exis.net, Inc. had been effective January 1, 2004.  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.





**2005**
            
            **2004**Net
                sales
            
            $
            3,679,982
            
            $
            3,619,304Gross
                profit
            
            $
            2,627,524
            
            $
            2,236,198Selling,
                general and administrative expenses
            
            $
            1,800,132
            
            $
            1,681,170Net
                income
            
            $
            40,114
            
            $
            285,280Basic
                income per share
            
            $
            0.01
            
            $
            0.00








**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 $21,778 in the
      current reporting period, representing the excess of the shared revenue received
      over the recorded basis of the assets sold.




31




**NOTE
      4 - PROPERTY AND EQUIPMENT**




The
      cost
      of property and equipment at December 31, 2005 and December 31, 2004 consisted
      of the following:





****


**2005**
            
            **2004**Land
            
            $
            10,000
            
            $
            10,000Building
            
            
            213,366
            
            
            213,366Automobile
            
            
            9,500
            
            
            9,500Computer
                equipment
            
            
            633,753
            
            
            576,437Furniture
                and fixtures
            
            
            42,909
            
            
            42,909909,528
            
            
            852,212Less
                accumulated depreciation
            
            
            (597,747
            )
            
            (492,928
            )$
            311,781
            
            $
            359,284




Depreciation
      expense was $104,819 and
      $84,583 for the
      years ended December 31, 2005 and 2004, respectively.








**NOTE
      5 - CONVERTIBLE DEBENTURES**





On
      May
      11, 2000, the Company issued two convertible debentures aggregating $500,000.
       The debentures bore interest at 12% per annum and were due on May 1, 2001.
       The debenture holders voluntarily decided to hold on to the debentures.
      The debentures were convertible into shares of the Company's common stock at
      a
      rate equal to the lowest of $.70 or 60% of the average of the three lowest
      closing bid prices for the Company's common stock during the 20 trading days
      immediately preceding the conversion date.  In addition, the Company also
      issued three-year warrants to purchase an aggregate of 250,000 shares of common
      stock at an initial exercise price of $0.77 per share.  Due to the
      preferential conversion feature of these debentures the Company recognized
      a
      financing charge of $242,857 (which represented the value of additional shares
      issuable upon conversion at the $.70 conversion price versus the number of
      shares issuable upon conversion at the market value at the date of issuance).
       In addition, the warrants issued in connection with these debentures were
      valued at $121,543 using the Black-Scholes model.  Since these debentures
      were convertible on issuance, preferential conversion costs were expensed
      immediately and the value of the warrant was recognized as financing costs
      over
      the term of the debentures.





On
      August
      14, 2000, the Company issued two additional convertible debentures aggregating
      $500,000 to the holders of the above mentioned debentures for the same terms
      described above, except for the due date of August 14, 2001.  In connection
      with these debentures, the Company recognized a financing charge in 2000 in
      connection with the preferential conversion feature of $333,333 and valued
      the
      250,000 warrants issued in connection with these debentures at $13,332 using
      the
      Black-Scholes model.  Since these debentures were convertible on issuance,
      the preferential conversion costs were expensed immediately and the value of
      the
      options was recognized as financing costs over the term of the
      debentures.





During
      the year ended December 31, 2002, the holders of the debentures converted
      $12,200 of principal and $9,000 of accrued interest into 1,218,255 and
      1,500,000, respectively, shares of the Company’s common stock. In addition,
      during the year ended December 31, 2002, the Company repaid $325,000 of these
      debentures in cash.





On
      a
      cumulative basis through December 31, 2002, the holders of the debentures
      converted $525,588 of principal and $99,820 of accrued interest into 14,319,156
      and 5,176,352, respectively, shares of the Company’s common stock.  Also as
      of December 31, 2002, the Company had repaid $335,000 of these debentures in
      cash.




32




On
      December 31, 2002, New Millennium Capital Partners II, LLC and AJW Partners,
      LLC
      (the “Convertible Debenture Holders”) filed a complaint against the Company, its
      former officers and its current officers at the Supreme Court of the State
      of
      New York. The complaint alleged the Company breached their contractual and
      fiduciary duties.  This proceeding was a dispute over the amount owed on
      the convertible debentures. The original dispute arose over a significant
      payment issued by a conversion of stock that was neither applied to the
      principal or interest balance by the Convertible Debenture Holders.





Effective
      January 31, 2004, the Company entered into a Settlement Agreement and Mutual
      Release (the Agreement) with the Convertible Debenture Holders whereby all
      legal
      action pending regarding the convertible debentures held by the Convertible
      Debenture Holders was dismissed.  The Settlement Agreement is an exhibit to
      Form 8-K filed with the Securities and Exchange Commission dated February 23,
      2004.





The
      terms
      of the Agreement included a cash payment of $100,000 plus the issuance of
      4,000,000 shares of the Company’s common stock at a conversion price of $.02 per
      share. The Agreement limited the number of shares the Convertible Debenture
      Holders could have sold in any calendar month to 500,000 shares, beginning
      in
      May 2004. In exchange, the Company
      agreed to
      guarantee an average price of $.08 per share for the stock that sold.  To
      the extent that there was a differential between the actual selling price and
      the guaranteed selling price, the Company was obligated to pay the differential
      to the Convertible Debenture Holders within thirty days of receiving a request
      for payment.  However, the request for payment could have only been made
      between January 1, 2005 and February 28, 2005.





As
      a
      result of signing the Agreement, the Company has recognized a contingent
      liability of $220,000 as of December 31, 2003, representing management’s
      estimate of the potential additional payment that could have been required
      under
      the terms of the Agreement related to the stock price guarantee.  Demand
      for payment, per the terms of the settlement agreement, was made for the gross
      up balance on January 11, 2005
      f or
      $259,734. This amount was reflected in the balance sheet as a current liability. The
      Company settled this amount in cash on February 28, 2005.





**NOTE
      6 - NOTES PAYABLE**




Notes
      payable at December 31, 2005 and 2004 consist of the following:




**2005**
            
            **2004**Bank
                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% and6.75%as
                of December 31, 2005 and 2004 respectively).
            
            $
            8,855
            
            $
            44,273Bank
                note payable in monthly interest and principal payments of $1,784.
                Interest is payable prime plus 4.5%, (11.5% and 9.75% as of December
                31,
                2005 and 2004 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.
            
            
            86,007
            
            
            97,597Bank
                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 and again on February 1, 2006 the note was renewed for another
                year. Interest is payable at an annual rate of prime plus .75%
                (8.0%and
                6.0% as of December 31, 2005 and 2004 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.
            
            
            43,158
            
            
            103,880




33




Non-interest
                bearing amount due on acquisition of Virginia LinkInternet
                and Network Management, Inc. and Mount Airy Networks, LLC payable
                in
                thirty monthly installments of $6,667.
            
            
            75,830
            
            
            144,472Non-interest
                bearing note due on acquisition of Exchange Computers, Inc. and Exis.net,
                Inc. payable in twelve monthly installments of $10,000.
            
            
            —
            
            
            104,694Non-interest
                bearing note due on acquisition of Idacomm’s customer base payable in
                seven monthly installments of $250,000.
            
            
            820,341
            
            
            —1,034,191
            
            
            494,916Less
                current portion
            
            
            (959,344
            )
            
            (323,434
            )Long-term
                portion
            
            $
            74,847
            
            $
            171,482




The
      future principal maturities of these notes are as follows:




Year
                ending December 31, 2006
            
            $
            959,344Year
                ending December 31, 2007
            
            
            11,160Year
                ending December 31, 2008
            
            
            11,160Year
                ending December 31, 2009
            
            
            11,160Year
                ending December 31, 2010
            
            
            11,160Thereafter
            
            
            30,207Total
            
            $
            1,034,191











**NOTE
      7 - NOTES PAYABLE - STOCKHOLDERS**




Notes
      payable - stockholders at December 31, 2005 and 2004 consist of the
      following:




**2005**
            
            **2004**Note
                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.
            
            $
            603,659
            
            $
            481,709Note
                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%.
            
            
            15,909
            
            
            32,375Note
                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%.
            
            
            198,676
            
            
            306,226Note
                payable to stockholder issued in connection to the acquisition of
                Idacomm’s customer base. The note is payable on September 14, 2006 and
                bears interest at 8.0%.
            
            
            25,000
            
            
            -Note
                payable to stockholder issued in connection to the acquisition of
                Idacomm’s customer base. The note is payable on October 13, 2006 and bears
                interest at 8.0%.
            
            
            50,000
            
            
            -




34




893,244
            
            
            820,310Less
                current portion
            
            
            (242,724
            )
            
            (124,016
            )Long-term
                portion
            
            $
            650,520
            
            $
            696,294




The
      future principal maturities of these notes are as follows:




Year
                ending December 31, 2006
            
            $
            242,724Year
                ending December 31, 2007
            
            
            46,861Year
                ending December 31, 2008
            
            
            603,659Year
                ending December 31, 2009
            
            
            —Year
                ending December 31, 2010
            
            
            —Total
            
            $
            893,244





**NOTE
      8 - 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, 2005 and 2004 was $74,277 and $72,937, respectively.  Future
      minimum lease payments under operating leases with initial or remaining terms
      of
      one year or more are as follows:






Year
                ended December
                31,2006
            
            $
            48,6002007
            
            
            —2008
            
            
            —Total
            
            $
            48,600




Litigation


The
      Company was involved in legal proceedings to resolve a dispute in the amount
      the
      Company owes concerning a convertible debenture.  This dispute arose over a
      significant payment the Company issued by a conversion of stock that was neither
      applied to the principal or interest balance by the convertible debenture
      holders.  Effective January 31, 2004, the Company entered into a Settlement
      Agreement and Mutual Release (the Agreement) with the convertible debenture
      holders whereby all legal action pending regarding the convertible debentures
      held by the convertible debenture holders was dismissed. See
      discussion at note 5.





Lynchburg.net
      Acquisition


In
      connection with the Lynchburg. net
      (a
      division of FRE Enterprises, Inc.) acquisition, the Company was required to
      issue an additional 4,145,995 shares of its common stock on the third
      anniversary of the acquisition date
      (November 22, 2003), if no unforeseen contingencies arise.  In December,
      2004, these additional shares were issued.





**NOTE
      9 - 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, 2005, the Company's Board of Directors
      has not issued any Preferred Stock.




35




Common
      Stock


During
      the year ended December 31, 2004 the company issued 8,145,995 shares of common
      stock. The Company issued 4,145,995 shares per the acquisition agreement of
      FRE
      Enterprises. The Company also issued 4,000,000 shares per the Settlement
      Agreement in connection with the convertible debentures. During
      the year ended December 31, 2005 the Company issued 4,000,000 shares of common
      stock in accordance with a Debt Conversion Agreement.





**NOTE
      10 - INCOME TAXES**




The
      reconciliation of the effective income tax rate to the federal statutory rate
      as
      of December 31, 2004 and 2003 is as follows:





**2005**
            
            **2004**Federal
                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, 2004 and
      2003 are as follows:





**2005**
            
            **2004**Accounts
                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, 2005, 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 $3,300,000 expire starting in
      2012.








**NOTE
      11 - 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, 2006.  For the years ended December 31, 2005 and 2004, the
      Company paid this stockholder $46,200
      and $46,200 ,
      respectively, for rent on this office building.







**NOTE
      12 - SEGMENT INFORMATION**




The
      Company has four business units with separate management and reporting
      infrastructures that offer different products and services.  The business
      units have been aggregated into four reportable segments: Corporate, Internet,
      Development 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 in the Martinsville ,
      Galax,
      Virginia Beach and Lynchburg, Virginia; Mt. Airy, North Carolina; and in the
      North-western states.  The Development group provides custom software
      programming to businesses, principally in the manufacturing industries. The
      web
      based assets of the Development group was sold in August of 2004.  The
      Retail group operates a retail
      computer store in Lynchburg, Virginia, as well as, providing computer training
      to customers.




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.




36




Summarized
      financial information concerning the Company's reportable segments is shown
      in
      the following table for the years ended December 31, 2004 and 2003:





**December
                31, 2005****Corporate**
            
            **Internet**
            
            **Development**
            
            **Retail**
            
            **Consolidated**Revenue
            
            $
            -
            
            $
            3,527,148
            
            $
            -
            
            $
            152,834
            
            $
            3,679,982Operating
                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





**December
                31, 2004****Corporate**
            
            **Internet**
            
            **Development**
            
            **Retail**
            
            **Consolidated**Revenue
            
            $
            -
            
            $
            2,790,342
            
            $
            81,430
            
            $
            262,432
            
            $
            3,134,204Operating
                income (loss)
            
            
            (71,785
            )
            
            316,163
            
            
            9,600
            
            
            62,996
            
            
            316,974Depreciation
                and amortization
            
            
            -
            
            
            452,830
            
            
            -
            
            
            4,301
            
            
            457,131Interest
                expense
            
            
            (15,802
            )
            
            (217,796
            )
            
            -
            
            
            -
            
            
            (233,598
            )Goodwill
            
            
            -
            
            
            1,288,559
            
            
            -
            
            
            -
            
            
            1,288,559Identifiable
                assets
            
            
            -
            
            
            2,366,217
            
            
            -
            
            
            87,346
            
            
            2,453,563




**NOTE
      13 - SUBSEQUENT EVENTS**





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 Netrover, Inc.’s stock and a
      non-compete agreement of the company.





**NOTE
      14 - RESTATED ISSUED AND OUTSTANDING SHARES**





The
      Company restated shares deducted from the issued and outstanding status for
      the
      year ended December 31, 2002 for shares not cancelled for the period then ended.
      Certain restricted shares were restated to the issued and outstanding status
      to
      more accurately reflect their status on December 31, 2004.





**NOTE
      15 - 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 $1,592,211 as of December 31, 2005.  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




37




**ITEM
      8A.  CONTROLS AND PROCEDURES**




As
      required by SEC rules, we have evaluated the effectiveness of the design and
      operation of our disclosure controls and procedures within 90 days of the filing
      of this annual report. 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 the design and operation of our disclosure controls
      and procedures are effective. There were no significant changes to our internal
      controls or in other factors that could significantly affect internal controls
      subsequent to the date of their evaluation.




Disclosure
      controls and procedures are our controls and other procedures that 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





**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
                since**Frank
                R. Erhartic, Jr.
            
            37
            
            President,
                CEO, Director
            
            October
                2001Julia
                E. Erhartic
            
            38
            
            Secretary,
                Director
            
            October
                2001Daniel
                Judd
            
            49
            
            CFO,
                Director
            
            June
                2004




**Frank
      Erhartic, Jr.,** 37, 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
      re-manufacturing 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,
      including most recently Idacomm and Netrover.  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** ,
      38,
      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.




38




**Dan
      Judd** ,
      49,  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.





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. reports of 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, 2005
      all of our executive officers and directors complied with the requirements
      of
      Section 16 (a).




**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.





**Other**
            **Long-term****Name
                and**
            
            
            
            **Annual**
            **Compensation****Principal
                Position**
            **Year**
            **Salary
                ($)**
            **Bonus
                ($)**
            **Compensation($)**
            **Awards**Frank
                R. Erhartic, Jr.
            2005
            67,885
            —
            —
            —Director,
                President &
            2004
            52,500
            —
            —
            —Chief
                Executive OfficerJulie
                E. Erhartic
            2005
            13,000
            —
            —
            —Director,
                Secretary
            2004
            13,000
            —
            —
            —Daniel
                Judd
            2005
            38,846Director,
                Chief Financial
            2004
            36,350Officer





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




The
      following table sets forth certain information as of
      March
      24, 2006 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%




39




(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 24, 2006.





(3)
      Frank
      and Julie Erhatric, 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, 2006.








**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
            Filed2.1.1
            Agreement
                and Plan of Reorganization, dated October 25, 1998
            *2.2.1
            Agreement
                and Plan of Reorganization, dated July 27, 1999
            *2.3
            Asset
                Sale and Agreement re divestiture of Holland American Specialties,
                dated
                September 30, 1999 *
            *2.4
            Asset
                Sale and Agreement re divestiture of Sierra Madre Foods, Inc., dated
                September 30, 1999
            *2.5
            Letter
                of Intent to Acquire Eastern Shore Net, dated August 17, 1999
            *2.6
            Letter
                of Intent to Acquire Neocom Microspecialists, Inc., dated September
                2,
                1999
            *2.7
            Plan
                and Agreement of Share Exchange, re acquisition of Neocom
                Micro-specialists, Inc., dated December 15, 1999
            *2.8
            Neocom
                Debt Assumption Agreement dated December 15, 1999
            *3.1(i)
            Articles
                of Incorporation of the Registrant (December 17, 1992)
            *3.1(ii)
            Amended
                Articles of Incorporation (July 29, 1998)
            *3.1(iii)
            Amended
                Articles of Incorporation (October 26, 1998)
            *3.1(iv)
            Amended
                Articles of Incorporation (July 14, 1999)
            *3.1(v)
            Amended
                Articles of Incorporation (July 28, 1999)
            *3.2(i)
            By-laws
                of the Registrant (December 17, 1992)
            *4.2
            Convertible
                Debenture Purchase Agreement dated as of May 11, 2000 between the
                investors named therein and the Registrant
            ***4.3
            12%
                Convertible Debenture due May 11, 2001 made by the Registrant in
                favor of
                New Millenium Capital Partners II, L.L.C.
            ***4.4
            12%
                Convertible Debenture due May 11, 2001 made by the Registrant in
                favor of
                AJW Partners, L.L.C.
            ***4.5
            Stock
                Purchase Warrant dated as of May 11, 2000 issued by Registrant to
                New
                Millenium Capital Partners, L.L.C.
            ***4.6
            Stock
                Purchase Warrant dated as of May 11, 2000 issued by Registrant to
                AJW
                Partners, L.L.C.
            ***4.7
            Registration
                Rights Agreement dated as of May 11, 2000 by and between the Registrant
                and the investors named therein.
            ***10.1
            Lease
                for Corporate Office
            **10.2
            Security
                Agreement dated as of May 11, 2000 by and between the Registrant
                and the
                investors named therein.
            ***10.3
            Stock
                Tender and Exchange Agreement, dated November 22, 2000, by and among
                Sitestar Corporation and Frank and Julie Erhartic, the owners of
                FRE
                Enterprises, Inc.
            ****




40


10.4
            Lease
                dated November 22, 2000 for corporate offices
            #10.5
            Lease
                Agreement dated March 24, 2004
            #10.7
            Definitive
                Purchase Agreement with Virginia Link Internet, dated June 30,
                2004
            ******10.8
            Definitive
                Purchase Agreement with Network Management, Inc., dated June 30,
                2004
            ******10.9
            Definitive
                Agreement with Thomas Albanese selling the assets of Sitestar Applied
                Technologies, Inc., dated August 31, 2004
            F10.10
            Definitive
                Purchase Agreement to acquirecertain
                assets of Exchange Computers/Exis.net, Inc,
                effective November 22, 2004
            F21.1
            Subsidiaries
                of the Registrant
            F31.1
            Certification
                of Chief Executive Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002
            F31.2
            Certification
                of Chief Financial Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002
            F32.1
            Certification
                Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002
            F




*  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.




**  Filed
      as
      an exhibit to the Registrant's Form-10SB filed with the Securities and Exchange
      Commission on January 7, 2000 and incorporated herein by reference.




***  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.




****  Filed
      as
      an exhibit to the Registrant's Form 8-K, filed on December 7, 2000 and
      incorporated herein by reference .




*****  Filed
      as
      an exhibit to the Company's Current Report on Form 8-K, filed on February 23,
      2004 and incorporated herein by reference.




******  Filed
      as
      an exhibit to the Company's Quarterly Report on Form 10-QSB, filed on August
      16,
      2004 and incorporated herein by reference.




#  Filed
      as
      an exhibit to Registrant’s Form 10-KSB filed with the Securities and Exchange
      Commission on April 14, 2004




F  Filed
      herewith




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




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





On
      December 28, 2004, the Company retained Bagell, Josephs & 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, 2005. Bagell, Josephs &
Company, L.L.C. performed the services listed below and was paid the fees listed
      below for the fiscal year ended December 31, 2004.





**Audit
      Fees**





Bagell,
      Josephs & Company, L.L.C. will be paid aggregate fees of approximately
      $30,000 for the fiscal year ended December 31, 2004 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, 2005.




41





**Audit
      Related Fees**





Bagell,
      Josephs & Company, L.L.C. is engaged for aggregate fees of approximately
      $30,000 for the fiscal year ended December 31, 2005 and for the first three
      quarters of 2006 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 & Company, L.L.C. was not paid any other fees for professional
      services during the fiscal years ended December 31, 2004 and December 31, 2003.





MCLEOD
      & COMPANY





Prior
      to
      November 4, 2004, the Company’s independent auditor was McLeod & Company.
      McLeod and Company, performed the services listed below and was paid the fees
      listed below for the fiscal years ended December 31, 2004.





Audit
      Fees





McLeod
      and Company was paid aggregate fees of approximately $12,000 for the fiscal
      year
      ended December 31, 2004 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.





Audit
      Related Fees





McLeod
      and Company was paid aggregate fees of $0 for the fiscal year ended December
      31,
      2004 for assurance and related services reasonably related to the performance
      of
      the audit or review of the Company's financial statements.





Tax
      Fees





McLeod
      and Company was paid aggregate fees of $0 for the fiscal year ended December
      31,
      2004 for professional services rendered for tax compliance, tax advice and
      tax
      planning during these fiscal years.




All
      Other
      Fees





McLeod
      and Company was not paid any other fees for professional services during the
      fiscal years ended December 31, 2004.




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.




March
      30, 2005




SITESTAR
              CORPORATIONBy:
              /s/ Frank
              Erhartic, Jr.Frank
              Erhartic,
              Jr.President, Chief Executive Officer


42
 By:
                /s/ Daniel A.
                JuddDaniel
                A.
                JuddChief Financial Officer
  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
            March 30, 2005Frank
              Erhartic, Jr.
            Officer, Director
              (Principal Executive Officer)


/s/
              Daniel
              A. Judd
            Chief Financial Officer
            March 30, 2005Daniel
              A. Judd
            (Principal
                Financial Officer,
              Principal
                Accounting Officer)


/s/
              Julie
              Erhartic
            Secretary, Director
            March 30, 2005Julie
              Erhartic




43