**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-QSB**




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




**For
      the quarterly period ended September 30, 2006**




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




For
      the
      transition period from ________________ to _______________




**000-27763**


(Commission
      file number)




**SITESTAR
      CORPORATION**


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




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




**7109
      Timberlake Road, Lynchburg, VA  24502**


(Address
      of principal executive offices)




**(434)
      239-4272**


(Issuer's
      telephone number)




N/A


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




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





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




APPLICABLE
      ONLY TO CORPORATE ISSUERS




As
      of November
      14, 2006 ,
      the
      issuer had 88,063,305 shares of common stock issued and
      outstanding.




Transitional
      Small Business Disclosure Format (check one):  Yes o   No x










**SITESTAR
      CORPORATION**




Index




Page
                  NumberPART
                  I.  FINANCIAL INFORMATIONItem
                  1.
              
              Financial StatementsCondensed
                  Consolidated Balance Sheets as of September30,
                  2006 (unaudited) and December 31,2005
                  (audited)
              
              3Condensed
                  Consolidated Statements of Income for thethree
                  months ended September 30, 2006 and2005
                  (unaudited)
              
              5Condensed
                  Consolidated Statements of Income for thenine
                  months ended September 30, 2006 and2005
                  (unaudited)
              
              6Condensed Consolidated Statements
                of Cash
                Flows forthe
                  nine months ended September 30, 2006 and 2005 (unaudited)
              
              7Notes
                  to unaudited Condensed Consolidated FinancialStatements
              
              9Item
                  2.
              
              Management's Discussion and Analysis
              
              22Item
                  3.
              
              Controls and Procedures
              
              30Part
                  II.
              
              OTHER INFORMATION
              
              31Item
                  1.
              
              Legal Proceedings
              
              31Item
                  2.
              
              Unregistered sales of equity securities
                and
                use of proceeds
              
              31Item
                  3.
              
              Defaults Upon Senior Securities
              
              31Item
                  4.
              
              Submission of Matters to a Vote of
                Security
                Holders
              
              31Item
                  5.
              
              Other Information
              
              31Item
                  6.
              
              Exhibits and Reports on Form 8-K
              
              31SIGNATURES
              
              
              
              32




2


PART
      I.
      FINANCIAL INFORMATION




**Item
      1.****Financial
      Statements**




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**SEPTEMBER
      30, 2006 AND DECEMBER 31, 2005**




**ASSETS**


2006
            
            2005(Unaudited)
            
            (Audited)CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            137,152
            
            $
            36,047Accounts
                receivable, net of allowance of $17,531and
                $13,834 as of September 30, 2006 andDecember
                31, 2005 respectively
            
            
            171,378
            
            
            143,917Prepaid
                expenses
            
            
            9,103
            
            
            -Total current assets
            
            
            317,633
            
            
            179,964PROPERTY
                AND EQUIPMENT, net
            
            
            291,371
            
            
            311,781CUSTOMER
                LIST, net of accumulatedamortization
                of $3,416,732 and $2,765,104 as ofSeptember
                30, 2006 and December 31, 2005 respectively
            
            
            2,020,715
            
            
            1,421,170GOODWILL,
                net of impairment
            
            
            1,288,559
            
            
            1,288,559OTHER
                ASSETS
            
            
            465,761
            
            
            289,586TOTAL
                ASSETS
            
            $
            4,384,039
            
            $
            3,491,060




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


3




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS, Continued**


**SEPTEMBER
      30, 2006 AND DECEMBER 31, 2005**




**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**




2006
            
            2005(Unaudited)
            
            (Audited)CURRENT
                LIABILITIESAccounts
                payable
            
            $
            272,836
            
            $
            193,748Accrued
                expenses
            
            
            293,677
            
            
            178,390Deferred
                revenue
            
            
            666,479
            
            
            321,555Notes
                payable
            
            
            528,638
            
            
            959,344Notes
                payable - stockholders
            
            
            142,804
            
            
            242,724Total
                current liabilities
            
            
            1,904,434
            
            
            1,895,761NOTES
                PAYABLE, less current portion
            
            
            66,026
            
            
            74,847NOTES
                PAYABLE - STOCKHOLDERS, less current portion
            
            
            694,970
            
            
            650,520TOTAL
                LIABILITIES
            
            
            2,665,430
            
            
            2,621,128STOCKHOLDERS'
                EQUITYPreferred
                Stock, $.001 par value, 10,000,000 sharesauthorized,
                0 shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value, 300,000,000 sharesauthorized,
                88,063,305 and86,013,305
                shares issued andoutstanding
                on September 30, 2006 December 31,2005 respectively
            
            
            88,063
            
            
            86,013Additional
                paid-in capital
            
            
            13,499,023
            
            
            13,450,207Treasury
                stock, $.001 par value, 6,218,305 common shareson
                September 30,  2006 and December 31, 2005
            
            
            (129,977
            )
            
            (129,977
            )Accumulated
                deficit
            
            
            (11,738,500
            )
            
            (12,536,311
            )Total
                stockholders’ equity
            
            
            1,718,609
            
            
            869,932TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            4,384,039
            
            $
            3,491,060




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





4





**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**FOR
      THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**


**(UNAUDITED)**




2006
            
            2005REVENUEInternet
                service revenue
            
            $
            1,444,772
            
            $
            780,793Retail
                revenue
            
            
            19,113
            
            
            37,615TOTAL
                REVENUE
            
            
            1,463,885
            
            
            818,408COST
                OF REVENUECost
                of Internet service revenue
            
            
            404,314
            
            
            198,594Cost
                of retail revenue
            
            
            22,900
            
            
            30,481TOTAL
                COST OF REVENUE
            
            
            427,214
            
            
            229,075GROSS
                PROFIT
            
            
            1,036,671
            
            
            589,333OPERATING
                EXPENSES:Selling
                general and administrative expenses
            
            
            701,400
            
            
            427,704INCOME
                FROM OPERATIONS
            
            
            335,271
            
            
            161,629OTHER
                INCOME (EXPENSES)
            
            
            (52,803
            )
            
            (45,105
            )INCOME
                BEFORE INCOME TAXES
            
            
            282,468
            
            
            116,524INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            282,468
            
            $
            116,524BASIC
                AND DILUTED EARNINGS PER SHARE
            
            $
            0.00
            
            $
            0.00WEIGHTED
                AVERAGE SHARESOUTSTANDING
                - BASIC AND DILUTED
            
            
            88,063,305
            
            
            83,839,392




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


5





**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**


**(UNAUDITED)**




2006
            
            2005REVENUEInternet
                service revenue
            
            $
            4,219,642
            
            $
            2,281,068Retail
                revenue
            
            
            66,795
            
            
            118,346TOTAL
                REVENUE
            
            
            4,286,437
            
            
            2,399,414COST
                OF REVENUECost
                of Internet service revenue
            
            
            1,149,436
            
            
            575,413Cost
                of retail revenue
            
            
            62,888
            
            
            68,103TOTAL
                COST OF REVENUE
            
            
            1,212,324
            
            
            643,516GROSS
                PROFIT
            
            
            3,074,113
            
            
            1,755,898OPERATING
                EXPENSES:Selling
                general and administrative expenses
            
            
            2,119,064
            
            
            1,281,875INCOME
                FROM OPERATIONS
            
            
            955,049
            
            
            474,023OTHER
                INCOME (EXPENSES)
            
            
            (157,238
            )
            
            (129,690
            )INCOME
                BEFORE INCOME TAXES
            
            
            797,811
            
            
            344,333INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            797,811
            
            $
            344,333BASIC
                AND DILUTED EARNINGS PER SHARE
            
            $
            0.01
            
            $
            0.00WEIGHTED
                AVERAGE SHARESOUTSTANDING
                - BASIC AND DILUTED
            
            
            88,046,821
            
            
            82,628,690




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


6





**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**


**(UNAUDITED)**


2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            797,811
            
            $
            344,333Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization expense
            
            
            760,768
            
            
            349,099Bad
                debt expense
            
            
            3,697
            
            
            348(Increase)
                decrease in:Accounts
                receivable
            
            
            (31,158
            )
            
            3,729Accounts
                receivable, other
            
            
            -
            
            
            52,891Prepaid
                expenses
            
            
            (9,104
            )
            
            -Increase
                (decrease) in:Accounts
                payable
            
            
            79,088
            
            
            (101,562
            )Accrued
                expenses
            
            
            100,523
            
            
            (10,403
            )Deferred
                revenue
            
            
            344,924
            
            
            (118,863
            )Net
                cash provided by operating activities
            
            
            2,046,549
            
            
            519,572CASH
                FLOWS FROM INVESTING ACTIVITIES:Other
                assets held for resale
            
            
            (5,271
            )
            
            (10,204
            )Purchase
                of property and equipment
            
            
            (197,003
            )
            
            (7,315
            )Purchase
                of domain name for resale
            
            
            (200,000
            )
            
            -Purchase
                of customer list
            
            
            (1,251,173
            )
            
            (250,000
            )Net
                cash (used in) investing activities
            
            
            (1,653,447
            )
            
            (267,519
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from notes payable - stockholders
            
            
            66,310
            
            
            335,000Net
                proceeds from notes payable
            
            
            756,804
            
            
            -Repayment
                of notes payable - stockholders
            
            
            (121,781
            )
            
            (154,953
            )Repayment
                of notes payable
            
            
            (1,196,330
            )
            
            (186,693
            )Repayment
                of convertible debentures
            
            
            -
            
            
            (259,734
            )Issuance
                of common stock
            
            
            203,000
            
            
            -Net
                cash (used in) financing activities
            
            
            (291,997
            )
            
            (266,380
            )NET
                INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS
            
            
            101,105
            
            
            (14,327
            )CASH
                AND CASH EQUIVALENTS -BEGINNING OF PERIOD
            
            
            36,047
            
            
            48,533CASH
                AND CASH EQUIVALENTS -END OF PERIOD
            
            $
            137,152
            
            $
            34,206




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


7


**** **SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
      (continued)**


**(UNAUDITED)**




**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION** **:**




During
      the nine months ended September 30, 2006 and 2005, the Company paid no income
      taxes and paid interest of approximately  $ 163,000  and
      $148 ,000 ,
      respectively.




**NON-CASH
      INVESTING AND FINANCING TRANSACTIONS:**




During
      the nine months ended September 30, 2006, the Company issued 2,050,000 shares
      of
      common stock in connection with the purchase of NetRover Inc. as described
      in
      note 6.




8




**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - BASIS OF PRESENTATION**




The
      unaudited condensed consolidated financial statements have been prepared by
      Sitestar Corporation (the “Company” or “Sitestar”), pursuant to the rules and
      regulations of the Securities and Exchange Commission. The information furnished
      herein reflects all adjustments (consisting of normal recurring accruals and
      adjustments), which are, in the opinion of management, necessary to fairly
      present the operating results for the respective periods. Certain information
      and footnote disclosures normally present in annual consolidated financial
      statements prepared in accordance with generally accepted accounting principles
      have been omitted pursuant to such rules and regulations. These financial
      statements should be read in conjunction with the audited consolidated financial
      statements and footnotes for the year ended December 31, 2005 included in the
      Company’s Annual Report on Form 10-KSB.  The results of the nine months
      ended September 30, 2006 are not necessarily indicative of the results to be
      expected for the full year ending December 31, 2006.




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with U.S. generally accepted accounting principles
      (GAAP), which contemplate continuation of the Company as a going concern.
 As shown in the consolidated financial statements, the Company had a
      working capital deficiency of $1,586,801 as of September 30, 2006.  That
      condition raises substantial doubt about the Company's ability to continue
      as a
      going concern. The financial statements do not include any adjustments that
      might result from the outcome of this uncertainty. However, the Company believes
      that existing cash, cash equivalents and cash flow from operations and the
      Company’s ability to obtain favorable financing will be sufficient to meet the
      Company’s working capital and capital expenditure requirements for the next
      twelve months. If the foregoing assumptions are true, Sitestar should not have
      the need to raise any additional material funds for operating expenses during
      that 12 month period. Growth in revenues is expected to be derived from
      acquisitions of customers and financing is one of the tools to accomplish this
      growth. Acquisitions of additional customers in the past few years have been
      accomplished primarily with seller financing and it is management’s belief that
      this is a repeatable method of financing for similar acquisitions in the near
      future.





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




9





**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




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


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


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


d)
            Maximize
                operational efficiency through the deployment of
                technology;


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





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





**NOTE
      2 - EARNINGS PER SHARE**




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




**NOTE
      3 - COMMON STOCK**




During
      the nine months ended September 30, 2006, the Company issued 2,050,000 shares
      of
      common stock in connection with the purchase of NetRover Inc. as described
      in
      note 6.




**NOTE
      4 - SEGMENT INFORMATION**




The
      Company has three business units that have separate management and reporting
      infrastructures offering different products and services.  The business
      units have been aggregated into three reportable segments: Corporate, Internet
      and Retail.





The
      Corporate group is the holding company and oversees the operating of the other
      business units. The Corporate group also arranges financing for the entire
      organization. The Internet group provides Internet access to customers in
      Virginia, North Carolina,


10




**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      4 - SEGMENT INFORMATION, continued**




Idaho,
      Washington, Utah, Nevada, Colorado, Arizona and Canadian areas. The Retail
      group
      operates a retail computer store in Lynchburg, Virginia, as well as, providing
      toner cartridge remanufacturing services in Lynchburg, Virginia.




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




Summarized
      financial information concerning the Company's reportable segments is shown
      in
      the following table for the three months ended September 30, 2006 and
      2005:




September
                30, 2006Corporate
            
            Internet
            
            Retail
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            1,444,772
            
            $
            19,113
            
            $
            1,463,885Operating
                Income (loss)
            
            $
            (17,240
            )
            $
            371,707
            
            $
            (19,196
            )
            $
            335,271Depreciation
                and amortization
            
            $
            -
            
            $
            283,182
            
            $
            471
            
            $
            283,653Interest
                expense
            
            $
            -
            
            $
            54,416
            
            $
            -
            
            $
            54,416Intangible
                assets
            
            $
            -
            
            $
            3,445,718
            
            $
            -
            
            $
            3,445,718Total
                assets
            
            $
            -
            
            $
            4,275,747
            
            $
            108,565
            
            $
            4,384,039




September
                  30, 2005Corporate
              
              Internet
              
              Retail
              
              ConsolidatedRevenue
              
              $
              -
              
              $
              780,793
              
              $
              37,615
              
              $
              818,408Operating
                  Income (loss)
              
              $
              (8,399
              )
              $
              182,804
              
              $
              (12,776
              )
              $
              161,629Depreciation
                  and amortization
              
              $
              
              
              $
              147,346
              
              $
              709
              
              $
              148,055Interest
                  expense
              
              $
              -
              
              $
              49,471
              
              $
              -
              
              $
              49,471Intangible
                  assets
              
              $
              -
              
              $
              3,066,068
              
              $
              -
              
              $
              3,066,068Total
                  assets
              
              $
              -
              
              $
              3,596,700
              
              $
              98,039
              
              $
              3,694,739




11





**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      4 - SEGMENT INFORMATION, continued**




Summarized
      financial information concerning the Company's reportable segments is shown
      in
      the following table for the nine months ended September 30, 2006 and
      2005:




September
                30, 2006Corporate
            
            Internet
            
            Retail
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            4,219,642
            
            $
            66,795
            
            $
            4,286,437Operating
                Income (loss)
            
            $
            (71,507
            )
            $
            1,075,336
            
            $
            (48,780
            )
            $
            955,049Depreciation
                and amortization
            
            $
            -
            
            $
            759,356
            
            $
            1,412
            
            $
            760,768Interest
                expense
            
            $
            -
            
            $
            163,004
            
            $
            -
            
            $
            163,004Intangible
                assets
            
            $
            -
            
            $
            3,445,718
            
            $
            -
            
            $
            3,445,718Total
                assets
            
            $
            -
            
            $
            4,275,474
            
            $
            108,565
            
            $
            4,384,039




September
                  30, 2005Corporate
              
              Internet
              
              Retail
              
              ConsolidatedRevenue
              
              $
              -
              
              $
              2,281,068
              
              $
              118,346
              
              $
              2,399,414Operating
                  Income (loss)
              
              $
              (51,523
              )
              $
              536,024
              
              $
              (10,478
              )
              $
              474,023Depreciation
                  and amortization
              
              
              
              
              $
              $346,973
              
              $
              2,126
              
              $
              349,099Interest
                  expense
              
              $
              -
              
              $
              147,585
              
              $
              -
              
              $
              147,585Intangible
                  assets
              
              $
              -
              
              $
              3,066,068
              
              $
              -
              
              $
              3,066,068Total
                  assets
              
              $
              -
              
              $
              3,596,700
              
              $
              98,039
              
              $
              3,694,739





**NOTE
      5 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS**





In
      May
      2005, the FASB issued SFAS 154, “Accounting for Changes and Error Corrections—a
      replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154
      changes the requirements with regard to the accounting for and reporting a
      change in an accounting principle. The provisions of SFAS 154 require, unless
      impracticable, retrospective application to prior periods presented in financial
      statements for all voluntary changes in an accounting principle and changes
      required by the adoption of a new accounting pronouncement in the unusual
      instance that the new pronouncement does not indicate a specific transition
      method. SFAS 154 also requires that a change in depreciation, amortization
      or
      depletion method for long-lived, non-financial assets be accounted for as a
      change in an accounting estimate, which requires prospective application of
      the
      new method. SFAS 154 is effective for all changes in an accounting principle
      made in fiscal years beginning after December 15, 2005. The Company has
      adopted SFAS 154 as of 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.




12




**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      5 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, Continued**





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. Management has assessed the implications of FIN 47 on the Company’s
      financial position, results of operations and cash flows and has determined
      it
      to be immaterial.





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




On
      December 16, 2004, FASB issued Financial Accounting Standards No. 153, Exchanges
      of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
      Nonmonetary Transactions (“FAS 153”). This statement amends APB Opinion 29 to
      eliminate the exception for nonmonetary exchanges of similar productive assets
      and replaces it with a general exception for exchanges of nonmonetary assets
      that do not have commercial substance.




13





**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      5 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, Continued**





Under
      FAS
      153, if a non-monetary exchange of similar productive assets meets a
      commercial-substance criterion and fair value is determinable, the transaction
      must be accounted for at fair value resulting in recognition of any gain or
      loss. FAS 153 is effective for non-monetary transactions in fiscal periods
      that
      begin after June 15, 2005. The implementation of this standard did not have
      a
      material impact on its financial position, results of operations or cash flows.




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





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




14





**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      5 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, Continued**





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





In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which
      provides a definition of fair value, establishes a framework for measuring
      fair
      value and requires expanded disclosures about fair value measurements. SFAS
      No.
      157 is effective for the financial statements issued for the fiscal years
      beginning after November 15, 2007 and the interim periods within those fiscal
      years. The provisions of SFAS No. 157 should be applied prospectively.
      Management is assessing the potential impact on the Company’s financial
      condition and results of operations.





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




15





**NOTE
      6 - ACQUISITIONS**





Idacomm,
      a wholly owned subsidiary of Idacorp


Effective
      September 16, 2005, the Company entered into a Definitive Agreement pursuant
      to
      which it acquired the Internet related assets of Idacomm, an Idaho corporation.
      The transaction consists of the acquisition of the dial-up customers, the
      related Internet assets and non-compete agreements from Idacomm. The total
      purchase price was $1,698,430 representing the fair value of the assets
      acquired, less $112,735 for deferred revenues and less a 10% discount, for
      a net purchase price of $1,545,304, paid by a down payment of $250,000 with
      the
      balance represented by a non-interest bearing note payable by the Company to
      Idacomm over 7 months.





The
      fair
      value of assets acquired is summarized as follows:




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





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





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




The
      following table presents the unaudited pro forma condensed statement of
      operations for the nine months ended September 30, 2005 and reflects the results
      of operations of the Company as if the acquisition of Idacomm had been effective
      January 1, 2005. The pro forma amounts are not necessarily indicative of the
      combined results of operations had the acquisitions been effective as of that
      date, or of the anticipated results of operations, due to cost reductions and
      operating efficiencies that are expected as a result of the acquisitions.




16





**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS, continued**





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





NetRover
      Inc.


Effective
      January 1, 2006, the Company entered into a Definitive Agreement pursuant to
      which it acquired 100% of the issued and outstanding shares of stock of NetRover
      Inc., a Canadian corporation. The transaction consists of the acquisition of
      over 7,000 customers including dial-up and DSL Internet subscribers, web hosting
      and other business accounts. The total purchase price was $604,535 representing
      the fair value of the company, paid by a down payment of 2,000,000 shares of
      the
      Company’s common stock, with the balance represented by a non-interest bearing
      note payable by the Company to Idacomm, Inc. with the note due in full by a
      balloon payment on January 6, 2007.





The
      fair
      value of assets acquired is summarized as follows:




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





Because
      the acquisition of NetRover Inc. was consummated on January 1, 2006, there
      are
      no results of operations of these companies for the nine months ended September
      30, 2005 included in the accompanying September 30, 2006 and 2005 consolidated
      financial statements.




The
      following table presents the unaudited pro forma condensed statement of
      operations for the nine months ended September 30, 2005 and reflects the results
      of operations of the Company as if the acquisition of NetRover Inc. had been
      effective January 1, 2005. The pro forma amounts are not necessarily indicative
      of the combined results of operations had the acquisitions been effective as
      of
      that date, or of the anticipated results of operations, due to cost reductions
      and operating efficiencies that are expected as a result of the
      acquisitions.




17


**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS, continued**





2005Net
                sales
            
            $
            3,119,124Gross
                profit
            
            $
            2,205,218Selling,
                general and administrative expenses
            
            $
            1,690,661Net
                income
            
            $
            357,601Basic
                income per share
            
            $
            0.00





Prolynx


Effective
      March 16, 2006, the Company entered into a Definitive Agreement pursuant to
      which it acquired the Internet related assets of Prolynx, Inc., a Colorado-based
      Internet Service Provider. The acquisition further increases the company's
      dial-up and DSL Internet customer base by 700 in the Rocky Mountain region.
      The
      total purchase price was $90,000 representing the fair value of the net assets
      acquired paid in the form of the Company’s assumption of $90,000 in operating
      expenses accrued by Prolynx.





The
      fair
      value of assets acquired is summarized as follows:





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





Because
      the acquisition of Prolynx was consummated on March 16, 2006, there are no
      results of operations of these companies for the nine months ended September
      30,
      2005 included in the accompanying September 30, 2006 and 2005 consolidated
      financial statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the nine months ended September 30, 2005 and reflects the results
      of operations of the Company as if the acquisition of Prolynx had been effective
      January 1, 2005.  The pro forma amounts are not necessarily indicative of
      the combined results of operations had the acquisitions been effective as of
      that date, or of the anticipated results of operations, due to cost reductions
      and operating efficiencies that are expected as a result of the
      acquisitions.




18





**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      6 - ACQUISITIONS, continued**





2005Net
                sales
            
            $
            2,502,223Gross
                profit
            
            $
            1,853,307Selling,
                general and administrative expenses
            
            $
            1,334,582Net
                income
            
            $
            389,015Basic
                income per share
            
            $
            0.00





First
      Net




Effective
      July 1, 2006, the Company entered into a Definitive Agreement pursuant to which
      it acquired the Internet related assets of First USA, Inc., an Ohio-based
      Internet Service Provider. The acquisition further increases the company's
      dial-up Internet customer base by 6,200 in the Ohio Valley region. The total
      purchase price was $725,000 representing the fair value of the assets acquired
      which consisted of a $250,000 cash payment at closing with the balance to be
      paid in six equal monthly payments beginning August 2006.





The
      definitive agreement states that in the event that actual annualized revenue
      differs more than three percent from estimates used at closing, the purchase
      price will be adjusted accordingly. The purchase price has been adjusted down
      to
      $590,810 as of September 30, 2006. Because the acquisition of First Net was
      consummated on July 1, 2006, there are no results of operations of these
      companies for the nine months ended September 30, 2005 included in the
      accompanying September 30, 2006 and 2005 consolidated financial statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the nine months ended September 30, 2005 and reflects the results
      of operations of the Company as if the acquisition of First Net had been
      effective January 1, 2005.  The pro forma amounts are not necessarily
      indicative of the combined results of operations had the acquisitions been
      effective as of that date, or of the anticipated results of operations, due
      to
      cost reductions and operating efficiencies that are expected as a result of
      the
      acquisitions.





2005Net
                sales
            
            $
            2,629,870Gross
                profit
            
            $
            1,930,546Selling,
                general and administrative expenses
            
            $
            1,363,114Net
                income
            
            $
            425,391Basic
                income per share
            
            $
            0.00





19




**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      6 - ACQUISITIONS, continued**





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




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




**NOTE
        7 -- PROVISION FOR INCOME TAXES**
 
 Income
        taxes are provided for the tax effects of transactions reported in the financial
        statements and consist of taxes currently due. Deferred taxes related to
        differences between the basis of assets and liabilities for financial and
        income
        tax reporting will either be taxable or deductible when the assets or
        liabilities are recovered or settled. The difference between the basis of
        assets
        and liabilities for financial and income tax reporting are not material
        therefore, the provision for income taxes from operations consist of income
        taxes currently payable.
 
 The
        nature of the timing difference generating the deferred tax asset, are the
        accumulated net operating loss carry forwards that can be applied towards
        mitigating future tax liabilities of the Company. The Company has established
        a
        valuation account at the full value of the tax deferred asset as of September
        30, 2006 and September 30, 2005. The Company’s operations have generated
        federal, state income taxes payable which have been offset by the operating
        loss
        carry forwards. The Company does not have an effective tax rate due to the
        Company’s lack of taxable profits to-date.
 2006
                
                2005Deferred
                    tax assets
                
                $
                3,521,550
                
                $
                3,760,893Less:
                    valuation allowance
                
                
                3,521,550
                
                
                3,760,893Totals
                
                $
                -
                
                $
                -
 
 20
 
 At
        September 30, 2006 and September 30, 2005, the Company had accumulated deficits
        of $11,738,500 and $12,536,311, respectively, available to offset future
        taxable
        income through 2026. The Company established valuation allowances equal to
        the
        full amount of the deferred tax assets due to the uncertainty of the operating
        losses in future periods.
 
 There
        was
        no provision for income taxes for the nine months ended September 30, 2006
        and
        September 30, 2005.
 
 **NOTE
        8 - INTANGIBLE ASSETS**
 
 The
        Company continually monitors its intangible assets to determine whether any
        impairment has occurred.  In making such determination with respect to
        these assets, the Company evaluates the performance, on an undiscounted cash
        flow basis, of the intangible assets or group of assets.  Should impairment
        be identified, a loss would be reported to the extent that the carrying value
        of
        the related intangible asset exceeds its fair value using the discounted
        cash
        flow method.
 
 The
        Company's customer lists are being amortized over three and five years.
        Amortization expense for the customer lists was $706,183 and $274,989 for
        the nine months ended September 30, 2006 and 2005, respectively.




**NOTE
      7 - 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 $1,586,801 as of September 30, 2006. That condition raises substantial doubt
      about the Company's ability to continue as a going concern. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty. However the Company believes that existing cash, cash
      equivalents and cash flow from operations and the Company’s ability to obtain
      favorable financing will be sufficient to meet the Company’s working capital and
      capital expenditure requirements for the next twelve months. If the foregoing
      assumptions are true Sitestar should not have the need to raise any additional
      material funds for operating expenses during that 12 month period.





Growth
      in
      revenues is expected to be derived from acquisitions of customers and financing
      is one of the tools to accomplish this growth. Acquisitions of additional
      customers in the past few years have been accomplished primarily with seller
      financing and it is management’s belief that this is a repeatable method of
      financing for similar acquisitions in the near future.





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





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


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


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


d)
            Maximize
                operational efficiency through the deployment of
                technology;


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


21


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




General




The
      following discussion and analysis should be read in conjunction with the
      Company’s consolidated financial statements and related footnotes for the year
      ended December 31, 2005 included in the Annual Report on Form 10-KSB.  The
      discussion of results, causes and trends should not be construed to imply any
      conclusion that such results or trends will necessarily continue in the
      future.




Overview




The
      Company is a national Internet Service Provider and Computer Services company
      offering a broad range of services to business and residential customers.
 In November 2003, the Company announced the launch of the national dial-up
      Internet service that made service available to thousands of cities throughout
      the United States.  This expanded service features web acceleration, e-mail
      acceleration and pop-up ad blocking. Spam and virus filtering are also included.
       The Company’s national Internet service is marketed under the brand name
      SurfWithUs.net to differentiate the Company’s national Internet service from its
      local Internet service.  The Company utilizes its own infrastructure as
      well as affiliations that allow it to expand its network and services to most
      of
      the United States.





The
      products and services that the Company provides include:


·
              Internet
                  access services;
 ·
              Web
                  acceleration services;
 ·
              Web
                  design and programming services;
 ·
              Web
                  hosting services;
 ·
              End-to-end
                  e-commerce solutions;
 ·
              Online
                  marketing consulting;
 ·
              Toner
                  and ink cartridge remanufacturing services;
                  and
 ·
              Computer
                  programming and consulting
                  services.




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




22





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





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





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




Results
      of operations




The
      following tables show financial data for the nine months ended September 30,
      2006 and 2005. Operating results for any period are not necessarily indicative
      of results for any future period.





For
                the nine months ended September 30, 2006
              (unaudited)Corporate
            
            Internet
            
            Retail
            
            TotalRevenue
            
            $
            -
            
            $
            4,219,642
            
            $
            66,795
            
            $
            4,286,437Cost
                of revenue
            
            
            -
            
            
            1,149,436
            
            
            62,888
            
            
            1,212,324Gross
                profit
            
            
            -
            
            
            3,070,206
            
            
            3,907
            
            
            3,074,113Operating
                expenses
            
            
            71,507
            
            
            1,994,870
            
            
            52,687
            
            
            2,119,064Income
                (loss) from operations
            
            
            (71,507
            )
            
            1,075,336
            
            
            (48,780
            )
            
            955,049Other
                income (expense)
            
            
            -
            
            
            (157,238
            )
            
            -
            
            
            (157,238
            )Net
                income (loss)
            
            $
            (71,507
            )
            $
            918,098
            
            $
            (48,780
            )
            $
            797,811




23





For
                the nine months ended September 30, 2005
              (unaudited)Corporate
            
            Internet
            
            Retail
            
            TotalRevenue
            
            $
            -
            
            $
            2,281,068
            
            $
            118,346
            
            $
            2,399,414Cost
                of revenue
            
            
            -
            
            
            575,413
            
            
            68,103
            
            
            643,516Gross
                profit
            
            
            -
            
            
            1,705,655
            
            
            50,243
            
            
            1,755,898Operating
                expenses
            
            
            51,523
            
            
            1,169,631
            
            
            60,721
            
            
            1,281,875Income
                (loss) from operations
            
            
            (51,523
            )
            
            536,024
            
            
            (10,478
            )
            
            474,023Other
                income (expense)
            
            
            -
            
            
            (129,690
            )
            
            -
            
            
            (129,690
            )Net
                income (loss)
            
            $
            (51,523
            )
            $
            406,334
            
            $
            (10,478
            )
            $
            344,333




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





The
      following tables show a reconciliation of EBITDA to the GAAP presentation of
      net
      income for the nine months ended September 30, 2006 and 2005.





For
                the nine months ended September 30, 2006Corporate
            
            Internet
            
            Retail
            
            TotalEBITDA
            
            $
            (71,507
            )
            $
            1,840,458
            
            $
            (47,368
            )
            $
            1,721,583Interest
                expense
            
            
            -
            
            
            (163,004
            )
            
            -
            
            
            (163,004
            )Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (53,173
            )
            
            (1,412
            )
            
            (54,585
            )Amortization
            
            
            -
            
            
            (706,183
            )
            
            -
            
            
            (706,183
            )Net
                income (loss)
            
            $
            (71,507
            )
            $
            918,098
            
            $
            (48,780
            )
            $
            797,811




For
                  the nine months ended September 30, 2005Corporate
            
            Internet
            
            Retail
            
            TotalEBITDA
            
            $
            (51,523
            )
            $
            900,892
            
            $
            (8,352
            )
            $
            841,017Interest
                expense
            
            
            -
            
            
            (147,585
            )
            
            -
            
            
            (147,585
            )Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (71,984
            )
            
            (2,126
            )
            
            (74,110
            )Amortization
            
            
            -
            
            
            (274,989
            )
            
            -
            
            
            (274,989
            )Net
                income (loss)
            
            $
            (51,523
            )
            $
            406,334
            
            $
            (10,478
            )
            $
            344,333




24


NINE
      MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO SEPTEMBER 30, 2005
      (Unaudited)




REVENUE.
       Revenue for the nine months ended September 30, 2006 increased by
      $1,887,023 or 78.7% from $2,399,414 for the nine months ended September 30,
      2005
      to $4,286,437 for the same period in 2006.  Internet sales increased
      $1,938,574 or 85.0% from $2,281,068 for the nine months ended September 30,
      2005
      to $4,219,642 for the same period in 2006. Internet sales increased due to
      the
      addition of Internet customers from the asset acquisitions of Idacomm, NetRover
      Inc., Prolynx and First Net. These acquisitions, for the nine months ended
      September 30, 2006, yielded approximately $2,398,000 in additional net revenues.
      Sitestar focuses on marketing and selling Internet access to second-tier markets
      where broadband is not prevalent. The Company’s strategy is to leverage
      operational economies of scale to provide dial-up service in these markets
      where
      it will continue to be the core method for connecting to the Internet. While
      Sitestar is currently adding customers through promotional marketing campaigns,
      this method for strong and sustainable growth is threatened by competition
      from
      nationally-known ISPs and discount dial-up providers as well as from the future
      introduction of broadband services. To increase the expansion of its dial-up
      base the Company is and plans to continue to acquire ISPs in these target
      markets. Offsetting this increase in Internet sales in part, retail sales
      decreased $51,551 or 43.6% for the nine months ended September 30, 2006 from
      $118,346 for the nine months ended September 30, 2005 to $66,795 for the same
      period in 2006.  Decreases in retail sales of new equipment reflect
      competition from on line and discount 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 nine months ended September 30, 2006 increased
      by $568,808 or 88.4% from $643,516 for the nine months ended September 30,
      2005
      to $1,212,324 for the same period in 2006. Internet cost of revenue increased
      $574,023 or 99.8% from $575,413 for the nine months ended September 30, 2005
      to
      $1,149,436 for the same period in 2006.  This increase is primarily due to
      increases in the number of subscribers representing an increase of $704,953
      for
      the nine months ended September 30, 2006.





OPERATING
      EXPENSES. Operating expenses for the nine months ended September 30, 2006
      increased $837,189 or 65.3% from $1,281,875 for the nine months ended September
      30, 2005 to $2,119,064 for the same period in 2006.  Amortization increased
      $431,194 or 156.8% from $274,989 for the nine months ended September 30, 2005
      to
      $706,183 for the same period in 2006.  This increase is due to the
      amortization of recent customer acquisitions.  Wages increased $279,929 or
      106.3% from $263,293 for the nine months ended September 30, 2005 to $543,222
      for the same period in 2006. This is primarily the results of employees acquired
      with the purchase of NetRover Inc. Corporate expenses of $70,602 for the nine
      months ended September 30, 2006 consisted primarily of professional fees.




25


Corporate
      expenses of $51,523 for the nine months ended September 30, 2005 consisted
      primarily of professional fees.




GAIN
      ON
      SALE OF ASSETS.  A gain was recognized on the sale of the assets of
      Sitestar Applied Technologies, Inc. from Servatus Development, LLC of $11,287
      and $17,895 for the nine months ended September 30, 2006 and 2005 respectively.
       This represents, per the Definitive Agreement, 20% of the gross revenue of
      Servatus Development, LLC for the nine months ended September 30, 2006 and
      2005
      respectively.





INTEREST
      EXPENSE. Interest expense for the nine months ended September 30, 2006 increased
      by $15,419 or 10.5% from $147,585 for the nine months ended September 30, 2005
      to $163,004 for the same period in 2006.  This increase is a result of
      financing the acquisitions of additional customers.





SEPTEMBER
      30, 2006 (Unaudited) COMPARED TO DECEMBER 31, 2005 (Audited)





BALANCE
      SHEETS.   Net accounts receivable increased $27,461 or 19.1% from
      $143,917 on December 31, 2005 to $171,378 on September 30, 2006.  This
      increase is substantially due to the addition of the customer base from
      acquisitions. Due to the slow moving nature of inventory, management has
      reclassified it on the balance sheets from current assets to other assets held
      for resale which increased by $5,465 or 4.4% from $123,586 on December 31,
      2005
      to $129,317 on September 30, 2006. Accounts payable
      increased by $79,088 or 40.8% from $193,748 on December 31, 2005 to $272,836
      on
      September 30, 2006.  Accrued expenses increased by $115,287 or 64.6% from
      $178,390 on December 31, 2005 to $293,677 on September 30, 2006.  The
      increase in current liabilities is a reflection of servicing the increased
      customer base. Deferred revenue increased by $344,924 or 107.3% from $321,555
      on
      December 31, 2005 to $666,479 on September 30, 2006 representing increased
      volume of customer accounts that have been prepaid. The current portion of
      notes
      payable, including notes payable to shareholders, decreased $530,626 or 44.1%
      from $1,202,068 on December 31, 2005 to $671,442 on September 30, 2006.
 This is primarily a result of servicing the debt of the acquisitions of
      customers. This decrease in borrowing was offset in part by increases in
      long-term notes payable to shareholders.





LIQUIDITY
      AND CAPITAL RESOURCES




Cash
      and
      cash equivalents totaled $137,152 and $36,047 at September 30, 2006 and at
      December 31, 2005, respectively. EBITDA was $1,721,583 for the nine months
      ended
      September 30, 2006 as compared to $841,017 for the same period in 2005.




26





2006
            
            2005EBITDA
                for the nine months ended September 30,
            
            $
            1,721,583
            
            $
            841,017Interest
                expense
            
            
            (163,004
            )
            
            (147,585
            )Taxes
            
            
            -
            
            
            -Depreciation
            
            
            (54,585
            )
            
            (74,110
            )Amortization
            
            
            (706,183
            )
            
            (274,989
            )Net
                income for the nine months ended September 30
            
            $
            797,811
            
            $
            344,333




The
      accompanying condensed 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 $1,586,801 as of September 30, 2006.  That condition raises substantial
      doubt about the Company's ability to continue as a going concern. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty. However the Company believes that existing cash, cash
      equivalents and cash flow from operations and the Company’s ability to obtain
      favorable financing will be sufficient to meet the Company’s working capital and
      capital expenditure requirements for the next twelve months. If the foregoing
      assumptions are true, Sitestar should not have the need to raise any additional
      material funds for operating expenses during that 12 month period. Growth in
      revenues is expected to be derived from acquisitions of customers and financing
      is one of the tools to accomplish this growth. Acquisitions of additional
      customers in the past few years have been accomplished primarily with seller
      financing and it is management’s belief that this is a repeatable method of
      financing for similar acquisitions in the near future. In October 2002, new
      management was installed. New management has taken the following steps that
      it
      believes will be sufficient to provide the Company with the ability to continue
      in existence and mitigate the concerns:




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


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


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


d)
            Maximize
                operational efficiency through the deployment of
                technology;


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





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.




27





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
      billing and collections was the implementation of a uniform manual
      invoice-processing fee, which also helps speed up the billing and collections
      process.





The
      aging
      of accounts receivable as of September 30, 2006 and December 31, 2005 is as
      shown:





2006
            
            2005Current
            
            $
            68,170
            
            
            40
            %
            $
            89,166
            
            
            29
            %30
                < 60
            
            
            54,499
            
            
            32
            %
            
            43,428
            
            
            56
            %60
                +
            
            
            48,709
            
            
            28
            %
            
            26,123
            
            
            15
            %Total
            
            $
            171,378
            
            
            100
            %
            $
            158,717
            
            
            100
            %




OFF
      BALANCE SHEET TRANSACTIONS




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




Forward-looking
      statements


This
        report contains forward-looking statements that are based on management’s
        expectations, estimates, projections and assumptions. The Company assumes
        no
        obligation except as required by law to update the forward-looking statements
        contained in this report as a result of new information or future events
        or
        developments. These forward-looking statements generally can be identified
        by
        words such as “believes,” “expects,” “projects,” “anticipates,” “foresees,”
“forecasts,” “estimates,” “should” or other words or phrases of similar import.
        Forward-looking statements are made pursuant to the safe harbor provisions
        of
        the Private Securities Litigation Reform Act of 1995, as amended. These
        statements are not guarantees of future performance and involve certain risks
        and uncertainties, which are difficult to predict. Therefore, actual future
        results and trends may differ materially from what is forecast in
        forward-looking statements due to a variety of factors, including and without
        limitation, as found in the Company's reports filed with the Securities and
        Exchange Commission.




28




CRITICAL
      ACCOUNTING POLICY AND ESTIMATES





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




29




Item
      3.
   Controls and Procedures




We
      have
      evaluated the effectiveness of our disclosure controls and procedures and
      internal controls over financial reporting as of September 30, 2006. This
      evaluation was carried out under the supervision and with the participation
      of
      our management, including our principal executive officer and principal
      financial officer. Based on this evaluation, these officers have concluded
      that
      our disclosure controls and procedures are effective. There were no changes
      in
      internal control over financial reporting during the last fiscal quarter ended
      September 30, 2006 that materially affected, or is reasonably likely to
      materially affect internal control over financial reporting.




Disclosure
      controls and procedures and internal controls over financial reporting are
      designed to ensure that information required to be disclosed by us in the
      reports that we file or submit under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the SEC’s rules
      and forms.  Disclosure controls and procedures include, without limitation,
      controls and procedures designed to ensure that information required to be
      disclosed by us in the reports that we file under the Exchange Act is
      accumulated and communicated to our management, including principal executive
      officer and principal financial officer, as appropriate, to allow timely
      decisions regarding required disclosure.




30





PART
      II.
 OTHER INFORMATION




Item
      1.
    Legal Proceedings




None.




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




None.





Item
      3.
    Defaults Upon Senior Securities




None.




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




None.





Item
      5.
    Other Information




None




Item
      6.
    Exhibits




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




31.1
              
              Certification of President Pursuant
                to the
                Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer Pursuant to the Securities Exchange
                  Act of
                  1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.32
              
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002




31





SIGNATURES




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.




SITESTAR
              CORPORATIONDate:November
                14, 2006
            By:
            /s/
              Frank Erhartic, Jr.Frank
                Erhartic, Jr.
              President,
                Chief Executive Officer
              (Principal
                Executive Officer and
              Principal
                Accounting Officer)




Date:November
                14, 2006
            By:
            /s/
              Daniel A. JuddDaniel
                  A. Judd
                Chief
                  Financial Officer
                (Principal
                  Financial Officer)




32