REPORT
        ON
        FORM 10-QSB FOR QUARTER ENDED MARCH 31, 2006
 **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 March 31, 2006**
  [
 ]
           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 [  ]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined by Rule
        12b-2 of the Exchange Act). Yes [  ]  No [X]
  APPLICABLE
        ONLY TO CORPORATE ISSUERS
  As
        of May
        15, 2006, the issuer had 88,013,305 shares of common stock issued and
        outstanding.
  Transitional
        Small Business Disclosure Format (check one):  Yes [   ]
  No [X]
 
 
 
 
 **SITESTAR
        CORPORATION**
  Index
 PageNumberPART
                    I. FINANCIAL INFORMATIONItem
                    1. Financial Statements (Unaudited)Condensed
                    Consolidated Balance Sheets as of March 31, 2006 and December
                    31,2005
                3Condensed
                    Consolidated Statements of Income for the three months ended
                    March 31,
                    2006 and2005
                5Condensed
                    Consolidated Statements of Cash Flows for the three months ended
                    March 31,
                    2006 and 2005
                6Notes
                    to Condensed Consolidated FinancialStatements
                8Item
                    2. Management's Discussion and Analysis
                19Item
                    3. Controls andProcedures
                28Part
                    II. OTHER INFORMATION
                29Item
                    1. Legal Proceedings
                29Item
                    2. Unregistered sales of equity securities and use of proceeds
                29Item
                    3. Defaults Upon Senior Securities
                29Item
                    4. Submission of Matters to a Vote of Security Holders
                29Item
                    5. Other Information
                29Item
                    6. Exhibits and Reports on Form 8-K
                29SIGNATURES
                30
 
 
 2
 PART
        I.
        FINANCIAL INFORMATION
  **Item
        1.****Financial
        Statements**
   **SITESTAR
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **MARCH
        31, 2006 AND DECEMBER 31, 2005**
  **ASSETS**
 2006
              
              2005(Unaudited)
              
              (Audited)CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              99,160
              
              $
              36,047Accounts
                  receivable, net of allowance of $18,156and
                  $13,834 as of March 31, 2006 and December 31,2005
                  respectively
              
              
              159,030
              
              
              143,917Prepaid
                  expenses
              
              
              8,840
              
              
              -Total current assets
              
              
              267,030
              
              
              179,964PROPERTY
                  AND EQUIPMENT, net
              
              
              327,172
              
              
              311,781CUSTOMER
                  LIST, net of accumulated
                amortization
                  of $2,967,811 and $2,765,104 as of March
                31,
                  2006 and December 31, 2005 respectively
              
              
              1,905,212
              
              
              1,421,170GOODWILL,
                  net of impairment
              
              
              1,288,559
              
              
              1,288,559OTHER
                  ASSETS
              
              
              292,741
              
              
              289,586TOTAL
                  ASSETS
              
              $
              4,080,714
              
              $
              3,491,060
   See
        the
        accompanying notes to the condensed consolidated financial
        statements.
  
 
 3
 
 
 **SITESTAR
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS, Continued**
 **MARCH
        31, 2006 AND DECEMBER 31, 2005**
  **LIABILITIES
        AND STOCKHOLDERS’ EQUITY**
  2006
              
              2005(Unaudited)
              
              (Audited)CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              479,257
              
              $
              193,748Accrued
                  expenses
              
              
              323,434
              
              
              178,390Deferred
                  revenue
              
              
              570,881
              
              
              321,555Notes
                  payable, current portion
              
              
              500,923
              
              
              959,344Notes
                  payable - stockholders, current portion
              
              
              227,128
              
              
              242,724Total
                  current liabilities
              
              
              2,101,623
              
              
              1,895,761NOTES
                  PAYABLE , less current portion
              
              
              192,469
              
              
              74,847NOTES
                  PAYABLE - STOCKHOLDERS, less current portion
              
              
              681,142
              
              
              650,520TOTAL
                  LIABILITIES
              
              
              2,975,234
              
              
              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,
                  88,013,305 and86,013,305
                  shares issued andoutstanding
                  on March 31, 2006 December 31,2005 respectively
              
              
              88,013
              
              
              86,013Additional
                  paid-in capital
              
              
              13,648,207
              
              
              13,450,207Treasury
                  stock, $.001 par value, 6,218,305 and6,218,305common
                  shares on March 31,2006
                  and December 31, 2005 respectively
              
              
              (129,977
              )
              
              (129,977
              )Accumulated
                  deficit
              
              
              (12,500,763
              )
              
              (12,536,311
              )Total
                  stockholders’ equity
              
              
              1,105,480
              
              
              869,932TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              4,080,714
              
              $
              3,491,060
  See
        the
        accompanying notes to the condensed consolidated financial
        statements.
 
 
 4
 
 **SITESTAR
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF INCOME**
 **FOR
        THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**
 **(UNAUDITED)**
  2006
              
              2005REVENUEInternet
                  service revenue
              
              $
              1,430,300
              
              $
              761,540Retail
                  revenue
              
              
              27,223
              
              
              38,849TOTAL
                  REVENUE
              
              
              1,457,523
              
              
              800,389COST
                  OF REVENUECost
                  of Internet service revenue
              
              
              429,181
              
              
              188,692Cost
                  of retail revenue
              
              
              20,608
              
              
              20,639TOTAL
                  COST OF REVENUE
              
              
              449,789
              
              
              209,331GROSS
                  PROFIT
              
              
              1,007,734
              
              
              591,058OPERATING
                  EXPENSES:Selling
                  general and administrative expenses
              
              
              762,730
              
              
              477,427INCOME
                  FROM OPERATIONS
              
              
              245,004
              
              
              113,631OTHER
                  INCOME (EXPENSES)
              
              
              (57,322
              )
              
              (41,564
              )INCOME
                  BEFORE INCOME TAXES
              
              
              187,682
              
              
              72,067INCOME
                  TAXES
              
              
              -
              
              
              -NET
                  INCOME
              
              $
              187,682
              
              $
              72,067BASIC
                  AND DILUTED EARNINGS PER SHARE
              
              $
              0.002
              
              $
              0.00WEIGHTED
                    AVERAGE SHARESOUTSTANDING - BASIC AND DILUTED
              
              
              88,013,305
              
              
              82,013,305
  See
        the
        accompanying notes to the condensed consolidated financial
        statements.
 
 
 5
  **SITESTAR
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **FOR
        THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**
 **(UNAUDITED)**
  2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              187,682
              
              $
              72,067Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization expense
              
              
              238,260
              
              
              100,269Bad
                  debt expense
              
              
              4,322
              
              
              (2,425
              )(Increase)
                  decrease in:Accounts
                  receivable
              
              
              (19,435
              )
              
              36,058Prepaid
                  expenses
              
              
              (8,840
              )
              
              -Increase
                  (decrease) in:Accounts
                  payable
              
              
              285,509
              
              
              (41,944
              )Accrued
                  expenses
              
              
              145,044
              
              
              37,856Deferred
                  revenue
              
              
              249,326
              
              
              25,222Net
                  cash provided by operating activities
              
              
              1,081,868
              
              
              227,103CASH
                  FLOWS FROM INVESTING ACTIVITIES:Other
                  assets held for resale
              
              
              (5,271
              )
              
              (430
              )Purchase
                  of property and equipment
              
              
              (200,963
              )
              
              -Purchase
                  of customer list
              
              
              (686,748
              )
              
              -Net
                  cash (used in) investing activities
              
              
              (892,982
              )
              
              (430
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Net
                  proceeds from notes payable - stockholders
              
              
              52,483
              
              
              200,000Net
                  proceeds from notes payable
              
              
              452,069
              
              
              -Repayment
                  of notes payable - stockholders
              
              
              (37,457
              )
              
              (33,879
              )Repayment
                  of notes payable
              
              
              (792,868
              )
              
              (142,862
              )Repayment
                  of convertible debentures
              
              
              -
              
              
              (259,735
              )Issuance
                  of common stock
              
              
              200,000
              
              
              -Net
                  cash (used in) financing activities
              
              
              (125,773
              )
              
              (236,476
              )NET
                  INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS
              
              
              63,113
              
              
              (9,803
              )CASH
                  AND CASH EQUIVALENTS -BEGINNING OF PERIOD
              
              
              36,047
              
              
              48,534CASH
                  AND CASH EQUIVALENTS -END OF PERIOD
              
              $
              99,160
              
              $
              38,731
  See
        the
        accompanying notes to the condensed consolidated financial
        statements.
 
 6
 **SITESTAR
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **FOR
        THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (continued)**
 **(UNAUDITED)**
  **SUPPLEMENTAL
        DISCLOSURES OF CASH FLOW INFORMATION:**
  During
        the three months ended March 31, 2006 and 2005, the Company paid no income
        taxes
        and interest of approximately  $61 ,000  and
        $50 ,000 ,
        respectively.
  **NON-CASH
        INVESTING AND FINANCING TRANSACTIONS:**
  During
        the three months ended March 31, 2006, the Company issued 2,000,000 shares
        of
        common stock in connection with the purchase of NetRover Inc. as described
        in
        note 7.
  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 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.
 
 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 Digital Subscriber Line (DSL)
        Internet subscribers, web hosting and other business accounts. The total
        purchase price was $604,544 representing the fair value of the company, which
        consists of a down payment of 2,000,000 shares of the Company’s common stock and
        a non-interest bearing note payable with a balloon payment due on January
        6,
        2007.
 
 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 Digital Subscriber Line (DSL) Internet customer base in the Rocky
        Mountain region. The total purchase price was $90,000 representing the fair
        value of the assets acquired which consisted of the assumption of operating
        expenses accrued by Prolynx.
 
 See
        the
        accompanying notes to the condensed consolidated financial
        statements.
 
  7
 **SITESTAR
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        1 - BASIS OF PRESENTATION**
  The
        unaudited 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 three months
        ended March 31, 2006 are not necessarily indicative of the results to be
        expected for the full year ending December 31, 2006.
  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 $1,834,593 as of March 31, 2006.  That condition raises substantial
        doubt about the Company's ability to continue as a going concern. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty. However the Company believes that existing cash, cash
        equivalents and cash flow from operations and the Company’s ability to obtain
        favorable financing will be sufficient to meet the Company’s working capital and
        capital expenditure requirements for the next twelve months. Sitestar
        Corporation should not have the need to raise any additional material funds
        for
        operating expenses. 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:
 
 
 
 8
 
 **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  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.
 
 **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 operations 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 - CONVERTIBLE DEBENTURE**
  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 $0.70 per share.
 Due to the preferential conversion feature of these debentures, the
        Company recognized a financing charge in 2000 of $242,857 (which represents
        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. Because
        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.
 
 
 9
 **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        3 - CONVERTIBLE DEBENTURE, Continued**
 
 
 On
        August
        14, 2000, the Company issued two additional convertible debentures aggregating
        $500,000 to the holders of the above-mentioned debentures on the same terms
        described above, except that such convertible debentures had a 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.
         Because these debentures were convertible on issuance, the preferential
        conversion costs were expensed immediately and the value of the warrant was
        recognized as a financing cost 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 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 that the Company and the officers breached their contractual
        and fiduciary duties.  The original dispute arose over a significant
        payment issued by the conversion of stock that was neither applied to the
        principal or interest balance by the 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
        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.
 
 10
 
 **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        3 - CONVERTIBLE DEBENTURE, Continued**
 
 
 The
        terms
        of the Agreement included a cash payment of $100,000 to the Convertible
        Debenture Holders 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.  The request for payment could only be
        made between January 1, 2005 and February 28, 2005.
 
 As
        a
        result of signing the Agreement, the Company 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 for $259,793.  The Company settled this amount in cash on
        February 28, 2005 after receiving a corrected demand of $259,734 on February
        1,
        2005.
  **NOTE
        4 - COMMON STOCK**
  During
        the three months ended March 31, 2006, the Company issued 2,000,000 shares
        of
        common stock in connection with the purchase of NetRover Inc. as described
        in
        note 7.
  **NOTE
        5 - 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
        the
        Martinsville, Galax, Virginia Beach, Shenandoah Valley and Lynchburg, Virginia,
        Mt. Airy, North Carolina, 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 ( http://www.recharge.net ).
 
 11
 **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
 
 The
        Company evaluates the performance of its operating segments based on income
        from
        operations before income taxes, accounting changes, non-recurring items,
        and
        interest income and expense.
  Summarized
        financial information concerning the Company's reportable segments is shown
        in
        the following table for the three months ended March 31, 2006 and
        2005:
  March
                  31, 2006Corporate
              
              Internet
              
              Retail
              
              ConsolidatedRevenue
              
              $
              -
              
              $
              1,430,300
              
              $
              27,223
              
              $
              1,457,523Operating
                  Income (loss)
              
              
              (35,243
              )
              
              293,131
              
              
              (12,884
              )
              
              245,004Depreciation
                  and amortization
              
              
              -
              
              
              237,789
              
              
              471
              
              
              238,260Interest
                  expense
              
              
              -
              
              
              (60,969
              )
              
              -
              
              
              (60,969
              )Intangible
                  assets
              
              
              -
              
              
              3,357,048
              
              
              -
              
              
              3,357,048Total
                  assets
              
              $
              -
              
              $
              3,971,713
              
              $
              109,001
              
              $
              4,080,714
 
  March
                  31, 2005Corporate
              
              Internet
              
              Retail
              
              ConsolidatedRevenue
              
              $
              -
              
              $
              761,540
              
              $
              38,849
              
              $
              800,389Operating
                  Income (loss)
              
              
              (32,498
              )
              
              150,033
              
              
              (3,904
              )
              
              113,631Depreciation
                  and amortization
              
              
              
              
              
              81,558
              
              
              709
              
              
              82,267Interest
                  expense
              
              
              -
              
              
              49,923
              
              
              -
              
              
              49,923Intangible
                  assets
              
              
              -
              
              
              1,670,104
              
              
              -
              
              
              1,670,104Total
                  assets
              
              $
              -
              
              $
              2,222,560
              
              $
              87,731
              
              $
              2,310,291
 
 **NOTE
        6 - 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 CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        6 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, Continued**
 
 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 disclosure 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 mandatory redeemable financial instruments.
 For certain mandatory redeemable financial instruments, the statement was
        effective as of January 1, 2005.  The effective date has been deferred
        indefinitely for certain other types of mandatory redeemable financial
        instruments.  The Company currently does not have any financial instruments
        that are within the scope of this statement.
 
 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. Accordingly, the Company implemented the revised
        standard in the fourth quarter of fiscal year 2005. Currently, the Company
        accounts for its share-based payment transactions under the provisions of
        APB
        25, which does not necessarily require the recognition of compensation cost
        in
        the financial statements. Management has assessed the implications of this
        revised standard and has determined it to be immaterial.
 
 
 13
 
 **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        6 - 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.
 
 **NOTE
        7 - 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 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.
  
 14
  **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        7 - ACQUISITIONS, continued**
 
 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
 
 Because
        the acquisition of Idacomm was consummated on September 16, 2005, there are
        no
        results of operations of these companies for the three months ended March
        31,
        2005 included in the accompanying March 31, 2006 and 2005 consolidated financial
        statements.
  The
        following table presents the unaudited pro forma condensed statement of
        operations for the three months ended March 31, 2006 and 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.
 
  15
 
 **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        7 - ACQUISITIONS, continued**
 
 
 2006
              
              2005Net
                  sales
              
              $
              1,457,523
              
              $
              1,966,844Gross
                  profit
              
              
              1,007,734
              
              
              1,318,833Selling,
                  general and administrative expenses
              
              
              762,730
              
              
              975,330Net
                  income
              
              $
              187,682
              
              $
              271,560Basic
                  income per share
              
              $
              0.002
              
              $
              0.003
  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 Digital Subscriber Line (DSL)
        Internet subscribers, web hosting and other business accounts. The total
        purchase price was $604,544 representing the fair value of the company, which
        consists of a down payment of 2,000,000 shares of the Company’s common stock and
        a non-interest bearing note payable with a balloon payment due on January
        6,
        2007.
 
 Because
        the acquisition of NetRover Inc. was consummated on January 1, 2006, there
        are
        no results of operations of these companies for the three months ended March
        31,
        2005 included in the accompanying March 31, 2006 and 2005 consolidated financial
        statements.
  The
        following table presents the unaudited pro forma condensed statement of
        operations for the three months ended March 31, 2006 and 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.
 
 
 16
  **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        7 - ACQUISITIONS, continued**
 
 2006
              
              2005Net
                  sales
              
              $
              1,457,523
              
              $
              1,708,845Gross
                  profit
              
              
              1,007,734
              
              
              1,175,883Selling,
                  general and administrative expenses
              
              
              762,730
              
              
              832,528Net
                  income
              
              $
              187,682
              
              $
              180,151Basic
                  income per share
              
              $
              0.002
              
              $
              0.002
 
 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 Digital Subscriber Line (DSL) Internet customer base by 700 in
        the
        Rocky Mountain region. The total purchase price was $90,000 representing
        the
        fair value of the assets acquired which consisted of the assumption of operating
        expenses accrued by Prolynx.
 
 Because
        the acquisition of Prolynx was consummated on March 16, 2006, there are no
        results of operations of these companies for the three months ended March
        31,
        2005 included in the accompanying March 31, 2006 and 2005 consolidated financial
        statements.
  The
        following table presents the unaudited pro forma condensed statement of
        operations for the three months ended March 31, 2006 and 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.
 
 2006
              
              2005Net
                  sales
              
              $
              1,457,523
              
              $
              1,478,770Gross
                  profit
              
              
              1,007,734
              
              
              1,028,981Selling,
                  general and administrative expenses
              
              
              762,730
              
              
              790,944Net
                  income
              
              $
              187,682
              
              $
              180,715Basic
                  income per share
              
              $
              0.002
              
              $
              0.002
  
 17
 
 **SITESTAR
        CORPORATION**
 ****NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS****
  **NOTE
        8 - 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 $1,834,593 as of March 31, 2006.  That condition raises substantial
        doubt about the Company's ability to continue as a going concern. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty. However the Company believes that existing cash, cash
        equivalents and cash flow from operations and the Company’s ability to obtain
        favorable financing will be sufficient to meet the Company’s working capital and
        capital expenditure requirements for the next twelve months. Sitestar
        Corporation should not have the need to raise any additional material funds
        for
        operating expenses. 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 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
 
   18
  **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.
        The
        Company serves primarily markets in Mid Atlantic, Northwestern states and
        Canada.  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 further expanded with the purchase
        of NetRover Inc. a Canadian corporation, 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 national marketing method.  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 Internet Service Provider (ISP) division has five sites of operation
        (http://www.sitestar.net, http://www.lynchburg.net, http://www.advi.net,
         http://www.valink.com and http://www.exis.net).  These are located
        in  Martinsville,
        Galax, Virginia Beach, Shenandoah Valley and Lynchburg, Virginia, Mt. Airy,
        North Carolina,
        Idaho, Washington, Utah, Nevada, Arizona Canadian 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.
 
 19
 
 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) takes 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 three months ended March 31,
        2006
        and 2005. Operating results for any period are not necessarily indicative
        of
        results for any future period.
 
 For
                  the three months ended March 31, 2006 (unaudited)Corporate
              
              Internet
              
              Retail
              
              TotalRevenue
              
              $
              -
              
              $
              1,430,300
              
              $
              27,223
              
              $
              1,457,523Cost
                  of revenue
              
              
              -
              
              
              429,181
              
              
              20,608
              
              
              449,789Gross
                  profit
              
              
              -
              
              
              1,001,119
              
              
              6,615
              
              
              1,007,734Operating
                  expenses
              
              
              35,243
              
              
              707,988
              
              
              19,499
              
              
              762,730Income
                  (loss) from operations
              
              
              (35,243
              )
              
              293,131
              
              
              (12,884
              )
              
              245,004Other
                  income (expense)
              
              
              -
              
              
              (57,322
              )
              
              -
              
              
              (57,322
              )Net
                  income (loss)
              
              $
              (35,243
              )
              $
              235,809
              
              $
              (12,884
              )
              $
              187,682
   
 20
 
 For
                  the three months ended March 31, 2005 (unaudited)Corporate
              
              Internet
              
              Retail
              
              TotalRevenue
              
              $
              -
              
              $
              761,540
              
              $
              38,849
              
              $
              800,389Cost
                  of revenue
              
              
              -
              
              
              188,692
              
              
              20,639
              
              
              209,331Gross
                  profit
              
              
              -
              
              
              572,848
              
              
              18,210
              
              
              591,058Operating
                  expenses
              
              
              32,498
              
              
              422,815
              
              
              22,114
              
              
              477,427Income
                  (loss) from operations
              
              
              (32,498
              )
              
              150,033
              
              
              (3,904
              )
              
              113,361Other
                  income (expense)
              
              
              -
              
              
              (41,564
              )
              
              -
              
              
              (41,564
              )Net
                  income (loss)
              
              $
              (32,498
              )
              $
              108,469
              
              $
              (3,904
              )
              $
              72,067
  EBITDA
        (earnings before interest, taxes, depreciation and amortization) consists
        of
        revenue less cost of revenue and operating expense.  EBITDA is provided
        because it is a measure commonly used by investors to analyze and compare
        companies on the basis of operating performance. EBITDA is presented to enhance
        an understanding of the Company’s operating results and is not intended to
        represent cash flows or results of operations in accordance with GAAP for
        the
        periods indicated. EBITDA is not a measurement under GAAP and is not necessarily
        comparable with similarly titled measures for other companies. See the Liquidity
        and Capital Resource section for further discussion of cash generated from
        operations.
 
 The
        following tables show a reconciliation of EBITDA to the GAAP presentation
        of net
        income for the three months ended March 31, 2006 and 2005.
 
 **For the three months ended March 31, 2006****Corporate**
              
              **Internet**
              
              **Retail**
              
              **Total**EBITDA
              
              $
              (35,243
              )
              $
              534,567
              
              $
              (12,413
              )
              $
              486,911Interest
                  expense
              
              
              -
              
              
              (60,969
              )
              
              -
              
              
              (60,969
              )Taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Depreciation
              
              
              -
              
              
              (17,360
              )
              
              (471
              )
              
              (17,831
              )Amortization
              
              
              -
              
              
              (220,429
              )
              
              -
              
              
              (220,429
              )Net
                  income (loss)
              
              $
              (35,243
              )
              $
              235,809
              
              $
              (12,884
              )
              $
              187,682
 
 **For
                  the three months ended March 31, 2005****Corporate**
              
              **Internet**
              
              **Retail**
              
              **Total**EBITDA
              
              $
              (32,498
              )
              $
              257,951
              
              $
              (3,195
              )
              $
              222,258Interest
                  expense
              
              
              -
              
              
              (49,923
              )
              
              -
              
              
              (49,923
              )Taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Depreciation
              
              
              -
              
              
              (22,656
              )
              
              (709
              )
              
              (23,365
              )Amortization
              
              
              -
              
              
              (76,903
              )
              
              -
              
              
              (76,903
              )Net
                  income (loss)
              
              $
              (32,498
              )
              $
              108,469
              
              $
              (3,904
              )
              $
              72,067
    21
  THREE
        MONTHS ENDED MARCH 31, 2006 COMPARED TO MARCH 31, 2005
        (Unaudited)
  REVENUE.
         Revenue for the three months ended March 31, 2006 increased by $657,134 or
        82.1% from $800,389 for the three months ended March 31, 2005 to $1,457,523
        for
        the same period in 2006.  Internet sales increased $668,760 or 87.8% from
        $761,540 for the three months ended March 31, 2005 to $1,430,300 for the
        same
        period in 2006. Internet sales increased due to the addition of Internet
        customers from the asset acquisitions of Idacomm, NetRover Inc. and Prolynx.
        These acquisitions, for the three months ended March 31, 2006, yielded
        approximately $782,000 in additional net revenues.  While the Company
        continues to sign up new customers, the trend is moving towards growth in
        broadband Internet connections and more choices for consumers resulting in
        net a
        decline in excess of growth for dial-up customers.  To insure continued
        strength in revenue growth the Company’s strategy is to continue to consummate
        acquisitions of Internet Service Providers.  Offsetting this increase in
        Internet sales in part, retail sales decreased $11,626 or 29.9% for the three
        months ended March 31, 2006 from $38,849 for the three months ended March
        31,
        2005 to $27,223 for the same period in 2006.  Decreases in retail sales of
        new equipment 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 three months ended March 31, 2006 increased
        by
        $240,458 or 114.9% from $209,331 for the three months ended March 31, 2005
        to
        $449,789 for the same period in 2006. Internet cost of revenue increased
        $240,489 or 127.5% from $188,692 for the three months ended March 31, 2005
        to
        $429,181 for the same period in 2006.  This increase is primarily due to
        increases in the number of subscribers representing an increase of $201,257
        for
        the three months ended March 31, 2006.
 
 OPERATING
        EXPENSES. Operating expenses for the three months ended March 31, 2006 increased
        $285,303 or 59.8% from $477,427 for the three months ended March 31, 2005
        to
        $762,730 for the same period in 2006.  Amortization increased $143,526 or
        186.6% from $76,903 for the three months ended March 31, 2005 to $220,429
        for
        the same period in 2005.  This increase is due to the amortization of
        recent customer acquisitions.  Wages increased $85,682 or 70.2% from
        $121,995 for the three months ended March 31, 2006 to $207,677 for the same
        period in 2005. This is primarily the results of employees acquired with
        the
        purchase of NetRover Inc. Corporate expenses of $35,243 for the three months
        ended March 31, 2006 consisted primarily of professional fees.  Corporate
        expenses of $32,498 for the three months ended March 31, 2005 consisted
        primarily of professional fees.
   22
  GAIN
        ON
        SALE OF ASSETS.  A gain was recognized on the sale of the assets of
        Sitestar Applied Technologies, Inc. from Servatus LLC of $3,393 and $8,359
        for
        the three months ended March 31, 2006 and 2005 respectively.  This
        represents, per the Definitive Agreement, 20% of the gross revenue of Servatus,
        LLC for the three months ended March 31, 2006 and 2005 respectively.
 
 INTEREST
        EXPENSE. Interest expense for the three months ended March 31, 2006 increased
        by
        $11,045 or 22.1% from $49,923 for the three months ended March 31, 2005 to
        $60,969 for the same period in 2006.  This increase is a result of
        financing the acquisitions of additional customers.
 
 MARCH
        31, 2006 (Unaudited) COMPARED TO DECEMBER 31, 2005 (Audited)
 
 BALANCE
        SHEETS.   Net accounts receivable increased $15,113 or 10.5% from
        $143,917 on December 31, 2005 to $159,030 on March 31, 2006.  This increase
        is substantially due to the addition of the customer base from Idacomm. 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 $5,878 or 4.8% from $123,586 on December 31, 2005 and $129,464
        on
        March 31, 2006. Accounts payable
        increased by $285,509 or 147.4% from $193,748 on December 31, 2005 to $479,257
        on March 31, 2006.  Accrued expenses increased by $145,044 or 81.3% from
        $178,390 on December 31, 2005 to $323,434 on March 31, 2006.  The increase
        in current liabilities is a reflection of servicing the increased customer
        base.
        Deferred revenue increased by $249,326 or 43.7% from $321,555 on December
        31,
        2005 to $570,881 on March 31, 2006 representing increased volume of customer
        accounts that have been prepaid. The current portion of notes payable, including
        notes payable to shareholders, decreased $474,017 or 65.1% from $1,202,068
        on
        December 31, 2005 to $728,051 on March 31, 2006.  This is a primarily
        result of servicing the debt of the acquisition of Idacomm’s customers. This
        note, with an initial principal balance of $1,295,304 and with terms of seven
        months, had a principal balance of $84,963 as of March 31, 2006. This decrease
        in borrowing was offset in part by increases in long-term notes payable,
        as well
        as, long-term notes payable to shareholders.
  23
  LIQUIDITY
        AND CAPITAL RESOURCES
  Cash
        and
        cash equivalents totaled $99,160 and $36,047 at March 31, 2006 and at December
        31, 2005, respectively. EBITDA (Earnings Before Interest, Taxes, Depreciation,
        and Amortization) was $486,911 for the three months ended March 31, 2006
        as
        compared to $222,258 for the same period in 2005.
 
 2006
                
                2005EBITDA
                    for the three months ended March 31,
                
                $
                486,911
                
                $
                222,258Interest
                    expense
                
                
                (60,969
                )
                
                (49,923
                )Taxes
                
                
                -
                
                
                -Depreciation
                
                
                (17,831
                )
                
                (23,365
                )Amortization
                
                
                (220,429
                )
                
                (76,903
                )Net
                    income for the three months ended March 31,
                
                $
                187,682
                
                $
                72,067
  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 $1,834,593 as of March 31, 2006.  That condition raises substantial
        doubt about the Company's ability to continue as a going concern. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty. However the Company believes that existing cash, cash
        equivalents and cash flow from operations and the Company’s ability to obtain
        favorable financing will be sufficient to meet the Company’s working capital and
        capital expenditure requirements for the next twelve months. Sitestar
        Corporation should not have the need to raise any additional material funds
        for
        operating expenses. 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 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.
   24
  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
        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 in 2000 of $242,857 (which represents 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 with a 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 repaid $335,000 of these debentures in
        cash.
  25
  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 and the officers breached their
        contractual and fiduciary duties.  This proceeding was a dispute over the
        amount owed on the convertible debentures.
 
 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 regarding the convertible debentures held by the Convertible
        Debenture Holders will be 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 had recognized a contingent
        liability of $220,000 as of December 31, 2003, representing management’s
        estimate of the potential additional payment that may 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 for $259,734.  The Company settled this
        amount in cash on February 28, 2005.
 
 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 March 31, 2006 and December 31, 2005 is as
        shown:
   26
 
 2006
              
              2005Current
              
              $
              71,444
              
              
              40
              %
              $
              89,166
              
              
              29
              %30
                  < 60
              
              
              56,578
              
              
              32
              %
              
              43,428
              
              
              56
              %60
                  +
              
              
              49,164
              
              
              28
              %
              
              26,123
              
              
              15
              %Total
              
              $
              177,186
              
              
              100
              %
              $
              158,717
              
              
              100
              %
  The
        Company believes that the existing cash, cash equivalents, and cash flow
        from
        operations and the Company’s ability to obtain favorable financing will be
        sufficient to meet the 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, the Company
        may need to slow down or stop the acquisition of Internet Service Providers
        and
        reduce the marketing and development efforts. Any of these events could harm
        the
        Company’s business, financial condition or results of operations.
 
  OFF
        BALANCE SHEET TRANSACTIONS
  The
        Company is not a party to any off balance sheet transactions.
  Forward-looking
        statements
  This
        report contains certain forward-looking statements within the meaning of
        Section
        27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
        Exchange Act of 1934, as amended. Stockholders are cautioned that all
        forward-looking statements involve risks and uncertainty, including without
        limitation, the Company’s ability to expand the 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.
 
 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.
 
 27
 
 Item
        3.
   Controls and Procedures
  We
        have
        evaluated the effectiveness of our disclosure controls and procedures and
        internal controls over financial reporting as of March 31, 2006. This evaluation
        was carried out under the supervision and with the participation of our
        management, including our principal executive officer and principal financial
        officer. Based on this evaluation, these officers have concluded that our
        disclosure controls and procedures are effective. There were no significant
        changes to our internal controls over financial reporting that could
        significantly affect internal controls during the last fiscal quarter ended
        March 31, 2006.
  Disclosure
        controls and procedures and internal controls over financial reporting are
        designed to ensure that information required to be disclosed by us in the
        reports that we file or submit under the Exchange Act is recorded, processed,
        summarized and reported, within the time periods specified in the SEC’s rules
        and forms.  Disclosure controls and procedures include, without limitation,
        controls and procedures designed to ensure that information required to be
        disclosed by us in the reports that we file under the Exchange Act is
        accumulated and communicated to our management, including principal executive
        officer and principal financial officer, as appropriate, to allow timely
        decisions regarding required disclosure.
 
 
 28
  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
 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
 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
 32
        Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
        Section
        906 of the Sarbanes-Oxley Act of 2002
  29
 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: May
                15,
                2006
              By:
              /s/ Frank
                Erhartic, Jr.Frank
                  Erhartic, Jr.
                President,
                  Chief Executive Officer
                (Principal
                  Executive Officer and
                Principal
                  Accounting Officer)
  Date: May
                  15,
                  2006
                By:
                /s/ Daniel
                  A.
                  Judd.Chief
                      Financial Officer
                    (Principal
                      Financial Officer)
 
 30