**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 June 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
      August 15, 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 June30,
                2006 (unaudited) and December 31, 2005 (unaudited)
            3Condensed
                Consolidated Statements of Income for thethree
                months ended June 30, 2006 and 2005 (unaudited)
            5Condensed
                Consolidated Statements of Income for thesix
                months ended June 30, 2006 and 2005 (unaudited)
            6Condensed
                Consolidated Statements of Cash Flows forthe
                six months ended June 30, 2006 and 2005 (unaudited)
            7Notes
                to unaudited Condensed Consolidated Financial Statements
            9Item
                2. Management's Discussion and Analysis
            21Item
                3. Controls and Procedures
            29Part
                II. OTHER INFORMATION
            30Item
                1. Legal Proceedings
            30Item
                2. Unregistered sales of equity securities and use of
                proceeds
            30Item
                3. Defaults Upon Senior Securities
            30Item
                4. Submission of Matters to a Vote of Security Holders
            30Item
                5. Other Information
            30Item
                6. Exhibits and Reports on Form 8-K
            30SIGNATURES
            31




2




PART
      I.
      FINANCIAL INFORMATION




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




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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




**ASSETS**




2006
            
            2005(Unaudited)
            
            (Audited)CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            141,360
            
            $
            36,047Accounts
                receivable, net of allowance of $16,878
              and
                $13,834 as of June 30, 2006 and December 31,
              2005
                respectively
            
            
            159,472
            
            
            143,917Prepaid
                expenses
            
            
            8,822
            
            
            -Total
                current assets
            
            
            309,654
            
            
            179,964PROPERTY
                AND EQUIPMENT, net
            
            
            308,474
            
            
            311,781CUSTOMER
                LIST, net of accumulated
              amortization
                of $3,168,754 and $2,765,104 as of June
              30,
                2006 and December 31, 2005 respectively
            
            
            1,704,269
            
            
            1,421,170GOODWILL,
                net of impairment
            
            
            1,288,559
            
            
            1,288,559OTHER
                ASSETS
            
            
            274,134
            
            
            289,586TOTAL
                ASSETS
            
            $
            3,885,090
            
            $
            3,491,060




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




3





**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS, Continued**


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




**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**




2006
            
            2005(Unaudited)
            
            (Audited)CURRENT
                LIABILITIESAccounts
                payable
            
            $
            317,600
            
            $
            193,748Accrued
                expenses
            
            
            279,205
            
            
            178,390Deferred
                revenue
            
            
            510,391
            
            
            321,555Notes
                payable
            
            
            405,007
            
            
            959,344Notes
                payable - stockholders
            
            
            186,624
            
            
            242,724Total
                current liabilities
            
            
            1,698,827
            
            
            1,895,761NOTES
                PAYABLE, less current portion
            
            
            68,980
            
            
            74,847NOTES
                PAYABLE - STOCKHOLDERS, less current portion
            
            
            681,142
            
            
            650,520TOTAL
                LIABILITIES
            
            
            2,448,949
            
            
            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 shares
              authorized,
                88,063,305 and86,013,305
                shares issued and
              outstanding
                on June 30, 2006 December 31,
              2005 respectively
            
            
            88,063
            
            
            86,013Additional
                paid-in capital
            
            
            13,651,157
            
            
            13,450,207Treasury
                stock, $.001 par value, 6,218,305 common shares
              on
                June 30,  2006 and December 31, 2005
            
            
            (129,977
            )
            
            (129,977
            )Accumulated
                deficit
            
            
            (12,173,102
            )
            
            (12,536,311
            )Total
                stockholders’ equity
            
            
            1,436,141
            
            
            869,932TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            3,885,090
            
            $
            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 JUNE 30, 2006 AND 2005**


**(UNAUDITED)**




2006
            
            2005REVENUEInternet
                service revenue
            
            $
            1,344,570
            
            $
            738,736Retail
                revenue
            
            
            20,459
            
            
            41,882TOTAL
                REVENUE
            
            
            1,365,029
            
            
            780,618COST
                OF REVENUECost
                of Internet service revenue
            
            
            315,941
            
            
            188,127Cost
                of retail revenue
            
            
            19,380
            
            
            16,984TOTAL
                COST OF REVENUE
            
            
            335,321
            
            
            205,111GROSS
                PROFIT
            
            
            1,029,708
            
            
            575,507OPERATING
                EXPENSES:Selling
                general and administrative expenses
            
            
            654,935
            
            
            376,744INCOME
                FROM OPERATIONS
            
            
            374,773
            
            
            198,763OTHER
                INCOME (EXPENSES)
            
            
            (47,112
            )
            
            (43,020
            )INCOME
                BEFORE INCOME TAXES
            
            
            327,661
            
            
            155,743INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            327,661
            
            $
            155,743BASIC
                AND DILUTED EARNINGS PER SHARE
            
            $
            0.00
            
            $
            0.00WEIGHTED
                AVERAGE SHARESOUTSTANDING
                - BASIC AND DILUTED
            
            
            88,063,305
            
            
            82,013,305




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




5




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005**


**(UNAUDITED)**




2006
            
            2005REVENUEInternet
                service revenue
            
            $
            2,774,870
            
            $
            1,500,276Retail
                revenue
            
            
            47,682
            
            
            80,731TOTAL
                REVENUE
            
            
            2,822,552
            
            
            1,581,007COST
                OF REVENUECost
                of Internet service revenue
            
            
            745,122
            
            
            376,820Cost
                of retail revenue
            
            
            39,988
            
            
            37,622TOTAL
                COST OF REVENUE
            
            
            785,110
            
            
            414,442GROSS
                PROFIT
            
            
            2,037,442
            
            
            1,166,565OPERATING
                EXPENSES:Selling
                general and administrative expenses
            
            
            1,417,664
            
            
            854,171INCOME
                FROM OPERATIONS
            
            
            619,778
            
            
            312,394OTHER
                INCOME (EXPENSES)
            
            
            (104,435
            )
            
            (84,584
            )INCOME
                BEFORE INCOME TAXES
            
            
            515,343
            
            
            227,810INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            515,343
            
            $
            227,810BASIC
                AND DILUTED EARNINGS PER SHARE
            
            $
            0.01
            
            $
            0.00WEIGHTED
                AVERAGE SHARESOUTSTANDING
                - BASIC AND DILUTED
            
            
            88,038,443
            
            
            82,013,305




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




6





**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005**


**(UNAUDITED)**




2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            515,343
            
            $
            227,810Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization expense
            
            
            477,116
            
            
            201,045Bad
                debt expense
            
            
            3,044
            
            
            1,220(Increase)
                decrease in:Accounts
                receivable
            
            
            (18,598
            )
            
            39,086Prepaid
                expenses
            
            
            (8,823
            )
            
            -Increase
                (decrease) in:Accounts
                payable
            
            
            123,852
            
            
            (144,497
            )Accrued
                expenses
            
            
            100,815
            
            
            (12,896
            )Deferred
                revenue
            
            
            188,836
            
            
            (16,560
            )Net
                cash provided by operating activities
            
            
            1,381,585
            
            
            295,208CASH
                FLOWS FROM INVESTING ACTIVITIES:Other
                assets held for resale
            
            
            (5,271
            )
            
            (13,723
            )Purchase
                of property and equipment
            
            
            (201,571
            )
            
            (5,969
            )Purchase
                of customer list
            
            
            (686,748
            )
            
            -Net
                cash (used in) investing activities
            
            
            (893,590
            )
            
            (19,692
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from notes payable - stockholders
            
            
            52,483
            
            
            200,000Net
                proceeds from notes payable
            
            
            425,223
            
            
            -Repayment
                of notes payable - stockholders
            
            
            (77,961
            )
            
            (107,786
            )Repayment
                of notes payable
            
            
            (985,427
            )
            
            (125,754
            )Repayment
                of convertible debentures
            
            
            -
            
            
            (259,734
            )Issuance
                of common stock
            
            
            203,000
            
            
            -Net
                cash (used in) financing activities
            
            
            (382,682
            )
            
            (293,274
            )NET
                INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS
            
            
            105,313
            
            
            (17,758
            )CASH
                AND CASH EQUIVALENTS -BEGINNING OF PERIOD
            
            
            36,047
            
            
            48,533CASH
                AND CASH EQUIVALENTS -END OF PERIOD
            
            $
            141,360
            
            $
            30,775




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


7


**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (continued)**


**(UNAUDITED)**




**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:**




During
      the six months ended June 30, 2006 and 2005, the Company paid no income taxes
      and paid interest of approximately  $109 ,000  and
      $98 ,000 ,
      respectively.




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




During
      the six months ended June 30, 2006, the Company issued 2,050,000 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 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, which consisted of 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.





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, paid
      by
      of a down payment of 2,000,000 shares of the Company’s common stock, with the
      balance represented by a non-interest bearing note payable by the Company to
      Isomedia, Inc. with the note due in full, by a balloon payment 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 paid in the form of the Company’s the assumption of
      $90,000 in operating expenses accrued by Prolynx.





8




**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1 - BASIS OF PRESENTATION**




The
      unaudited condensed consolidated financial statements have been prepared by
      Sitestar Corporation (the “Company” or “Sitestar”), pursuant to the rules and
      regulations of the Securities and Exchange Commission. The information furnished
      herein reflects all adjustments (consisting of normal recurring accruals and
      adjustments), which are, in the opinion of management, necessary to fairly
      present the operating results for the respective periods. Certain information
      and footnote disclosures normally present in annual consolidated financial
      statements prepared in accordance with generally accepted accounting principles
      have been omitted pursuant to such rules and regulations. These financial
      statements should be read in conjunction with the audited consolidated financial
      statements and footnotes for the year ended December 31, 2005 included in the
      Company’s Annual Report on Form 10-KSB.  The results of the six months
      ended June 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,
      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 $1,389,173 as of June 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 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 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 six months ended June 30, 2006, the Company issued 2,050,000 shares of
      common stock in connection with the purchase of NetRover Inc. as described
      in
      note 7.




**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 the
      Martinsville, Galax,




10




**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      4 - SEGMENT INFORMATION, continued**





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 ).




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 June 30, 2006 and
      2005:




June
                30, 2006Corporate
            
            Internet
            
            Retail
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            1,344,570
            
            $
            20,459
            
            $
            1,365,029Operating
                Income (loss)
            
            $
            (19,024
            )
            $
            410,498
            
            $
            (16,701
            )
            $
            374,773Depreciation
                and amortization
            
            $
            -
            
            $
            238,385
            
            $
            471
            
            $
            238,856Interest
                expense
            
            $
            -
            
            $
            47,620
            
            $
            -
            
            $
            47,620Intangible
                assets
            
            $
            -
            
            $
            3,138,105
            
            $
            -
            
            $
            3,138,105Total
                assets
            
            $
            -
            
            $
            3,776,613
            
            $
            108,477
            
            $
            3,885,090




June
                30, 2005Corporate
            
            Internet
            
            Retail
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            738,736
            
            $
            41,882
            
            $
            780,618Operating
                Income (loss)
            
            $
            (10,626
            )
            $
            203,188
            
            $
            6,201
            
            $
            198,763Depreciation
                and amortization
            
            $
            
            
            $
            100,068
            
            $
            708
            
            $
            100,776Interest
                expense
            
            $
            -
            
            $
            48,191
            
            $
            -
            
            $
            48,191Intangible
                assets
            
            $
            -
            
            $
            1,593,201
            
            $
            -
            
            $
            1,593,201Total
                assets
            
            $
            -
            
            $
            2,113,997
            
            $
            100,150
            
            $
            2,214,147





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 six months ended June 30, 2006 and
      2005:




June
                30, 2006Corporate
            
            Internet
            
            Retail
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            2,774,870
            
            $
            47,682
            
            $
            2,822,552Operating
                Income (loss)
            
            $
            (54,267
            )
            $
            703,629
            
            $
            (29,585
            )
            $
            619,778Depreciation
                and amortization
            
            $
            -
            
            $
            476,174
            
            $
            941
            
            $
            477,116Interest
                expense
            
            $
            -
            
            $
            108,589
            
            $
            -
            
            $
            108,589Intangible
                assets
            
            $
            -
            
            $
            3,138,105
            
            $
            -
            
            $
            3,138,105Total
                assets
            
            $
            -
            
            $
            3,776,613
            
            $
            108,477
            
            $
            3,885,090





June
                30, 2005Corporate
            
            Internet
            
            Retail
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            1,500,276
            
            $
            80,731
            
            $
            1,581,007Operating
                Income (loss)
            
            $
            (43,124
            )
            $
            353,220
            
            $
            2,298
            
            $
            312,394Depreciation
                and amortization
            
            $
            
            
            $
            $199,628
            
            $
            1,417
            
            $
            201,045Interest
                expense
            
            $
            -
            
            $
            98,114
            
            $
            -
            
            $
            98,114Intangible
                assets
            
            $
            -
            
            $
            1,593,201
            
            $
            -
            
            $
            1,593,201Total
                assets
            
            $
            -
            
            $
            2,113,997
            
            $
            100,150
            
            $
            2,214,147





**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**





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.





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 Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for
      Non-monetary transactions (“FAS 153”). This statement amends APB Opinion 29 to
      eliminate the exception for non-monetary exchanges of similar productive assets
      and replaces it with a general exception for exchanges of non-monetary 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 results of
      operations.




**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





15





**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS, continued**





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 of these companies for the six months ended June 30,
      2005
      included in the accompanying June 30, 2006 and 2005 consolidated financial
      statements.




The
      following table presents the unaudited pro forma condensed statement of
      operations for the six months ended June 30, 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.





2006
            
            2005Net
                sales
            
            $
            ,882,552
            
            $
            2,528,451Gross
                profit
            
            $
            ,037,442
            
            $
            1,824,844Selling,
                general and administrative expenses
            
            $
            1,417,664
            
            $
            1,282,438Net
                income
            
            $
            515,343
            
            $
            442,469Basic
                income per share
            
            $
            0.01
            
            $
            0.01








16




**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS, continued**





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, 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 six months ended June 30,
      2005 included in the accompanying June 30, 2006 and 2005 consolidated financial
      statements.




The
      following table presents the unaudited pro forma condensed statement of
      operations for the six months ended June 30, 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.





17




**SITESTAR
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS, continued**





2006
            
            2005Net
                sales
            
            $
            2,882,552
            
            $
            2,078,321Gross
                profit
            
            $
            2,037,442
            
            $
            1,464,456Selling,
                general and administrative expenses
            
            $
            1,417,664
            
            $
            1,170,611Net
                income
            
            $
            515,343
            
            $
            191,172Basic
                income per share
            
            $
            0.01
            
            $
            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 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 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 six months ended June 30,
      2005
      included in the accompanying June 30, 2006 and 2005 consolidated financial
      statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the six months ended June 30, 2006 and 2005 and reflects the
      results of operations of the Company as if the acquisition of Prolynx had been
      effective March 16, 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**





2006
            
            2005Net
                sales
            
            $
            2,882,552
            
            $
            1,647,272Gross
                profit
            
            $
            2,037,442
            
            $
            1,230,751Selling,
                general and administrative expenses
            
            $
            1,417,664
            
            $
            892,196Net
                income
            
            $
            515,343
            
            $
            253,951Basic
                income per share
            
            $
            0.01
            
            $
            0.00





**NOTE
      7 - SUBSEQUENT EVENTS**





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.





In
      the
      event that actual annualized revenue differs more than three percent from
      estimates used at closing, the purchase price will be adjusted accordingly.
      Because the acquisition of First Net was consummated on July 1, 2006, there
      are
      no results of operations of these companies for the six months ended June 30,
      2006 or June 30, 2005 included in the accompanying June 30, 2006 and 2005
      consolidated financial statements.





The
      following table summarizes the estimated fair values of assets acquired and
      liabilities assumed at the date of acquisition. Sitestar is in the process
      of
      assessing the valuations of certain intangible assets; thus, the allocation
      of
      the purchase price is subject to refinement.





Domain
                name
            
            $
            200,000Accounts
                receivable
            
            
            57,535Customer
                list
            
            
            718,332Non-compete
                agreement
            
            
            10,000Deferred
                revenue
            
            
            (260,867
            )Purchase
                price
            
            $
            725,000




19




**SITESTAR
      CORPORATION**


**NOTES
      TO 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 $1,389,173 as of June 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 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





20




**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 the Mid Atlantic and Northwestern states
      in
      America and in 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
      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 Internet Service Provider (ISP) division has five primary 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 and in 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.





21





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) 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 six months ended June 30, 2006
      and
      2005. Operating results for any period are not necessarily indicative of results
      for any future period.





For
                the six months ended June 30, 2006 (unaudited)Corporate
            
            Internet
            
            Retail
            
            TotalRevenue
            
            $
            -
            
            $
            2,774,870
            
            $
            47,682
            
            $
            2,822,552Cost
                of revenue
            
            
            -
            
            
            745,122
            
            
            39,988
            
            
            785,110Gross
                profit
            
            
            -
            
            
            2,029,748
            
            
            7,694
            
            
            2,037,442Operating
                expenses
            
            
            54,267
            
            
            1,326,119
            
            
            37,278
            
            
            1,417,664Income
                (loss) from operations
            
            
            (54,267
            )
            
            703,629
            
            
            (29,584
            )
            
            619,778Other
                income (expense)
            
            
            -
            
            
            (108,435
            )
            
            -
            
            
            (104,435
            )Net
                income (loss)
            
            $
            (54,267
            )
            $
            599,194
            
            $
            (29,584
            )
            $
            515,343





22





For
                the six months ended June 30, 2005 (unaudited)Corporate
            
            Internet
            
            Retail
            
            TotalRevenue
            
            $
            -
            
            $
            1,500,276
            
            $
            80,731
            
            $
            1,581,007Cost
                of revenue
            
            
            -
            
            
            376,820
            
            
            37,622
            
            
            414,442Gross
                profit
            
            
            -
            
            
            1,123,456
            
            
            43,109
            
            
            1,166,565Operating
                expenses
            
            
            43,124
            
            
            770,236
            
            
            40,811
            
            
            854,171Income
                (loss) from operations
            
            
            (43,124
            )
            
            353,220
            
            
            2,298
            
            
            312,394Other
                income (expense)
            
            
            -
            
            
            (84,584
            )
            
            -
            
            
            (84,584
            )Net
                income (loss)
            
            $
            (43,124
            )
            $
            268,636
            
            $
            2,298
            
            $
            227,810




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 six months ended June 30, 2006 and
      2005.


****


**For
                the six months ended June 30,
                2006****Corporate**
            
            **Internet**
            
            **Retail**
            
            **Total**EBITDA
            
            $
            (54,267
            )
            $
            1,183,958
            
            $
            (28,643
            )
            $
            1,101,048Interest
                expense
            
            
            -
            
            
            (108,589
            )
            
            -
            
            
            (108,589
            )Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (36,803
            )
            
            (941
            )
            
            (37,744
            )Amortization
            
            
            -
            
            
            (439,372
            )
            
            -
            
            
            (439,372
            )Net
                income (loss)
            
            $
            (54,267
            )
            $
            599,194
            
            $
            (29,584
            )
            $
            515,343





**For
                the six months ended June 30, 2005****Corporate**
            
            **Internet**
            
            **Retail**
            
            **Total**EBITDA
            
            $
            (43,124
            )
            $
            566,378
            
            $
            3,715
            
            $
            526,969Interest
                expense
            
            
            -
            
            
            (98,114
            )
            
            -
            
            
            (98,114
            )Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (45,821
            )
            
            (1,417
            )
            
            (47,238
            )Amortization
            
            
            -
            
            
            (153,807
            )
            
            -
            
            
            (153,807
            )Net
                income (loss)
            
            $
            (43,124
            )
            $
            268,636
            
            $
            2,298
            
            $
            227,810





23





SIX
      MONTHS ENDED JUNE 30, 2006 COMPARED TO JUNE 30, 2005
      (Unaudited)




REVENUE.
       Revenue for the six months ended June 30, 2006 increased by $1,241,545 or
      78.5% from $1,581,007 for the six months ended June 30, 2005 to $2,822,552
      for
      the same period in 2006.  Internet sales increased $1,274,594 or 85.0% from
      $1,500,276 for the six months ended June 30, 2005 to $2,774,870 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 six months ended June 30, 2006, yielded
      approximately $1,511,000 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
      a
      net 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 $33,049 or 41.0% for the six
      months ended June 30, 2006 from $80,731 for the six months ended June 30, 2005
      to $47,682 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 six months ended June 30, 2006 increased
      by
      $370,668 or 89.4% from $414,442 for the six months ended June 30, 2005 to
      $785,110 for the same period in 2006. Internet cost of revenue increased
      $368,302 or 97.7% from $376,820 for the six months ended June 30, 2005 to
      $745,122 for the same period in 2006.  This increase is primarily due to
      increases in the number of subscribers representing an increase of $490,668
      for
      the six months ended June 30, 2006.





OPERATING
      EXPENSES. Operating expenses for the six months ended June 30, 2006 increased
      $563,493 or 66.0% from $854,171 for the six months ended June 30, 2005 to
      $1,417,664 for the same period in 2006.  Amortization increased $285,565 or
      185.7% from $153,807 for the six months ended June 30, 2005 to $439,372 for
      the
      same period in 2006.  This increase is due to the amortization of recent
      customer acquisitions.  Wages increased $202,904 or 113.0% from $179,482
      for the six months ended June 30, 2005 to $382,386 for the same period in 2006.
      This is primarily the results of employees acquired with the purchase of
      NetRover Inc. Corporate expenses of $54,267 for the six months ended June 30,
      2006 consisted primarily of professional fees.  Corporate expenses of
      $43,124 for the six months ended June 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 LLC of $7,779 and $13,529
      for
      the six months ended June 30, 2006 and 2005 respectively.  This represents,
      per the Definitive Agreement, 20% of the gross revenue of Servatus, LLC for
      the
      six months ended June 30, 2006 and 2005 respectively.





24


INTEREST
      EXPENSE. Interest expense for the six months ended June 30, 2006 increased
      by
      $10,475 or 10.7% from $98,114 for the six months ended June 30, 2005 to $108,589
      for the same period in 2006.  This increase is a result of financing the
      acquisitions of additional customers.





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





BALANCE
      SHEETS.   Net accounts receivable increased $15,555 or 10.8% from
      $143,917  on
      December 31, 2005 to $159,472 on June 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 $5,270 or 4.3% from $123,586 on December 31, 2005 and $128,858
      on
      June 30, 2006. Accounts payable
      increased by $123,852 or 63.9% from $193,748 on December 31, 2005 to $317,600
      on
      June 30, 2006.  Accrued expenses increased by $100,815 or 56.5% from
      $178,390 on December 31, 2005 to $279,205 on June 30, 2006.  The increase
      in current liabilities is a reflection of servicing the increased customer
      base.
      Deferred revenue increased by $188,836 or 58.7% from $321,555 on December 31,
      2005 to $510,391 on June 30, 2006 representing increased volume of customer
      accounts that have been prepaid. The current portion of notes payable, including
      notes payable to shareholders, decreased $610,437 or 50.8% from $1,202,068
      on
      December 31, 2005 to $591,631 on June 30, 2006.  This is primarily a 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 a term of seven months,
      was
      paid off as of June 30, 2006. 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 $141,360 and $36,047 at June 30, 2006 and at December
      31, 2005, respectively. EBITDA (Earnings Before Interest, Taxes, Depreciation
      and Amortization) was $1,101,048 for the six months ended June 30, 2006 as
      compared to $526,969 for the same period in 2005.





2006
            
            2005EBITDA
                for the six months ended June 30,
            
            $
            1,101,048
            
            $
            526,969Interest
                expense
            
            
            (108,589
            )
            
            (98,114
            )Taxes
            
            
            -
            
            
            -Depreciation
            
            
            (37,744
            )
            
            (47,238
            )Amortization
            
            
            (439,372
            )
            
            (153,807
            )Net
                income for the six months ended June 30,
            
            $
            515,343
            
            $
            227,810





25





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 $1,389,173 as of June 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 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.





26





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 June 30, 2006 and December 31, 2005 is as
      shown:





2006
            
            2005Current
            
            $
            58,417
            
            
            37
            %
            $
            89,166
            
            
            29
            %30
                < 60
            
            
            59,617
            
            
            37
            %
            
            43,428
            
            
            56
            %60
                +
            
            
            41,438
            
            
            26
            %
            
            26,123
            
            
            15
            %Total
            
            $
            159,472
            
            
            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.





27




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.





28




**Item
      3.    Controls and Procedures**




We
      have
      evaluated the effectiveness of our disclosure controls and procedures and
      internal controls over financial reporting as of June 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
      June 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.





29




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





30




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:
              August 15, 2006
            By:
            /s/
              Frank Erhartic, Jr.Frank
              Erhartic, Jr.President,
                Chief Executive Officer
              (Principal
                Executive Officer and
              Principal
                Accounting Officer)


Date:
              August 15, 2006
            By:
            /s/
              Daniel A. JuddDaniel
              A. JuddChief
                Financial Officer
              (Principal
                Financial Officer)






31