**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, 2007**




[
 ]
         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 August
      14, 2007, the issuer had 88,063,305 shares
      of common stock issued and outstanding.




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











**SITESTAR
      CORPORATION**




Index


Page
                NumberPART
                I.  FINANCIAL INFORMATIONItem
                1.  Financial StatementsCondensed
                Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December
                31,2006
                (audited)
            3Condensed
                Consolidated Statements of Income for the three months ended June
                30, 2007
                and2006
                (unaudited)
            5Condensed
                Consolidated Statements of Income for the six months ended June 30,
                2007
                and2006
                (unaudited)
            6Condensed
                Consolidated Statements of Cash Flows for the six months ended June
                30,
                2007 and 2006 (unaudited)
            7Notes
                to unaudited Condensed Consolidated Financial Statements
            9Item
                2.   Management's Discussion and Analysis
            22Item
                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
            30SIGNATURES
            31




-2-




PART
      I.
      FINANCIAL INFORMATION




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




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**JUNE
      30, 2007 AND DECEMBER 31, 2006**




**ASSETS**


2007
            
            2006(Unaudited)
            
            (Audited)CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            232,988
            
            $
            129,453Accounts
                receivable, net of allowance of $19,418and
                $15,695 as of June 30, 2007 and December 31,2006
                respectively
            
            
            213,018
            
            
            170,626Prepaid
                expenses
            
            
            19,487
            
            
            23,676Total current assets
            
            
            465,493
            
            
            323,755PROPERTY
                AND EQUIPMENT, net
            
            
            265,178
            
            
            274,269CUSTOMER
                LIST, net of accumulatedamortization
                of $4,302,795 and $3,716,215 as ofJune
                30, 2007 and December 31, 2006 respectively
            
            
            2,122,238
            
            
            1,721,233GOODWILL,
                net of impairment
            
            
            1,288,559
            
            
            1,288,559OTHER
                ASSETS
            
            
            410,391
            
            
            437,197TOTAL
                ASSETS
            
            $
            4,551,859
            
            $
            4,045,013






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




-3-




**SITESTAR
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS, continued**


**JUNE
      30, 2007 AND DECEMBER 31, 2006**




**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**




2007
            
            2006(Unaudited)
            
            (Audited)CURRENT
                LIABILITIESAccounts
                payable
            
            $
            29,713
            
            $
            105,814Accrued
                expenses
            
            
            220,610
            
            
            426,216Deferred
                revenue
            
            
            640,585
            
            
            588,766Notes
                payable
            
            
            483,908
            
            
            286,114Notes
                payable - stockholders
            
            
            -
            
            
            46,861Total
                current liabilities
            
            
            1,374,816
            
            
            1,453,771NOTES
                PAYABLE, less current portion
            
            
            215,155
            
            
            63,113NOTES
                PAYABLE - STOCKHOLDERS, less current portion
            
            
            850,617
            
            
            814,946TOTAL
                LIABILITIES
            
            
            2,440,588
            
            
            2,331,830STOCKHOLDERS'
                EQUITYPreferred
                Stock, $.001 par value, 10,000,000 sharesauthorized,
                0 shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value, 300,000,000 sharesauthorized,
                88,063,305 and 88,063,305 shares issued and
              outstanding
                on June 30, 2007 December 31,2006 respectively
            
            
            88,063
            
            
            88,063Additional
                paid-in capital
            
            
            13,651,157
            
            
            13,651,157Treasury
                stock, $.001 par value, 8,218,305 common shareson
                June 30,  2007 and December 31, 2006
            
            
            (329,977
            )
            
            (329,977
            )Accumulated
                deficit
            
            
            (11,297,972
            )
            
            (11,696,060
            )Total
                stockholders’ equity
            
            
            2,111,271
            
            
            1,713,183TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            4,551,859
            
            $
            4,045,013






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, 2007 AND 2006**


**(UNAUDITED)**




2007
            
            2006REVENUE
            
            $
            1,528,733
            
            $
            1,365,029COST
                OF REVENUE
            
            
            539,981
            
            
            335,321GROSS
                PROFIT
            
            
            988,752
            
            
            1,029,708OPERATING
                EXPENSES:Selling
                general and administrative expenses
            
            
            845,150
            
            
            654,935INCOME
                FROM OPERATIONS
            
            
            143,602
            
            
            374,773OTHER
                INCOME (EXPENSES)
            
            
            (54,082
            )
            
            (47,112
            )INCOME
                BEFORE INCOME TAXES
            
            
            89,520
            
            
            327,661INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            89,520
            
            $
            327,661BASIC
                AND DILUTED EARNINGS PER SHARE
            
            $
            0.00
            
            $
            0.00WEIGHTED
                AVERAGE SHARESOUTSTANDING
                - BASIC AND DILUTED
            
            
            88,063,305
            
            
            88,063,305






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, 2007 AND 2006**


**(UNAUDITED)**




2007
            
            2006REVENUE
            
            $
            2,968,714
            
            $
            2,822,552COST
                OF REVENUE
            
            
            931,006
            
            
            785,110GROSS
                PROFIT
            
            
            2,037,708
            
            
            2,037,442OPERATING
                EXPENSES:Selling
                general and administrative expenses
            
            
            1,553,545
            
            
            1,417,664INCOME
                FROM OPERATIONS
            
            
            484,163
            
            
            619,778OTHER
                INCOME (EXPENSES)
            
            
            (86,075
            )
            
            (104,435
            )INCOME
                BEFORE INCOME TAXES
            
            
            398,088
            
            
            515,343INCOME
                TAXES
            
            
            -
            
            
            -NET
                INCOME
            
            $
            398,088
            
            $
            515,343BASIC
                AND DILUTED EARNINGS PER SHARE
            
            $
            0.01
            
            $
            0.01WEIGHTED
                AVERAGE SHARESOUTSTANDING
                - BASIC AND DILUTED
            
            
            88,063,305
            
            
            88,038,443






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, 2007 AND 2006**


**(UNAUDITED)**





2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            398,088
            
            $
            515,343Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization expense
            
            
            658,676
            
            
            477,116Bad
                debt expense
            
            
            3,723
            
            
            3,044(Increase)
                decrease in:Accounts
                receivable
            
            
            (46,115
            )
            
            (18,598
            )Prepaid
                expenses
            
            
            4,189
            
            
            (8,823
            )Increase
                (decrease) in:Accounts
                payable
            
            
            (76,101
            )
            
            123,852Accrued
                expenses
            
            
            (205,606
            )
            
            100,815Deferred
                revenue
            
            
            51,819
            
            
            188,836Net
                cash provided by operating activities
            
            
            788,673
            
            
            1,381,585CASH
                FLOWS FROM INVESTING ACTIVITIES:Other
                assets held for resale
            
            
            24,834
            
            
            (5,271
            )Purchase
                of property and equipment
            
            
            (21,033
            )
            
            (201,571
            )Purchase
                of non-compete
            
            
            (40,000
            )
            
            -Purchase
                of customer list
            
            
            (987,585
            )
            
            (686,748
            )Net
                cash (used in) investing activities
            
            
            (1,023,784
            )
            
            (893,590
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from notes payable - stockholders
            
            
            -
            
            
            52,483Net
                proceeds from notes payable
            
            
            675,043
            
            
            425,223Repayment
                of notes payable - stockholders
            
            
            (55,753
            )
            
            (77,961
            )Repayment
                of notes payable
            
            
            (280,644
            )
            
            (985,427
            )Issuance
                of common stock
            
            
            -
            
            
            203,000Net
                cash (used in) financing activities
            
            
            338,646
            
            
            (382,682
            )NET
                INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS
            
            
            103,535
            
            
            105,313CASH
                AND CASH EQUIVALENTS -BEGINNING OF PERIOD
            
            
            129,453
            
            
            36,047CASH
                AND CASH EQUIVALENTS -END OF PERIOD
            
            $
            232,988
            
            $
            141,360


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, 2007 AND 2006 (continued)**


**(UNAUDITED)**




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




During
      the six months ended June 30, 2007 and 2006, the Company paid no income taxes
      and paid interest of approximately  $85 ,000
      and
      $109,000, respectively.




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




During
      the six months ended June 30, 2007, the Company issued
      no
      shares of common stock.






-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, 2006 included in the
      Company’s Annual Report on Form 10-KSB.  The results for the six months
      ended June 30, 2007 are not necessarily indicative of the results to be expected
      for the full year ending December 31, 2007.




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with U.S. generally accepted accounting principles
      (GAAP), which contemplate continuation of the Company as a going concern.
 As shown in the consolidated financial statements, the Company had a
      working capital deficiency of $909,323 as of June 30, 2007.  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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




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


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


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


d)
            Maximize
                operational efficiency through the deployment of
                technology;


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





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





**NOTE
      2 - EARNINGS PER SHARE**




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




**NOTE
      3 - COMMON STOCK**




During
      the six months ended June 30, 2007, the Company issued no
      shares
      of common stock.




**NOTE
      4 - SEGMENT INFORMATION**




The
      Company has two business units that have been aggregated into two reportable
      segments: Corporate and Internet.





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
      Company’s Internet group consists of multiple sites of operation and services
      customers throughout the U.S. and Canada, with concentrations in customers
      in
      the Mid-Atlantic, Ohio Valley and Rocky Mountain regions in the U.S. and in
      Ontario, Canada.





-10-




**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      4 - SEGMENT INFORMATION, continued**







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, 2007 and
      2006:




June30,
        2007


Corporate
            
            Internet
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            1,528,733
            
            $
            1,528,733Operating
                Income (loss)
            
            $
            (40,247
            )
            $
            183,850
            
            $
            143,603Depreciation
                and amortization
            
            $
            -
            
            $
            353,438
            
            $
            353,438Interest
                expense
            
            $
            -
            
            $
            49,713
            
            $
            49,713Intangible
                assets
            
            $
            -
            
            $
            3,526,436
            
            $
            3,526,436Total
                assets
            
            $
            -
            
            $
            4,551,859
            
            $
            4,551,859





June 30,
      2006


Corporate
            
            Internet
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            1,365,029
            
            $
            1,365,029Operating
                Income (loss)
            
            $
            (19,024
            )
            $
            393,797
            
            $
            374,773Depreciation
                and amortization
            
            $
            -
            
            $
            238,856
            
            $
            238,856Interest
                expense
            
            $
            -
            
            $
            47,620
            
            $
            47,620Intangible
                assets
            
            $
            -
            
            $
            3,138,105
            
            $
            3,138,105Total
                assets
            
            $
            -
            
            $
            3,885,090
            
            $
            3,885,090





Summarized
      financial information concerning the Company's reportable segments is shown
      in
      the following table for the six months ended June 30, 2007 and
      2006:





June 30,
      2007


Corporate
            
            Internet
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            2,968,714
            
            $
            2,968,714Operating
                Income (loss)
            
            $
            (43,726
            )
            $
            527,889
            
            $
            484,163Depreciation
                and amortization
            
            $
            -
            
            $
            658,676
            
            $
            658,676Interest
                expense
            
            $
            -
            
            $
            85,182
            
            $
            85,182Intangible
                assets
            
            $
            -
            
            $
            3,526,436
            
            $
            3,526,436Total
                assets
            
            $
            -
            
            $
            4,551,859
            
            $
            4,551,859




-11-




**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      4 - SEGMENT INFORMATION, continued**




June 30,
      2006


Corporate
            
            Internet
            
            ConsolidatedRevenue
            
            $
            -
            
            $
            2,822,552
            
            $
            2,822,552Operating
                Income (loss)
            
            $
            (54,267
            )
            $
            674,045
            
            $
            619,778Depreciation
                and amortization
            
            $
            -
            
            $
            477,116
            
            $
            477,116Interest
                expense
            
            $
            -
            
            $
            108,589
            
            $
            108,589Intangible
                assets
            
            $
            -
            
            $
            3,138,105
            
            $
            3,138,105Total
                assets
            
            $
            -
            
            $
            3,885,090
            
            $
            3,885,090





**NOTE
      5 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS**





In
      May
      2005, the Financial Accounting Standards Board (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.





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





-12-




**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




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





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 believes it
      will not have a material impact on its financial position or results of
      operations.





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





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





In
      June
      2006, the FASB ratified the consensus reached in Emerging Issues Task Force
      (EITF) Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar
      Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06-2 provides
      recognition guidance on the accrual of employees’ rights to compensated absences
      under a sabbatical or other similar benefit arrangement. EITF Issue No. 06-2
      is
      effective for the Company for all financial statements after December 31, 2006.
      The Company believes it will not have a material impact on its financial
      position or on the results of operations.





-13-




**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





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





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




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





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





In
      February 2007, the FASB issued FASB Statement No. 159, The Fair Value
      Option for Financial Assets and Financial Liabilities (“FAS 159”).
      FAS 159 permits companies to choose to measure, on an
      instrument-by-instrument basis, financial instruments and certain other items
      at
      fair value that are not currently required to be measured at fair value. The
      Company currently is evaluating whether to elect the option provided for in
      this
      standard.




-14-




**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS**





**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 customers including
      dial-up and DSL Internet subscribers, web hosting and other business accounts.
      The total purchase price was $604,544 representing the fair value of the
      company, paid by a down payment of 2,000,000 shares of the Company’s common
      stock, with the balance represented by a non-interest bearing note paid by
      the
      Company to Isomedia, Inc. with the note paid 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





**Prolynx**


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





The
      fair
      value of assets acquired is summarized as follows:





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





Because
      the acquisition of Prolynx was consummated on March 16, 2006, there are limited
      results of operations of this company for the six months ended June 30, 2006
      included in the accompanying June 30, 2007 and 2006 consolidated financial
      statements.





-15-


**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      6 - ACQUISITIONS, continued**





The
      following table presents the unaudited pro forma condensed statement of
      operations for the six months ended June 30, 2006 and reflects the results
      of
      operations of the Company as if the acquisition of Prolynx had been effective
      January 1, 2006.  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.





2006Net
                sales
            
            $
            2,877,562Gross
                profit
            
            $
            2,092,452Selling,
                general and administrative expenses
            
            $
            1,444,898Net
                income
            
            $
            543,119Basic
                income per share
            
            $
            0.01





**First
      Net**


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





The
      definitive agreement states that in the event that actual annualized revenue
      differs more than three percent from estimates used at closing, the purchase
      price will be adjusted accordingly. The purchase price has been adjusted down
      to
      $590,810. 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 included in the accompanying June 30, 2007 and 2006 consolidated
      financial statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the six months ended June 30, 2006 and reflects the results
      of
      operations of the Company as if the acquisition of First Net had been effective
      January 1, 2006.  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
      6 - ACQUISITIONS, continued**





2006Net
                sales
            
            $
            3,177,674Gross
                profit
            
            $
            2,319,564Selling,
                general and administrative expenses
            
            $
            1,594,405Net
                income
            
            $
            620,724Basic
                income per share
            
            $
            0.01





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


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





**Magnolia
      Internet Services**


Effective
      February 1, 2007, the Company entered into a Definitive Agreement pursuant
      to
      which it acquired the Internet related assets of Magnolia Internet Services,
      Inc., an Arkansas-based Internet Service Provider. The acquisition establishes
      the Company's Internet presence in Arkansas. The total purchase price was
      $119,333 representing the fair value of the assets acquired which consisted
      of a
      $12,000 cash payment at closing with the balance to be paid in eleven equal
      monthly payments beginning March 2007.





The
      definitive agreement states that in the event that actual annualized revenue
      differs more than three percent from estimates used at closing, the purchase
      price will be adjusted accordingly. The purchase price has been adjusted down
      to
      $95,744  as
      of
      June 30, 2007. Because the acquisition of Magnolia Internet Services was
      consummated on February 1, 2007, there are no results of operations of this
      company for the six months ended June 30, 2006 included in the accompanying
      June
      30, 2007 and 2006 consolidated financial statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the six months ended June 30, 2006 and reflects the results
      of
      operations of the




-17-


**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS, continued**





Company
      as if the acquisition of Magnolia Internet Services had been effective
      January


1,
      2006.
 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.





2006Net
                sales
            
            $
            2,900,079Gross
                profit
            
            $
            2,119,330Selling,
                general and administrative expenses
            
            $
            1,451,524Net
                income
            
            $
            560,800Basic
                income per share
            
            $
            0.01





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





Customer
                list
            
            
            95,463Non-compete
                agreement
            
            
            10,000Equipment
            
            
            10,000Deferred
                revenue
            
            
            (19,719
            )Purchase
                price
            
            $
            95,744





**OW
      Holdings, Inc.**


Effective
      February 28, 2007, the Company entered into a Definitive Agreement pursuant
      to
      which it acquired the Internet related assets of OW Holdings, Inc., a
      Wyoming-based Internet Service Provider. The acquisition further increases
      the
      Company's Internet presence in the Rocky Mountain region. The total purchase
      price was $900,000 representing the fair value of the assets acquired which
      consisted of a $600,000 cash payment at closing and the balance was paid in
      ninety days. The purchase price has been adjusted down to $802,452  as
      of
      June 30, 2007. The following table summarizes the estimated fair values of
      assets acquired and liabilities assumed at the date of acquisition. Sitestar
      has
      assessed the valuations of certain intangible assets as represented
      below.


Accounts
                receivable
            
            
            (2,098
            )Customer
                list
            
            
            870,680Non-compete
                agreement
            
            
            25,000Equipment
            
            
            10,000Deferred
                revenue
            
            
            (101,130
            )Purchase
                price
            
            $
            802,452






-18-




**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 - ACQUISITIONS, continued**





Because
      the acquisition of OW Holdings, Inc. was consummated on February 28, 2007,
      there
      are no results of operations of this company for the six months ended June
      30,
      2006 included in the accompanying June 30, 2007 and 2006 consolidated financial
      statements.





The
      following table presents the unaudited pro forma condensed statement of
      operations for the six months ended June 30, 2006 and reflects the results
      of
      operations of the Company as if the acquisition of OW Holdings had been
      effective January 1, 2006.  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.





2006Net
                sales
            
            $
            3,327,613Gross
                profit
            
            $
            2,420,821Selling,
                general and administrative expenses
            
            $
            1,599,284Net
                income
            
            $
            682,058Basic
                income per share
            
            $
            0.01





**AlaNet
      Internet Services**


Effective
      June 21, 2007, the Company entered into a Definitive Agreement pursuant to
      which
      it acquired the Internet related assets of AlaNet Internet Services, Inc.,
      an
      Alabama-based Internet Service Provider. The acquisition augments the Company's
      Internet presence in the deep-south region. The total purchase price was $51,306
      representing the fair value of the assets acquired which consisted of a $4,275
      cash payment at closing with the balance to be paid in eleven monthly
      installments beginning July 2007.





Because
      the acquisition of AlaNet Internet Services was consummated on June 21, 2007,
      there are no results of operations of this company for the six months ended
      June
      30, 2006 and limited results of operations for the six months ended June 23,
      2007 included in the accompanying June 30, 2007 and 2006 consolidated financial
      statements.





**NOTE
      7 -- PROVISION FOR INCOME TAXES**





Income
      taxes are provided for the tax effects of transactions reported in the financial
      statements and consist of taxes currently due. Deferred taxes related to
      differences between the basis of assets and liabilities for financial and income
      tax reporting will either be taxable or deductible when the assets or
      liabilities are recovered or settled. The difference between the basis of assets
      and liabilities for financial and income tax




-19-


**SITESTAR
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      7 - PROVISION FOR INCOME TAXES, continued**





reporting
      are not material therefore, the provision for income taxes from operations
      consist of income taxes currently payable. The nature of the timing difference
      generating the deferred tax asset, are the accumulated net operating loss carry
      forwards that can be applied towards mitigating future tax liabilities of the
      Company. The Company has established a valuation account at the full value
      of
      the tax deferred asset as of June 30, 2007 and June 30, 2006. The Company’s
      operations have generated federal, state income taxes payable which have been
      offset by the operating loss carry forwards. The Company does not have an
      effective tax rate due to the Company’s lack of taxable income to
      date.





At
      June
      30, 2007 and December 31, 2006, the Company had accumulated deficits of
      $11,297,972 and $11,696,060, respectively, available to offset future taxable
      income through 2006 . The
      Company established valuation allowances equal to the full amount of the
      deferred tax assets due to the uncertainty of the operating losses in future
      periods.





Following
      is the Company’s approximated schedule of net operating loss carry
      forwards:




December
                31, 2003
            
            $
            134,000December
                31, 2004
            
            $
            1,871,433December
                31, 2005
            
            $
            4,071,163December
                31, 2006
            
            $
            24,988,912December
                31, 2006
            
            $
            10,611,258




There
      was
      no provision for income taxes for the six months ended June 30, 2007 and June
      30, 2006.





**NOTE
      8 - INTANGIBLE ASSETS**





The
      Company continually monitors its intangible assets to determine whether any
      impairment has occurred.  In making such determination with respect to
      these assets, the Company evaluates the performance, on an undiscounted cash
      flow basis, of the intangible assets or group of assets.  Should impairment
      be identified, a loss would be reported to the extent that the carrying value
      of
      the related intangible asset exceeds its fair value using the discounted cash
      flow method.  The Company's customer lists are being amortized over three
      and five years. Amortization expense was $628,552 and $439,372 for the six
      months ended June 30, 2007 and 2006, respectively.




-20-


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





The
      accompanying consolidated financial statements have been prepared in accordance
      with U.S. GAAP, which contemplate continuation of the Company as a going
      concern. As shown in the consolidated financial statements, the Company had
      a
      working capital deficiency of $909,323 as of June 30, 2007. That condition
      raises substantial doubt about the Company's ability to continue as a going
      concern. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty. However, the Company believes
      that
      existing cash, cash equivalents and cash flow from operations and the Company’s
      ability to obtain favorable financing will be sufficient to meet the Company’s
      working capital and capital expenditure requirements for the next twelve months.
      If the foregoing assumptions are true, Sitestar should not have the need to
      raise any additional material funds for operating expenses during that 12 month
      period.





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





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





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


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


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


d)
            Maximize
                operational efficiency through the deployment of
                technology;


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




-21-




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




**General**




The
      following discussion and analysis should be read in conjunction with the
      Company’s consolidated financial statements and related footnotes for the year
      ended December 31, 2006 included in the Annual Report on Form 10-KSB.  The
      discussion of results, causes and trends should not be construed to imply any
      conclusion that such results or trends will necessarily continue in the
      future.




**Overview**




The
      Company is a national Internet Service Provider and Computer Services company
      offering a broad range of services to business and residential customers.
 In November 2003, the Company announced the launch of the national dial-up
      Internet service that made service available to thousands of cities throughout
      the United States.  This expanded service features web acceleration, e-mail
      acceleration and pop-up ad blocking. Spam and virus filtering are also included.
       The Company 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 division consists of multiple sites of operation and services
      customers throughout the U.S. and Canada, with concentrations in customers
      in
      the Mid-Atlantic, Ohio Valley and Rocky Mountain regions in the U.S. and in
      Ontario, Canada. Sitestar products include narrow-band (dial-up) services and
      broadband services (ISDN, DSL, satellite, cable and wireless), and supports
      these products utilizing its own infrastructure and affiliations. Value-added
      services include web acceleration, spam and virus filtering as well as spyware
      protection.





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




-22-





Through
      its Internet division, the Company sells and manufactures computer systems,
      computer hardware, computer software, networking services, repair services
      and
      toner and ink cartridge remanufacturing services from the Lynchburg, Virginia
      location.





The
      Company is a factory authorized service center for many national-brand computer
      equipment companies. The Company’s toner and ink cartridge remanufacturing
      service utilizes empty toner cartridges and remanufactures them to provide
      savings to customers over buying brand new cartridges. This service is available
      locally and nationwide.





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




**Results
      of operations**




The
      following tables show financial data for the six months ended June 30, 2007
      and
      2006. Operating results for any period are not necessarily indicative of results
      for any future period.





For
                the six months ended June 30, 2007 (unaudited)Corporate
            
            Internet
            
            TotalRevenue
            
            $
            -
            
            $
            2,968,714
            
            $
            2,968,714Cost
                of revenue
            
            
            -
            
            
            931,006
            
            
            931,006Gross
                profit
            
            
            -
            
            
            2,037,708
            
            
            2,037,708Operating
                expenses
            
            
            43,726
            
            
            1,509,819
            
            
            1,553,545Income
                (loss) from operations
            
            
            (43,726
            )
            
            527,889
            
            
            484,163Other
                income (expense)
            
            
            -
            
            
            (86,075
            )
            
            (86,075
            )Net
                income (loss)
            
            $
            (43,726
            )
            $
            441,814
            
            $
            398,088




-23-




For
                the six months ended June 30, 2006 (unaudited)Corporate
            
            Internet
            
            TotalRevenue
            
            $
            -
            
            $
            2,822,552
            
            $
            2,822,552Cost
                of revenue
            
            
            -
            
            
            785,110
            
            
            785,110Gross
                profit
            
            
            -
            
            
            2,037,442
            
            
            2,037,442Operating
                expenses
            
            
            54,267
            
            
            1,363,397
            
            
            1,417,664Income
                (loss) from operations
            
            
            (54,267
            )
            
            674,045
            
            
            619,778Other
                income (expense)
            
            
            -
            
            
            (104,435
            )
            
            (104,435
            )Net
                income (loss)
            
            $
            (54,267
            )
            $
            569,610
            
            $
            515,343




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, 2007 and 2006.





For
                the six months ended June 30, 2007Corporate
            
            Internet
            
            TotalEBITDA
            
            $
            (43,726
            )
            $
            1,186,279
            
            $
            1,142,553Interest
                expense
            
            
            -
            
            
            (85,182
            )
            
            (85,182
            )Taxes
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (30,731
            )
            
            (30,731
            )Amortization
            
            
            -
            
            
            (628,552
            )
            
            (628,552
            )Net
                income (loss)
            
            $
            (43,726
            )
            $
            441,814
            
            $
            398,088





For
                the six months ended June 30, 2006Corporate
            
            Internet
            
            TotalEBITDA
            
            $
            (54,267
            )
            $
            1,155,315
            
            $
            1,101,048Interest
                expense
            
            
            -
            
            
            (108,589
            )
            
            (108,589
            )Taxes
            
            
            -
            
            
            -
            
            
            -Depreciation
            
            
            -
            
            
            (37,744
            )
            
            (37,744
            )Amortization
            
            
            -
            
            
            (439,372
            )
            
            (439,372
            )Net
                income (loss)
            
            $
            (54,267
            )
            $
            569,610
            
            $
            515,343





-24-




**SIX
      MONTHS ENDED JUNE 30, 2007 COMPARED TO JUNE 30, 2006
      (Unaudited)**




**REVENUE** .
       Revenue for the six months ended June 30, 2007 increased by $146,162 or
      5.2% from $2,822,552 for the six months ended June 30, 2006 to $2,968,714 for
      the same period in 2007. Internet sales increased due to the addition of
      Internet customers from the asset acquisitions of Magnolia Internet Services,
      OW
      Holding (One West) and AlaNet. These acquisitions, for the six months ended
      June
      30, 2007, yielded approximately $586,000 in additional net revenues. These
      increases from acquisitions were offset by additional attrition to broadband
      service and the termination of an affiliate relationship. Sitestar focuses
      on
      marketing and selling Internet access to second-tier markets where broadband
      is
      not prevalent. The Company’s strategy is to leverage operational economies of
      scale to provide dial-up service in these markets where it will continue to
      be
      the core method for connecting to the Internet. While Sitestar is currently
      adding customers through promotional marketing campaigns, this method for strong
      and sustainable growth is threatened by competition from nationally-known ISPs
      and discount dial-up providers as well as from the future introduction of
      broadband services. To increase its dial-up base, the Company plans to continue
      to acquire ISPs in these target markets





**COST
      OF REVENUE** .
      Costs
      of revenue for the six months ended June 30, 2007 increased by $145,896 or
      18.6%
      from $785,110 for the six months ended June 30, 2006 to $931,006  for
      the
      same period in 2007.  This increase is due telecommunications expenses
      associated with the acquisitions of customers which accounted for approximately
      $190,000 in additional direct expenses.





**OPERATING
      EXPENSES** .
      Operating expenses for the six months ended June 30, 2007 increased $135,881
      or
      9.6% from $1,417,664 for the six months ended June 30, 2006 to $1,553,545 for
      the same period in 2007.  Amortization expense increased $189,180 or 43.1%
      from $439,372 for the six months ended June 30, 2006 to $628,552 for the same
      period in 2007.  This increase is due to the acquisition of customer bases.
      This increase was offset in part by decreases in wages of $21,655 or 5.7% from
      382,386 for the six months ended June 30, 2006 to $360,731 for the same time
      period in 2007. Professional fees decreased by $12,500 or 27.8% from 45,000
      for
      the six months ended June 30, 2006 to $32,500 for the same time period in 2007.
      Corporate expenses of $43,726 for the six months ended June 30, 2007 consisted
      primarily of professional fees. Corporate expenses of $54,267 for the six months
      ended June 30, 2006 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. to Servatus Development, LLC of $7,959 and $7,779 for the six months ended
      June 30, 2007 and 2006 respectively.  This represents, per the Definitive
      Purchase Agreement between the parties, 20% of the gross revenue of Servatus
      Development, LLC for the six months ended June 30, 2007 and 2006 respectively.


-25-




**INTEREST
      EXPENSE** .
      Interest expense for the six months ended June 30, 2007 decreased by $23,407
      or
      21.6% from $108,589 for the six months ended June 30, 2006 to $85,182 for the
      same period in 2007.  This decrease is a result of retiring debt that
      carried a high rate of imputed interest.





**JUNE
      30, 2007 (Unaudited) COMPARED TO DECEMBER 31, 2006
      (Audited)**





**FINANCIAL
      CONDITION.** Net
      accounts receivable increased $43,392 or 24.8% from $170,626 on December 31,
      2006 to $213,018 on June 30, 2007.  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 decreased by $34,711 or
      26.8% from $129,464 on December 31, 2006 to $94,753 on June 30, 2007. Accounts payable
      decreased by $76,101 or 71.9% from $105,814 on December 31, 2006 to $29,713
      on
      June 30, 2007.  Accrued expenses decreased by $205,606  or
      48.2%
      from $426,216 on December 31, 2006 to $220,610 on June 30, 2007.  These
      decreases are a reflection of increased cash flows from recent
      acquisitions.  Deferred
      revenue increased by $51,819 or 8.8% from $588,766 on December 31, 2006 to
      $640,585 on June 30, 2007 representing increased volume of customer accounts
      that have been prepaid. The current portion of notes payable increased $197,794
      or 69.1% from $286,114 on December 31, 2006 to $483,908 on June 30, 2007.
      Long-term notes payable increased $152,042 or 240.9% from $63,113 on December
      31, 2006 to $215,155 on June 30, 2007.  These increases are primarily a
      result of financing recent acquisitions of customers.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Cash
      and
      cash equivalents totaled $232,988 and $129,453 at June 30, 2007 and at December
      31, 2006, respectively. EBITDA was $1,142,553 for the six months ended June
      30,
      2007 as compared to $1,101,048 for the same period in 2006.




2007
              
              2006EBITDA
                  for the six months ended June 30,
              
              $
              1,142,553
              
              $
              1,101,048Interest
                  expense
              
              
              (85,182
              )
              
              (108,589
              )Taxes
              
              
              -
              
              
              -Depreciation
              
              
              (30,731
              )
              
              (37,744
              )Amortization
              
              
              (628,552
              )
              
              (439,372
              )Net
                  income for the six months ended June 30,
              
              $
              398,088
              
              $
              515,343


The
      accompanying condensed consolidated financial statements have been prepared
      in
      accordance with U.S. GAAP, which contemplate continuation of the Company as
      a
      going concern.  As shown in the consolidated financial statements, the
      Company had a working capital deficiency of $909,323 as of June 30, 2007.  
That condition raises substantial doubt about the Company's ability to continue
      as a going concern.




-26-


The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty. However, the Company believes that existing cash,
      cash equivalents and cash flow from operations and the Company’s ability to
      obtain favorable financing will be sufficient to meet the Company’s working
      capital and capital expenditure requirements for the next twelve months. If
      the
      foregoing assumptions are true, Sitestar should not have the need to raise
      any
      additional material funds for operating expenses during that 12 month period.
      Growth in revenues is expected to be derived from acquisitions of customers
      and
      financing is one of the tools to accomplish this growth.


Acquisitions
      of additional customers in the past few years have been accomplished primarily
      with seller financing and it is management’s belief that this is a repeatable
      method of financing for similar acquisitions in the near future. In October
      2002, new management was installed. New management has taken the following
      steps
      that it believes will be sufficient to provide the Company with the ability
      to
      continue in existence and mitigate the concerns:




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


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


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


d)
            Maximize
                operational efficiency through the deployment of
                technology;


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





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





Sales
      of
      Internet services, which are not automatically processed via credit card or
      bank
      account drafts, have been the Company’s highest exposure to collection risk.
 To help offset this exposure, the Company has added a late payment fee to
      encourage timely 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, 2007 and December 31, 2006 is as
      shown:





2007
            
            2006Current
            
            $
            100,016
            
            
            47
            %
            $
            87,399
            
            
            51
            %30
                < 60
            
            
            68,231
            
            
            32
            %
            
            44,574
            
            
            26
            %60
                +
            
            
            44,771
            
            
            21
            %
            
            38,653
            
            
            23
            %Total
            
            $
            213,018
            
            
            100
            %
            $
            170,626
            
            
            100
            %




-27-




**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, our ability to expand our customer base, make strategic
      acquisitions, general market conditions, and competition and pricing. Although
      we believe 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.





-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, 2007. 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, 2007 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
      CORPORATION




Date :
      August
      14, 2007


By : /s/
      Frank
      Erhartic, Jr.


Frank
      Erhartic, Jr.


President,
      Chief Executive Officer


(Principal
      Executive Officer and Principal
      Accounting Officer)





Date:
      August 14, 2007


By: /s/
      Daniel A. Judd


Daniel
      A.
      Judd


Chief
      Financial Officer


(Principal
      Financial Officer)






-31-