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 Number
PART I.  FINANCIAL INFORMATION
  
 
  
Item 1.  Financial Statements
  
 
  
Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006 (audited)
3
   
Condensed Consolidated Statements of Income for the three months ended June 30, 2007 and 2006 (unaudited)
5
   
Condensed Consolidated Statements of Income for the six months ended June 30, 2007 and 2006 (unaudited)
6
   
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)
7
 
  
Notes to unaudited Condensed Consolidated Financial Statements
9
   
Item 2.   Management's Discussion and Analysis
22
  
  
Item 3.   Controls and Procedures
29
 
  
Part II.  OTHER INFORMATION
30
 
  
Item 1.  Legal Proceedings
30
 
  
Item 2.  Unregistered sales of equity securities and use of proceeds
30
   
Item 3.  Defaults Upon Senior Securities
30
 
  
Item 4.  Submission of Matters to a Vote of Security Holders
30
 
  
Item 5.  Other Information
30
   
Item 6.  Exhibits
30
 
  
SIGNATURES
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 ASSETS
  
 
  
 
  
   Cash and cash equivalents
  
$
232,988
  
$
129,453
  
   Accounts receivable, net of allowance of $19,418 and $15,695 as of June 30, 2007 and December 31, 2006 respectively                
    
213,018
    
170,626
  
Prepaid expenses
    
19,487
    
23,676
  
      Total current assets
    
465,493
   
323,755
  
 
          
PROPERTY AND EQUIPMENT, net
    
265,178
   
274,269
  
CUSTOMER LIST, net of accumulated amortization of $4,302,795 and $3,716,215 as of June 30, 2007 and December 31, 2006 respectively
    
2,122,238
    
1,721,233
  
GOODWILL, net of impairment
    
1,288,559
   
1,288,559
  
OTHER ASSETS
    
410,391
   
437,197
  
 
          
TOTAL 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 LIABILITIES
  
 
  
 
  
 
  
 
  
 
  
  Accounts payable
  
$
29,713
  
$
105,814
  
  Accrued expenses
    
220,610
   
426,216
  
  Deferred revenue
    
640,585
   
588,766
  
  Notes payable
    
483,908
    
286,114
  
  Notes payable - stockholders
    
-
    
46,861
  
     Total current liabilities
    
1,374,816
    
1,453,771
  
 
          
  NOTES PAYABLE, less current portion                                  
    
215,155
    
63,113
  
  NOTES PAYABLE - STOCKHOLDERS, less current portion
    
850,617
    
814,946
  
  TOTAL LIABILITIES
    
2,440,588
    
2,331,830
  
 
          
STOCKHOLDERS' EQUITY
         
  Preferred Stock, $.001 par value, 10,000,000 shares
          
    authorized, 0 shares issued and outstanding
    
-
    
-
 
  Common stock, $.001 par value, 300,000,000 shares authorized, 88,063,305 and 88,063,305 shares issued and
outstanding on June 30, 2007 December 31, 2006 respectively
    
88,063
    
88,063
  
  Additional paid-in capital
    
13,651,157
    
13,651,157
  
 Treasury stock, $.001 par value, 8,218,305 common shares on 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
    
1,713,183
  
TOTAL 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
 
2006
 
 
  
 
  
 
  
REVENUE
  
$
1,528,733
  
$
1,365,029
  
 
          
COST OF REVENUE
    
539,981
    
335,321
 
 
          
GROSS PROFIT
    
988,752
    
1,029,708
 
 
          
 OPERATING EXPENSES:
          
   Selling general and administrative expenses
    
845,150
    
654,935
 
 
          
INCOME FROM OPERATIONS
    
143,602
    
374,773
 
 
          
OTHER INCOME (EXPENSES)
    
(54,082
)
  
(47,112
)
 
          
INCOME BEFORE INCOME TAXES
    
89,520
    
327,661
  
 
          
INCOME TAXES
    
-
    
-
  
 
          
NET INCOME
 
$
89,520
  
$
327,661
  
 
          
BASIC AND DILUTED EARNINGS PER SHARE
  
$
0.00
  
$
0.00
  
 
          
WEIGHTED AVERAGE SHARES
          
  OUTSTANDING - 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
 
2006
 
 
  
 
  
 
  
REVENUE
  
$
2,968,714
  
$
2,822,552
  
 
          
COST OF REVENUE
    
931,006
    
785,110
 
 
          
GROSS PROFIT
    
2,037,708
    
2,037,442
 
 
          
 OPERATING EXPENSES:
          
   Selling general and administrative expenses
    
1,553,545
    
1,417,664
 
 
          
INCOME FROM OPERATIONS
    
484,163
    
619,778
 
 
          
OTHER INCOME (EXPENSES)
    
(86,075
)
  
(104,435
)
 
          
INCOME BEFORE INCOME TAXES
    
398,088
    
515,343
  
 
          
INCOME TAXES
    
-
    
-
  
 
          
NET INCOME
 
$
398,088
  
$
515,343
  
 
          
BASIC AND DILUTED EARNINGS PER SHARE
  
$
0.01
  
$
0.01
  
 
          
WEIGHTED AVERAGE SHARES
          
  OUTSTANDING - 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
 
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
  
 
  
Net income
  
$
398,088
  
$
515,343
  
Adjustments to reconcile net income to net cash provided by operating activities:
          
Depreciation and amortization expense
    
658,676
    
477,116
 
Bad 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
)
  
123,852
 
Accrued expenses
    
(205,606
)
  
100,815
 
Deferred revenue
    
51,819
   
188,836
 
Net cash provided by operating activities
    
788,673
   
1,381,585
 
 
          
CASH 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
    
-
   
52,483
  
Net proceeds from notes payable
   
675,043
    
425,223
  
Repayment of notes payable - stockholders
    
(55,753
)
  
(77,961
)
Repayment of notes payable
    
(280,644
)
  
(985,427
)
Issuance of common stock
    
-
    
203,000
  
Net cash (used in) financing activities
    
338,646
    
(382,682
)
 
          
   NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS
    
103,535
    
105,313
  
 
          
   CASH AND CASH EQUIVALENTS -BEGINNING OF PERIOD
    
129,453
   
36,047
 
   CASH 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:
 
June 30, 2007
      
 
  
Corporate
  
Internet
  
Consolidated
  
Revenue
  
$
-
  
$
1,528,733
  
$
1,528,733
  
Operating Income (loss)
  
$
(40,247
)
$
183,850
  
$
143,603
  
Depreciation and amortization
  
$
-
  
$
353,438
  
$
353,438
  
Interest expense
  
$
-
  
$
49,713
  
$
49,713
  
Intangible assets
  
$
-
  
$
3,526,436
  
$
3,526,436
  
Total assets
  
$
-
  
$
4,551,859
  
$
4,551,859
  

 June 30, 2006
     
 
 
  
Corporate
  
Internet
  
Consolidated
  
Revenue
  
$
-
  
$
1,365,029
  
$
1,365,029
  
Operating Income (loss)
  
$
(19,024
)
$
393,797
  
$
374,773
  
Depreciation and amortization
  
$
-
  
$
238,856
  
$
238,856
  
Interest expense
  
$
-
  
$
47,620
  
$
47,620
  
Intangible assets
  
$
-
  
$
3,138,105
  
$
3,138,105
  
Total 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
  
Consolidated
  
Revenue
  
$
-
  
$
2,968,714
  
$
2,968,714
  
Operating Income (loss)
  
$
(43,726
)
$
527,889
  
$
484,163
  
Depreciation and amortization
  
$
-
  
$
658,676
  
$
658,676
  
Interest expense
  
$
-
  
$
85,182
  
$
85,182
  
Intangible assets
  
$
-
  
$
3,526,436
  
$
3,526,436
  
Total 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
  
Consolidated
  
Revenue
  
$
-
  
$
2,822,552
  
$
2,822,552
  
Operating Income (loss)
  
$
(54,267
)
$
674,045
  
$
619,778
  
Depreciation and amortization
  
$
-
  
$
477,116
  
$
477,116
  
Interest expense
  
$
-
  
$
108,589
  
$
108,589
  
Intangible assets
  
$
-
  
$
3,138,105
  
$
3,138,105
  
Total 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
  
$
594,535
  
Non-compete agreement
    
10,000
  
Purchase 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
  
$
4,310
  
Fixed assets
    
5,500
  
Customer list          
    
92,029
  
Non-compete agreement
    
5,000
  
Deferred 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.

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

 
  
2006
  
Net sales
  
$
3,177,674
  
Gross profit
  
$
2,319,564
  
Selling, general and administrative expenses
  
$
1,594,405
  
Net income
  
$
620,724
  
Basic 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
  
$
200,000
  
Accounts receivable
    
31,732
  
Customer list
    
564,425
  
Non-compete agreement
    
10,000
  
Deferred 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.

 
  
2006
  
Net sales
  
$
2,900,079
  
Gross profit
  
$
2,119,330
  
Selling, general and administrative expenses
  
$
1,451,524
  
Net income
  
$
560,800
  
Basic 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
    
95,463
  
Non-compete agreement
    
10,000
  
Equipment
    
10,000
  
Deferred 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          
    
870,680
  
Non-compete agreement
    
25,000
  
Equipment
    
10,000
  
Deferred 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.

 
  
2006
  
Net sales
  
$
3,327,613
  
Gross profit
  
$
2,420,821
  
Selling, general and administrative expenses
  
$
1,599,284
  
Net income
  
$
682,058
  
Basic 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
  
$
134,000
  
December 31, 2004
  
$
1,871,433
  
December 31, 2005
  
$
4,071,163
  
December 31, 2006
  
$
24,988,912
  
December 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
  
Total
  
Revenue
  
$
-
  
$
2,968,714
  
$
2,968,714
  
Cost of revenue
    
-
    
931,006
   
931,006
  
 
              
Gross profit
    
-
    
2,037,708
   
2,037,708
  
 
              
Operating expenses
    
43,726
   
1,509,819
   
1,553,545
  
Income (loss) from operations
    
(43,726
)
  
527,889
    
484,163
  
Other 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
  
Total
  
Revenue
  
$
-
  
$
2,822,552
  
$
2,822,552
  
Cost of revenue
    
-
    
785,110
   
785,110
  
 
              
Gross profit
    
-
    
2,037,442
   
2,037,442
  
 
              
Operating expenses
    
54,267
   
1,363,397
   
1,417,664
  
Income (loss) from operations
    
(54,267
)
  
674,045
    
619,778
  
Other 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, 2007
  
 
  
Corporate
  
Internet
  
Total
  
EBITDA
  
$
(43,726
)
$
1,186,279
  
$
1,142,553
  
Interest 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, 2006
  
 
  
Corporate
  
Internet
  
Total
  
EBITDA
  
$
(54,267
)
$
1,155,315
  
$
1,101,048
  
Interest 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
  
2006
  
 EBITDA for the six months ended June 30,
  
$
1,142,553
  
$
1,101,048
  
Interest 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
  
2006
  
Current
  
$
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.
 
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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.
 
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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.
 
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
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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)
 
 
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