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, 2007 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 hosting services;
· End-to-end e-commerce solutions; and
· Toner and ink cartridge remanufacturing services.

The Company's Internet division consists of multiple sites of operation and services customers throughout the U.S. and Canada. Sitestar products include narrow-band (dial-up) services, broadband services (ISDN, DSL, satellite, cable and wireless) and the Company 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.

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'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 three months ended March 31, 2008 and 2007. Operating results for any period are not necessarily indicative of results for any future period.

                                        For the three months ended March 31, 2008
                                                       (unaudited)
                                     Corporate            Internet            Total
   Revenue                         $           -       $     2,544,545     $ 2,544,545
   Cost of revenue                             -               825,218         825,218

   Gross profit                                -             1,719,327       1,719,327

   Operating expenses                     43,416             1,321,676       1,365,092
   Income (loss) from operations         (43,416 )             397,651         354,235
   Other income (expense)                      -               (50,235 )       (50,235 )
   Income before income taxes            (43,416 )             347,416         304,000
   Income tax                            (84,754 )                   -         (84,754 )
   Net income (loss)               $    (128,170 )     $       347,416     $   219,246

                                        For the three months ended March 31, 2007
                                                       (unaudited)
                                      Corporate              Internet            Total
    Revenue                         $         -       $     1,439,981      $ 1,439,981
    Cost of revenue                           -               391,026          391,026

    Gross profit                              -             1,048,955        1,048,955

    Operating expenses                    3,479               704,916          708,395
    Income (loss) from operations        (3,479 )             344,039          340,560
    Other income (expense)                    -               (31,992 )        (31,992 )
    Income before income taxes           (3,479 )             312,047          308,047
    Income tax                                -                     -                -
    Net income (loss)               $    (3,479 )     $       312,047      $   308,568

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

The following tables show a reconciliation of EBITDA to the GAAP presentation of net income for the three months ended March 31, 2008 and 2007.

                         For the three months ended March 31, 2008
                        Corporate              Internet           Total
EBITDA              $     (43,416 )     $     1,141,512     $ 1,098,096
Interest expense                -               (71,686 )       (71,686 )
Taxes                     (84,754 )                   -         (84,754 )
Depreciation                    -                (9,292 )        (9,292 )
Amortization                    -              (713,118 )      (713,118 )
Net income (loss)   $    (128,170 )     $       347,416     $   219,246

For the three months ended March 31, 2007

                       Corporate              Internet           Total
EBITDA              $     (3,479 )     $       653,361      $  649,882
Interest expense               -               (35,469 )       (35,469 )
Taxes                          -                     -               -
Depreciation                   -               (14,740 )       (14,740 )
Amortization                   -              (291,105 )      (291,105 )
Net income (loss)   $     (3,479 )     $       312,047      $  308,568

THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO MARCH 31, 2007 (Unaudited)

REVENUE.

Revenue for the three months ended March 31, 2008 increased by $1,104,564 or 76.7% from $1,439,981 for the three months ended March 31, 2007 to $2,544,545 for the same period in 2008. Internet sales increased primarily due to the addition of Internet customers from the asset acquisition of USA Telephone These acquisitions, for the three months ended March 31, 2008, yielded approximately $1,307,000 in additional net revenues. This increase from acquisitions was offset by additional attrition to broadband service. 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 three months ended March 31, 2008 increased by $434,192 or 111.0% from $391,026 for the three months ended March 31, 2007 to $825,218 for the same period in 2008. This increase is due to telecommunications expenses associated with the acquisitions of customers which had not realized anticipated economies and accounted for approximately $433,624 in additional direct expenses.

OPERATING EXPENSES.

Operating expenses for the three months ended March 31, 2008 increased $656,697 or 92.7% from $708,395 for the three months ended March 31, 2007 to $1,365,092 for the same period in 2008. Amortization expense increased $422,013 or 145.0% from $291,105 for the three months ended March 31, 2007 to $713,118 for the same period in 2008. This increase is due to the acquisition of customer bases. Corporate expenses of $43,416 for the three months ended March 31, 2008 consisted primarily of professional fees. Corporate expenses of $3,479 for the three months ended March 31, 2007 consisted primarily of professional fees.

INCOME TAXES

For the three months ended March 31, 2009 corporate income tax expense $84,754 were accrued.

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 $19,551 and $4,189 for the three months ended March 31, 2008 and 2007. This represents, per the Definitive Purchase Agreement between the parties, 20% of the gross revenue of Servatus Development, LLC for the three months ended March 31, 2008 and 2007.

INTEREST EXPENSE.

Interest expense for the three months ended March 31, 2008 increased by $36,217 or 102.1% from $35,469 for the three months ended March 31, 2007 to $71,686 for the same period in 2008. This decrease is a result of retiring debt that carried a high rate of imputed interest.

MARCH 31, 2008 (Unaudited) COMPARED TO DECEMBER 31, 2007 (Audited)

FINANCIAL CONDITION.

Net accounts receivable increased $322,181 or 107.4% from $299,863 on December 31, 2007 to $622,044 on March 31, 2008. This increase is substantially due to the addition of customers 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 $292 or .4% from $70,739 on December 31, 2007 to $70,447 on March 31, 2008. Accounts payable increased by $15,564 or 19.8% from $78,713 on December 31, 2007 to $94,277 on March 31, 2008. Accrued expenses increased by $25,922 or 18.8% from $138,021 on December 31, 2007 to $163,943 on March 31, 2008. This increase is a reflection of accruing professional fees. Deferred revenue increased by $14,341 or 1.1% from $1,361,606 on December 31, 2007 to $1,375,947 on March 31, 2008 representing increased volume of customer accounts that have been prepaid. The current portion of notes payable decreased $216,870 or 17.1% from $1,268,866 on December 31, 2007 to $1,051,996 on March 31, 2008. This is substantially due to the curtailment of a line of credit of $200,000 in addition to servicing term notes. Long-term notes payable decreased $390,516 or 23.0% from $1,694,836 on December 31, 2007 to $1,304,320 on March 31, 2008. This decrease is the result of offsetting principal balance of the purchase note of USA telephone against collections of accounts receivable by USAT. Long-term notes payable to stockholders decreased $87,010 or 12.7% from $686,687 on December 31, 2007 to $599,677 on March 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $235,931 and $232,249 at March 31, 2008 and at December 31, 2007. EBITDA was $1,098,096 for the three months ended March 31, 2008 as compared to $649,882 for the same period in 2007.

                                                          2008            2007
     EBITDA for the three months ended March 31,       $ 1,098,096     $  649,882
     Interest expense                                      (71,686 )      (35,469 )
     Taxes                                                 (84,754 )            -
     Depreciation                                           (9,292 )      (14,740 )
     Amortization                                         (713,118 )     (291,105 )
     Net income for the three months ended March 31,   $   219,246     $  308,568

The aging of accounts receivable as of March 31, 2008 and December 31, 2007 is as shown:

                  2008                    2007
Current   $  244,272        39 %   $ 171,446        57 %
30 < 60      214,895        35 %      72,337        24 %
60 +         162,877        26 %      56,080        19 %
Total     $  622,044       100 %   $ 299,863       100 %

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.