UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




x     QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For
the quarterly period ended June 30, 2010




o    TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT




For the
transition period from ________________ to _______________




000-27763


(Commission
file number)




SITESTAR
CORPORATION


(Exact
name of small business issuer as specified in its charter)




NEVADA
            
            88-0397234(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (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 of 1934 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 xNo o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
Accelerated Filer oAccelerated Filer oNon-Accelerated Filer (Do not check if a smaller reporting
Company) oSmaller Report Company x





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).        x
Yes    o No





Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act).


Yes oNo x





As
of August 13, 2010, the issuer had 91,326,463 shares of common stock issued and
75,239,705 outstanding.









SITESTAR
CORPORATION




Index





Page
              NumberPART
      I.  FINANCIAL INFORMATIONItem
      1.
            
            Financial
      Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of June 30, 2010 and December 31,
      2009
            
            3-4Condensed
      Consolidated Statements of Income for the three months ended June 30, 2010
      and 2009
            
            5Condensed
      Consolidated Statements of Income for the six months ended June 30, 2010
      and 2009
            
            6Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2010 and 2009
            
            7-8Notes
      to Condensed Consolidated Financial Statements
            
            9-18Item
      2.
            
            Management's
      Discussion and Analysis
            
            18-25Item
      3.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            25Item
      4.
            
            Controls
      and Procedures
            
            25-26Part
      II.  OTHER INFORMATION
            
            27Item
      1.
            
            Legal
      Proceedings
            
            27Item
      1A.
            
            Risk
      Factors
            
            27Item
      2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            27Item
      3.
            
            Defaults
      Upon Senior Securities
            
            27Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            27Item
      5.
            
            Other
      Information
            
            27Item
      6.
            
            Exhibits
            
            27SIGNATURES
            
            28





2





PART I. FINANCIAL INFORMATION




Item 1.     Financial
Statements




SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


JUNE
30, 2010 AND DECEMBER 31, 2009




ASSETS




2010
            
            
            2009CURRENT
      ASSETS
            
            UnauditedCash
      and cash equivalents
            
            $
            1,150,484
            
            
            $
            1,090,807Accounts
      receivable, net of allowance of $9,387and
      $14,316
            
            
            178,443
            
            
            
            455,773Prepaid
      expenses
            
            
            181,072
            
            
            
            1,430Total
      current assets
            
            
            1,509,999
            
            
            
            1,548,010PROPERTY
      AND EQUIPMENT, net
            
            
            185,780
            
            
            
            193,715CUSTOMER
      LIST, net of accumulated amortization of$11,185,178
      and $10,216,778
            
            
            1,049,975
            
            
            
            2,018,375GOODWILL,
      net of impairment
            
            
            1,288,559
            
            
            
            1,288,559DEFERRED
      TAX ASSETS
            
            
            848,339
            
            
            
            760,861OTHER
      ASSETS
            
            
            315,281
            
            
            
            496,314TOTAL
      ASSETS
            
            $
            5,197,933
            
            
            $
            6,305,834




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




3





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS, continued


JUNE
30, 2010 AND DECEMBER 31, 2009




LIABILITIES
AND STOCKHOLDERS’ EQUITY




2010
            
            
            2009CURRENT
      LIABILITIES
            
            UnauditedAccounts
      payable
            
            $
            54,577
            
            
            $
            131,598Accrued
      income taxes
            
            
            155,815
            
            
            
            414,815Accrued
      expenses
            
            
            44,908
            
            
            
            29,052Deferred
      revenue
            
            
            698,700
            
            
            
            861,235Notes
      payable
            
            
            900,615
            
            
            
            900,615Total
      current liabilities
            
            
            1,854,615
            
            
            
            2,337,315NOTES
      PAYABLE, less current portion
            
            
            -
            
            
            
            -NOTES
      PAYABLE - STOCKHOLDERS, less current portion
            
            
            267,072
            
            
            
            547,245TOTAL
      LIABILITIES
            
            
            2,121,687
            
            
            
            2,884,560STOCKHOLDERS'
      EQUITYPreferred
      Stock, $.001 par value, 10,000,000 shares authorized, 0 shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, $.001 par value, 300,000,000 sharesauthorized,
      91,326,463 shares issued in 2010 and 2009 and75,199,705
      and 76,199,705 shares outstanding in 2010 and2009
            
            
            91,326
            
            
            
            91,326Additional
      paid-in capital
            
            
            13,880,947
            
            
            
            13,880,947Treasury
      stock, at cost, 16,126,758 and 15,126,758 commonshares
            
            
            (775,124
            )
            
            
            (735,696
            )Accumulated
      deficit
            
            
            (10,120,903
            )
            
            
            (9,815,303
            )Total
      stockholders’ equity
            
            
            3,076,246
            
            
            
            3,421,274TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            5,197,933
            
            
            $
            6,305,834




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, 2010 AND 2009


(UNAUDITED)




2010
            
            
            2009REVENUE
            
            $
            1,296,598
            
            
            $
            2,051,732COST
      OF REVENUE
            
            
            593,580
            
            
            
            846,685GROSS
      PROFIT
            
            
            703,018
            
            
            
            1,205,047OPERATING
      EXPENSES:Selling
      general and administrative expenses
            
            
            845,572
            
            
            
            1,158,512INCOME
      (LOSS) FROM OPERATIONS
            
            
            (142,554
            )
            
            
            46,535OTHER
      INCOME (EXPENSES)
            
            
            (5,217
            )
            
            
            (29,288
            )INCOME
      (LOSS) BEFORE INCOME TAXES
            
            
            (147,771
            )
            
            
            17,247INCOME
      TAXES (EXPENSE) BENEFIT
            
            
            (165,867
            )
            
            
            (27,688
            )NET
      INCOME (LOSS)
            
            $
            (313,638
            )
            
            $
            (10,441
            )BASIC
      AND DILUTED EARNINGS PER SHARE
            
            $
            0.00
            
            
            $
            0.00WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
            
            
            75,231,353
            
            
            
            77,766,500




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, 2010 AND 2009


(UNAUDITED)




2010
            
            
            2009REVENUE
            
            $
            2,758,610
            
            
            $
            4,429,842COST
      OF REVENUE
            
            
            1,251,309
            
            
            
            1,672,721GROSS
      PROFIT
            
            
            1,507,301
            
            
            
            2,757,121OPERATING
      EXPENSES:Selling
      general and administrative expenses
            
            
            1,623,892
            
            
            
            2,263,334INCOME
      (LOSS) FROM OPERATIONS
            
            
            (116,591
            )
            
            
            493,787OTHER
      INCOME (EXPENSES)
            
            
            (32,718
            )
            
            
            (50,581
            )INCOME
      (LOSS) BEFORE INCOME TAXES
            
            
            (149,309
            )
            
            
            443,206INCOME
      TAXES EXPENSE (BENEFIT)
            
            
            156,289
            
            
            
            (91,218
            )NET
      INCOME (LOSS)
            
            $
            (305,598
            )
            
            $
            534,424BASIC
      AND DILUTED EARNINGS PER SHARE
            
            $
            0.00
            
            
            $
            0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
            
            
            75,399,401
            
            
            
            77,766,500




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, 2010 AND 2009


(UNAUDITED)




2010
            
            
            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            (305,598
            )
            
            $
            534,424Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization expense
            
            
            1,053,864
            
            
            
            1,287,293Allowance
      for doubtful accounts
            
            
            (4,929
            )
            
            
            (13,696
            )(Increase)
      decrease in:Accounts
      receivable
            
            
            282,259
            
            
            
            (395,370
            )Prepaid
      expenses
            
            
            (179,642
            )
            
            
            (70
            )Other
      assets
            
            
            101,741
            
            
            
            137,711Deferred
      tax asset
            
            
            (87,478
            )
            
            
            (390,130
            )Increase
      (decrease) in:Accounts
      payable
            
            
            (77,021
            )
            
            
            (68,855
            )Accrued
      expenses
            
            
            15,856
            
            
            
            (7,382
            )Deferred
      revenue
            
            
            (162,535
            )
            
            
            15,479Accrued
      income taxes
            
            
            (259,000
            )
            
            
            298,912Net
      cash provided by operating activities
            
            
            377,517
            
            
            
            1,398,316CASH
      FLOWS FROM INVESTING ACTIVITIES:Other
      assets held for resale
            
            
            1,761
            
            
            
            (403
            )Purchase
      of property and equipment
            
            
            -
            
            
            
            (3,000
            )Purchase
      of non-compete
            
            
            -
            
            
            
            (1,000
            )Purchase
      of customer list
            
            
            -
            
            
            
            (67,398
            )Net
      cash provided by (used in) investing activities
            
            
            1,761
            
            
            
            (71,803
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayment
      of notes payable – stockholders
            
            
            (280,173
            )
            
            
            (54,984
            )Purchase
      treasury stock
            
            
            (39,428
            )
            
            
            (593,657
            )Repayment
      of notes payable
            
            
            -
            
            
            
            (317,258
            )Net
      cash (used in) financing activities
            
            
            (319,601
            )
            
            
            (965,900
            )NET
      (DECREASE) IN CASH AND CASH  EQUIVALENTS
            
            
            59,677
            
            
            
            360,614CASH
      AND CASH EQUIVALENTS –BEGINNING OF  PERIOD
            
            
            1,090,807
            
            
            
            527,553CASH
      AND CASH EQUIVALENTS -END OF  PERIOD
            
            $
            1,150,484
            
            
            $
            888,167




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




7




SITESTAR CORPORATION AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009


(UNAUDITED)




SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:




During
the six months ended June 30, 2010 and 2009, the Company used cash to pay income
taxes of $489,000 and $0 and paid interest expense of approximately $20,000 and
$48,000, respectively.




8




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





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 (SEC). 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 U.S. Generally Accepted
Accounting Principles (GAAP) 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, 2009 included in the Company’s Annual Report on Form 10-K.
 The results for the three and six months ended June 30, 2010 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2010.





NOTE
2 – EARNINGS PER SHARE




GAAP
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.





For the
three months ended June 30, 2010 and 2009:




2010
            
            
            2009Net
      income (loss) available to common shareholders
            
            $
            (313,638
            )
            
            $
            (10,441
            )Weighted
      average number of common shares
            
            
            75,231,353
            
            
            
            77,766,500Basic
      and diluted income per share
            
            $
            0.00
            
            
            $
            0.00





For the
six months ended June 30, 2010 and 2009:




2010
            
            
            2009Net
      income (loss) available to common shareholders
            
            $
            (305,598
            )
            
            $
            534,424Weighted
      average number of common shares
            
            
            75,399,401
            
            
            
            77,766,500Basic
      and diluted income per share
            
            $
            0.00
            
            
            $
            0.01





9




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





NOTE
3 – COMMON STOCK





During
the six months ended June 30, 2010, the Company issued no shares of common stock
and repurchased 1,000,000 treasury shares.




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 operation of the other
business unit. 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.





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, 2010 and
2009:





June
      30, 2010Corporate
            
            
            Internet
            
            
            ConsolidatedRevenue
            
            $
            -
            
            
            $
            1,296,598
            
            
            $
            1,296,598Operating
      Income (loss)
            
            $
            (61,593
            )
            
            $
            (80,961
            )
            
            $
            (142,554
            )Depreciation
      and amortization
            
            $
            -
            
            
            $
            526,029
            
            
            $
            526,029Interest
      expense
            
            $
            -
            
            
            $
            8,141
            
            
            $
            8,141Intangible
      assets
            
            $
            -
            
            
            $
            2,409,617
            
            
            $
            2,409,617Total
      assets
            
            $
            -
            
            
            $
            5,197,933
            
            
            $
            5,197,933





10





SITESTAR
CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED




NOTE
4 – SEGMENT INFORMATION, continued





June
      30, 2009Corporate
            
            
            Internet
            
            
            ConsolidatedRevenue
            
            $
            -
            
            
            $
            2,051,732
            
            
            $
            2,051,732Operating
      Income (loss)
            
            $
            (52,500
            )
            
            $
            99,035
            
            
            $
            46,535Depreciation
      and amortization
            
            $
            -
            
            
            $
            624,409
            
            
            $
            624,409Interest
      expense
            
            $
            -
            
            
            $
            26,567
            
            
            $
            26,567Intangible
      assets
            
            $
            -
            
            
            $
            4,624,501
            
            
            $
            4,624,501Total
      assets
            
            $
            -
            
            
            $
            7,577,078
            
            
            $
            7,577,078





Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the six months ended June 30, 2010 and
2009:





June
      30, 2010Corporate
            
            
            Internet
            
            
            ConsolidatedRevenue
            
            $
            -
            
            
            $
            2,758,610
            
            
            $
            2,758,610Operating
      Income (loss)
            
            $
            (64,677
            )
            
            $
            (51,914
            )
            
            $
            (116,591
            )Depreciation
      and amortization
            
            $
            -
            
            
            $
            1,053,864
            
            
            $
            1,053,864Interest
      expense
            
            $
            -
            
            
            $
            19,631
            
            
            $
            19,631Intangible
      assets
            
            $
            -
            
            
            $
            2,409,617
            
            
            $
            2,409,617Total
      assets
            
            $
            -
            
            
            $
            5,197,933
            
            
            $
            5,197,933




June
      30, 2009Corporate
            
            
            Internet
            
            
            ConsolidatedRevenue
            
            $
            -
            
            
            $
            2,378,110
            
            
            $
            4,429,842Operating
      Income (loss)
            
            $
            (79,615
            )
            
            $
            573,402
            
            
            $
            493,787Depreciation
      and amortization
            
            $
            -
            
            
            $
            1,287,293
            
            
            $
            1,287,293Interest
      expense
            
            $
            -
            
            
            $
            48,451
            
            
            $
            48,451Intangible
      assets
            
            $
            -
            
            
            $
            4,624,501
            
            
            $
            4,624,501Total
      assets
            
            $
            -
            
            
            $
            7,577,078
            
            
            $
            7,577,078





11




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED




NOTE
5 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS





In April
2009, the Financial Accounting Standard Board (FASB) issued FASB Accounting
Standard Codification (ASC) 320-10, Recognition and Presentation of
Other-Than-Temporary Impairments. FASB ASC 320-10 amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change FASB ASC 320-10 brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. FASB ASC
320-10 is effective for interim and annual reporting periods ending after June
15, 2009 The Company’s adoption of FASB ASC 320-10 did not have a material
impact on the Company’s condensed consolidated financial
statements.




In April
2009, the FASB issued FASB ASC 820-10, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. FASB ASC 820-10 provides
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased. FASB ASC
820-10 also includes guidance on identifying circumstances that indicate a
transaction is not orderly. This emphasizes that even if there has been a
significant decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions.
FASB ASC 820-10 is effective for interim and annual reporting periods ending
after June 15, 2009, and is applied prospectively. The Company’s adoption of
FASB ASC 820-10 did not have a material impact on the Company’s condensed
consolidated financial statements.




In April
2009, the FASB issued FASB ASC 825-10, Interim Disclosures about Fair Value of
Financial Instruments. FASB ASC 825-10 amends previous guidance, to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
FASB ASC 825-10 also requires those disclosures in summarized financial
information at interim reporting periods.  FASB ASC 825-10 is
effective for interim and annual reporting periods ending after June 15, 2009.
The Company’s adoption of FASB ASC 825-10 did not have a material impact on the
Company’s condensed consolidated financial statements.




12




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED




NOTE
5 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, continued




In June
2009, the FASB issued FASB ASC 105-10, The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162. FASB ASC 105-10 establishes the FASB
Accounting Standards Codification (“Codification”) as the source of
authoritative GAAP recognized by the FASB to be applied to nongovernmental
entities. The only other source of authoritative GAAP is the rules and
interpretive releases of the SEC which only apply to SEC registrants. The
Codification superseded all the existing non-SEC accounting and reporting
standards upon its effective date. Since the issuance of the Codification is not
intended to change or alter existing GAAP, adoption of this statement did not
have an impact on the Company’s financial position or results of operations, but
changed the way in which GAAP is referenced in the Company’s financial
statements. FASB ASC 105-10 is effective for interim and annual reporting
periods ending after September 15, 2009.





In May
2009, the FASB issued FASB ASC 855-10, Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are
available to be issued. The Company adopted FASB ASC 855-10 effective
April 1, 2009 and has evaluated subsequent events after the balance sheet
date of June 30, 2010 through the date the financial statements were
issued.





In
October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue
Recognition (Topic 605)”. This Update provides amendments to the criteria in
Subtopic 605-24 for separating consideration in multiple-deliverable revenue
arrangements. It establishes a hierarchy of selling prices to determine the
selling price of each specific deliverable which includes vendor-specific
objective evidence (if available), third-party evidence (if vendor-specific
evidence is not available), or estimated selling price if neither of the first
two are available. This Update also eliminates the residual method for
allocating revenue between the elements of an arrangement and requires that
arrangement consideration be allocated at the inception of the arrangement.
Finally, this Update expands the disclosure requirements regarding a vendor’s
multiple-deliverable revenue arrangements. This Update is effective for fiscal
years beginning on or after June 15, 2010. We do not anticipate any
material impact from this Update.




13





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





NOTE
6 – ACQUISITIONS





Pulaski Networks,
LLC




Effective
February 10, 2009, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of Pulaski Networks, LLC, a
Virginia-based ISP.  The total purchase price was $24,907 representing
the fair value of the assets acquired which consisted of applying the amount
owed to the Company by Pulaski Networks for wholesale dial-up service to the
purchase price.





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.





Equipment
            
            $
            3,000Customer
      list
            
            
            62,907Non-compete
      agreement
            
            
            1,000Deferred
      revenue
            
            
            (42,000
            )Purchase
      price
            
            $
            24,907





Because
the acquisition of Pulaski Networks was consummated effective February 10, 2009,
there are limited results of operations of Pulaski Networks in the condensed
consolidated financial statements for the three months ended June 30,
2010.





The
following table presents the unaudited pro forma condensed consolidated
statement of operations for the six months ended June 30, 2009 and reflects the
results of operations of the Company as if the acquisition of Pulaski Networks
had been effective January 1, 2009. 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.





2009Net
      sales
            
            $
            4,439,062Gross
      profit
            
            $
            2,762,141Selling,
      general and administrative expenses
            
            $
            2,265,257Net
      income
            
            $
            537,520Basic
      income per share
            
            $
            0.01





14




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





NOTE
6 – ACQUISITIONS, continued





Jellico.com,
Inc.




Effective
August 1, 2010, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Jellico.com, Inc., a
Tennessee-based Internet Service Provider.  The total purchase price
was $17,020 representing the fair value of the assets acquired which consisted
of a $10,000 cash payment at closing with the remaining balance due in 4 monthly
installments beginning September 2010.





NOTE
7 – PROVISION FOR INCOME TAXES





The
provision for federal and state income taxes for the six months ended June 30,
2010 and 2009 included the following:





2010
            
            
            2009Current
      provision:Federal
            
            $
            207,201
            
            
            $
            254,075State
            
            
            36,566
            
            
            
            44,837Deferred
      provision:Federal
            
            
            (74,356
            )
            
            
            (331,611
            )State
            
            
            (13,122
            )
            
            
            (58,519
            )Total
      income tax
      provision
            
            $
            156,289
            
            
            $
            (91,218
            )





Deferred
tax assets and liabilities reflect the net effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.  Significant components
of the Company's deferred tax assets and liabilities at June 30, 2010 and
December 31, 2009 are as follows:





2010
            
            
            2009Accounts
      receivable
            
            $
            14,316
            
            
            $
            14,695Amortization
      of Intangible assets
            
            
            3,386,443
            
            
            
            3,298,586Less
      valuation allowance
            
            
            (2,552,420
            )
            
            
            (2,552,420
            )Deferred
      tax
      asset
            
            $
            848,339
            
            
            $
            760,861





At June
30, 2010 and December 31, 2009, the Company has provided a valuation allowance
for the deferred tax asset since management has not been able to determine that
the realization of that asset is more likely than not.  The Company is
subject to Federal income taxes as well as income taxes of state
jurisdictions.  For Federal and state taxes purposes, tax years 2006
through 2009 remain open to examination.




15




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





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
years. Amortization expense was $1,045,928 and $1,270,065 for the six
months ended June 30, 2010 and 2009.





NOTE
9 – DEFERRED REVENUE





Deferred
revenue represents collections from customers in advance for services not yet
performed and are recognized as revenue in the period service is
provided.





Revenue
Recognition




The
Company sells Internet services under annual and monthly contracts.  Under
the annual contracts, the subscriber pays a one-time annual fee, which is
recognized as revenue ratably over the life of the contract. Under the monthly
contracts, the subscriber is billed monthly and revenue is recognized for the
period the service relates.  Sales of computer hardware are recognized
as revenue upon delivery and acceptance of the product by the customer. Sales
are adjusted for any returns or allowances.




16




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





NOTE
10 - NOTES PAYABLE





Notes
payable at June 30, 2010 and December 31, 2009 consist of the
following:




2010
            
            
            2009Non-interest
      bearing amount due on acquisition of USA Telephone
            
            $
            900,615
            
            
            $
            900,615Totals
            
            
            900,615
            
            
            
            900,615Less
      current portion
            
            
            (900,615
            )
            
            
            (900,615
            )Long-term
      portion
            
            $
            -
            
            
            $
            -





The
future principal maturities of these notes are as follows:




Twelve
      months ending June 30, 2011
            
            $
            900,615Twelve
      months ending June 30, 2012
            
            
            -Twelve
      months ending June 30, 2013
            
            
            -Twelve
      months ending June 30, 2014
            
            
            -Twelve
      months ending June 30, 2015
            
            
            -Thereafter
            
            
            -Total
            
            $
            900,615




NOTE
11 - NOTES PAYABLE – STOCKHOLDERS





Notes
payable - stockholders at June 30, 2010 and December 31, 2009 consist of the
following:




2010
            
            
            2009Note
      payable to officer and stockholder on a line of credit of $750,000 at an
      annual interest rate of 10% interest.  The accrued interest and
      principal are due on January 1, 2014.
            
            $
            267,072
            
            
            $
            424,930Note
      payable to stockholder. The note is payable on January 1, 2014 and bears
      interest at an annual rate of 8.0%.
            
            
            -
            
            
            
            122,315Totals
            
            
            267,072
            
            
            
            547,245Less
      current portion
            
            
            -
            
            
            
            -Long-term
      portion
            
            $
            267,072
            
            
            $
            547,245




17




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





NOTE
11 - NOTES PAYABLE – STOCKHOLDERS, continued





The
future principal maturities of these notes are as follows:




Year
      ending June 30, 2011
            
            
            
            
            
            $
            -Year
      ending June 30, 2012
            
            
            
            
            
            
            -Year
      ending June 30, 2013
            
            
            
            
            
            
            -Year
      ending June 30, 2014
            
            
            
            
            
            
            267,072Year
      ending June 30, 2015
            
            
            
            
            
            
            -Total
            
            
            
            
            
            
            267,072





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





The
Company is restating earnings for the quarters ended December 31, 2009 to
reflect the proper revenue recognition of processing charges and late fees for
customers cut off from internet service because the collectability of those
charges is not reasonably assured.  In addition, the Company will
institute ongoing monitoring that constantly occurs in the ordinary course of
operations.





Forward-looking
statements




This
report contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the Company’s ability to expand the Company’s customer base, make
strategic acquisitions, general market conditions and competition and
pricing.





Although
the Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.




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, 2009 included in the Annual Report on Form 10-K.  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.




18




SITESTAR
CORPORATION





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





Overview




Sitestar
is an Internet Service Provider (ISP) that offers consumer and business-grade
Internet access, wholesale managed modem services for downstream ISPs and Web
hosting.  Sitestar also delivers value-added services including spam,
virus and spyware protection, pop-up ad blocking and web
acceleration.  The Company maintains multiple sites of operation and
provides services to customers throughout the U.S. and Canada.





The
products and services that the Company provides include:




·




·




·




·




·





The
Company’s Internet division markets and sells narrow-band (dial-up and ISDN) and
broadband services (DSL, fiber-optic, satellite 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.





Additionally,
the Company markets and sells web hosting and related services to consumers and
businesses.





The
Company also markets, 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.





Results
of operations




The
following tables show financial data for the six months ended June 30, 2010 and
2009. Operating results for any period are not necessarily indicative of results
for any future period.




19





SITESTAR
CORPORATION





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





For the six months ended
              June 30, 2010Corporate
            
            
            Internet
            
            
            TotalRevenue
            
            $
            -
            
            
            $
            2,758,610
            
            
            $
            2,758,610Cost
      of revenue
            
            
            -
            
            
            
            1,251,309
            
            
            
            1,251,309Gross
      profit
            
            
            -
            
            
            
            1,507,301
            
            
            
            1,507,301Operating
      expenses
            
            
            64,677
            
            
            
            1,559,215
            
            
            
            1,623,892Income
      (loss) from operations
            
            
            (64,677
            )
            
            
            (51,914
            )
            
            
            (116,591
            )Other
      income (expense)
            
            
            -
            
            
            
            (32,718
            )
            
            
            (32,718
            )Income
      (loss) before income taxes
            
            
            (64,677
            )
            
            
            (84,632
            )
            
            
            (149,309
            )Income
      taxes expense (benefit)
            
            
            156,289
            
            
            
            -
            
            
            
            156,289Net
      income (loss)
            
            $
            (220,966
            )
            
            $
            (84,632
            )
            
            $
            (305,598
            )








For the six months ended
              June 30, 2009Corporate
            
            
            Internet
            
            
            TotalRevenue
            
            $
            -
            
            
            $
            4,429,842
            
            
            $
            4,429,842Cost
      of revenue
            
            
            -
            
            
            
            1,672,721
            
            
            
            1,672,721Gross
      profit
            
            
            -
            
            
            
            2,757,121
            
            
            
            2,757,121Operating
      expenses
            
            
            102,819
            
            
            
            2,160,515
            
            
            
            2,263,334Income
      (loss) from operations
            
            
            (102,819
            )
            
            
            596,606
            
            
            
            493,787Other
      income (expense)
            
            
            -
            
            
            
            (50,581
            )
            
            
            (50,581
            )Income
      (loss) before income taxes
            
            
            (102,819
            )
            
            
            546,025
            
            
            
            443,206Income
      taxes (expense) benefit
            
            
            91,218
            
            
            
            -
            
            
            
            91,218Net
      income (loss)
            
            $
            (11,601
            )
            
            $
            546,025
            
            
            $
            534,424





20




SITESTAR
CORPORATION





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





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, 2010 and
2009.





For
      the six months ended
              June
      30, 2010Corporate
            
            
            Internet
            
            
            TotalEBITDA
            
            $
            (64,677
            )
            
            $
            988,862
            
            
            $
            924,185Interest
      expense
            
            
            -
            
            
            
            (19,631
            )
            
            
            (19,631
            )Taxes
            
            
            (156,289
            )
            
            
            -
            
            
            
            (156,289
            )Depreciation
            
            
            -
            
            
            
            (7,935
            )
            
            
            (7,935
            )Amortization
            
            
            -
            
            
            
            (1,045,928
            )
            
            
            (1,045,928
            )Net
      income (loss)
            
            $
            (220,966
            )
            
            $
            (84,632
            )
            
            $
            (305,598
            )





For
      the six months ended
              June
      30, 2009Corporate
            
            
            Internet
            
            
            TotalEBITDA
            
            $
            (102,819
            )
            
            $
            1,881,769
            
            
            $
            1,778,950Interest
      expense
            
            
            -
            
            
            
            (48,451
            )
            
            
            (48,451
            )Taxes
            
            
            91,218
            
            
            
            -
            
            
            
            91,218Depreciation
            
            
            -
            
            
            
            (17,228
            )
            
            
            (17,228
            )Amortization
            
            
            -
            
            
            
            (1,270,065
            )
            
            
            (1,270,065
            )Net
      income (loss)
            
            $
            11,601
            
            
            $
            546,025
            
            
            $
            534,424





21




SITESTAR
CORPORATION





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





SIX
MONTHS ENDED JUNE 30, 2010 COMPARED TO JUNE 30, 2009




REVENUE





Revenue
for the six months ended June 30, 2010 decreased by $1,671,232 or 37.7% from
$4,429,842 for the six months ended June 30, 2009 to $2,758,610 for the same
period in 2010.  Internet sales decreased due primarily to customer
attrition to broadband services and is offset in part by the addition of
Internet customers from asset acquisitions.  To help offset this
decline in revenues, the Company has acquired and plans to continue to acquire
the assets of additional ISPs and fold them into its operations.





COST
OF REVENUE





Costs of
revenue for the six months ended June 30, 2010 decreased by $421,412 or 25.2%
from $1,672,721 for the six months ended June 30, 2009 to $1,251,309 for the
same period in 2010.  Cost of revenue decreased as a result of declining
revenue.





OPERATING
EXPENSES




Operating
expenses for the six months ended June 30, 2010 decreased $639,442 or 28.3% from
$2,263,334 for the six months ended June 30, 2009 to $1,623,892 for the same
period in 2010.  This decrease is a reflection of lower revenue and
associated variable costs.  Amortization expense decreased $224,137 or
17.6% from $1,270,065 for the six months ended June 30, 2009 to $1,045,928 for
the same period in 2010.




INCOME
TAXES





For the
six months ended June 30, 2010 and June 30, 2009 corporate income tax (expense)
benefit of $(156,289) and $91,218 were accrued.





INTEREST
EXPENSE





Interest
expense for the six months ended June 30, 2010 decreased by $28,900 or 59.6%
from $48,451 for the six months ended June 30, 2009 to $19,631 for the same
period in 2010.  This decrease is a result of reducing debt to finance the
acquisition of additional customers.




22





SITESTAR
CORPORATION





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





JUNE 30, 2010 COMPARED TO
DECEMBER 31, 2009





FINANCIAL
CONDITION





Net
accounts receivable decreased $277,330 or 60.9% from $455,773 on December 31,
2009 to $178,443 on June 30, 2010.  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 $1,763 or 3.8% from
$45,962 on December 31, 2009 to $44,199 on June 30, 2010.  Accounts
payable decreased by $77,021 or 58.5% from $131,598 on December 31, 2009 to
$54,577 on June 30, 2010. Accrued expenses increased by $15,856 or 54.6% from
$29,052 on December 31, 2009 to $44,908 on June 30, 2010.  Deferred
revenue decreased by $162,535 or 18.9% from $861,235 on December 31, 2009 to
$698,700 on June 30, 2010 representing decreased volume of customer accounts
that have been prepaid. The current portion of notes payable was
unchanged.  Long-term notes payable to shareholders decreased $280,173
or 51.2% from $547,245 on December 31, 2009 to $267,072 on June 30,
2010.  This is due primarily to the early payoff of one
note.





LIQUIDITY AND CAPITAL
RESOURCES




Cash and
cash equivalents totaled $1,150,484 and $1,090,807 at June 30, 2010 and at
December 31, 2009.  EBITDA was $924,185 for the six months ended June
30, 2010 as compared to $1,127,973 for the same period in 2009.





2010
            
            
            2009EBITDA
      for the six months ended June 30,
            
            $
            924,185
            
            
            $
            1,778,950Interest
      expense
            
            
            (19,631
            )
            
            
            (48,451
            )Taxes
            
            
            (156,289
            )
            
            
            91,218Depreciation
            
            
            (7,935
            )
            
            
            (17,228
            )Amortization
            
            
            (1,045,928
            )
            
            
            (1,270,065
            )Net
      income for the six months ended June 30,
            
            $
            (305,598
            )
            
            $
            534,424





23




SITESTAR
CORPORATION




The aging
of accounts receivable as of June 30, 2010 and December 31, 2009 is as
shown:





2010
            
            
            2009Current
            
            $
            53,395
            
            
            
            30
            %
            
            $
            150,467
            
            
            
            33
            %30
      < 60
            
            
            37,612
            
            
            
            21
            %
            
            
            159,585
            
            
            
            35
            %60
      +
            
            
            87,436
            
            
            
            49
            %
            
            
            145,721
            
            
            
            32
            %Total
            
            $
            178,443
            
            
            
            100
            %
            
            $
            455,773
            
            
            
            100
            %





OFF-BALANCE
SHEET TRANSACTIONS




The
Company is not a party to any off-balance sheet transactions.




24




SITESTAR
CORPORATION





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





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 pursuant to the rules and regulations of
the Securities and Exchange Commission. 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.




Item 3.    Quantitative and Qualitative
Disclosures About Market Risk




None.




Item
4.    Controls and Procedures




Evaluation
of Disclosure Controls and Procedures:





Management,
including our Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of June 30, 2010. Our
disclosure controls and procedures 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 accurately and on a
timely basis.




25




Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were effective as of
June 30, 2010, as related to the material weaknesses in internal control
over financial reporting discussed in the fiscal 2009 Form 10-K.  The
material weaknesses related to proper revenue recognition of processing charges
and late fees of customers cut off from internet service because the
collectability of those charges is not reasonably assured and the material
weakness that ongoing monitoring does not always occur in the ordinary course of
operations.





As of May
21, 2010, the Company began evaluating the aforementioned weaknesses and is
remediating the deficiencies with additional procedures and controls including
additional personnel training.  The Company has evaluated the
effectiveness of its disclosure controls and procedures and internal controls
over financial reporting as of June 30, 2010, including the remedial actions
discussed above.





Because
of the material weaknesses in internal control over financial reporting
described in the fiscal 2009 Form 10-K, we performed additional analyses and
other post-closing procedures to ensure that our condensed consolidated
financial statements were prepared in accordance with generally accepted
accounting principles. Accordingly, management, including our Chief Executive
Officer and Chief Financial Officer, believes the condensed consolidated
financial statements included in this report fairly present, in all material
respects, our financial condition, results of operations and cash flows for the
periods presented.





Changes
in Internal Control over Financial Reporting:




No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
June 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, except for the
changes in our internal controls discussed above in order to remediate material
weaknesses.





26





SITESTAR
CORPORATION





PART II.  OTHER INFORMATION




Item 1.     Legal Proceedings





A
complaint has been filed in Belmont County, Ohio by First USA, Inc. alleging a
breach of agreement for the purchase and sale of Internet Service Provider
accounts dated July 1, 2006.  The complaint demands judgment of
approximately $150,000.  The Company has vigorously defended this
claim.  This matter was dismissed by the plaintiff on December 11,
2009.





Item
1A.   Risk Factors




Not
required for small business.




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-Q:




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




27




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




SITESTAR
      CORPORATIONDate:
      August 16, 2010
              By:
              /s/ Frank Erhartic,
      Jr.Frank
      Erhartic, Jr.President,
      Chief Executive Officer(Principal
      Executive Officer and
                Principal
      Accounting Officer)




Date:
      August 16, 2010
              By:
              /s/
      Daniel A. Judd.Daniel
      A. JuddChief
      Financial Officer(Principal
      Financial Officer)




28