Pledge And Irrevocable Proxy Security Agreement Dated December 4, 2002

EXHIBIT 10.3


PLEDGE AND IRREVOCABLE PROXY SECURITY AGREEMENT


THIS PLEDGE AND IRREVOCABLE PROXY SECURITY AGREEMENT (the " Agreement" ) is made and entered into as of the 4th day of December, 2002, by Sitestar Corporation, a Nevada corporation whose chief executive office is located at 7109 Timberlake Road, Lynchburg, Virginia 24502 (the " Company" or the " Pledgor" ) in favor of Clinton J. Sallee and Frederick T. Manlunas, and their successors and assigns, (collectively hereinafter called the " Secured Party" ), whose address is 15303 Ventura Boulevard, Suite 1510, Sherman Oaks, California 91403.


1.

RECITALS


1.1.

This Agreement is part of the redemption of shares of common stock of the Company made and entered into by and between the Company and the Secured Party of even date herewith (the " Redemption Agreement" ). THE PROVISIONS OF THE REDEMPTION AGREEMENT ARE INCORPORATED HEREIN BY REFERENCE.


1.2

Secured Party has agreed to accept a promissory note of even date herewith (the " Note" ) from the Company for the redemption of 32,483,346 shares of common stock of the Company (the " Redeemed Shares" ). THE PROVISIONS OF THE NOTE ARE INCORPORATED HEREIN BY REFERENCE.


1.3

Secured Party' s agreement to accept the Note is conditioned upon Secured Party' s receiving a pledge and security interest from the Pledgor in the Redeemed Shares.


1.4

Pledgor is the owner of the Redeemed Shares, and Pledgor desires to pledge the Redeemed Shares to Secured Party in connection with Secured Party' s acceptance of the Note from Pledgor.


2.

PLEDGE OF STOCK


2.1

Pledgor hereby assigns, transfers, pledges and delivers to Secured Party and grants Secured Party a security interest in the Redeemed Shares including without limitation all dividends and distributions thereon, all additions thereto, all proceeds thereof from sale or otherwise, all substitutions therefor, and all securities issued with respect thereto as a result of any stock dividend, stock split, warrants or other rights, reclassification, readjustment or other change in the capital structure of the Company, and the securities of any corporation or other properties received upon the conversion or exchange thereof pursuant to any merger, consolidation, reorganization, sale of assets or other agreement or received upon any liquidation of the Company or such other corporation (all hereinafter called the " Pledged Securities" ).


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2.2

Secured Party shall retain possession of all certificates and other evidences of the Pledged Securities that come into the possession, custody or control of Pledgor, and any other property constituting part of the Pledged Securities, free and clear of any prior lien, claim, charge or encumbrance, subject to payments by the Company under the Note, on a pro rata basis, pursuant to a schedule for return of the Shares to the Company to be determined by the Parties.


2.3

Secured Party may receive, hold and/or dispose of the Pledged Securities subject and pursuant to all the terms, conditions and provisions of this Agreement, of the Redemption Agreement, and of the Note until the Obligation (defined below) has been discharged in full. Secured Party is hereby authorized and empowered to take any and all action with respect to such property as authorized hereunder. In its discretion and without notice to Pledgor, Secured Party may take any one or more of the following actions, without liability except to account for property actually received by it:


(a)

Transfer to or register in its name or the name of its nominee any of the Pledged Securities, with or without indication of the security interest herein created, and whether or not so transferred or registered, receive the income, dividends and other distributions thereon and hold them or apply them to the Obligation in any order of priority;


(b)

Exercise or cause to be exercised all voting and corporate powers with respect to any of the Pledged Securities so registered or transferred, including all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to such Pledged Securities, as if the absolute owner thereof;


(c)

Insure any of the Pledged Securities;


(d)

Exchange any of the Pledged Securities for other property upon a reorganization, recapitalization or other readjustment and, in connection therewith, deposit any of the Pledged Securities with any committee or depositary upon such terms as the Secured Party may determine;


(e)

In its name, or in the name of Pledgor, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or in exchange for, any of the Pledged Securities and, in connection therewith, endorse notes, checks, drafts, money orders, documents of title or other evidences of payment, shipment or storage in the name of Pledgor; and


(f)

Make any compromise or settlement deemed advisable with respect to any of the Pledged Securities.


Secured Party shall be under no duty to exercise, or to withhold the exercise of, any of the rights, powers, privileges and options expressly or implicitly granted to Secured Party in this Agreement, and shall not be responsible for any failure to do so or delay in so doing.


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3.

OBLIGATION SECURED


3.1

This Agreement shall secure, in such order of priority as Secured Party may elect:


(a)

Payment of the aggregate sum of $766,659 according to the terms of the Note, with interest thereon, extension and other fees, late charges, prepayment premiums and attorneys' fees, according to the terms thereof, and all extensions, modifications, renewals or replacements thereof;


(b)

Payment, performance and observance by Pledgor of each covenant, condition, provision and agreement contained in that Redemption Agreement and of all monies expended or advanced by Secured Party pursuant to the terms thereof or to preserve any right of Secured Party thereunder;


(c)

Payment, performance and observance by Pledgor of each covenant, condition, provision and agreement contained herein and of all monies expended or advanced by Secured Party pursuant to the terms hereof, or to preserve any right of Secured Party hereunder, or to protect or preserve the Pledged Securities or any part thereof; and


(d)

Payment and performance of any and all other indebtedness, obligations and liabilities of Pledgor to Secured Party of every kind and character, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, whether such indebtedness is from time to time reduced and thereafter increased or entirely extinguished and thereafter reincurred.


All of the indebtedness and obligations secured by this Agreement are hereinafter collectively called the " Obligation."


4.

REPRESENTATIONS AND WARRANTIES OF PLEDGOR


Pledgor hereby represents and warrants that:


4.1

Pledgor (i) is duly organized, validly existing and in good standing under the laws of the state in which it is organized; (ii) is qualified to do business and is in good standing under the laws of each state in which it is doing business; (iii) has full power and authority to own its properties and assets and to carry on its business as now conducted; and (iv) is fully authorized and permitted to execute and deliver this Agreement. The execution, delivery and performance by Pledgor of this Agreement and all other documents and instruments relating to the Obligation will not result in any breach of the terms and conditions of, nor constitute a default under, any agreement or instrument under which Pledgor is a party or is obligated. Pledgor is not in default in the performance or observance of any covenants, conditions or provisions of any such agre ement or instrument.


4.2

The address of Pledgor set forth at the beginning of this Agreement is the chief executive office of Pledgor.


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4.3

The Pledged Securities are and shall be duly and validly issued and pledged in accordance with applicable law, and this Agreement shall not contravene any law, agreement or commitment binding Pledgor or the Company, and Pledgor shall defend the right, title, lien and security interest of Secured Party in and to the Pledged Securities against the claims and demands of all persons and other entities whatsoever.


4.4

Pledgor has the right, power and authority to convey good and marketable title to the Pledged Securities; and the Pledged Securities and the proceeds thereof are and shall be free and clear of all claims, mortgages, pledges, liens, encumbrances and security interest of every nature whatsoever.


5.

IRREVOCABLE PROXY


5.1

Secured Party irrevocably constitutes and appoints Frank Erhartic, Jr. and Julie Erhartic (" the Erhartics" ) as Secured Party' s proxy with full power, in the same manner, to the same extent and with the same effect as if Secured Party were to do the same, in the sole discretion of Pledgor:


(a)

To call a meeting of the stockholders of the Company and to vote the Pledged Securities, or to seek the consent of such stockholders;


(b)

To consent to any and all actions by or with respect to the Company for which consent of the stockholders of the Company is or may be necessary or appropriate; and


(c)

Without limitation, to do all things that Secured Party can do or could do as stockholder of the Company, giving the Erhartics full power of substitution and revocation;


provided, however, that (i) the foregoing irrevocable proxy shall not be exercisable by Secured Party, and the Erhartics alone shall have the foregoing powers, so long as there is ...