Document:

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Exhibit 10.3

                                 PROMISSORY NOTE

$10,000,000.00                                        PHILADELPHIA, PENNSYLVANIA

                                                      FEBRUARY 15 2007

          FOR VALUE RECEIVED, PEOPLES EDUCATIONAL HOLDINGS, INC. ("Borrower"),
with a mailing address of 299 MARKET STREET, SADDLE BROOK, NJ 07663 promises to
pay to the order of SOVEREIGN BANK, a corporation authorized to do business in
Pennsylvania and New Jersey with an office at 1500 MARKET STREET, PHILADELPHIA,
PA 19102 ("Bank"), at such office of Bank or at such other place as Bank may
designate from time to time in writing, the principal balance ("Principal
Balance") of TEN MILLION AND 00/100 DOLLARS ($10,000,000.00) in lawful money of
the United States of America, together with interest thereon from the date
hereof at the rates hereinafter provided, and both payable as hereinafter
provided. This note ("Note") evidences a term loan ("Term Loan") in the amount
of $10,000,000.00 by Bank to Borrower.

     1. INTEREST RATE.

(a) For the purposes of this Note, the following terms shall have the meanings
ascribed to them below:

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     (i) "Business Day" means:

          (A)  any day which is neither a Saturday or Sunday nor a legal holiday
               on which commercial banks are authorized or required to be closed
               in New York City;

          (B)  when such term is used to describe a day on which a payment or
               prepayment is to be made in respect of a LIBOR Rate Loan, any day
               which is: (i) neither a Saturday or Sunday nor a legal holiday on
               which commercial banks are authorized or required to be closed in
               New York City; and (ii) a London Banking Day; and

          (C)  when such term is used to describe a day on which an interest
               rate determination is to be made in respect of a LIBOR Rate Loan,
               any day which is a London Banking Day.

     (ii) Interest Period: means the period of time commencing one (1) business
day after an Interest Rate Election Date and either:

          (A)  in the case of a LIBOR Rate Tranche:

               (I)  If the LIBOR Rate selected for such LIBOR Rate Tranche is
                    "one day": the following day and continuing from day to day;
                    provided, however, that if an Interest Period would end on a
                    day that is not a Business Day, such Interest Period shall
                    be extended to the next succeeding Business Day.

               (II) the LIBOR Rate selected for such LIBOR Rate Tranche is other
                    than "one day": and continuing for a period of time
                    associated with a LIBOR Rate offered by Bank and chosen by
                    Borrower, (i.e., 1 month LIBOR Rate, 2 month LIBOR Rate, 3
                    month LIBOR Rate, 6 month LIBOR Rate); provided, however,
                    that if an Interest Period would end on a day that is not a
                    Business Day, such Interest Period shall be extended to the
                    next succeeding Business Day unless such next succeeding
                    Business Day would fall in the next calendar month, in which
                    case such Interest Period shall end on the immediately
                    preceding Business Day.

          or (B) in the case of a Prime Rate Tranche the following day and
               continuing from day to day; provided, however, that if an
               Interest Period would end on a day that is not a Business Day,
               such Interest Period shall be extended to the next succeeding
               Business Day.

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     (iii) Interest Rate Election Date: means a date in each calendar month
which is one (1) business day before the commencement of the next succeeding
Interest Period.

     (iv) LIBOR Interest Rate: means a fluctuating rate of interest per annum
(which shall change, if at all, at the beginning of each Interest Period in
accordance with changes in the LIBOR Rate as calculated pursuant to paragraph 1
(a) (v) below) equal to either: (A) THE LIBOR RATE PLUS TWO HUNDRED (200) BASIS
POINTS (2.0%) IF, AT OF THE END OF THE MOST RECENT FISCAL QUARTER, BORROWER'S
TOTAL FUNDED DEBT TO EBITDA RATIO IS LESS THAN OR EQUAL TO 2.00:1 or (B) THE
LIBOR RATE PLUS TWO HUNDRED (225) BASIS POINTS (2.25%) IF, AT OF THE END OF THE
MOST RECENT FISCAL QUARTER, BORROWER'S TOTAL FUNDED DEBT TO EBITDA RATIO IS
GREATER THAN 2.00:1.

     (v) LIBOR Rate: means the rate obtained by dividing (i) the one-day,
one-month, two-month, three-month or six-month interest period London Interbank
Offered Rate (as selected by Borrower) as fixed by the British Bankers
Association for United States dollar deposits in the London Interbank Eurodollar
Market at approximately 11:00 a.m. London, England time (or as soon thereafter
as practicable) as determined by Bank from any broker, quoting service or
commonly available source utilized by Bank by (ii) a percentage equal to 100%
minus the stated maximum rate of all reserves required to be maintained against
"Eurocurrency Liabilities" as specified in Regulation D (or against any other
category of liabilities which includes deposits by reference to which the
interest rate on LIBOR Rate Tranche or Tranches is determined or any category of
extensions of credit or other assets which includes loans by a non-United
States' office of a bank to United States' residents) on such date to any member
bank of the Federal Reserve System. Each determination of the LIBOR Rate
applicable to a particular Interest Period shall be made by Bank and shall be
conclusive and binding upon Borrower absent manifest error.

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     (vi) LIBOR Rate Tranche(s): means, for each Interest Period, the portions
of all of the outstanding Principal Balance of the Term Loan with respect to
which Borrower has elected to pay interest at the LIBOR Interest Rate. Borrower
shall not be permitted to maintain more than four (4) LIBOR Rate Tranches at a
time.

     (vii) Maturity Date: means DECEMBER 31, 2012.

     (viii) Prime Interest Rate: means a fluctuating rate of interest per annum
equal to either: (A) THE PRIME RATE IF, AT OF THE END OF THE MOST RECENT FISCAL
QUARTER, BORROWER'S TOTAL FUNDED DEBT TO EBITDA RATIO IS LESS THAN OR EQUAL TO
2.00:1 or (B) THE PRIME RATE PLUS FIFTY (50) BASIS POINTS (0.50%) IF, AT OF THE
END OF THE MOST RECENT FISCAL QUARTER, BORROWER'S TOTAL FUNDED DEBT TO EBITDA
RATIO IS GREATER THAN 2.00:1.

     (ix) Prime Rate: means the rate of interest announced from time to time by
Bank as its "prime rate" or "prime lending rate" whether or not such rate is
published or otherwise made known to Borrower; provided, however, that such rate
shall be immediately and easily available to the public at any time and from
time to time during the term of the Term Loan. This rate of interest is
determined from time to time by Bank as a means of pricing some loans to its
customers and is neither tied to any external rate of interest or index nor does
it necessarily reflect the lowest rate of interest actually charged by Bank to
any particular class or category of customers of Bank. Changes in a prime-based
interest rate hereunder shall be effective on the same date as Bank effects a
change in its prime rate.

     (x) Prime Rate Tranche: means that portion of the Principal Balance with
respect to which Borrower has elected to pay interest at the Prime Interest
Rate.

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(b) Throughout the term of the Term Loan, Borrower shall be permitted to elect
to have a portion or portions of the Principal Balance accrue interest at either
the LIBOR Interest Rate or the Prime Interest Rate on and subject to the terms
of this paragraph 1(b). No later than each Interest Rate Election Date, Borrower
shall advise Bank in writing of Borrower's election (the "Rate Election") of the
portions of the Principal Balance for which interest shall accrue during the
next succeeding Interest Period at either the LIBOR Interest Rate or the Prime
Interest Rate. If Borrower fails so to advise Bank in writing of its Rate
Election on or before the applicable Interest Rate Election Date then, during
the next following Interest Period, all interest shall accrue on the outstanding
Principal Balance, or such portion thereof for which a Rate Election has not
been designated by such Interest Rate Election Date, at the LIBOR Interest Rate
based upon a "one-day" LIBOR Rate. In furtherance of the foregoing, Borrower
understands and acknowledges that, other than the LIBOR Interest Rate based upon
a "one-day" LIBOR Rate, any Rate Election made by Borrower for the LIBOR
Interest Rate pursuant to this Note shall be applicable only for the next
succeeding Interest Period and not thereafter without a new Rate Election in
accordance with the terms of this Note. Notwithstanding anything contained
herein to the contrary, if at any time during the term hereof Bank shall have
determined in good faith (which determination shall be conclusive and binding
upon Borrower) that U.S. dollar deposits in an amount approximately equal to the
Principal Balance which is to bear interest at a particular LIBOR Rate during
such particular Interest Period in accordance with the provisions of this Note
are not generally available at such time in the London interbank market, or
reasonable means do not exist for ascertaining a LIBOR Rate for such particular
Interest Period, the interest rate applicable to the Principal Balance, or such
portions thereof, with respect to which such LIBOR Rate applies, shall
automatically be converted to the Prime Interest Rate and

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shall remain in effect thereafter with respect to such Principal Balance, or
portions, thereof, until the expiration of the Interest Period in which Bank
shall have determined in good faith (which determination shall be conclusive and
binding upon Borrower) that the aforesaid circumstances no longer exist.

(c) All interest to be computed at the rate set forth in this Note, late fees
and all other fees and charges payable under this Note, shall continue to be due
and payable at such rates for so long as any balance remains outstanding
hereunder whether or not this has matured or been accelerated. This provision
shall survive and apply following any default, maturity, acceleration, recovery
of judgment, judgment of foreclosure, bankruptcy, insolvency proceedings of any
kind or the happening of any other event or occurrence, similar or dissimilar.

(d) The annual interest rate hereunder shall be calculated on the basis of a
360-day year and the actual number of days elapsed. Notwithstanding anything to
the contrary contained herein or in any other document executed in connection
with the Term Loan, the effective rate of interest hereunder shall not exceed
the maximum effective rate of interest permitted by applicable law or
regulation. Borrower hereby agrees to give Bank written notice in the event
Borrower has actual knowledge that any interest payment made to Bank with
respect to this Note will cause the total interest payments collected in any one
year to be usurious under applicable law, provided, however, that the failure of
Borrower to give such notice does not constitute a default under the Term Loan
nor shall it be construed as a waiver or consent by Borrower to Bank charge or
collect interest in excess of the maximum effective rate of interest permitted
by applicable law or regulation. Bank hereby agrees not to collect knowingly any
interest from Borrower in the form

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of fees or otherwise which will render the Term Loan usurious. In the event that
such interest would be usurious in Bank's opinion, Bank reserves the right to
reduce the interest payable by Borrower. This provision shall survive the
repayment of this Note.

     2. PAYMENTS OF PRINCIPAL AND INTEREST.

(a) Interest shall be calculated on the Prime Rate Tranche at the Prime Interest
Rate. Interest shall be calculated on the LIBOR Rate Tranche(s), if any, at the
LIBOR Interest Rate applicable to each LIBOR Rate Tranche. Commencing on the
LAST day of MARCH, 2007, and continuing until all sums outstanding hereunder are
repaid in full, Borrower shall pay to Bank INTEREST accrued on the outstanding
Prime Rate Tranche, due on and to be received by Bank on the LAST day of each
succeeding calendar MONTH thereafter. Commencing on the LAST day of MARCH, 2007
and continuing until all sums outstanding hereunder are repaid in full, Borrower
shall pay to Bank INTEREST accrued on each outstanding LIBOR Rate Tranche(s),
due on and to be received by Bank on the earlier of either (i) the last day of
an Interest Period associated with a LIBOR Rate Tranche or (ii) the last day of
each and every calendar quarter which happens to fall within an Interest Period
associated with a LIBOR Rate Tranche. Commencing on MARCH 31, 2008 and
continuing until all sums are paid in full, Borrower shall pay to Bank QUARTERLY
installments of Principal in the amount of FIVE HUNDRED THOUSAND AND 00/100
DOLLARS ($500,000.00), due on and to be received by Bank on the LAST day of each
QUARTER. All payments which are applied to the reduction of the Principal
Balance shall be applied first towards the reduction of such portions of the
Principal Balance which are part of the Prime Rate Tranche and, second towards
the reduction of the remaining Principal Balance.

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(b) The payments made under this Note may be applied on account of interest,
principal, or other sums due hereunder in such priority as Bank or any holder of
this Note may determine.

(c) If this Note is to be repaid in installments any prepayments shall be
credited to installments of principal in the inverse order of maturity, and any
installments hereunder shall not be reduced or postponed by any partial
prepayments. The unpaid Principal Balance then outstanding together with all
accrued and unpaid interest thereon shall become due and payable on the MATURITY
DATE.

     3. PREPAYMENT.

(a) Borrower may prepay the unpaid Principal Balance in full or in part at any
time or from time to time; provided, however, that (i) Borrower shall pay all
interest accrued hereunder, to the date of prepayment and (ii) should a LIBOR
Rate Tranche be repaid prior to the expiration of its applicable Interest
Period, then Borrower shall pay to Bank compensation pursuant to the following
formula: the then current rate for United States Treasury securities (bills on a
discounted basis shall be converted to a bond equivalent) with a maturity date
closest to the end of said Interest Period as to which prepayment is made,
subtracted from the LIBOR Interest Rate for said LIBOR Rate Tranche. If the
result of this calculation is a positive number, then the resulting percentage
shall be multiplied by: the amount of said LIBOR Rate Tranche being prepaid. The
resulting amount shall be divided by: 360 and multiplied by the number of days
remaining in said Interest Period as to which the prepayment is being made. Said
amount shall be reduced to present value calculated by using the referenced
United States Treasury securities rate and the number of days remaining on the
Interest Period for said LIBOR Rate Traunche.

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     4. SECURITY. This Note, and the due performance by Borrower of all of its
obligations hereunder, is secured by, inter alia, (a) security interests in
substantially all personal property of Borrower and Guarantor pursuant to the
terms of a Security Agreement (the "Security Agreement") of even date herewith
and (b) A guaranty and suretyship agreement (the "Guaranty") executed by PEOPLES
EDUCATION, INC. ("Guarantor") in favor of Bank pursuant to which the Guarantor
guarantees and becomes surety for all payment, performance and other obligations
of Borrower in connection with the Loans (as defined in the Loan Agreement).

     This Note, the Security Agreement, the Loan Agreement executed in
connection with this transaction (the "Loan Agreement"), the Guaranty, the
Revolving Credit Note (as defined in the Loan Agreement) and any other document
executed and delivered in connection with the Loan Agreement are each
hereinafter referred to as a "Loan Document" and collectively as the "Loan
Documents." Any collateral securing any of Borrower's obligations under any of
the Loan Documents is hereinafter referred to collectively as the "Collateral."

     5. LATE CHARGE. In the event that any payment of principal or interest due
to Bank hereunder shall not be paid when due and shall remain unpaid in excess
of fifteen (15) days after the due date, in addition to and not in limitation of
any other rights or remedies which Bank may have in respect thereof under any of
the Loan Documents or in respect of any Collateral, Borrower shall pay Bank on
demand a "late charge" computed at the rate of five cents ($.05) for each dollar
(or part thereof) of the amount not paid, to cover the extra expense and
inconvenience to Bank in ensuring payment of such delinquent amount. Borrower
acknowledges

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that its failure to pay any amount due hereunder within such fifteen (15) day
period will result in Bank incurring additional expense in servicing the Term
Loan evidenced by this Note, the loss of the use of the money due and
frustration to Bank in meeting its loan commitments, that the damages to Bank in
connection with such late payment are extremely difficult and impractical to
ascertain, and that a sum equal to five cents ($.05) for each dollar which is
not paid within such fifteen (15) day period is a reasonable estimate of the
damages incurred by Bank in connection with any such late payment. The amount of
any such "late charge" not paid promptly following demand therefor shall be
deemed outstanding and payable pursuant to this Note and secured by the
Collateral; provided, however, that the "late charge" shall not be or become
part of the Principal Balance.

     6. EVENTS OF DEFAULT. In addition to any other event referred to herein,
the occurrence of which, by the terms hereof, constitutes an Event of Default
hereunder, the occurrence of any one or more of the following events shall
constitute an Event of Default hereunder:

     (a) Borrower shall fail to make any payment of principal, interest, fees
and/or costs due to Bank under this Note or under any of the other Loan
Documents within ten (10) days after the same is due and payable, whether at
maturity or by acceleration or otherwise;

     (b) Except as specifically otherwise provided for in this Note, Borrower
shall fail to observe or perform any of the covenants or agreements on its part
to be observed or performed under this Note within thirty (30) days after
written notice from Bank of such non-compliance;

     (c) Any Event of Default shall occur under the terms of any of the other
Loan Documents which continues beyond applicable notice and grace periods, if
any, set forth therein.

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     7. REMEDIES. Upon the occurrence of any Event of Default, then the entire
unpaid Principal Balance hereunder plus all interest accrued thereon plus all
other sums due and payable to Bank under the Loan Documents shall, at the option
of Bank, become due and payable immediately without presentment, demand, notice
of nonpayment, protest, notice of protest or other notice of dishonor, all of
which are hereby expressly waived by Borrower.

     Should an event described in section 8(a)(vi) or section 8(a)(vii) of the
Loan Agreement occur, then Bank is entitled to preconfirmation and
postconfirmation interest, at the Default Rate (as hereinafter defined), on the
Term Loan arrearages and other charges. Said interest on the Term Loan
arrearages and other charges will be considered an element of an allowed secured
claim provided for by any plan.

     8. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     9. REMEDIES CUMULATIVE,_ETC.

     (a) No right or remedy conferred upon or reserved to Bank under any of the
Loan Documents, or with respect to any Collateral, or now or hereafter existing
at law or in equity or by statute or other legislative enactment, is intended to
be exclusive of any other right or remedy, and each and every such right or
remedy shall be cumulative and concurrent, and shall be in addition to every
other such right or remedy, and may be pursued singly, concurrently,
successively or otherwise, at the sole discretion of Bank, and shall not be
exhausted by any one exercise thereof but may be exercised as often as occasion
therefor shall occur. No act of Bank shall be deemed or construed as an election
to proceed under any one such right or remedy to the

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exclusion of any other such right or remedy; furthermore, each such right or
remedy of Bank shall be separate, distinct and cumulative and none shall be
given effect to the exclusion of any other. The failure to exercise or delay in
exercising any such right or remedy, or the failure to insist upon strict
performance of any term of any of the Loan Documents, shall not be construed as
a waiver or release of the same, or of any Event of Default thereunder, or of
any obligation or liability of Borrower thereunder.

     (b) The recovery of any judgment by Bank and/or the levy of execution under
any judgment upon any Collateral shall not affect in any manner or to any extent
the lien or any security interest under the Loan Agreement in such Collateral,
or any rights, remedies or powers of Bank under any of the Loan Documents or
with respect to any Collateral, but such lien and such security interest, and
such rights, remedies and power of Bank shall continue unimpaired as before.
Further, the exercise by Bank of its rights and remedies and the entry of any
judgment by Bank shall not affect in any way the interest rate payable hereunder
or under any of the other Loan Documents on any amounts due to Bank but interest
shall continue to accrue on such amounts at the Default Rate (as hereinafter
defined).

     (c) Borrower hereby waives presentment, demand, notice of nonpayment,
protest, notice of protest or other notice of dishonor, and any and all other
notices in connection with any default in the payment of, or any enforcement of
the payment of, all amounts due under the Loan Documents. To the extent
permitted by law, Borrower waives the right to any stay of execution and the
benefit of all exemption laws now or hereafter in effect. Borrower further
waives and releases all material procedural errors, defects and imperfections in
any proceedings instituted by Bank under the terms of any Loan Document or with
respect to any Collateral.

     (d) Borrower agrees that Bank may release, compromise, forbear with respect
to, waive,

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suspend, extend or renew any of the terms of the Loan Documents (and Borrower
hereby waives any notice of any of the foregoing), and that Bank may resort to
any Collateral in such order and manner as it may think fit, or accept the
assignment, substitution, exchange, pledge, or release of all or any portion of
any Collateral, for such consideration, or none, as it may require, without in
any way affecting the validity of any liens over or other security interest in
the remainder of any such Collateral (or the priority thereof or the position of
any subordinate holder of any lien or other security interest with respect
thereto); and any action taken by Bank pursuant to the foregoing shall in no way
be construed as a waiver or release of any right or remedy of Bank, or of any
Event of Default, or of any liability or obligation of Borrower, under any of
the Loan Documents.

     10. DEFAULT RATE. Following the occurrence of an Event of Default hereunder
and continuing until the Principal Balance then outstanding hereunder and all
other sums payable under the Loan Documents are paid in full, the Principal
Balance outstanding hereunder shall bear interest at two percent (2%) per annum
in excess of the Prime Interest Rate ("Default Rate") and shall be secured by
the Collateral.

     11. COSTS AND EXPENSES. Following the occurrence of any Event of Default,
Borrower shall pay upon demand all reasonable costs and expenses (including all
reasonable amounts paid to attorneys, accountants and other advisors employed by
Bank), incurred by Bank in the exercise of any of its rights, remedies or powers
under any of the Loan Documents or with respect to any Collateral with respect
to such Event of Default, and any amount thereof not paid promptly following
demand therefor shall be added to the Principal Balance hereunder and shall bear
interest at the Default Rate from the date of such demand until paid in full,
and shall be secured by the Collateral. In connection with and as part of the
foregoing, in the event that any

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of the Loan Documents is placed in the hands of an attorney for the collection
of any sum payable thereunder, Borrower agrees to pay reasonable attorneys' fees
for the collection of the amount being claimed under the Loan Document, as well
as all costs, disbursements and allowances provided by law, the payment of which
sums shall be secured by the Collateral. Nothing in this paragraph 11 shall
limit the obligation of Borrower to pay any and all costs and expenses for which
Borrower is otherwise liable under any of the Loan Documents.

     12. INCREASED COSTS, TAXES, ETC. Borrower shall pay to Bank from time to
time such amounts as Bank may determine to be necessary to compensate Bank for
any costs incurred by Bank which Bank determines are attributable to its making
or maintaining the Term Loan hereunder or its obligation to make any such Term
Loan hereunder, or any reduction in any amount receivable by Bank under this
Note in respect of the Term Loan or such obligation (such increases in costs and
reductions in amounts receivable being herein called "Additional Costs"),
resulting from any change after the date of the Term Note in U.S. federal,
state, municipal, or foreign laws or regulations (including Regulation D), or
the adoption or making after such date of any interpretations, directives, or
requirements applying to a class of banks including Bank of or under any U.S.,
federal, state, municipal, or any foreign laws or regulations (whether or not
having the force of law) by any court or governmental or monetary authority
charged with the interpretation or administration thereof ("Regulatory Change"),
which: (1) changes the basis of taxation of any amounts payable to Bank under
this Note in respect of the Term Loan (other than taxes imposed on the overall
net income of Bank); or (2) imposes or modifies any reserve, special deposit,
compulsory loan, or similar requirements relating to any extensions of credit or
other assets of, or any deposits with or other liabilities of, Bank; or (3)
imposes any other condition affecting this Note (or any of such extensions of
credit or liabilities). Bank will notify

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Borrower of any event occurring after the date of this Note which will entitle
Bank to compensation as promptly as practicable after it obtains knowledge
thereof and determines to request such compensation. Determinations by Bank of
the effect of any Regulatory Change on its costs of making or maintaining the
Term Loan or on amounts receivable by it in respect of the Term Loan, and of the
additional amounts required to compensate Bank in respect of any Additional
Costs, shall be conclusive, provided that such determinations are made on a
reasonable basis. Borrower shall pay or reimburse Bank upon demand the amount of
such Additional Costs without credit against any indebtedness by this Note. If
Borrower does not or may not do so, Bank may at its option accelerate the
indebtedness evidenced by this Note to maturity as in the case of default by
Borrower.

     13. SEVERABILITY. In the event that for any reason one or more of the
provisions of this Note or their application to any person or circumstance shall
be held to be invalid, illegal or unenforceable in any respect or to any extent,
such provisions shall nevertheless remain valid, legal and enforceable in all
such other respects and to such extent as may be permissible. In addition, any
such invalidity, illegality or unenforceability shall not affect any other
provisions of this Note, but this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.

     14. SUCCESSORS AND ASSIGNS. This Note inures to the benefit of Bank and
binds Borrower, and their respective successors and assigns, and the words
"Bank" and "Borrower" whenever occurring herein shall be deemed and construed to
include such respective successors and assigns.

     15. NOTICES. All notices required to be given to any of the parties
hereunder shall be in writing and shall be deemed to have been sufficiently
given for all purposes when presented

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personally to such party or sent by certified or registered mail, return receipt
requested, to such party at its address set forth below:

     Borrower:   PEOPLES EDUCATIONAL HOLDINGS, INC.
                 299 MARKET STREET,
                 SADDLE BROOK, NJ 07663

     With a
     copy to:    ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
                 2800 LASALLE PLAZA
                 800 LASALLE AVENUE
                 MINNEAPOLIS, MN 55402

     Bank:       SOVEREIGN BANK
                 1500 MARKET STREET
                 PHILADELPHIA, PA 19102

     With a
     copy to:    LAW OFFICES OF MCGILL & LANOCE
                 6064 RIDGE AVENUE
                 PHILADELPHIA, PENNSYLVANIA 19128
                 ATTENTION: FRANCIS E. MCGILL, III, ESQUIRE

Such notice shall be deemed to be given when received if delivered personally,
or two (2) days after the date mailed if sent by certified or registered mail,
return receipt requested. Any notice of any change in such address shall also be
given in the manner set forth above. Whenever the giving of notice is required,
the giving of such notice may be waived in writing by the party entitled to
receive such notice.

     16. DEFINITIONS ;NUMBER AND GENDER. In the event Borrower consists of more
than one person or entity, the obligations and liabilities hereunder of each of
such persons and entities shall be joint and several and the word "Borrower"
shall mean all or some or any of them. For purposes of this Note, the singular
shall be deemed to include the plural and the neuter

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shall be deemed to include the masculine and feminine, as the context may
require. The references herein to the Loan Documents or any one of them shall
include any supplements to or any amendments of or restatements of such Loan
Documents or any one of them.

     17. INCORPORATION BY REFERENCE. All of the terms and provisions of the Loan
Documents, to the extent not inconsistent herewith, are hereby incorporated
herein by reference.

     18. CAPTIONS. The captions or headings of the paragraphs shall not affect
the meaning or construction of any of the terms or provisions of this Note.

     19. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.

     20. COMPLETE AGREEMENT. This Note shall only be amended or modified by an
instrument in writing that explicitly states that it amends this Note and is
signed by the party against whom enforcement of the amendment is sought.

     21. CONSENT TO JURISDICTION AND VENUE; CONSENT TO SERVICE OF PROCESS;
WAIVER OF JURY TRIAL. BORROWER WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION
OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE OR ANY
OF THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS RELATED TO ANY OF THE
LOAN DOCUMENTS. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY
BORROWER AND BORROWER ACKNOWLEDGES THAT NEITHER BANK NOR ANY PERSON ACTING ON
BEHALF THEREOF HAS OR HAVE MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS
WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. BORROWER
FURTHER ACKNOWLEDGES THAT BORROWER HAS BEEN REPRESENTED (OR HAS HAD THE

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OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF
THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED BY BORROWER'S OWN FREE WILL,
AND THAT BORROWER HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
BORROWER AGREES THAT THE OBLIGATIONS EVIDENCED BY THIS NOTE ARE EXEMPTED
TRANSACTIONS UNDER THE TRUTH-IN-LENDING ACT, 15 U.S.C. SECTION 1601, ET SEQ.
BORROWER FURTHER ACKNOWLEDGES THAT BORROWER HAS READ AND UNDERSTANDS THE MEANING
OF THIS WAIVER PROVISION. BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY
FEDERAL OR STATE COURT AS BANK MAY SELECT, FOR ANY PROCEEDING IN CONNECTION
HEREWITH. BORROWER AND HEREBY WAIVES OBJECTIONS AS TO VENUE AND CONVENIENCE OF
FORUM IF VENUE IS IN PHILADELPHIA COUNTY, PENNSYLVANIA OR THE COUNTY OF BERGEN,
NEW JERSEY OR IN ANY FEDERAL DISTRICT COURT IN PENNSYLVANIA, DELAWARE OR NEW
JERSEY. THE FOREGOING SHALL BE DEEMED INDEPENDENT COVENANTS.

          IN WITNESS WHEREOF, Borrower has executed this Promissory Note the day
and year first above written.

WITNESS:                                PEOPLES EDUCATIONAL HOLDINGS, INC.

                                        BY: /S/ BRIAN T. BECKWITH
-------------------------------------       ------------------------------------
                                            BRIAN T. BECKWITH
                                            PRESIDENT AND CHIEF EXECUTIVE
                                            OFFICER

                                       18<PAGE>

Exhibit 10.4

                               SECURITY AGREEMENT

     This SECURITY AGREEMENT is entered into as of FEBRUARY 15, 2007 by and
between PEOPLES EDUCATIONAL HOLDINGS, INC. AND PEOPLES EDUCATION, INC.
(collectively the "Debtor") and SOVEREIGN BANK ("the Secured Party").

                                    SECTION 1

                                   DEFINITIONS

SECTION 1.1 SPECIFIC DEFINITIONS. The following definitions shall apply:

     (a) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (b) "Account Debtors" means Debtor's customers and all other persons who
are obligated or indebted to Debtor in any manner, whether directly or
indirectly, primarily or secondarily, contingently or otherwise, with respect to
Accounts or General Intangibles.

     (c) "Accounts" means all Accounts, contract rights, instruments, documents,
chattel paper, and obligations in any form owing to Debtor arising out of the
sale or lease of goods or the rendition of services by Debtor whether or not
earned by performance; all credit insurance, guaranties, letters of credit,
advices of credit, and other security for any of the above; all merchandise
returned to or reclaimed by Debtor; and Debtor's Books relating to any of the
foregoing.

     (d) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (e) "Collateral" has the meaning given in section 2.1.

     (f) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (g) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (h) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (i) "Debtor's Books" means all of Debtor's books and records including, but
not limited to: minute books; ledgers; customer lists; records indicating,
summarizing, or evidencing Debtor's assets, liabilities, and the Accounts; all
information relating to Debtor's business operations or financial condition; and
all computer programs, disk or tape files, printouts, runs, and other
computer-prepared information and the equipment containing such information.

     (j) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

                                        1

<PAGE>

     (k) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (l) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (m) "Environmental Protection Statute" shall mean any federal or state law,
statute, rule, ordinance, judgment, order, decree, permit, license, regulation,
or other governmental restrictions or requirements enacted in connection with or
relating to the protection or regulation of the environment, health, or any
Hazardous Substance or Hazardous Waste.

     (n) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (o) "Equipment" means all equipment, fixtures, machinery, machine tools,
office equipment, furniture, furnishings, motors, motor vehicles, tools, dies,
parts, jigs, goods, all attachments, accessories, accessions, parts,
replacements, substitutions, additions, and improvements thereto, and all
supplies used or to be used in connection therewith, including, without
limitation, each of the items of equipment set forth on any schedule of
Equipment that is either now or in the future delivered by Debtor to Secured
Party and incorporated herein by reference.

     (p) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all references to sections thereof shall include such sections and
any predecessor provisions thereto, including any rules or regulations issued in
connection therewith.

     (q) "ERISA Affiliate" means each trade or business (whether or not
incorporated) that, together with Debtor, would be treated as a single employer
under Section 4001(b) (1) of ERISA or Section 414(b) or 414(c) of the IRC.

     (r) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (s) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (t) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (u) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (v) "General Intangibles" means all general intangibles, choses in action,
causes of action, and all other personal property of every kind and nature
(other than goods and Accounts), including, without limitation, patents,
trademarks, trade names, service marks, copyrights, copyright rights now owned
or hereafter acquired and all applications, registrations, licenses and
recievibles for any of the above and/or like protections in each work of
authorship and directive work thereof, whether published or unpublished; and
goodwill, trade secrets, licenses, franchises, rights under agreements, deposit
accounts, tax refunds, tax refund claims, moneys due from pension funds, and
Debtor's Books relating to any of the foregoing.

     (w) "Hazardous Substance" means (a) any "hazardous substance" as such term
is presently defined in section 101(4) of CERCLA (42 USC Section 9601(14)); (b)
any additional substances under any applicable laws relating to the real
property owned or occupied by Debtor.

                                        2

<PAGE>

     (x) "Hazardous Waste" has the meaning assigned to that term in 42 USC
Section 6903(5) and 40 CFR Section 261.3.

     (y) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (z) "Inventory" means any and all goods, supplies, wares, merchandise, and
other tangible personal property, including raw materials, work in process,
supplies and components, and finished goods, whether held for sale or lease or
to be furnished under any contract for service or so leased or furnished, and
also including products of and accessions to inventory, packing and shipping
materials, and all documents of title, whether negotiable or nonnegotiable,
representing any of the foregoing.

     (aa) "IRC" means the Internal Revenue code of 1986, as amended, and all
references to sections thereof shall include such sections and any successor
provisions thereto.

     (bb) "Lien" means any security interest, mortgage, pledge, assignment,
lien, or other encumbrance of any kind, including any interest of a vendor under
a conditional sale contract or consignment and any interest of a lessor under a
capital lease.

     (cc) "Loan Agreement" means the loan agreement of even date herewith
between Secured Party and PEOPLES EDUCATIONAL HOLDINGS, INC.

     (dd) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (ee) "Multiemployer Plan" means a plan described in Section 3(37) or
4001(a) (3) of ERISA or Section 414 of the IRC, which covers employees of Debtor
or any ERISA Affiliate.

     (ff) "Negotiable Collateral" has the meaning set forth in Section 8.3.

     (gg) "Notes" mean the two promissory notes of PEOPLES EDUCATIONAL HOLDINGS,
INC. payable to the order of Secured Party of even date herewith in the
principal amounts of $10,000,000.00 and $10,000,000.00, respectively. Each
promissory note shall be individually known as a "Note."

     (hh) "Obligation(s)" means (i) the due and punctual payment of all amounts
due or to become due under the Notes; (ii) the performance of all obligations of
Debtor under this Agreement and the Loan Agreement between Debtor and Secured
Party dated of even date herewith, and under all other Security Documents; (iii)
all extensions, renewals, modifications, amendments, and refinancings of any of
the foregoing; (iv) all Secured Party Expenses; and (v) all loans, advances,
indebtedness, and other obligations owed by Debtor to Secured Party of every
description whether now existing or hereafter arising (including those owed by
Debtor to others and acquired by Secured Party by purchase, assignment, or
otherwise) and whether direct or indirect, primary or as guarantor or surety,
absolute or contingent, liquidated or unliquidated, matured or unmatured,
whether or not Secured by additional Collateral, and including, without
limitation, obligations to perform or forbear from performing acts, all
overdrafts on Accounts maintained with Secured Party, and all amounts
represented by letters of credit now or hereafter issued by Secured Party for
the benefit of or at the request of Debtor.

                                        3

<PAGE>

     (ii) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (jj) "PBGC" means the Pension Benefit Guaranty Corporation.

     (kk) "Permitted Liens" means

          (i) Liens for property taxes and assessments or governmental charges
or levies and Liens securing claims or demands of mechanics and materialmen,
provided that payment thereof is not yet due or is being contested as permitted
in this Agreement;

          (ii) Liens incurred after the date hereof resulting from any judgment
or award, the time for the appeal or petition for rehearing of which has not
expired, or in respect of which Debtor is in good faith prosecuting an appeal or
proceeding for a review and in respect of which a stay of execution pending such
appeal or proceeding for review has been Secured;

          (iii) Liens and priority claims incidental to the conduct of business
or the ownership of properties and assets (including warehouse's and attorney's
Liens and statutory landlord's Liens); deposits, pledges, or Liens to secure the
performance of bids, tenders, or trade contracts, or to secure statutory
obligations; and surety or appeal bonds or other Liens of like general nature
incurred in the ordinary course of business and not in connection with the
borrowing of money; provided that in each case the obligation Secured is not
overdue or, if overdue, is being contested in good faith by appropriate actions
or proceedings; and further provided that any such warehouse's or statutory
landlord's Liens have been subordinated to the Liens of Secured Party in a
manner satisfactory to Secured Party;

          (iv) Liens existing on the date of this Security Agreement that secure
indebtedness outstanding on such date and that are disclosed on Exhibit 1.1
hereto;

          (v) Liens incurred after the date hereof given to secure the payment
of the purchase price incurred in connection with the acquisition of Equipment
useful and intended to be used in carrying on the business of Debtor, including
Liens existing on such Equipment at the time of acquisition thereof; provided
that (a) the Lien shall attach solely to the Equipment acquired or purchased and
(b) at the time of acquisition of such Equipment, the amount of indebtedness
Secured by Liens on such Equipment shall not exceed an aggregate amount equal to
$150,000.00.

          (vi) Liens incurred or arising in connection with existing or future
capital leases entered into by Debtor; provided that the amount of indebtedness
Secured by Liens on such capital leases shall not exceed an aggregate amount
equal to $150,000.00 PER YEAR.

     (ll) "Plan" means any plan (other than a Multiemployer Plan) described in
section 3(2) of ERISA maintained for employees of Debtor of any ERISA Affiliate
(and any such plan no longer maintained by Debtor or any ERISA Affiliate to
which Debtor or any ERISA Affiliate has made or was required to make any
contributions within any of the preceding five (5) years).

                                        4

<PAGE>

     (mm) "Proceeds" means all proceeds and products of Collateral and all
additions and accessions to, replacements of, insurance or condemnation proceeds
of, and documents covering Collateral; all property received wholly or partly in
trade or exchange for Collateral; all claims against third parties arising out
of damage, destruction, or decrease in value of the Collateral; and all rents,
revenues, issues, profits, and proceeds arising from the sale, lease, license,
encumbrance, collection, or any other temporary or permanent disposition of the
Collateral or any interest therein.

     (nn) "Prohibited Transaction" means any transaction described in section
406 of ERISA or the transitional rules set forth in section 414(c) of ERISA, and
any transaction described in Section 4975(c) of the IRC that is not exempt by
reason of Section 4975(c)(2) of the IRC or the transitional rules of section
2003(c) of ERISA.

     (oo) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (pp) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (qq) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (rr) "Reportable Event" means a reportable event described in Section 4043
of ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section 4068(f)
of ERISA.

     (ss) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (tt) "Secured Party Expenses" means: (i) all costs or expenses (including,
without limitation, taxes and insurance premiums) required to be paid by Debtor
under this Agreement or under any of the other Security Documents that are paid
or advanced by Secured Party; (ii) filing, recording, publication, and search
fees paid or incurred by Secured Party in connection with Secured Party's
transactions with Debtor; (iii) costs and expenses incurred by Secured Party to
correct any default or enforce any provision of the Security Documents or in
gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, and preparing for sale and/or advertising to sell the Collateral,
whether or not a sale is consummated; (iv) costs and expenses of suit incurred
by Secured Party in enforcing or defending the Security Documents or any portion
thereof; and (v) Secured Party's reasonable attorney fees and expenses incurred
(after execution of this Agreement) in advising Secured Party with respect to,
or in structuring, drafting, reviewing, negotiating, amending, terminating,
enforcing, defending, or otherwise concerning, the Security Documents or any
portion thereof, irrespective of whether suit is brought.

     (uu) "Security Document" means this Agreement and any other agreement or
instrument entered into between Debtor and Secured Party or executed by Debtor
and delivered to Secured Party in connection with this Agreement, including,
without limitation, the Loan Agreement between Debtor and Secured Party of even
date herewith, and the Notes.

     (vv) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (ww) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (xx) "Unmatured Default" means an event that, with the passage of time or
giving of notice, or both, would be an Event of Default.

                                        5

<PAGE>

SECTION 1.2. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND UNIFORM COMMERCIAL
CODE.

     All financial terms used in this Agreement, other than those defined in
this Section, have the meanings accorded to them generally accepted accounting
principles. All other terms used in this Agreement, other than those defined in
this Section, have the meanings accorded to them in the Uniform Commercial Code.

SECTION 1.3. CONSTRUCTION

     (a) Unless the context of this Agreement clearly requires otherwise, the
plural includes the singular, the singular includes the plural, the part
includes the whole, "including" is not limiting, and "or" has the inclusive
meaning of the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and other similar terms in this Agreement refer to this Agreement
as a whole and not exclusively to any particular provision of this Agreement.

     (b) Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Secured Party or Debtor, whether under any rule of
construction or otherwise. On the contrary, this Agreement has been reviewed by
each of the parties and its counsel and shall be construed and interpreted
according to the ordinary meaning of the words used as to accomplish the purpose
and intentions of all parties hereto fairly.

     (c) In the event of any direct conflict between the express terms and
provisions of this Agreement and of the Loan Agreement, the terms and provisions
of the Loan Agreement shall control.

                                    Section 2

                                SECURITY INTEREST

SECTION 2.1. GRANT OF SECURITY INTEREST. In order to secure prompt payment and
performance of all Obligations, Debtor hereby grants to Secured Party a
continuing first-priority pledge and security interest in the following property
of Debtor (the "Collateral"), whether now owned or existing or hereafter
acquired or arising and regardless of where located, SUBJECT ONLY TO Permitted
Liens. This security interest in the Collateral shall attach to all Collateral
without further act on the part of Secured Party or Debtor.

     The Collateral shall consist of the following:

     (a) All Accounts;

     (b) All Inventory and including all raw materials and work in process to be
processed into such inventory, together with all products of and accessions to
such inventory, packing and shipping materials relating thereto, and all
negotiable and nonnegotiable documents of title representing any of the
foregoing;

     (c) All Equipment;

     (d) All General Intangibles;

     (e) All Proceeds;

                                        6

<PAGE>

     (f) All notes, drafts, instruments, documents, securities, money, letters
of credit, advices of credit, or other property owned by Debtor or in which
Debtor has an interest that now or hereafter are at any time in the possession
or control of Secured Party or in transmit by mail or carrier to or in the
possession of any third Party acting on behalf of Secured Party, without regard
to whether Secured Party received the same in pledge, for safekeeping, as agent
for collection or transmission or otherwise, or whether Secured Party had
conditionally released the same, and all deposits accounts of Debtor, including
all demand, time savings, passbooks, or other passbook accounts.

                                    SECTION 3

                            SPECIFIC REPRESENTATIONS

SECTION 3.1.NAMES OF DEBTOR. The exact corporate name of Debtor is PEOPLES
EDUCATIONAL HOLDINGS, INC. AND PEOPLES EDUCATION, INC. ("COLLECTIVELY DEBTOR").
Debtor is incorporated under the laws of the State of DELAWARE.

SECTION 3.2. MERGERS AND CONSOLIDATIONS. Except as disclosed on Exhibit 3.2,
within the past five (5) years, no entity has merged into Debtor or been
consolidated with Debtor, and the business of Debtor has not ever been conducted
as a partnership or proprietorship.

SECTION 3.3. PURCHASE OF ASSETS. Except as disclosed on Exhibit 3.3, within the
past five (5) years, no entity has sold substantially all of its assets to
Debtor or sold assets to Debtor outside the ordinary course of such seller's
business at any time in the past.

SECTION 3.4. CHANGE OF NAME OR IDENTITY. So long as any of the Obligations
remain unpaid or unsatisfied, Debtor shall not change its name, business
structure, or identify or use any new trade name or merge into or consolidate
with any other entity.

                                    SECTION 4

                         PROVISIONS CONCERNING ACCOUNTS

SECTION 4.1. OFFICE AND RECORDS OF DEBTOR. Debtor's chief executive office is
located at: 299 MARKET STREET, SADDLE BROOK, NJ 07663. Debtor maintains all of
Debtor's Books with respect to its Accounts at that address. Debtor has not at
any time within the past four (4) months maintained its chief executive office
or Debtor Books with respect to its Accounts at any other location and shall not
do so hereafter except with prior written notice to Secured Party.

SECTION 4.2. REPRESENTATIONS. Debtor represents and warrants that each Account
at the time of its assignment to Secured Party (a) will be owned solely by
Debtor; (b) will be for a liquidated amount maturing as stated in Debtor's
Books; (c) will be a bona fide existing obligation created by the final sale and
delivery of goods or the rendition of services to Account Debtors by Debtor in
the ordinary course of its business; and (d) will not be subject to any known
deduction, offset, counterclaim, return privilege, or other condition, except as
reflected on Debtor's Books. Debtor shall not redate any invoices or reissue new
invoices in full or partial satisfaction of old invoices. Debtor shall have
received no notice of actual or imminent bankruptcy or insolvency of any Account
Debtor at the time the Account from such Account Debtor is created; and, in
accordance with prudent credit policies, the Account Debtor will be able timely
to discharge all of its indebtedness to Debtor. Allowances, if any, as between
Debtor and its customers will be on the

                                        7

<PAGE>

same basis and in accordance with the usual customary practices of Debtor as
they exist on the date of this Agreement.

SECTION 4.3. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 4.4. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 4.5. SCHEDULES OF ACCOUNTS; AGING REPORTS. From time to time (but not
more than once a quarter), Debtor shall provide Secured Party with schedules
describing all Accounts created or acquired by Debtor. Together with each
schedule, Debtor shall, if requested by Secured Party, furnish Secured Party
with copies of Debtor's sales journals or invoices, customer purchase orders or
the equivalent, and original shipping or delivery receipts for all goods sold,
and Debtor warrants the genuineness thereof. Debtor shall, from time to time
hereafter but not less often than quarterly, execute and deliver to Secured
Party no later than the tenth day of each quarter during the term of this
Agreement a detailed aging of Accounts by total, a summary aging of Accounts by
customer, and a reconciliation statement.

     Should a nonmonetary Event of Default occur, then Debtor shall deliver to
Secured Party, as Secured Party may from time to time request during the
continuation of the default, original delivery receipts, customer purchase
orders, shipping instructions, bills of lading, and other documentation
respecting shipment arrangements. Absent such a request by Secured Party, copies
of all such documentation shall be held by Debtor as custodian for Secured
Party.

     Should a monetary Event of Default occur, then, until all Obligations have
been satisfied and loans paid in full, Debtor shall deliver to Secured Party, as
Secured Party may from time to time request, original delivery receipts,
customer purchase orders, shipping instructions, bills of lading, and other
documentation respecting shipment arrangements. Absent such a request by Secured
Party, copies of all such documentation shall be held by Debtor as custodian for
Secured Party.

SECTION 4.6. SECURED PARTY'S RIGHTS. Should a monetary Event of Default occur,
then, until such Event of Default has been cured or waived, any officer,
employee, or agent of Secured Party shall have the right, at any time or times
hereafter, in the name of Secured Party or its nominee (including Debtor), to
verify the validity, amount, or any other matter relating to any Accounts by
mail, telephone, or otherwise; and all reasonable costs thereof shall be payable
to Secured Party. Secured Party or its designee may at any time, after the
occurrence of a monetary Event of Default by Debtor hereunder, notify customers
or Account Debtors that Accounts have been assigned to Secured Party or of
Secured Party's security interest therein and, after the occurrence of a
monetary Event of Default by Debtor hereunder, collect the same directly and
charge all collection costs and expenses to Debtor's Account.

     During the continuation of a nonmonetary Event of Default, hereunder then
any officer, employee, or agent of Secured Party shall have the right, at any
time or times during the continuation thereof, in the name of Secured Party or
its nominee (including Debtor), to verify the validity, amount, or any other
matter relating to any Accounts by mail, telephone, or otherwise; and all
reasonable costs thereof shall be payable to Secured Party. Secured Party or

                                        8

<PAGE>

its designee may at any time, during the continuation of a nonmonetary Event
of Default hereunder, notify customers or Account Debtors that Accounts have
been assigned to Secured Party or of Secured Party's security interest therein
and, during the continuation of a nonmonetary Event of Default hereunder,
collect the same directly and charge all collection costs and expenses to
Debtor's Account.

SECTION 4.7. DISCLAIMER OF LIABILITY. Secured Party shall not be liable to
Debtor or any third person for the correctness, validity, or genuineness of any
instruments or documents released or endorsed to Debtor by Secured Party (which
shall automatically be deemed to be without recourse to Secured Party in any
event) or for the existence, character, quantity, quality, condition, value, or
delivery of any goods purporting to be represented by any such documents; and
Secured Party, by accepting a Lien on the Collateral to Debtor, shall not be
deemed to have assumed any obligation or liability to any supplier or creditor
of Debtor or to any other third Party. Debtor agrees to indemnify and defend
Secured Party and hold it harmless in respect to any claim or proceeding arising
out of any matter referred to in section 4.7.

SECTION 4.8. POSTDEFAULT RIGHTS. Upon the occurrence Event of Default by Debtor
and during the continuation thereof, no discount, credit, or allowance shall be
granted by Debtor to any Account Debtor and no return of merchandise shall be
accepted by Debtor without Secured Party's consent. Secured Party may, after
default by Debtor and during the continuation thereof, settle or adjust disputes
and claims directly with Account Debtors for amounts and upon terms that Secured
Party considers advisable, and in such cases, Secured Party will credit Debtor's
account with only the net amounts received by Secured Party in payment of such
disputed Accounts, after deducting all Secured Party Expenses incurred in
connection therewith.

SECTION 4.9. ACCOUNTS OWED BY FEDERAL GOVERNMENT. If any Accounts shall arise
out of a contract with the United States of America or any department, agency,
subdivision, or instrumentality thereof, Debtor shall promptly notify Secured
Party thereof in writing and take all other action requested by Secured Party to
protect Secured Party's Lien on such Account under the provisions of the federal
laws on assignment of claims.

SECTION 4.10. NEW JERSEY AND MINNESOTA ACCOUNTS. If any Account Debtor is
located in New Jersey or in Minnesota, Debtor has filed and shall file all
legally required Notice of Business Activities Reports with the New Jersey
Division of Taxation or the Minnesota Department of Revenue, respectively.

SECTION 4.11. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

                                    SECTION 5

                    PROVISIONS CONCERNING GENERAL INTANGIBLES

SECTION 5.1. TITLE TO GENERAL INTANGIBLES. Debtor represents and warrants that
all of the General Intangibles assigned to Secured Party or in which Debtor
grants Secured Party a Lien are owned solely by Debtor.

SECTION 5.2. INTELLECTUAL PROPERTY.

     (A) A true and complete schedule setting forth all patents, federal and/or
state trademarks, service marks, trade name or brand name registrations and
copyright registrations, and all

                                        9

<PAGE>

pending applications and applications to be filed herefor, owned or controlled
by Debtor or licensed to Debtor, together with a summary description and full
information in respect of the filing, registration, or issuance thereof, and
expiration dates, is contained in Exhibit 5.2 hereto. No licenses, sublicenses,
covenants, or agreements have been entered into by Debtor in respect of any of
such items, and each such item is in full force and effect, free and clear of
all Liens and encumbrances of every nature, is not currently being challenged in
any way, and is not involved in any pending (or, to the knowledge of Debtor,
threatened) interference proceeding.

     (B) THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (C) Concurrently with its execution and delivery of this Agreement, Debtor
shall execute and deliver to Secured Party collateral assignments of all
registered patents, trademarks, trade names, copyrights, and applications for
any of them, in a form satisfactory to Secured Party and suitable for recording
in the records of the registering authority.

SECTION 5.3. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 5.4. LEASES.

     (a) Exhibit 5.4 is a true and complete list of all leases of real estate or
personal property to which Debtor is a party. Debtor represents and warrants
that each of the leases, and other agreements listed on Exhibit 5.4 is in full
force and effect; that neither Debtor nor, to Debtor's knowledge, any other
party thereto is in default under or in breach of the terms or condition of any
such lease or other agreement; that there has not occurred any Event of Default
or event that, after the giving of notice or the lapse of time or both, would
constitute a default under or breach of any such lease, contract, or other
agreement.

     (b) Debtor shall not amend, modify, or supplement any lease or agreement
included in the Collateral and listed on Exhibit 5.4 or waive any provision
thereof, without the prior written consent of the Secured Party, other than in
the ordinary cause of business.

     (c) Debtor shall remain liable to perform all of its duties and obligations
under any leases and agreements included in the Collateral to the same extent as
if this Agreement had not been executed; and Lender shall not have any
obligation or liability under such leases and agreements by reason of this
Agreement or otherwise.

                                    SECTION 6

                         PROVISIONS CONCERNING INVENTORY

SECTION 6.1. LOCATIONS. Exhibit 6.1 is a true and correct list showing all
places where Inventory is located (except for Inventory in transit), including,
without limitation, facilities leased and operated by Debtor and locations
neither owned nor leased by Debtor, and showing all such places where Inventory
of Debtor has been located in the past four months. Such list indicates whether
the premises are those of a warehouseman or other party. No Inventory will be
removed from locations set forth in Exhibit 6.1 except for the purpose of sale
in the ordinary course of

                                       10

<PAGE>

Debtor's business. No Inventory will be stored at locations other than those set
forth in Exhibit 6.1 except with the prior written consent of Secured Party (or,
upon thirty (30) days' written notice to Secured Party, to such other locations
as to which all action required to protect and perfect Secured Party's Lien in
such Inventory has been taken). Inventory may be moved from one location set
forth in Exhibit 6.1 to another in the ordinary course of Debtor's business.

SECTION 6.2. MERCHANTABLE INVENTORY. All Inventory consisting of raw materials
and finished goods is now and at all times hereafter shall be of good and
merchantable quality, free from defects.

SECTION 6.3. BOOKS AND RECORDS. Debtor does now keep and hereafter at all times
shall keep correct and accurate records itemizing and describing the kind, type,
quality, and quantity of the Inventory, and its cost therefor; all such records
shall be available upon demand to Secured Party for inspection and copying.

SECTION 6.4. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 6.5. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 6.6. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 6.7. SALES OF INVENTORY. Except during the continuance of an Event of
Default following written notice of cessation from the Bank, Debtor may sell
Inventory in the ordinary course of its business (which does not include a
transfer in full or partial satisfaction of indebtedness or a transfer for less
than fair equivalent value).

SECTION 6.8. WAREHOUSES AND LANDLORDS. Except as disclosed in Exhibit 6.8
attached hereto, Inventory is not now and shall not at any time hereafter be
stored with a bailee, warehouse, or similar Party without Secured Party's prior
written consent. If any Inventory is so stored, Debtor will, concurrent with
storing such Inventory, cause any such bailee, warehouse, or similar Party to
issue and deliver to Secured Party, in a form acceptable to Secured Party,
warehouse receipts in Secured Party's name evidencing the storage of the
Inventory. All such warehouse receipts do and will evidence ownership of the
Inventory stored by the issuers thereof, and the holder thereof is and will
continue to be the owner of good and marketable title of same, free and clear of
any Liens or encumbrances. All such warehouse receipts are and will be genuine,
valid, and enforceable by the holder thereof in accordance with their terms and
all statements thereon are and will be true and accurate in all respects.

SECTION 6.9. WAREHOUSE AGREEMENTS. Debtor shall provide Secured Party with
copies of all agreements between Debtor and any warehouse at which Inventory may
from time to time be kept and shall deliver to Secured Party a landlord's or
warehouseman's waiver satisfactory to Secured Party prior to entering into any
lease for warehouse, storage or business facilities.

SECTION 6.10. BULK PURCHASES. Except as set forth in Exhibit 6.10, Debtor has
not purchased any of the Collateral (a) in a transaction subject to the bulk
transfer laws or (b) in a transaction that was outside the ordinary course of
the seller's business.

                                       11

<PAGE>

SECTION 6.11. CUSTOMER DEPOSITS. When Debtor has received from any customers a
deposit or any full or partial payment for Collateral still in Debtor's
possession and such Collateral is reflected on Debtor's financial statements
delivered to Secured Party, Debtor shall report to Secured Party in writing the
amount of such deposits or payments when Debtor delivers those financial
statements to Secured Party.

SECTION 6.12. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 6.13. COMPLIANCE WITH LAW. Debtor shall comply with all federal, state,
and local laws, regulations, rulings, and orders applicable to Debtor or its
assets or business, in all material respects. Without limiting the generality of
the previous sentence, Debtor shall comply with all requirements of the federal
Fair Labor Standards Act in the conduct of its business and the production of
Inventory. Debtor shall notify Secured Party immediately of any violation by
Debtor of the Fair Labor Standards Act, and a failure of Debtor to so notify
Secured Party shall constitute a continuing representation that all Inventory
then existing has been produced in compliance with the Fair Labor Standards Act.

                                    SECTION 7

                         PROVISIONS CONCERNING EQUIPMENT

SECTION 7.1. LOCATIONS. Debtor warrants and represents that Exhibit 7.1 hereto
is a true and correct list showing the places where any of Debtor's Equipment is
now located or has been located at any time in the past four months. No
Equipment will be moved from its present location set forth in Exhibit 7.1 until
all steps necessary or appropriate to perfect Secured Party's security interest
in the Equipment at such new location and to verify the priority of that
security interest have been taken to the satisfaction of Secured Party.

SECTION 7.2. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 7.3. MAINTENANCE AND REPAIR. Debtor shall keep and maintain the
Equipment in good operating condition and repair and make all necessary repairs
thereto so that the value and operating efficiency thereof shall at all times be
maintained and preserved. Debtor shall immediately notify Secured Party of any
material loss or damage to the Equipment.

SECTION 7.4. FIXTURES. Debtor shall not permit any item of Equipment to become a
fixture to real estate or an accession to other property without the prior
written consent of Secured Party, and the Equipment is now and shall at all
times remain personal property except with Secured Party's prior written
consent. If any of the Collateral is or will be attached to real estate in such
a manner as to become a fixture under applicable state law and if such real
estate is encumbered, Debtor will obtain from the holder of each Lien or
encumbrance a written consent and subordination to the security interest hereby
granted, or a written disclaimer of any interest in the Collateral, in a form
acceptable to Secured Party. Exhibit 7.4 sets forth all locations at which
fixtures of Debtor are located and the name of the owner of record of the real
estate at each location if Debtor is not the owner of record.

SECTION 7.5. EVIDENCE OF OWNERSHIP. If Debtor now or hereafter has any vehicles,
aircraft,

                                       12

<PAGE>

watercraft, or other Equipment for which a certificate of title has been issued,
Debtor shall immediately deliver to Secured Party, properly endorsed, each
certificate of title or application for title or other evidence of ownership for
each such item of Equipment. Debtor shall take all actions necessary to have
Secured Party's Lien properly recorded on each such certificate of title and
take all other steps necessary to perfect Secured Party's Lien in all such
assets now or hereafter owned by Debtor.

SECTION 7.6. TRANSFERS OF EQUIPMENT. Secured Party, at the request of Debtor,
shall release its security interest in any Equipment comprising part of the
Collateral without substitution therefor as long as:

     (a) Prior to the release of Secured Party's security interest, Debtor shall
pay to Secured Party (i) the proceeds from the sale; (ii) the fair market value
of the Equipment; or (iii) an amount equal to the original cost of the Equipment
to Debtor less depreciation calculated on a straight-line basis for the useful
life of the Equipment, whichever amount is greatest;

     (b) The value, marketability, and operating integrity of the remaining
Collateral after such action is not impaired; and

     (c) No Event of Default has occurred and is continuing.

SECTION 7.7. SUBSTITUTION OF EQUIPMENT. Debtor may from time to time substitute
Equipment, provided that (a) the substituted Equipment is not subject to any
Lien, other than a Permitted Lien, and has a fair market value at least equal to
the fair market value of the Equipment for which it is substituted; (b) the
marketability and operating integrity of the Debtor's Equipment after such
substitution is not impaired; and (c) no Event of Default has occurred, any such
substituted Equipment shall become a part of the Collateral, and the Equipment
for which substitution has been made shall become the property of Debtor free
and clear of the security interest of Secured Party.

SECTION 7.8. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 7.9. ADDITIONAL ACQUISITIONS. Debtor shall promptly notify Secured Party
in writing of any of its acquisitions, by Purchase, Lease, or otherwise, or any
after-acquired Equipment, including a description of the Equipment and of its
present locations and (if different) its intended permanent locations.

                                    SECTION 8

                     OTHER PROVISIONS CONCERNING COLLATERAL

SECTION 8.1. TITLE. Debtor has good an marketable title to the Collateral, and
the Liens granted to Secured Party pursuant to the Agreement are fully perfected
first-priority Liens in and to the Collateral, subject only to Permitted Liens,
with priority over the rights of every person in the Collateral other than the
rights of Debtor and any Permitted Liens, and the Collateral is free, clear and
unencumbered by any Liens in favor of any person other than Secured Party,
except for Permitted Liens.

                                       13

<PAGE>

SECTION 8.2. FUTURE ASSURANCES. Debtor shall execute and deliver to Secured
Party, concurrent with Debtor's execution of this Agreement and at any time or
times hereafter at the written request of Secured Party, all financing
statements, continuation financing statements, fixture filings, security
agreements, chattel mortgages, assignments, endorsements of certificates of
title, applications for titles, affidavits, reports, notices, schedules of
Accounts, letters of authority and all other documents Secured Party may
reasonably request, in form satisfactory to Secured Party, to perfect and
maintain perfected Secured Party's Liens in the Collateral and in order to
consummate fully all the transactions contemplated under the Security Documents.
Debtor hereby irrevocably makes, constitutes, and appoints Secured Party (and
any of Secured Party's officers, employees or agents designated by Secured
Party) as Debtor's true and lawful attorney with power to sign the name of
Debtor on any of the above-described documents or on any other similar documents
that need to be executed, recorded, and/or filed in order to perfect or continue
perfected Secured Party's Liens in the Collateral. The appointment of Secured
Party as Debtor's attorney is irrevocable as long as any Obligations are
outstanding. Any person dealing with Secured Party shall be entitled to rely
conclusively on any written or oral statement of Secured Party that this power
of attorney is in effect.

SECTION 8.3. DELIVERY OF POSSESSION. If any Collateral, including proceeds,
consists of a letter of credit, advice of credit, instrument, money,
certificates of deposit, negotiable document, chattel paper, or similar property
(collectivey "Negotiable Collateral"), Debtor shall immediately upon receipt
thereof, endorse and assign such Negotiable Collateral over to Secured Party and
deliver actual physical possession of the Negotiable Collateral to Secured
Party.

SECTION 8.4. CERTIFICATES OF DEPOSIT. Immediately upon execution of this
Agreement, Debtor shall give written notice of Secured Party's Liens to all
persons who have issued certificates of deposit to Debtor and, at the request of
Secured Party, shall obtain the written consent of the issuer to such security
interest and a waiver (or subordination) of any Lien and right of setoff of such
issuer as to such certificate of deposit or the funds represented thereby.

SECTION 8.5. TRANSFER OF COLLATERAL. Debtor shall not sell, lease, license,
transfer or otherwise dispose of any interest in any Collateral except in the
ordinary course of its business; sales of Inventory in full or partial
satisfaction of existing Obligations of Debtor are not considered to be sales in
the ordinary course of business.

SECTION 8.6. ACQUISITION OF ASSETS. Debtor shall promptly notify Secured Party
in writing of its aquisition by purchase, lease, or otherwise of any
after-acquired tangible property or intangible property of the type included in
the Collateral with the exception of purchases in the ordinary course of
Debtor's business. Such notice shall include a description of the acquired
property and of its present locations and (if different) of its intended
permanent locations.

SECTION 8.7. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 8.8. SECURED PARTY'S DUTY OF CARE. Secured Party shall have no duty of
care with respect to the Collateral except that Secured Party shall exercise
reasonable care with respect to the Collateral in Secured Party's custody.
Secured Party shall be deemed to have exercised

                                       14

<PAGE>

reasonable care if such property is accorded treatment substantially equal to
that which Secured Party accords its own property or if Secured Party takes
action with respect to the Collateral as the Borrower shall request or agree to
in writing, provided that no failure to comply with such request nor any
omission to do any such act requested by the Borrower shall be deemed a failure
to exercise reasonable care. Secured Party's failure to take steps to preserve
rights against any parties or property shall not be deemed to be failure to
exercise reasonable care with respect to the Collateral in Secured Party's
custody. All risk of loss, damage, or destruction of the Collateral shall be
borne by Debtor.

SECTION 8.9. DEBTOR'S CONTRACTS. Debtor shall remain liable to perform its
Obligations under any contracts and agreements included in the Collateral to the
same extent as though this Agreement had not been entered into, and Secured
Party shall not have any obligation or liability under such contracts and
agreements by reason of this Agreement or otherwise.

SECTION 8.10. REINSTATEMENT OF LIENS. If, at any time after payment in full by
Debtor of all Obligations and termination of Secured Party's Liens, any payments
on Obligations previously made by Debtor or any other person must be disgorged
by Secured Party for any reason whatsoever (including, without limitation, the
insolvency, bankruptcy, or reorganization of Debtor or such other person), this
Agreement and Security Party's Liens granted hereunder shall be reinstated as to
all disgorged payments as though such payments had not been made, and Debtor
shall sign and deliver to Secured Party all documents and things necessary to
reperfect all terminated Liens.

SECURED 8.11. SECURED PARTY EXPENSES. If Debtor fails to pay any moneys (whether
taxes, assessments, insurance premiums, or otherwise) due to third persons or
entities, fails to make any deposits or furnish any required proof of payment of
deposit, or fails to discharge any Lien prohibited hereby, all as required under
the terms of this Agreement, then Secured Party may, to the extent that it
determines that such failure by Debtor could have a material adverse effect on
Secured Party's interests in the Collateral, in its discretion and without prior
notice to Debtor, make payment of the same or any part thereof. Any amounts paid
or deposited by Secured Party shall constitute Secured Party Expenses, shall
become part of the Obligations, shall bear interest at the rate then in effect
under the Note chosen by Secured Party, and shall be Secured by the Collateral.
Any payments made by Secured Party shall not constitute (a) an agreement by
Secured Party to make similar payments in the future or (b) a waiver by Secured
Party of any Event of Default under this Agreement. Secured Party need not
inquire as to, or contest the validity of, any such expense, tax, security
interest, encumbrance, or Lien, and the receipt of the usual official notice for
the payment of moneys to a government entity shall be conclusive evidence that
the same was validly due and owing.

Debtor shall immediately and without demand reimburse Secured Party for all sums
expended by Secured Party that constitute Secured Party Expenses, and Debtor
hereby authorizes and approves all advances and payments by Secured Party for
items constituting Secured Party Expenses.

SECTION 8.12. INSPECTION OF COLLATERAL AND RECORDS. Should an Event of Default
occur and be

                                       15

<PAGE>

continuing, then, during Debtor's usual business hours, Secured Party may
inspect and examine the Collateral and check and test the same as to quality,
quantity, value, and condition (and Debtor agrees to reimburse Secured Party for
its reasonable costs and expenses in so doing). Secured Party shall also have
the right at any time or times hereafter, during Debtor's usual business hours,
and without unreasonable interference with Debtor's business operations, or
during the usual business hours of any third Party having control over the
records of Debtor, to inspect and verify Debtor's Books in order to verify the
amount or condition of, or any other matter relating to, the Collateral and
Debtor's financial condition and to copy and make extracts therefrom, Debtor
waives the right to assert a confidential relationship, if any, it may have with
any accounting firm and/or service bureau in connection with any information
requested by Secured Party pursuant to this Agreement and agrees that Secured
Party may directly contact any such accounting firm and/or service bureau in
order to obtain such information.

SECTION 8.13. DEPOSIT ACCOUNTS. In order to perfect Secured Creditor's security
interest in Debtor's deposit accounts maintained at any financial institutions
at which Debtor maintains deposit accounts now or in the future. Debtor agrees
to execute a form of notification to such financial institutions(s) in order to
notify them of Secured Creditor's Lien in such deposit accounts.

SECTION 8.14. WAIVERS. Debtor waives demand, protest, notice of protest, notice
of default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, Accounts, documents, instruments, chattel paper and
guaranties at any time held by Secured Party on which Debtor may in any way be
liable.

SECTION 8.15. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

                                    Section 9

                          REPRESENTATION AND WARRANTIES

                  [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

                                   Section 10

                                    COVENANTS

SECTION 10.1. LEASE OR ENCUMBRANCE OF ASSETS. Debtor shall not lease any assets
as lessee and shall not create, incur, assume or permit to exist any Lien on any
asset not owned or hereafter acquired by Debtor, except for Liens to Secured
Party and Permitted Liens.

SECTION 10.2. BUSINESS. Debtor shall engage primarily in business of the same
general character and shall not make any investment in any other entity through
the direct or indirect holding of securities or otherwise.

SECTION 10.3. CONDITION AND REPAIR. Debtor shall maintain in good repair and
working order all properties used in its business and from time to time shall
make all appropriate repairs and replacements thereof.

                                       16

<PAGE>

SECTION 10.4 INSURANCE. Debtor, at its expense, shall keep and maintain the
Inventory and Equipment insured against loss or damage by fire, theft,
explosion, sprinklers, and all other hazards and risks ordinarily insured
against by other owners who use such properties in similar businesses for the
full insurable value thereof. Debtor shall also keep and maintain business
interruption, public liability, and property damage insurance relating to
Debtor's ownership and use of the Inventory and Equipment and its other assets.
All such policies of insurance shall be in such form, with such companies, and
in such amounts as may be satisfactory to Secured Party. Debtor shall deliver to
Secured Party certified copies of such policies of insurance and evidence of the
payments of all premiums therefor. All such policies of insurance shall contain
a provision that Secured Party shall be given thirty (30) days prior written
notice of material change or cancellation of said policy and that no such change
or cancellation shall be effective as to Secured Party in the absence of such
notice and shall contain an endorsement in a form satisfactory to Secured Party
showing Secured Party as a loss payee thereof, with full waiver of warranties,
and all proceeds payable thereunder shall be payable to Secured Party and, upon
receipt by Secured Party, shall be applied on account of the Obligations unless
Secured Party consents to allow Debtor, upon Debtor's request, to use the
proceeds to replace the destroyed Collateral and/or repair damaged Collateral.
To secure the payment of the Obligations, Debtor grants Secured Party a security
interest in and to all such policies of the Obligations, Debtor grants Secured
Party a security interest in and to all such policies of insurance (except those
of public liability and property damage) and the proceeds thereof, and Debtor
shall direct all insurers under such policies of insurance to pay all proceeds
thereof directly to Secured Party.

     Debtor hereby irrevocably appoints Secured Party (and any of Secured
Party's officers, employees, or agents designated by Secured Party) as Debtor's
attorney following the occurrence of an Event of Default, for the purpose of
making, settling, and adjusting all claims under such policies of insurance,
endorsing the name of Debtor on any check, draft, instrument, or other item of
payment for the proceeds of such policies of insurance and for making all
determinations and decisions with respect to such policies of insurance. Debtor
will not cancel any of such policies without Secured Party's prior written
consent. Each such insurer shall agree by endorsement upon the policy or
policies of insurance issued by it to Secured Party as required above, or by
independent instruments furnished to Secured Party, that it will give Secured
Party at least thirty (30) days' written notice before any such policy or
policies of insurance will be altered or canceled and that no act or default of
Debtor, or any other person, shall affect the right of Secured Party to recover
under such policy or policies of insurance or to pay any premium in whole or
part relating thereto. If Debtor fails to comply with its covenants contained in
Section 10.4, Secured Party may, but shall have no obligation to, obtain action
with respect to such policies that Secured Party deems prudent. All sums so
disbursed by Secured Party, as well as reasonable attorney fees, court costs,
expenses, and other charges relating thereto, shall constitute Secured Party
Expenses and are payable on demand.

                                       17

<PAGE>

SECTION 10.5. TAXES. Debtor shall pay all taxes, assessment, and other
governmental charges imposed upon it or any of its assets or in respect of any
of its franchises, business, income, or profits before any penalty or interest
accrues thereon, and all claims (including without limitation, claims for labor,
services, materials, and supplies) for sums that have become due and payable and
that by law have or might become a Lien or charge upon any of its assets,
provided that (unless any material item or property would be lost, forfeited, or
materially impaired as result thereof) no such charge or claim need be paid if
it is being contested in good faith by appropriate proceedings promptly
initiated and diligently conducted, if Secured Party is notified in advance of
such contest, and if Debtor establishes any reserve or other appropriate
provision required by generally accepted accounting principles and deposits with
Secured Party cash or an acceptable bond in an amount equal to twice the amount
of such charge or claim. Debtor shall make timely payment or deposit of all FICA
payment and withholding taxes required of it by applicable laws and will, upon
request, furnish Secured Party with proof satisfactory to Secured Party
indicating that Debtor has made such payments or deposits.

SECTION 10.6. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 10.7. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 10.8. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

SECTION 10.9. [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

                                   Section 11

                                EVENTS OF DEFAULT

     Any of the following events shall be an Event of Default:

     (a) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (b) Debtor fails to make any payment of principal, interest, costs and/or
fees or any other payment on any Obligation within five (5) days after said
payment is due and payable, whether at maturity or by acceleration or otherwise;

     (c) Any representation or warranty made herein by Debtor or in any document
furnished to Secured Party by Debtor under this Agreement is incorrect in any
material respect;

     (d) Debtor fails to observe or perform any covenant, condition, or
agreement to be observed or performed pursuant to the terms hereof, provided
such default continues unremedied for thirty (30) days after written notice
thereof from Secured Party;

     (e) Debtor fails to keep its assets insured as required herein, or material
uninsured damage to or loss, theft, or destruction of the Collateral occurs or
fails to deliver to Secured Party

                                       18

<PAGE>

satisfactory evidence of the renewal or replacement of any such policy at least
fifteen (15) days prior to the expiration date or cancellation of such policy;

     (f) A court enters a decree or order for relief of Debtor in an involuntary
case under any applicable bankruptcy, insolvency, or other similar law then in
effect, or appoints a receiver, liquidator, assignee, custodian, trustee, or
sequestrator (or other similar official) of Debtor or for any substantial part
of its property, or order the windup or liquidation of Debtor's affairs; or a
petition initiating an involuntary case under any such bankruptcy, insolvency,
or similar law is filed against Debtor and is pending for ninety (90) days
without dismissal;

     (g) Debtor commences a voluntary case under any applicable bankruptcy,
insolvency, or other similar law then in effect, makes any general assignment
for the benefit or creditors, fails generally to pay its debts as such debts
become due, or takes corporate action in furtherance of any of the foregoing;

     (h) Final judgment for the payment of money in excess of $150,000.00 is
rendered against Debtor and remains undischarged for thirty (30) days during
which execution is not effectively stayed;

     (i) Any one or more of the following occurs with respect to Debtor or any
ERISA Affiliate if such event or events, individually or in the aggregate,
could, in the opinion of Secured Party, have a material adverse effect on the
financial condition of Debtor:

          (i) The occurrence of a Reportable Event with respect to a Plan;

          (ii) The filing of a notice of intent to terminate a Plan under
     Section 4041 of ERISA;

          (iii) The receipt of a notice by the administrator of a Plan that the
     PBGC has instituted proceedings to terminate a Plan or appoint a trustee to
     administer a Plan;

          (iv) The occurrence of any other event or existence of any other
     conditions that might, in the opinion of Secured Party, constitute grounds
     under Section 4042 of ERISA for the termination of, or the appointment of a
     trustee to administer, any Plan;

          (v) The withdrawal by Debtor or any ERISA affiliate from a
     Multiemployer Plan or a Plan described in Section 4063 of ERISA;

          (vi) The cessation of operations at a location in the manner described
     in Section 4068(f) of ERISA;

          (vii) Failure to make full payment when due of all amounts that, under
     the provisions of any Plan or applicable law, Debtor or any ERISA Affiliate
     is required to pay as contribution thereto; or

          (viii) Debtor or any ERISA Affiliate creates an accumulated funding
     deficiency within the meaning of Section 302 of ERISA or Section 412 of the
     IRC with respect to any Plan, irrespective of whether waived;

     (j) Any guarantor revokes or attempts to revoke its guaranty of any of the
Obligations, or dies, or becomes the subject of an insolvency proceeding of the
type described in clauses (f) or (g) above with respect to Debtor;

     (k) Debtor makes any payment on account of indebtedness that has been
subordinate to any

                                       19

<PAGE>

Obligations, other than payments specifically permitted by the terms of such
subordination;

     (l) Any person holding indebtedness that has been subordinated to any
Obligations dies, terminates the subordination arrangement or asserts that it is
terminated, or becomes the subject of an insolvency proceeding of the type
described in (f) or (g) above with respect to Debtor;

     (m) An Event of Default occurs under any Security Document and continues
beyond any applicable notice and cure period;

     (n) Debtor defaults under the terms of any indebtedness or lease involving
total payment obligations of Debtor in excess of $100,000.00 and such default is
not cured within the time period permitted pursuant to the terms and conditions
of such indebtedness or lease, or an event occurs that gives any creditor or
lessor the right to accelerate the maturity of any such indebtedness or lease
payments;

     (o) Demand is made for payment for any indebtedness, in excess of
$100,000.00 that was not originally payable upon demand when incurred but the
terms of which were later changed to provide for payment upon demand;

     (p) Debtor is enjoined, restrained, or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs;

     (q) A judgment or other claim becomes a Lien upon any or all of Debtor's
assets other than a Permitted Lien;

     (r) A notice of Lien, levy, or assessment is filed of record with respect
to any or all of Debtor's assets by the United States Government, or any
department, agency, or instrumentally thereof, or by any state, county,
municipal, or other governmental agency; or any tax or debt owing at any time
hereafter to any one or more of such entities becomes a Lien upon any or all of
the Debtor's Collateral and the same is not paid on the payment date thereof,
except to the extent such tax or debt is being contested by Debtor as permitted
in Section 10.5;

     (s) There is a material impairment of the priority of Secured Party's Liens
on the Collateral;

     (t) A material portion of Debtor's assets are attached, seized, or
subjected to writ or distress warrant, or are levied upon, or come into the
possession of any judicial officer and such seizure or levy is not released
within ten (10) days;

     (u) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (v) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (w) Any patent, trademark, copyright, or other intellectual property right
or process owned by Debtor or licensed to Debtor is declared invalid or is
declared to infringe on the rights of any other person, if such declaration is
nonappealable or prevents the use of such patent, trademark, copyright, or other
intellectual property right or process and if such loss of the use of such
patent, trademark, copyright, or other intellectual property right or process
will have a demonstrable material impact on the consolidated net revenue of
Debtor;

     (x) [THIS SECTION HAS BEEN INTENTIONALLY DELETED];

     (x) [THIS SECTION HAS BEEN INTENTIONALLY DELETED];

     (y) Any representation or warranty made in writing to Secured Party by any
officer of Debtor

                                       20

<PAGE>

in connection with the transaction contemplated in this Agreement is materially
incorrect when made; or

     (aa) Debtor fails to comply with all of the material requirements of any
Environmental Protection Statute to which Debtor, the Collateral, or any of
Debtor's other property is subject.

     (bb) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (cc) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

                                   SECTION 12

                                    REMEDIES

SECTION 12.1 SPECIFIC REMEDIES. Upon the occurrence of any Event of Default and
during the continuation thereof:

     (a) Secured Party may cease advancing money or extending credit to or for
the benefit of Debtor under the Loan Agreement, under any of the other Security
Documents, or under any other agreement between Debtor and Secured Party.

     (b) Secured Party may declare all Obligations to be due and payable
immediately, whereupon they shall immediately become due and payable without
presentment, demand, protest, or notice of any kind, all of which are hereby
expressly waived by Debtor.

     (c) Secured Party may set off against the Obligations all Collateral,
balance, credits, deposits, Accounts, or moneys of Debtor then or thereafter
held with Secured Party, including amounts represented by certificates of
deposit.

     (d) Secured Party may enter any premises of Debtor, with or without
judicial process, and take possession of the Collateral. Secured Party may
remove the Collateral and may remove and/or copy all records pertaining thereto,
and/or Secured Party may remain on such premises and use the premises for the
purpose of collection, preparing, and disposing of the Collateral, without any
liability for rent or occupancy charges. Debtor shall, upon request of Secured
Party, assemble the Collateral and any records pertaining thereto and make them
available at a place designated by Secured Party that is reasonably convenient
to both parties.

     (e) Secured Party may dispose of the Collateral in its then-existing
condition or, at its election, may take such measures as it deems necessary or
advisable to refurbish, repair, improve, process, finish, operate, demonstrate,
and prepare for sale the Collateral and may store, ship, reclaim, recover,
protect, advertise for sale or lease, and insure the Collateral. Secured Party
may use and operate Equipment of Debtor in order to process or finish Inventory
included in the Collateral. If any Collateral consists of documents, Secured
Party may proceed either as to the documents or as to the goods represented
thereby.

     (f) Secured Party may pay, purchase, contest, or compromise any
encumbrance, charge or Lien that, in the opinion of Secured Party, appears to be
prior or superior to its Lien and pay all expenses incurred in connection
therewith.

     (g) [THIS SECTION HAS BEEN INTENTIONALLY DELETED]

     (h) Secured Party may (i) notify Account Debtors to make payment on
Accounts and General Intangible directly to Secured Party; (ii) settle, adjust,
compromise, extend, or renew Accounts or

                                       21

<PAGE>

General Intangibles, either before or after legal proceedings to collect such
Accounts or General Intangibles have commenced; (iii) prepare and file any
bankruptcy proofs of claim or similar documents against any Account Debtor; (iv)
prepare and file any notice, assignment, satisfaction, or release of Lien, UCC
termination statement; or any similar document; (v) sell or assign Accounts and
General Intangibles, individually or in bulk, upon such terms, for such amounts,
and at such time or times as Secured Party deems advisable; and (vi) complete
the performance required of Debtor under any contract or agreement to which
Debtor is a Party and out of which Accounts or General Intangibles arise or may
arise. Secured Party may use and operate Debtor's Equipment for all such
purposes.

     (i) Secured Party may (i) endorse Debtor's name on all checks, notes,
drafts, money orders, or other forms of payment of or security for Accounts or
other Collateral; (ii) sign Debtor's name on drafts drawn on Account Debtors or
issuers of letters of credit; and (iii) notify the postal authorities in
Debtor's name to change the address for delivery of Debtor's mail to an address
designated by Secured Party, receive and open all mail address to Debtor, copy
all mail, retain all mail relating to Collateral, and hold all other mail
available for pickup by Debtor.

     (j) Secured Party may sell the Collateral at public or private sale and is
not required to repossess Collateral before selling it. Any requirement of
reasonable notice of any disposition of the Collateral shall be satisfied if
such notice is sent to Debtor ten (10) days prior to such disposition by any of
the methods provided in Section 13.6 hereof. Debtor shall be credited with net
proceeds of such sale only when they are actually received by Secured Party, and
Debtor shall continue to be liable for any deficiency remaining after the
Collateral is sold or collected.

     (k) Debtor further agrees that if Secured Party shall solicit bids from
three or more dealers in the type of property repossessed by Secured Party
hereunder, any sale by Secured Party of such property in bulk or in parcels to
the bidder submitting the highest cash bid therefor shall also be deemed to be a
commercially reasonable means of disposing of Collateral. Secured Party may
adjourn any public or private sale from time to time to a reasonably specified
time and place by announcement at the time and place of sale previously fixed,
without further notice by publication or otherwise of the time and place of such
adjourned sale, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.

     (l) If the sale is to be a public sale, Secured Party shall also give
notice of the time and place by publishing a notice one time at least ten (10)
calendar days before the date of the sale in a newspaper of general circulation
in the county in which the sale is to be held.

     (m) To the maximum extent permitted by applicable law, Secured Party may be
the purchaser of any or all of the Collateral at any public sale and shall be
entitled, for the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of the Collateral sold at any public sale,
to use and apply all or any part of the Obligations as a credit on account of
the purchase price of any Collateral payable by Secured Party at such sale.

SECTION 12.2. LICENSE. Secured Party is hereby granted a license or other right
to use, without charge, Debtor's patents, copyrights, trade secrets, technical
processes, rights of use of any name,

                                       22

<PAGE>

trade names, trademarks, labels, and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral, and Debtor's rights under all
licenses and all agreements shall inure to Secured Party's benefit.

SECTION 12.3 POWER OF ATTORNEY. Debtor hereby appoints Secured Party(and any of
Secured Party's officers, employees, or agents designated by Secured Party) as
Debtor's attorney, with power after the occurrence and during the continuation
of an Event of Default: (a) to endorse Debtor's name on any checks, notes,
acceptances, money orders, drafts, or other forms of payment or security that
may come into Secured Party's possession; (b) to sign Debtor's name on drafts
against Account Debtors, on schedules and assignments of Accounts, on
verification of Accounts, and on notices to Account Debtors; (c) to notify the
post office authorities to change the address for delivery of Debtor's mail to
an address designated by Secured Party, to receive and open all mail addressed
to Debtor, and to retain all mail relating to the Collateral and forward all
other mail to Debtor; (d) to send requests for verification of Accounts; and (e)
to do all things necessary to carry out this Agreement. The appointment of
Secured Party as Debtor's attorney and each and every one of Secured Party's
rights and powers, being coupled with an interest, are irrevocable as long as
any Obligations are outstanding. Any person dealing with Secured Party shall be
entitled to rely conclusively on any written or oral statement of Secured Party
that this power of attorney is in effect. Secured Party may also use Debtor's
stationery, after the occurrence and during the continuation of an Event of
Default, in connection with exercising its rights and remedies and performing
the Obligations of Debtor.

SECTION 12.4. EXPENSES SECURED. All expenses, including reasonable attorney
fees, incurred by Secured Party in the exercise of its rights and remedies
provided in this Agreement, in any other Security Document, or by law shall be
payable by Debtor, shall be part of the Obligations, and shall be Secured by the
Collateral.

SECTION 12.5. EQUITABLE RELIEF. Debtor recognizes that in the event Debtor fails
to perform, observe, or discharge any of its obligations or liabilities under
this Agreement, no remedy of law will provide adequate relief to Secured Party,
and Debtor agrees that Secured Party shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual Damages.

SECTION 12.6. REMEDIES ARE CUMULATIVE. No remedy set forth herein is exclusive
of any other available remedy or remedies, but each is cumulative and in
addition to every other right or remedy given under this Agreement or under any
other agreement between Secured Party and Debtor or now or hereafter existing at
law or in equity or by statute. Secured Party may pursue its rights and remedies
concurrently or in any sequence, and no exercise of one right or remedy shall be
deemed to be an election. No delay by Secured Party shall constitute a waiver,
or acquiescence by it.

                                       23

<PAGE>

                                   SECTION 13

                            MISCELLANEOUS PROVISIONS

SECTION 13.1. DELAY AND WAIVER. No delay or omission to exercise any right shall
impair any such right or be a waiver thereof, but any such right may be
exercised from time to time and as often as may be deemed expedient. A waiver on
one occasion shall be limited to that particular occasion.

SECTION 13.2. COMPLETE AGREEMENT. This Agreement and the Exhibits are the
complete agreement of the parties hereto and supersede all previous
understandings relating to the subject matter hereof. This Agreement may be
amended only by an instrument in writing that explicitly states that it amends
this Agreement and is signed by the Party against whom enforcement of the
amendment is sought. This Agreement may be executed in counterparts, each of
which will be an original and all of which will constitute a single agreement.

SECTION 13.3. SEVERABILITY;HEADINGS. If any part of this Agreement or the
application thereof to any person or circumstance is held invalid, the remainder
of this Agreement shall not be affected thereby. The section headings herein are
included for convenience only and shall not be deemed to be a part of this
Agreement.

SECTION 13.4. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the respective legal representatives, successors, and assigns of
the parties hereto; however, Debtor may not assign any of its rights or delegate
any of its obligations hereunder. Secured Party (and any subsequent assignee)
may transfer and assign this Agreement and deliver the Collateral to the
assignee, who shall thereupon have all of the rights of Secured Party; and
Secured Party (or such subsequent assignee who in turn assigns as aforesaid)
shall then be relieved and discharged of any responsibility or liability with
respect to this Agreement and said Collateral.

SECTION 13.5. MULTIPLE DEBTORS. If there is more than one Debtor, the following
provisions shall apply:

(a) each Debtor agrees that it is jointly and severally, directly, and primarily
liable to Secured Party for payment in full of the Obligations and that such
liability is independent of the duties. Obligations, and liability of each and
all of the other joint and several Debtors. Secured Party may bring a separate
action or actions on the Obligations against each, any, or all of the Debtors,
whether action is sought against any other or all of such Debtors or any one or
more of the Debtors is or is not joined therein.

                                       24

<PAGE>

(b) Each Debtor agrees that any release that may be given by Secured Party to
any one or more of the Debtors or any guarantor of the Obligations shall not
release any other Debtor from its Obligations hereunder.

(c) Each Debtor hereby waives any right to assert against Bank any defense
(legal or equitable), setoff, counterclaim, or claims that such Debtor
individually may now or any time hereafter have against another Debtor or any
other party liable to Secured Party in any manner or way whatsoever.

(d) Any and all present and future debt and other obligations of any Debtor to
any other Debtor are hereby subordinated to the full payment and performance of
the Obligations; provided, however, such debt and other obligations may be
incurred and repaid, subject to the terms of this agreement, as long as no Event
of Default shall have occurred and not have been waived.

(e) Each Debtor is presently informed as to the financial condition of each of
the other Debtors and of all other circumstances that a diligent inquiry would
reveal and that bear upon the risk of nonpayment of the Obligations. Each Debtor
hereby covenants that it will continue to keep itself informed as to the
financial condition of all other Debtors, the status of all other Debtors, and
all circumstances that bear upon the risk of nonpayment. Absent a written
request from any of the Debtors to Secured Party for information, each Debtor
hereby waives any and all rights it may have to require Secured Party to
disclose to such Debtor any information that Secured Party may now or hereafter
acquire concerning the condition or circumstances of any of the Debtors.

(f) Each Debtor hereby waives all rights to notices of default, existence,
creation, or incurring of new or additional indebtedness and all other notices
of formalities to which such Debtor may, as a joint and several Debtor
hereunder, be entitled.

(g) The term "Debtor" shall mean "the Debtors and each of them individually and
collectively."

SECTION 13.6. NOTICES. Any notices under or pursuant to his Agreement shall be
deemed duly sent when delivered in hand or when mailed by registered or
certified mail, return receipt requested, or when delivered by courier or when
transmitted by telex, telecopy, or similar electronic medium to the following
addresses:

     To Debtor:          PEOPLES EDUCATIONAL HOLDINGS, INC.
                         AND
                         PEOPLES EDUCATION, INC.
                         299 MARKET STREET,
                         SADDLE BROOK, NJ 07663

     With a
     copy to:            ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
                         2800 LASALLE PLAZA
                         800 LASALLE AVENUE
                         MINNEAPOLIS, MN 55402

                                       25

<PAGE>

     To Secured Party:   SOVEREIGN BANK
                         1500 MARKET STREET
                         PHILADELPHIA, PA 19102

     with a
     copy to:            LAW OFFICES OF MCGILL & LANOCE
                         6064 RIDGE AVENUE
                         PHILADELPHIA, PENNSYLVANIA 19128
                         ATTENTION: FRANCIS E. MCGILL, III, ESQUIRE

     Either Party may change such address by sending notice of the change to the
other Party; such change of address shall be effective only upon actual receipt
of the notice by the other Party.

SECTION 13.7. GOVERNING LAW. All acts and transactions hereunder and the rights
and obligations of the parties hereto shall be governed, construed, and
interpreted in accordance with the domestic laws of the Commonwealth of
Pennsylvania.

SECTION 13.8.Waiver of Jury Trial; Consent to Jurisdiction and Venue; Consent to
Service of Process. THE DEBTOR WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION
OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS AGREEMENT OR
ANY OF THE OTHER SECURITY DOCUMENTS OR ANY OF THE TRANSACTIONS RELATED TO ANY OF
THE SECURITY DOCUMENTS. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY
MADE BY DEBTOR AND DEBTOR ACKNOWLEDGES THAT NEITHER SECURED PARTY NOR ANY PERSON
ACTING ON BEHALF THEREOF HAS OR HAVE MADE ANY REPRESENTATIONS OF FACT TO INDUCE
THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE
DEBTOR FURTHER ACKNOWLEDGES THAT DEBTOR HAS BEEN REPRESENTED (OR HAS HAD THE
OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE
MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED BY DEBTOR'S OWN
FREE WILL, AND THAT DEBTOR HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH
COUNSEL. THE DEBTOR AGREES THAT THE OBLIGATIONS EVIDENCED BY THIS AGREEMENT ARE
EXEMPTED TRANSACTIONS UNDER THE TRUTH-IN-LENDING ACT, 15 U.S.C. SECTION 1601, ET
SEQ. DEBTOR FURTHER ACKNOWLEDGES THAT DEBTOR HAS READ AND UNDERSTANDS THE
MEANING OF THIS WAIVER PROVISION. DEBTOR HEREBY CONSENTS TO THE JURISDICTION OF
ANY FEDERAL OR STATE COURT AS SECURED PARTY MAY SELECT, FOR ANY PROCEEDING IN
CONNECTION HEREWITH. DEBTOR AND HEREBY WAIVES OBJECTIONS AS TO VENUE AND
CONVENIENCE OF FORUM IF VENUE IS IN

                                       26

<PAGE>

PHILADELPHIA COUNTY, PENNSYLVANIA OR THE COUNTY OF BERGEN, NEW JERSEY OR IN ANY
FEDERAL DISTRICT COURT IN PENNSYLVANIA, DELAWARE OR NEW JERSEY. THE FOREGOING
SHALL BE DEEMED INDEPENDENT COVENANTS.

SECTION 13.10. MANDATORY PREPAYMENTS. NOTWITHSTANDING ANYTHING CONTAINED IN ANY
SECURITY DOCUMENT, UPON ANY MATERIAL SALE OF COLLATERAL, AS DETERMINED BY
SECURED PARTY IN ITS SOLE DISCRETION, DEBTOR SHALL IMMEDIATELY REPAY, WITHOUT
THE OPPORTUNITY TO REBORROW, 100% OF THE PROCEEDS FROM THE SALE OF THE
COLLATERAL. NOTWITHSTANDING ANYTHING CONTAINED IN ANY SECURITY DOCUMENT, UPON
SECURED PARTY MATERIALLY ISSUING OR INCURRING DEBT, AS DETERMINED BY SECURED
PARTY IN ITS SOLE DISCRETION, DEBTOR SHALL IMMEDIATELY REPAY, WITHOUT THE
OPPORTUNITY TO REBORROW, 100% OF THE PROCEEDS FROM SAID ISSUANCE OR INCURRENCE
OF DEBT. NOTWITHSTANDING ANYTHING CONTAINED IN ANY SECURITY DOCUMENT, UPON
SECURED PARTY ISSUING EQUITY OR RECEIVING CAPITAL CONTRIBUTIONS, AS DETERMINED
BY SECURED PARTY IN ITS SOLE DISCRETION, DEBTOR SHALL IMMEDIATELY REPAY, WITHOUT
THE OPPORTUNITY TO REBORROW, 50% OF THE PROCEEDS FROM SAID EQUITY ISSUANCE OR
CAPITAL CONTRIBUTIONS.

     IN WITNESS WHEREOF, the Debtor and the Secured Party have executed this
Agreement by their duly authorized officers as of the date first above written.

WITNESS:

                                       PEOPLES EDUCATIONAL HOLDINGS, INC.

                                       BY: /S/ BRIAN T. BECKWITH
------------------------                   ------------------------------------
                                           BRIAN T. BECKWITH
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER

                                       PEOPLES EDUCATION, INC.

                                       BY: /S/ BRIAN T. BECKWITH
------------------------                   -------------------------------------
                                           BRIAN T. BECKWITH
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER

                                       27

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