SECURITY AGREEMENT

            This SECURITY AGREEMENT is dated as of March 11, 2003 between PEI
Holdings, Inc., a Delaware corporation (the "Debtor"), and Bank of America,
N.A., in its capacity as administrative agent under the Credit Agreement
described below ("Agent").

                              W I T N E S S E T H:

            WHEREAS, pursuant to a certain Credit Agreement of even date
herewith among the Debtor, Agent and Lenders (as the same may be amended,
restated, modified or supplemented and in effect from time to time, the "Credit
Agreement"), Lenders have agreed, subject to the satisfaction of certain
conditions precedent, to make Loans and other financial accommodations available
to the Debtor; and

            WHEREAS, it is a condition precedent to the availability of such
Loans and other financial accommodations under the Credit Agreement that the
Debtor shall have granted the security interests contemplated by this Agreement
in order to secure the payment and performance of the Obligations;

            NOW, THEREFORE, in consideration of the foregoing, and in order to
induce Lenders to make the Loans and other financial accommodations available to
the Debtor under the Credit Agreement, the Debtor hereby agrees with Agent, for
its benefit and the benefit of Lenders, as follows:

SECTION 1. Definitions.

            1.1 The following terms, as used herein, have the meanings set forth
below:

            "Agreement" means this Security Agreement, as the same may be
amended, restated, modified or supplemented and in effect from time to time in
accordance with the terms hereof.

            "Collateral" has the meaning assigned to that term in Section 2.

            "Copyright Security Agreement" means, if any, each Copyright
Security Agreement executed and delivered by the Debtor to Agent, as the same
may be amended and in effect from time to time.

            "Copyrights" means (a) any copyrights, copyright registrations and
copyright applications, and all renewals and extensions of any of the foregoing,
(b) all income damages and payments now and hereafter due or payable with
respect thereto, including, without limitation, damages and payments for past or
future infringements thereof, (c) licenses of any of the foregoing to or from
third parties and the royalties and other payments, if any, receivable
thereunder, (d) the right to sue for past, present and future infringements
thereof, and (e) all rights corresponding thereto throughout the world.

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            "Federal Registration Collateral" means Collateral with respect to
which Liens may be registered, recorded or filed under, or notice thereof given
under, any federal statute or regulation.

            "Intellectual Property" means, collectively, all Copyrights,
Patents, Trademarks and Trade Secrets.

            "Intercreditor Agreement" means that certain Intercreditor Agreement
among Debtor, Agent and the trustee under the Senior Secured Note Indenture.

            "License" has the meaning set forth in Section 4.3(g) herein.

            "Patent Security Agreement" means, if any, each Patent Security
Agreement executed and delivered by the Debtor to Agent, as the same may be
amended and in effect from time to time.

            "Patents" means (a) any patents and patent applications, and all
renewals, extensions and continuations of any of the foregoing, (b) all income
damages and payments now and hereinafter due or payable with respect thereto,
including, without limitation, damages and payments for past or future
infringements thereof, (c) licenses of any of the foregoing to or from third
parties and the royalties and other payments, if any, receivable thereunder, (d)
the right to sue for past, present and future infringements thereof, and (e) all
rights corresponding thereto throughout the world.

            "Permitted Liens" means those Liens permitted by Section 7.01 of the
Credit Agreement.

            "Security Interests" means the security interests granted or
provided for pursuant to Section 2 hereof and pursuant to any Copyright Security
Agreements, Patent Security Agreements and Trademark Security Agreements, as
well as all other security interests created, assigned or provided as additional
security for the Obligations pursuant to the provisions of this Agreement or any
of the other Loan Documents.

            "Trade Secrets" means technology, trade secrets and other
confidential information, know-how, proprietary processes, formulae, algorithms,
models, and methodologies, all renewals and extensions of any of the foregoing
and all goodwill symbolized by any of the foregoing, (b) all income damages and
payments now and hereinafter due or payable with respect thereto, including,
without limitation, damages and payments for past or future infringements
thereof, (c) licenses of any of the foregoing to or from third parties and the
royalties and other payments, if any, receivable thereunder, (d) the right to
sue for past, present and future infringements thereof, and (e) all rights
corresponding thereto throughout the world.

            "Trademark Security Agreement" means, if any, each Trademark
Security Agreement executed and delivered by the Debtor to Agent, as the same
may be amended and in effect from time to time.


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<PAGE>

            "Trademarks" means any (a) trademarks, trademark registrations, and
trademark applications, trade names and trade styles, service marks, service
registrations and service mark applications, all renewals and extensions of any
of the foregoing and all goodwill symbolized by any of the foregoing, (b) all
income damages and payments now and hereinafter due or payable with respect
thereto, including, without limitation, damages and payments for past or future
infringements, unfair competition, dilution, or for injury to the goodwill
associated with any of the foregoing, (c) licenses of any of the foregoing to or
from third parties and the royalties and other payments, if any, receivable
thereunder, (d) the right to sue for past, present and future infringements
thereof, and (e) all rights corresponding thereto throughout the world.

            "UCC" means the Uniform Commercial Code of the State of Illinois as
in effect from time to time.

            1.2 Other Definition Provisions. References to "Sections" shall be
to Sections of this Agreement unless otherwise specifically provided. For
purposes hereof, "including" is not limiting and "or" is not exclusive. Except
as provided by the immediately following sentence, capitalized terms used herein
and not otherwise defined herein shall have the respective meanings provided for
in the Credit Agreement. All capitalized terms defined in the UCC and not
otherwise defined herein shall have the respective meanings provided for by the
UCC. Any of the terms defined in Section 1.1 may, unless the context otherwise
requires, be used in the singular or the plural depending on the reference. All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations.

SECTION 2. Grant of Security Interests.

            To secure the payment and performance of the Obligations, the Debtor
hereby grants to Agent, for its benefit and the benefit of Lenders, and for the
benefit of each Affiliate of Agent and each Lender, a lien on, security interest
in and right of set-off against any and all right, title and interest in and to
any and all property and interests in property of the Debtor, whether now owned
or existing or hereafter created, acquired or arising, including all of the
following properties and interests in properties, whether now owned or hereafter
created, acquired or arising (all being collectively referred to herein as the
"Collateral"):

            (a) Accounts;

            (b) Chattel Paper;

            (c) Commercial Tort Claims specifically identified on Schedule III
hereto;

            (d) Deposit Accounts, all cash, and other property deposited therein
or otherwise credited thereto from time to time and other monies and property in
the possession or under the control of Agent or any Lender or any affiliate,
representative, agent or correspondent of Agent or any Lender;


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<PAGE>

            (e) Documents;

            (f) General Intangibles, including without limitation any and all
Intellectual Property;

            (g) Goods, including without limitation any and all Inventory, any
and all Equipment and any and all Fixtures;

            (h) Instruments;

            (i) Investment Property;

            (j) Letter-of-Credit Rights;

            (k) Supporting Obligations;

            (l) Any and all other personal property and interests in property
whether or not subject to the UCC;

            (m) Any and all books and records, in whatever form or medium, that
at any time evidence or contain information relating to any of the foregoing
properties or interests in properties or are otherwise necessary in the
collection thereof or realization thereon;

            (n) All Accessions and additions to, and substitutions and
replacements of, any and all of the foregoing; and

            (o) All Proceeds and products of the foregoing, including without
limitation all insurance pertaining to the foregoing and proceeds thereof.

Notwithstanding the foregoing, "Collateral" shall not include (i) any stock in a
Controlled Foreign Corporation (within the meaning of Section 957 of the Code)
in excess of 65% of such stock or in excess of 65% of the total combined voting
power of all classes of such entity entitled to vote, (ii) any General
Intangibles or other rights arising under any contracts, instruments, licenses
or other documents to the extent that the grant of a Lien or security interest
therein would (A) result in a breach of the terms of, or constitute a default
under, such contract, instrument, license, agreement or other document (other
than to the extent that any such term would be rendered ineffective pursuant to
Section 9-406, 9-407 or 9-408 of the Uniform Commercial Code or any successor
provision of the Uniform Commercial Code of any relevant jurisdiction or other
applicable law) or (B) give any other party to such contract, instrument,
license or other document the right to terminate its obligations thereunder
pursuant to a valid and enforceable provision (including without limitation in
connection with the operation of Section 9-406, 9-407 or 9-408 of the Uniform
Commercial Code or any other applicable law), (iii) any personal property
(including motor vehicles) in respect of which perfection of a Lien is not
either (A) governed by the Uniform Commercial Code or (B) accomplished by
appropriate evidence of the lien being recorded in the U.S. Copyright


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<PAGE>

Office or the U.S. Patent and Trademark Office, or (iv) any property subject to
any Pledge Agreement.

SECTION 3. Representations and Warranties.

            The Debtor represents and warrants to Agent and to each Lender as
follows:

            3.1 Binding Obligation; Perfection. This Agreement constitutes a
valid and binding obligation of the Debtor, enforceable against it in accordance
with its terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law). Subject to taking the
actions specified in Section 3.5, Agent has a valid and perfected first priority
Security Interest in the Collateral (except with respect to Trademarks, in which
Agent has a valid and perfected second priority Security Interest) to the extent
that a security interest therein may be perfected by the filing of a financing
statement and the other actions referred to in Section 3.5, securing the payment
of the Obligations, and Debtor acknowledges that such Security Interests are
entitled to all of the rights, priorities and benefits afforded by the UCC or
other applicable law as enacted in any relevant jurisdiction within the United
States which relates to perfected security interests subject to Permitted Liens.

            3.2 Organizational Information. Schedule I hereto sets forth, as of
the Closing Date, (i) the full, correct and current name of the Debtor, as its
appears in the Debtor's organizational documents, (ii) any names of the Debtor
other than the Debtor's current name, as set forth on Debtor's organizational
documents used during the five (5) year period preceding the Closing Date, (iii)
the Debtor's type of organization, (iv) the Debtor's jurisdiction of
organization and (v) the Debtor's organizational identification number (except
where the Debtor's jurisdiction of organization does not assign organizational
numbers).

            3.3 Collateral Locations. Schedule II hereto sets forth all
addresses at which, as of the Closing Date, any material portion of the
Collateral consisting of Equipment or Inventory is located, indicating for each
whether such location is owned or leased by the Debtor, or owned or operated by
a third-party such as a warehouseman, consignee or processor. Schedule II
indicates, as of the Closing Date, which of the foregoing addresses serves as
the Debtor's chief executive office. Schedule II sets forth, as of the Closing
Date, the address of all real properties maintained by the Debtor, leased or
owned, on which any material portion of the Fixtures are located, together with
the name and address of the record owner of each such property.

            3.4 Existing Liens. As of the Closing Date, the Debtor owns the
Collateral free and clear of Liens, except for Permitted Liens.

            3.5 Governmental Authorizations; Consents; Federal Registration
Collateral. Except as set forth in this Section 3.5, no authorization, approval
or other action by, and no notice to or filing with, any domestic or foreign
governmental authority or regulatory body or consent of any other Person is
required for (i) the grant by the Debtor of


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<PAGE>

the Security Interests granted hereby or for the execution, delivery or
performance of this Agreement by the Debtor; or (ii) the exercise by Agent of
its rights and remedies hereunder other than such as has already been obtained
or taken or the failure of which to obtain would not be reasonably likely to
have a Material Adverse Effect. Except as set forth on the schedules to the
Copyright Security Agreement and the Trademark Security Agreement, none of the
material Collateral is Federal Registration Collateral. Except for (a) the
filing of UCC financing statements with the Secretary of State of the Debtor's
jurisdiction of organization, (b) the filing of UCC financing statements in
appropriate local jurisdictions with respect to Fixtures, (c) the filing of any
necessary registrations or notices and the issue of recordations thereof, as
applicable, in respect of any and all Federal Registration Collateral (other
than Trademarks), and (d) with respect to Trademarks, the filing of the
Trademark Security Agreement with the U.S. Patent and Trademark Office, together
with an appropriately completed recordation form and the issuance of recordation
therefor, no authorization, approval or other action by, and no notice to or
filing with, any domestic or foreign governmental authority or regulatory body
or consent of any other Person is required for the perfection of the Security
Interests granted hereby and pursuant to any other Loan Documents in the
Collateral in which a lien may be perfected under United States, state or
federal law; provided, however, that additional registrations, notices and
issuances of recordation, as applicable, may be necessary with respect to
Federal Registration Collateral acquired by the Debtor after the date hereof.

            3.6 Accounts. To the Debtor's knowledge, each material Account
constitutes the legally valid and binding obligation of the applicable Account
Debtor. No Account Debtor has any defense, set-off, claim or counterclaim
against the Debtor that can be asserted against Agent, whether in any proceeding
to enforce Agent's rights in the Collateral or otherwise, except defenses,
setoffs, claims or counterclaims that are not, in the aggregate, material to the
value of the Accounts taken as a whole.

            3.7 Inventory. To the Debtor's knowledge, all material Inventory is,
and will be, of good and merchantable quality, free from any material defects.
None of the Debtor's Inventory has been produced in violation of any provision
of the Fair Labor Standards Act of 1938, or in violation of any other law in any
material respect.

            3.8 Intellectual Property. The Trademarks listed on the schedule to
the Trademark Security Agreement constitute all the federally registered
Trademarks owned by the Debtor. The Copyrights listed on the schedule to the
Copyright Security Agreement constitute the material federally registered
Copyrights in the original programming of Debtor and its direct and indirect
subsidiaries. Debtor currently does not own any Patents. All of the
registrations for such Intellectual Property are subsisting and, to the Debtor's
knowledge, enforceable and all filings necessary to maintain the effectiveness
of such registrations have been made. Except as set forth on Schedule V, the
Debtor has received no written notice of any material suits or actions commenced
or threatened with reference to any Intellectual Property of Debtor which are
unresolved. The execution, delivery and performance of this Agreement or the
Copyright Security Agreement or the Trademark Security Agreement by the Debtor
will not violate or cause a default under any agreement pertaining to
Intellectual


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<PAGE>

Property to which Debtor is a party that is included in the Collateral, other
than any such violation or default that would not reasonably be expected to have
a Material Adverse Effect.

            3.9 Certain Collateral Disclosures. Except in each case as set forth
on Schedule IV hereto, the Debtor has no ownership interest in any material
Chattel Paper, Letter-of-Credit Rights, Commercial Tort Claims, Documents, or
Equipment covered by any certificate of title.

            3.10 Control Arrangements. Except for Control arising by operation
of law in favor of banks and securities intermediaries having custody over
deposit accounts and securities accounts, to the knowledge of Debtor, no Person
(other than Agent) has Control of any deposit accounts, Electronic Chattel
Paper, Investment Property or Letter-of-Credit Rights in which the Debtor has
any interest and which constitutes part of the Collateral.

            3.11 Accurate Information. All factual information (taken as a
whole) heretofore or contemporaneously furnished by or on behalf of Debtor in
writing to Agent or any Lender (including, without limitation, all information
contained in the Loan Documents) for purposes of or in connection with this
Agreement or any transaction contemplated herein is, and all other such factual
information (taken as a whole) hereafter furnished by or on behalf of Debtor in
writing to Agent or any Lender for purposes of or in connection with this
Agreement or any transaction contemplated herein, when taken as a whole, does
not contain as of the date furnished any untrue statement of material fact or
omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading; provided that to the extent any such factual information
was based upon or constituted a forecast or projection, Debtor represents only
that it acted in good faith and utilized reasonable assumptions and due care in
the preparation of such factual information.

            3.12 Survival of Representations and Warranties. All representations
and warranties of the Debtor contained in this Agreement shall survive the
execution and delivery of this Agreement.

SECTION 4. Covenants and Further Assurances.

            Until the Obligations are paid in full and the Credit Agreement has
terminated:

            4.1 Name or Entity Changes. The Debtor shall not change the Debtor's
name, type of organization or jurisdiction of organization without providing
thirty (30) days' prior written notice to Agent. If the Debtor is at any time
assigned a new organizational identification number, it shall promptly notify
Agent thereof in writing.

            4.2 Accounts. Except as otherwise provided in this Section 4.2, the
Debtor shall continue to collect, at its own expense, all amounts due or to
become due to the Debtor with respect to Accounts and apply such amounts as are
so collected to the outstanding balances thereof. In connection with such
collections, the Debtor may take (and, at Agent's direction during the
continuance of any Event of Default, shall take) such action as the


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<PAGE>

Debtor (or, during the continuance of an Event of Default, Agent) may deem
necessary or advisable to enforce collection of the Accounts. Agent shall have
the right if an Event of Default has occurred and is continuing to: (i) notify
the Account Debtor under any Accounts (or any other Person obligated thereon) of
the Lien granted upon such Accounts in favor of Agent and to direct such Account
Debtors and other Persons to make payment of all amounts due or to become due or
otherwise render performance directly to Agent; (ii) exercise the rights of the
Debtor with respect to the obligation of the Account Debtor to make payment or
otherwise render performance to the Debtor and with respect to any property that
secures the obligations of the Account Debtor or any other Person obligated on
the Collateral; and (iii) adjust, settle or compromise the amount or payment of
such Accounts. If an Event of Default has occurred and is continuing, all
amounts and Proceeds received by the Debtor with respect to the Accounts shall
be received in trust for the benefit of Agent (on behalf of Lenders), and, at
Agent's request, shall be segregated from other funds of the Debtor and
forthwith paid over to Agent in the same form as so received (with any necessary
endorsement) to be applied against the Obligations.

            4.3 Intellectual Property.

            (a) The Debtor shall concurrently herewith deliver to Agent each
Copyright Security Agreement and Trademark Security Agreement and all other
documents, instruments and other items as may be necessary for Agent to file
such agreements with the U.S. Copyright Office and the U.S. Patent and Trademark
Office, as applicable, except any recordation cover sheets and the applicable
recording fee pertaining thereto.

            (b) In the event the Debtor acquires or becomes the owner of any new
or additional Federal Registration Collateral consisting of Patents, Trademarks,
or material registered Copyrights in original programming of the Debtor and its
direct and indirect subsidiaries, the Debtor shall give to Agent prompt written
notice thereof, and shall within thirty (30) days of such notice amend (and
hereby authorizes Agent to amend) the schedules to the respective security
agreements or enter into new or additional security agreements to include any
such new or additional Federal Registration Collateral thereon and provide all
other documents, instruments and other items as may be necessary for Agent to
file such agreements with the U.S. Copyright Office and the U.S. Patent and
Trademark Office, as applicable, except any recordation cover sheets and the
applicable recording fee pertaining thereto.

            (c) The Debtor shall: (i) diligently prosecute any application filed
by the Debtor to register material Intellectual Property at any time pending;
(ii) make application for registration or issuance of all newly-acquired
material Intellectual Property owned by the Debtor as reasonably deemed
appropriate by the Debtor; and (iii) preserve and maintain all rights in the
material Intellectual Property owned by the Debtor unless the Debtor has a
purpose in the ordinary course of business to do otherwise and to do otherwise
could not reasonably be expected to have a Material Adverse Effect.

            (d) The Debtor shall not abandon any right to file an application to
register material Intellectual Property, nor shall the Debtor abandon any
pending application to


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<PAGE>

register material Intellectual Property or material registered Intellectual
Property unless the Debtor has a purpose in the ordinary course of business to
do otherwise and to do otherwise could not reasonably be expected to have a
Material Adverse Effect. The Debtor will notify the Agent promptly if it knows
that any application or registration relating to any Patents, Trademarks, or
material registered Copyrights in original programming of the Debtor and its
direct and indirect subsidiaries owned by it may become abandoned or dedicated
to the public, or of any adverse determination or development (including the
institution of, or any adverse determination or development in, any proceeding
in the U.S. Copyright Office, the U.S. Patent and Trademark Office or any court)
regarding the Debtor's ownership of such Federal Registration Collateral, or its
right to maintain, register or patent the same. If any of the Debtor's rights to
any Federal Registration Collateral consisting of material Intellectual Property
are infringed, misappropriated or diluted by a third party, the Debtor will
notify the Agent within thirty (30) days after it learns thereof and will,
unless the Debtor shall reasonably determine that such undertaking would not be
commercially reasonable, promptly sue for infringement, misappropriation or
dilution and to recover any and all damages for such infringement,
misappropriation or dilution, and/or take such other actions as the Debtor shall
reasonably deem appropriate under the circumstances to protect such Federal
Registration Collateral.

            (e) The Debtor shall not sell or assign or otherwise transfer or
dispose of its interest in, or grant any license under, or otherwise encumber
any Intellectual Property or enter into any other agreement with respect to any
material Intellectual Property included in the Collateral, except in the
ordinary course and consistent with past practices and except as permitted
hereunder or under the Credit Agreement. The Debtor further agrees that it shall
not take any action or permit any action to be taken by others subject to its
control, including licensees, or knowingly fail to take any action which could
materially and adversely affect the validity or enforcement of the rights
granted to Agent under this Agreement, except as permitted hereunder or under
the Credit Agreement.

            (f) The Debtor agrees to maintain the quality of any and all
products in connection with which the Trademarks are used, unless Debtor has a
purpose in the ordinary course of business to do otherwise and to do otherwise
could not reasonably be expected to have a Material Adverse Effect. During the
continuance of an Event of Default, the Debtor agrees that Agent, or a
conservator appointed by Agent, shall have the right to establish such
additional product quality controls as Agent, or said conservator, in its
reasonable judgment, may deem necessary to assure the maintenance of the quality
of products sold by the Debtor under the Trademarks.

            (g) Notwithstanding any Enforcement Action (as defined in the
Intercreditor Agreement) by Trustee (as defined in the Intercreditor Agreement)
against the Trademarks or the existence of an Enforcement Period (as defined in
the Intercreditor Agreement) with respect thereto, Debtor hereby grants to Agent
effective during the existence of an Event of Default, the following licenses
with respect to the Intellectual Property to the extent it can lawfully grant
such licenses and subject to any third party rights to such Intellectual
Property (each, a "License"): (i) for a period of one (1) year after Agent
completes foreclosure in Agent's security interest in the Collateral consisting
of Inventory


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(including work-in-process), a license to use the Intellectual Property for the
purpose of completing the production, printing and/or manufacture of
work-in-process Inventory, provided that such Inventory is completed in a manner
that maintains the level of quality of such Inventory as comparable to that
which prevailed prior to the Events of Default; and (ii) a license to use the
Intellectual Property for the purpose of selling completed Inventory, including
in such License, the right to make public displays or performances of any
Collateral consisting of completed Inventory until such Inventory is sold off.
Each License shall be worldwide, assignable, non-exclusive, include the right to
sublicense and shall be free of obligation to pay royalties. If a sale,
exclusive license or other transfer or conveyance is made of any Intellectual
Property in compliance with the terms of the Credit Agreement, Agent's Security
Interest in the subject Intellectual Property shall not be released or deemed
released until the transferee or licensee thereof has executed a document in
form reasonably acceptable to Agent, confirming and acknowledging the survival
of the License.

            (h) If an Event of Default shall have occurred and be continuing,
the Agent may (without assuming any obligation or liability thereunder), at any
time and from time to time, in its sole and reasonable discretion, enforce (and
shall have the exclusive right to enforce) against any licensee or sublicensee
all rights and remedies of the Debtor in, to and under any of its Intellectual
Property and take or refrain from taking any action under any thereof, and the
Debtor releases the Agent and each other Secured Party from liability for, and
agrees to hold the Agent and each other Secured Party free and harmless from and
against any claims and expenses arising out of, any lawful action so taken or
omitted to be taken with respect thereto, except for claims and expenses arising
from the Agent's or such Secured Party's gross negligence or willful misconduct.

            (i) If Agent elects to exercise its remedies as set forth in that
certain Deed of Trust With Assignment of Rents Security Agreement and Fixture
Filing of even date herewith by Playboy Enterprises International, Inc. for the
benefit of Agent, Debtor acknowledges and agrees that Agent, its assigns and any
purchaser of the Playboy Mansion may use the term "Playboy Mansion" when
describing such Playboy Mansion to the extent that such use constitutes a "fair
use" under applicable trademark law.

            4.4 Bailees. No material Collateral consisting of Equipment or
Inventory shall at any time be in the possession or control of any warehouse,
consignee, bailee or any of the Debtor's agents or processors without prior
written notice to Agent and the receipt by Agent, if Agent has so requested, of
warehouse receipts or bailee lien waivers (as applicable) reasonably
satisfactory to Agent prior to the commencement of such possession or control.
If an Event of Default has occurred and is continuing, the Debtor shall, upon
the request of Agent, notify any such warehouse, consignee, bailee, agent or
processor of the Security Interests, shall instruct such Person to hold all such
Collateral for Agent's account subject to Agent's instructions and shall obtain
an acknowledgement from such Person that such Person holds the Collateral for
Agent's benefit.

            4.5 Chattel Paper and Instruments. The Debtor shall deliver to Agent
all Tangible Chattel Paper and all Instruments (other than Tangible Chattel
Paper and Instruments whose value does not exceed $25,000) duly endorsed and
accompanied by duly


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<PAGE>

executed instruments of transfer or assignment, all in form and substance
reasonably satisfactory to Agent. The Debtor shall use commercially reasonable
efforts to provide Agent with Control of all Electronic Chattel Paper by having
Agent identified as the assignee of the Records pertaining to the single
authoritative copy thereof and otherwise complying with the applicable elements
of Control set forth in the UCC. If an Event of Default has occurred and is
continuing, the Debtor also shall deliver to Agent all security agreements
securing any Chattel Paper and securing any Instruments. If an Event of Default
has occurred and is continuing, the Debtor will mark conspicuously all Chattel
Paper and all Instruments with a legend, in form and substance reasonably
satisfactory to Agent, indicating that such Chattel Paper and such Instruments
are subject to the Security Interests.

            4.6 Letters of Credit. At the Agent's request, Debtor shall use
commercially reasonable efforts to deliver to Agent all Letters of Credit with a
value in excess of $25,000, duly endorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and substance reasonably
satisfactory to Agent. The Debtor shall use commercially reasonable efforts to
take any and all actions as may be necessary from time to time to cause Agent to
obtain exclusive Control of any Letter-of-Credit Rights owned by the Debtor in a
manner reasonably acceptable to Agent.

            4.7 Equipment. The Debtor shall cause all material Equipment and
other material properties to be maintained and preserved in good and working
order, ordinary wear and tear excepted, and promptly make or cause to be made
all necessary repairs, replacements and other improvements in connection
therewith (other than with respect to obsolete Equipment), except where the
failure to do so would not reasonably be expected to have a Material Adverse
Effect. With respect to any item of Equipment that is covered by a certificate
of title under a statute of any jurisdiction under the law of which indication
of a security interest on such certificate is required as a condition of
perfection thereof, upon request of Agent, the Debtor shall deliver to Agent any
and all certificates of title, applications for title or similar evidence of
ownership of all such Equipment which has a value in excess of $10,000 and shall
execute and file with the registrar of motor vehicles or other appropriate
authority in such jurisdiction an application or other document requesting the
notation or other indication of the security interest created hereunder on such
certificate of title.

            4.8 Investment Property. At Agent's request, the Debtor shall take
any and all actions as may be commercially reasonable to (i) cause Agent to
obtain exclusive Control of any Investment Property owned by the Debtor in a
manner reasonably acceptable to Agent and (ii) request from any issuers of
Investment Property and such other Persons, for the benefit of Agent, written
confirmation of Agent's Control over such Investment Property upon terms and
conditions reasonably acceptable to Agent.

            4.9 General Intangibles. The Debtor shall use commercially
reasonable efforts to obtain any consents, waivers or agreements necessary to
enable Agent to exercise remedies hereunder with respect to any of the Debtor's
rights under any material General Intangibles, including the Debtor's rights as
a licensee of material software and other Intellectual Property.


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<PAGE>

            4.10 Commercial Tort Claims. The Debtor shall advise Agent upon the
Debtor becoming aware that it has any interest in a material Commercial Tort
Claim. With respect to any material Commercial Tort Claim in which the Debtor
has any interest, the Debtor shall execute and deliver such documents as may be
necessary to create and perfect Agent's security interest in such Commercial
Tort Claim.

            4.11 Taxes and Claims. The Debtor shall pay when due all material
property and other taxes, assessments and governmental charges imposed upon, and
all claims against, the Collateral (including claims for labor, materials and
supplies); provided that no such tax, assessment, charge or claim need be paid
to the extent (i) it is not delinquent or thereafter payable without penalty, or
(ii) it is being contested in good faith by appropriate proceedings diligently
conducted and for which adequate reserves have been provided in accordance with
GAAP or (iii) the failure to pay such would not reasonably be expected to have a
Material Adverse Effect.

            4.12 Collateral Generally.

            (a) The Debtor hereby authorizes Agent to file one or more financing
or continuation statements, and amendments thereto (or similar documents
required by any laws of any applicable jurisdiction), relating to all or any
part of the Collateral without the signature of the Debtor (to the extent such
signature is required under the laws of any applicable jurisdiction), which
financing statements may describe the Collateral as "all assets" or "all
personal property" or words of like import.

            (b) The Debtor will furnish to Agent, from time to time upon
reasonable request by Agent, statements and schedules further identifying,
updating, and describing the Collateral and such other information, reports and
evidence concerning the Collateral as Agent may reasonably request, all in
reasonable detail.

            (c) The Debtor shall not use or permit any Collateral to be used
unlawfully in any material respect or in violation of any provision of
applicable law, or any policy of insurance covering any of the Collateral, in
each case, in any material respect.

            (d) The Debtor shall give Agent not less than thirty (30) days prior
written notice of any change in the Debtor's chief executive office and
principal place of business or of any new location of business or any new
location for any of the Collateral that is material to Debtor and that consists
of Equipment or Inventory. With respect to any such new location, upon Agent's
request, the Debtor shall execute and deliver such instruments, documents and
notices and take such actions as may be necessary to create and perfect the
Security Interests under the laws of the United States.

            (e) The Debtor shall keep full and accurate books and records
relating to the Collateral and, if an Event of Default has occurred and is
continuing, at the request of Agent shall stamp or otherwise mark such books and
records in such manner as Agent may reasonably request indicating that the
Collateral is subject to the Security Interests.


                                      -12-
<PAGE>

            (f) Except for the safe custody of any Collateral in its possession
and the accounting for monies actually received hereunder, the Debtor agrees
that Agent shall have no duties concerning the custody and preservation of any
Collateral in its possession (or in the possession of any agent or bailee) or
with respect to any income thereon or the preservation of rights against prior
parties or any other rights pertaining thereto. Agent shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession if it takes such action for that purpose as Debtor reasonably
requests in writing, but failure of Agent to comply with any such request at any
time shall not of itself be deemed a failure to exercise reasonable care. Agent
shall not be liable or responsible for any loss or damage to any of the
Collateral, or for any diminution in the value thereof, by reason of the act or
omission of any warehouseman, carrier, forwarding agency, consignee or other
agent or bailee reasonably selected by Agent.

            (g) The Debtor assumes all liability and responsibility in
connection with the Collateral acquired by it, and the liability of the Debtor
to pay the Obligations shall in no way be affected or diminished by reason of
the fact that such Collateral may be lost, stolen, damaged, or for any reason
whatsoever unavailable to the Debtor.

            (h) Agent agrees that upon payment in full of all Obligations and
the termination of the Committed Loans and all Support Agreements, the Security
Interests shall automatically terminate and all rights to the Collateral shall
revert to the Debtor. Agent further agrees that upon such termination of the
Security Interests or release or re-assignment of any Collateral, Agent shall,
at the expense of the Debtor, return all Collateral then in Agent's possession
and execute and deliver to the Debtor such documents as the Debtor shall
reasonably request to evidence the termination of the Security Interests or the
release and re-assignment of such Collateral, as the case may be.

            4.13 Liens. The Collateral will be subject to no Liens, other than
Permitted Liens.

            4.14 Maintenance of Insurance. The Debtor shall maintain with
reputable insurance companies that are not Affiliates of the Debtor, insurance
with respect to its properties and business against loss or damage of the kinds
customarily insured against by Persons engaged in the same or similar business,
of such types and in such amounts (after giving effect to any self-insurance
compatible with the following standards) as are customarily carried under
similar circumstances by such other Persons and providing for not less than
thirty (30) days' prior notice to Agent of termination, lapse or cancellation of
such insurance.

            If Debtor fails to maintain the insurance required by the
immediately preceding paragraph, Agent may purchase such insurance at the
Debtor's expense, to protect Agent's interests in the Collateral. This insurance
may, but need not, protect the interests of the Debtor. The coverage that Agent
purchases may not pay any claim that the Debtor may make or any claim that is
made against the Debtor in connection with the Collateral. The Debtor may later
cancel any insurance purchased by Agent, but only after providing Agent with
evidence that the Debtor has obtained insurance as required by this Agreement.
If


                                      -13-
<PAGE>

Agent purchases insurance for the Collateral, the Debtor will be responsible for
the costs of that insurance, including interest and any other charges that may
be imposed in connection with the placement of the insurance, until the
effective date of the cancellation or expiration of the insurance. The costs of
the insurance may be added to the Loans. The costs of the insurance may be more
than the cost of insurance that the Debtor may be able to obtain on its own.

            4.15 Federal Compliance.

            (a) The Debtor shall notify Agent in writing upon acquiring any
ownership interest in Federal Registration Collateral. The Debtor shall take
such steps as may be necessary in order to perfect the Agent's Security
Interests in Federal Registration Collateral.

            (b) The Debtor shall notify Agent in writing of any Collateral which
constitutes a claim against the United States government or any instrumentality
or agency thereof, the assignment of which claim is restricted by federal law.
Upon the reasonable request of Agent, the Debtor shall take such steps as may be
necessary to comply with any applicable federal assignment of claims laws and
other comparable laws.

            (c) The Debtor shall not produce any Inventory in violation of any
provision of the Fair Labor Standards Act of 1938, or in violation of any other
law.

            4.16 Debtor Remains Liable. Anything herein to the contrary
notwithstanding: (i) the Debtor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein and shall
perform all of its duties and obligations thereunder to the same extent as if
this Agreement had not been executed; (ii) the exercise by Agent of any of the
rights hereunder shall not release the Debtor from any of its duties or
obligations under the contracts and agreements included in the Collateral; (iii)
neither Agent nor any Lender shall have any obligation or liability under the
contracts and agreements included in the Collateral by reason of this Agreement,
nor shall Agent nor any Lender be obligated to perform any of the obligations or
duties of the Debtor thereunder or to take any action to collect or enforce any
claim for payment assigned hereunder; and (iv) neither Agent nor any Lender
shall have any liability in contract or tort for the Debtor's acts or omissions.

            4.17 Other Documents and Actions. The Debtor shall, from time to
time, at its expense, promptly execute and deliver all further instruments,
documents and notices and take all further action that may be necessary in order
to create, perfect and protect any Security Interests, or to enable Agent to
exercise and enforce its rights and remedies hereunder or under any other Loan
Document with respect to any Collateral.

SECTION 5. Remedial Provisions.

            (a) Upon the occurrence and during the continuance of an Event of
Default, Agent or its attorneys shall have the right without notice or demand or
legal process (unless the same shall be required by applicable law), personally,
or by an agent, (i) to enter


                                      -14-
<PAGE>

upon, occupy and use any premises owned or leased by the Debtor or where the
Collateral is located (or is believed to be located) until the Obligations are
paid in full without any obligation to pay rent to the Debtor, to render the
Collateral useable or saleable and to remove the Collateral or any part thereof
to the premises of Agent for such time as Agent may desire in order to
effectively collect or liquidate the Collateral and use in connection with such
removal any and all services, supplies and other facilities of the Debtor; (ii)
to take possession of the Debtor's original books and records, to obtain access
to the Debtor's data processing equipment, computer hardware and Software
relating to the Collateral and to use all of the foregoing and the information
contained therein in any manner Agent deems appropriate; and (iii) to notify
postal authorities to change the address for delivery of the Debtor's mail to an
address designated by Agent and to receive, open and dispose of all mail
addressed to the Debtor. If the Debtor's books and records are prepared or
maintained by an accounting service, contractor or other third party agent, the
Debtor hereby irrevocably authorizes such service, contractor or other agent,
upon notice by Agent to such Person that an Event of Default has occurred and is
continuing, to deliver to Agent or its designees such books and records, and to
follow Agent's instructions with respect to further services to be rendered.

            (b) If any Event of Default shall have occurred and be continuing,
Agent may exercise in respect of the Collateral, in addition to all other rights
and remedies provided for herein or otherwise available to it, all the rights
and remedies of Agent on default under the UCC (whether or not the UCC applies
to the affected Collateral) and also may: (i) require the Debtor to, and the
Debtor hereby agrees that it will, at its expense and upon request of Agent
forthwith, assemble all or part of the Collateral as directed by Agent and make
it available to Agent at any place or places designated by Agent which is
reasonably convenient to Agent in which event the Debtor shall at its own
expense (A) forthwith cause the same to be moved to the place or places so
designated by Agent, (B) store and keep any Collateral so delivered to Agent at
such place or places pending further action by Agent, and (C) while Collateral
shall be so stored and kept, provide such guards and maintenance services as
shall be necessary to protect the same and to preserve and maintain the
Collateral in good condition; (ii) withdraw all cash in any deposit account and
apply such monies in payment of the Obligations; and (iii) without notice except
as specified below, sell, lease, license or otherwise dispose of the Collateral
or any part thereof by one or more contracts, in one or more parcels at public
or private sale, and without the necessity of gathering at the place of sale of
the property to be sold, at any of Agent's offices or elsewhere, at such time or
times, for cash, on credit or for future delivery, and at such price or prices
and upon such other terms as Agent may deem commercially reasonable.

            (c) The Debtor agrees that, to the extent notice of sale shall be
required by law, a reasonable authenticated notification of disposition shall be
a notification given at least ten (10) days prior to any such sale and such
notice shall (i) describe Agent and the Debtor, (ii) describe the Collateral
that is the subject of the intended disposition, (iii) state the method of
intended disposition, (iv) state that the Debtor is entitled to an accounting of
the Obligations and state the charge, if any, for an accounting, and (v) state
the time and place of any public disposition or the time after which any private
sale is to be made. At any sale of


                                      -15-
<PAGE>

the Collateral, if permitted by law, Agent may bid (which bid may be, in whole
or in part, in the form of cancellation of indebtedness) for the purchase,
lease, license or other disposition of the Collateral or any portion thereof for
the account of Agent (on behalf of Lenders). Agent shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given.
Agent may disclaim any warranties that might arise in connection with the sale,
lease, license or other disposition of the Collateral and have no obligation to
provide any warranties at such time. Agent may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned. To the extent permitted by law, the Debtor hereby specifically
waives all rights of redemption, stay or appraisal, which it has or may have
under any law now existing or hereafter enacted.

            (d) If an Event of Default has occurred and is continuing, the
Debtor hereby irrevocably authorizes and empowers Agent, without limiting any
other authorizations or empowerments contained in any of the other Loan
Documents, to assert, either directly or on behalf of the Debtor, any claims the
Debtor may have, from time to time, against any other party to any of the
agreements to which the Debtor is a party or to otherwise exercise any right or
remedy of the Debtor under any such agreements (including, without limitation,
the right to enforce directly against any party to any such agreement all of the
Debtor's rights thereunder, to make all demands and give all notices and to make
all requests required or permitted to be made by the Debtor thereunder).

            (e) If an Event of Default has occurred and is continuing, the
proceeds of any collection, enforcement, sale or other disposition of, or other
realization upon, all or any part of the Collateral and any cash held in any
deposit account shall be applied in accordance with the applicable provisions of
the Credit Agreement.

            (f) The Debtor acknowledges and agrees that a breach of any of the
covenants contained in Sections 4, 5 and 6 hereof will cause irreparable injury
to Agent and that Agent has no adequate remedy at law in respect of such
breaches and therefore agrees, without limiting the right of Agent to seek and
obtain specific performance of other obligations of the Debtor contained in this
Agreement, that the covenants of the Debtor contained in the Sections referred
to in this Section shall be specifically enforceable against the Debtor.

            (g) No failure or delay on the part of Agent or any Lender in the
exercise of any power, right or privilege hereunder shall impair such power,
right or privilege or be construed to be a waiver of any default or acquiescence
therein, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or any other right, power
or privilege. All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies otherwise available.

SECTION 6. Attorney-in-Fact.

            The Debtor hereby irrevocably appoints Agent, its nominee, and any
other Person whom Agent may designate, as the Debtor's attorney-in-fact, with
full power during


                                      -16-
<PAGE>

the existence of any Event of Default, (i) to sign the Debtor's name on
verifications of Accounts and other Collateral; (ii) to send requests for
verification of Collateral to the Debtor's customers, Account Debtors and other
obligors; (iii) to endorse the Debtor's name on any checks, notes, acceptances,
money orders, drafts, and any other forms of payment or security that may come
into Agent's possession or on any assignments, stock powers, or other
instruments of transfer relating to the Collateral or any part thereof; (iv) to
sign the Debtor's name on any invoice or bill of lading relating to any
Collateral, on claims to enforce collection of any Collateral, on notices to and
drafts against customers and Account Debtors and other obligors, on schedules
and assignments of Collateral, on notices of assignment and on public records;
(v) to notify the post office authorities to change the address for delivery of
the Debtor's mail to an address designated by Agent; (vi) to receive, open and
dispose of all mail addressed to the Debtor; and (vii) to do all things
necessary to carry out the terms and provisions of this Agreement. To the
fullest extent permitted by law, the Debtor hereby ratifies and approves all
acts of any such attorney and agrees that neither Agent nor any such attorney
will be liable for any acts or omissions nor for any error of judgment or
mistake of fact or law other than, and to the extent of, such Person's gross
negligence or willful misconduct. The foregoing powers of attorney, being
coupled with an interest, are irrevocable until the Obligations have been fully
paid and satisfied and the Security Interests shall have terminated in
accordance with the terms hereof.

SECTION 7. Expenses.

            Subject to the provisions of Section 10.04 of the Credit Agreement,
the Debtor hereby agrees to promptly pay all fees, costs and expenses (including
reasonable attorneys' fees and expenses) incurred in connection with (i)
protecting, storing, warehousing, appraising, insuring, handling, maintaining
and shipping the Collateral, (ii) creating, perfecting, maintaining and
enforcing Agent's Liens and (iii) collecting, enforcing, retaking, holding,
preparing for disposition, processing and disposing of the Collateral.

            If the Debtor fails to promptly pay any portion of the above costs,
fees and expenses when due or to perform any other obligation of the Debtor
under this Agreement, Agent may, at its option, but shall not be required to,
pay or perform the same and charge the Debtor's account for all reasonable fees,
all costs and all expenses incurred therefor, and the Debtor agrees to reimburse
Agent therefor promptly upon written demand. All sums so paid or incurred by
Agent or any other Lender for any of the foregoing, any and all other sums for
which the Debtor may become liable hereunder and all fees, costs and expenses
(including reasonable attorneys' fees, all legal expenses and all court costs)
incurred by Agent in enforcing or protecting the Security Interests or any of
their rights or remedies under this Agreement shall constitute Obligations and,
to the extent not paid when due, shall bear interest until paid at the Default
Rate and shall be secured by the Collateral.

SECTION 8. Notices.

            All notices, approvals, requests, demands and other communications
hereunder to be delivered to the Debtor and all notices, approvals, requests,
demands and


                                      -17-
<PAGE>

other communications hereunder shall be given in accordance with the notice
provision of the Credit Agreement.

SECTION 9. Successors and Assigns.

            This Agreement shall be binding upon and insure to the benefit of
the parties hereto and their respective successors and assigns except that the
Debtor may not assign its rights or obligations hereunder without the written
consent of Agent. No sales of participations, other sales, assignments,
transfers or other dispositions of any agreement governing or instrument
evidencing the Obligations or any portion thereof or interest therein, made in
accordance with the provisions of Section 10.07 of the Credit Agreement shall in
any manner impair the Lien granted to Agent, for the benefit of Agent and
Lenders, hereunder.

SECTION 10. Changes in Writing.

            No amendment, modification, termination or waiver of any provision
of this Agreement shall be effective unless the same shall be in writing signed
by Agent.

SECTION 11. GOVERNING LAW; SUBMISSION TO JURISDICTION.

            THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, the LAWS OF THE STATE OF ILLINOIS applicable to agreements made and to be
performed entirely within such State; PROVIDED THAT DEBTOR AND AGENT SHALL
RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. ANY LEGAL ACTION OR PROCEEDING WITH
RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS
SITTING IN COOK COUNTY, ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN
DISTRICT OF SUCH STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, DEBTOR
AND Agent CONSENT, FOR THEMSELVES AND IN RESPECT OF THEIR PROPERTY, TO THE
NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. DEBTOR AND Agent IRREVOCABLY WAIVE
ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
AGREEMENT. DEBTOR AND Agent WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR
OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF SUCH
STATE.

SECTION 12. WAIVER OF JURY TRIAL.

            EACH OF THE DEBTOR AND AGENT HEREBY IRREVOCABLY WAIVES ANY AND ALL
RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR


                                      -18-
<PAGE>

THE TRANSACTIONS CONTEMPLATED HEREBY AND AGREES THAT ANY SUCH ACTION OR
PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

SECTION 13. Counterparts; Integration.

            This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement constitutes the entire
agreement and understanding among the parties hereto and supersede any and all
prior agreements and understandings, oral or written, relating to the subject
matter hereof.

SECTION 14. Headings.

            Headings and captions used in this Agreement are included for
convenience of reference and shall not be given any substantive effect.


                                      -19-
<PAGE>

      IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                                        PEI HOLDINGS, INC.


                                        By  /s/ Robert Campbell
                                            ------------------------------------
                                        Its Treasurer

                                        BANK OF AMERICA, N.A.


                                        By  /s/ David A. Johanson
                                            ------------------------------------
                                        Its David A. Johanson
                                            Vice President


                                      -20-
<PAGE>



                                   Schedule I
                           Organizational Information

(i)   Name of Debtor

      PEI Holdings, Inc.

(ii)  Former Name(s) (within a 5-year period preceding the Closing Date)

      None

(iii) Type of Organization

      Corporation

(iv)  Jurisdiction of Organization

      Delaware

(v)   Organizational Identification Number

      2970390

<PAGE>

                                   Schedule II
                              Collateral Locations

(i)   Location of Chief Executive Office

      680 N. Lake Shore Drive
      Chicago, IL
      (Leased Location)

(ii)  Other Locations/ Third-Party Locations/Fixture Locations

      None


                                      -22-
<PAGE>

                                  Schedule III
                             Commercial Tort Claims

                                      None.


                                      -23-
<PAGE>

                                   Schedule IV
                         Certain Collateral Disclosures

                                      None.


                                      -24-
<PAGE>

                                   Schedule V
                          Intellectual Property Claims

                                      None.


                                      -25-
<PAGE>

                                   Schedule VI
                          Excluded Investment Property

                                      None.


                                      -26-

Source: OneCLE Business Contracts.