Document:

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                                                                   EXHIBIT 10.42

This note supercedes and replaces the note dated March 16, 2000 executed by the
Borrower in favor of the Bank in the amount of $10,000,000.00

PROMISSORY NOTE

U.S. $15,000,000.00
     --------------

October 11, 2000 New York, New York
----------------

1.   OBLIGATION AND REPAYMENT: For value received, Borrower absolutely and
     unconditionally promises to pay to the order of the Bank, at the Office,
     without defense, setoff or counterclaim, the principal amount of Fifteen
     Million and 00/100 United States Dollars, together with interest and any
     other sum(s) due as specified below. The principal amount of this Note
     shall be due and payable as follows (complete one of the following as
     applicable):

     (A)    [ ] ON DEMAND.

     (B)    On ______________, 19____.

     (C)    In consecutive installments, of which each but the last shall be
            $_____________ and the last of which shall be equal to the then
            unpaid principal balance of this Note. The first such installment
            shall be due on ______________, 19__. Each subsequent installment
            shall be due on the corresponding day of each month/ quarter/ other
            __________ thereafter (or if there is no such corresponding day, on
            the last day of such period). The remaining principal balance shall
            be due on ______________, 19__.

     (D)    [X] In accordance with the attached Rider, but in any eveny no later
            than November 30, 2001.

2.   INTEREST: Subject to paragraph A(2) of the Terms and Conditions, interest
     shall accrue on the principal amount of this Note outstanding from time to
     time at the following rate (the "Loan Rate") (complete one of the following
     as applicable):

     (A)    A fixed rate equal to ______% per year.

     (B)    A Variable Prime-Based Rate equal to the Prime Rate plus ______% per
            year.

     (C)    [X] In accordance with the attached Rider.

     Interest shall be payable monthly/ quarterly/ (other) _____________ and at
     any Payment Date and at any time that any part of the principal or any
     installment of this Note is paid.

3.   RIDERS: IN THE EVENT OF ANY INCONSISTENCY BETWEEN THIS NOTE AND ANY
     RIDER(S) TO WHICH THIS NOTE IS SUBJECT, THE PROVISIONS OF SUCH RIDER(S)
     SHALL PREVAIL. THIS NOTE IS SUBJECT TO ANY RIDER(S) REFERRED TO IN
     PARAGRAPH 1(D) AND/OR 2(C) AND TO THE FOLLOWING RIDER(S), ALL OF WHICH ARE
     PART OF THIS NOTE:

                    Multiple-Loan Rider to Promissory Note
                    --------------------------------------
                              (Libor-Based Rate)

4.   ADDRESS AND IDENTIFICATION OF BORROWER:

     Address:   800 Regency Parkway
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               ---------------------------------------------------------
                         Cary, NC  27511
               ---------------------------------------------------------
     Telex or similar number:
                               -----------------------------------------
     Answerback:
                  ------------------------------------------------------
     Telecopy or similar number:
                                  --------------------------------------
     Social Security or Taxpayer ID number:
                                             ---------------------------

5.   AGREEMENT TO ALL TERMS AND CONDITION; AUTHORIZATION TO COMPLETE BLANKS:
     THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH BELOW AND ON THE
     REVERSE SIDE OF THIS NOTE. EACH OF THE UNDERSIGNED AGREES TO ALL OF THE
     PROVISIONS OF THIS NOTE, INCLUDING THE TERMS AND CONDITIONS AND ANY
     RIDER(S). THE BANK IS AUTHORIZED TO COMPLETE ANY BLANK SPACE IN THIS NOTE.
     SUCH COMPLETION SHALL BE CONCLUSIVE, FINAL AND BINDING ON BORROWER IN THE
     ABSENCE OF MANIFEST ERROR.

6.   NO REPRESENTATIONS OR AGREEMENTS BY THE BANK: EACH OF THE UNDERSIGNED
     ACKNOWLEDGES THAT THE BANK HAS MADE NO REPRESENTATION, COVENANT, COMMITMENT
     OR AGREEMENT TO BORROWER EXCEPT PURSUANT TO ANY WRITTEN DOCUMENT EXECUTED
     BY THE BANK.

7.   NO REPRESENTATION OF NONENFORCEMENT: EACH OF THE UNDERSIGNED ACKNOWLEDGES
     THAT NO REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED OR INDICATED
     THAT THE BANK WILL NOT ENFORCE ANY PROVISION OF THIS NOTE, INCLUDING THE
     TERMS AND CONDITIONS AND ANY RIDER(S), IN THE EVENT OF LITIGATION OR
     OTHERWISE.

8.   WAIVER OF JURY TRIAL: BORROWER WAIVES, AND UNDERSTANDS THAT THE BANK
     WAIVES, THE RIGHT TO A JURY TRIAL WITH RESPECT TO ANY DISPUTE ARISING
     HEREUNDER OR RELATING TO ANY OF THE LIABILITIES; ANY JUDICIAL PROCEEDING
     WITH RESPECT TO ANY SUCH DISPUTE SHALL TAKE PLACE WITHOUT A JURY.

9.   EXECUTION OF PROMISSORY NOTE:

     Print name of Borrower: Level 8 Systems, Inc.
                             ---------------------------------------------

     (Signature) By:         /s/ Renee D. Fulk
                         -------------------------------------------------
     Print name:             Renee D. Fulk
                         -------------------------------------------------
     Title or capacity:      Chief Financial Officer
                         -------------------------------------------------
     (if signing on behalf of Borrower)
     (Signature) By:         /s/ Steven Dmiszewicki
                         -------------------------------------------------
     Print Name:             Steven Dmiszewicki
                         -------------------------------------------------
     Title or capacity:      President
                         -------------------------------------------------
     (if signing on behalf of Borrower)

================================================================================

                             TERMS AND CONDITIONS

Definitions are set forth in paragraph M

A.   CALCULATION AND ACCRUAL OF INTEREST: (1) GENERALITY. Interest shall be
     calculated on a daily basis on outstanding balances at the Applicable Rate,
     divided by 360, on the actual days elapsed. During any time that the
     Applicable Rate would exceed the applicable maximum lawful rate of
     interest, the Applicable Rate shall automatically be reduced to such
     maximum rate. Any interest payment made in excess of such maximum rate
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     shall be applied as, and deemed to be, in the Bank's sole discretion, (a) a
     payment of any of the Liabilities, in such manner as determined by the
     Bank, or (b) cash collateral to be retained by the Bank to secure repayment
     of this Note. (2) INCREASED RATE. Interest shall accrue at the Increased
     Rate upon and after (a) the occurrence of any Debtor Relief Action, (b) any
     demand of payment of this Note (if payable on demand) or (c) the occurrence
     of any Event of Default (if this Note is payable other than on demand). (3)
     ACCRUAL. To the extent permitted by Law, interest shall accrue at the
     Applicable Rate on all unpaid Liabilities under this Note, including but
     not limited to any unpaid interest and any unpaid obligation owed pursuant
     to paragraph B (Indemnification).

B.   INDEMNIFICATION: To the extent permitted by Law: (1) TAXES: All payments
     under this Note shall be made free and clear of, and without deduction for,
     any Taxes. If Borrower shall be required to deduct any Taxes in respect of
     any sum payable under this Note, then (a) the sum payable shall be
     increased so that the Bank shall receive an amount equal to the sum the
     Bank would have received had no deductions been made, and (b) Borrower
     shall make such deductions and shall pay the amount deducted to the
     relevant Governmental Authority. Borrower shall pay to the Bank on demand,
     and shall indemnify and hold the Bank harmless from, any and all Taxes paid
     by the Bank and any and all liability (including penalties, interest and
     expenses) with respect thereto, whether or not such Taxes were correctly or
     legally asserted. Within 30 days after any Taxes are paid, Borrower shall
     furnish evidence thereof to the Bank. (2) REGULATORY COSTS. In the event
     that in connection

     with the transaction(s), contemplated by this Note and/or the Bank's
     funding of such transaction(s), the Bank is required to incur any
     Regulatory Costs in order to comply with any Law issued after the date of
     this Note, then Borrower shall pay the Bank on demand, and shall indemnify
     and hold the Bank harmless from any and all such Regulatory Costs. (3)
     COSTS AND EXPENSES. Borrower shall pay the Bank on demand, and shall
     indemnify and hold the Bank harmless from, any and all costs and expenses.
     (4) PREPAYMENT COSTS. If Borrower makes any payment of Prepaid Principal
     (voluntarily or not), and if the Applicable Rate with respect to such
     Prepaid Principal is not a Variable Prime-Based Rate, then Borrower shall
     pay to the Bank an amount sufficient to compensate the Bank for its
     Prepayment Costs. Borrower acknowledges that determining the actual amount
     of Prepayment Costs may be difficult or impossible in any specific
     instance. Accordingly, Borrower agrees that Prepayment Costs shall be
     deemed to be the excess, if any, of (i) the product of (A) the Prepaid
     Principle, times (B) the Applicable Rate divided by 360, times (C) the
     remaining number of days from the date of the payment to the applicable
     Payment Date, over (ii) that amount of interest which the Bank determines
     that the holder of a Treasury Obligation selected by the Bank in the amount
     (or as close to such amount as feasible) of the Prepaid Principal and
     having a maturity date on (or as soon after as feasible) the applicable
     Payment Date would earn if that Treasury Obligation were purchased in the
     secondary market on the date the Prepaid Principal is paid to the Bank and
     were held to maturity. Borrower agrees that the determination of Prepayment
     Costs shall be based on amounts which a holder of a Treasury Obligation
     could receive under these circumstances, whether or not the Bank actually
     invests the Prepaid Principal in any Treasury Obligation. (5) BANK
     CERTIFICATE. The Bank's certificate as to any amounts owing under this
     paragraph shall be prima facia evidence of Borrower's obligation.

C.   SET OFF: Every Account of Borrower with the Bank shall be subject to a lien
     and to being set off against the Liabilities. The Bank may at any time at
     its option and without notice, except as may be required by law, charge
     and/or appropriate and apply all or any part of any such Account toward the
     payment of any of the Liabilities.

D.   EVENTS OF DEFAULT: The remainder of this paragraph D shall not apply if
     this Note is payable on demand. Each of the following shall be an Event of
     Default hereunder: (1) NONPAYMENT. (a) The nonpayment when due of any
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     part of the Liabilities; (b) the prohibition by any Law of payment of any
     part of any of the Liabilities; (2) BANKRUPTCY; ADVERSE PROCEEDINGS. (a)
     The occurrence of any Debtor Relief Action; (b) the appointment of a
     receiver, trustee, committee, custodian, personal representative or similar
     official for any Party or for any Material part of any Party's property;
     (c) any action taken by any Party to authorize or consent to any action set
     forth in subparagraph D(2)(a) or (b); (d) the rendering against any Party
     of one or more judgments, orders, decrees and/or arbitration awards
     (whether for the payment of money or injunctive or other relief) which in
     the aggregate are Material to such Party, if they continue in effect for 30
     days without being vacated, discharged, stayed, satisfied or performed; (e)
     the issuance or filing of any warrant, process, order of attachment,
     garnishment or other lien or levy against any Material part of any Party's
     property; (f) the commencement of any proceeding under, or the use of any
     of the provisions of any Law against any Material part of any Party's
     property, including but not limited to any Law (i) relating to the
     enforcement of judgments or (ii) providing for forfeiture to, or
     condemnation, appropriation, seizure or taking possession by, or on order
     of any Governmental Authority; (g) the forfeiture to, or the condemnation,
     appropriation, seizure or taking possession by, or on the order of, any
     Governmental Authority, of any Material part of any Party's property; (h)
     any Party being charged with a crime by indictment, information or the
     like. (3) NONCOMPLIANCE. (a) Any Default with respect to any Agreement with
     or to the Bank, (b) the giving to the Bank by or on behalf of any Party at
     any time of any materially incorrect or incomplete representation,
     warranty, statement or information; (c) the failure of any Party to furnish
     to the Bank, copies of its financial statements and such other information
     respecting its business, properties, condition or operations, financial or
     otherwise, promptly when, and in such form as, reasonably required or
     requested by the Bank; (d) any Party's failure or refusal, upon reasonable
     notice from the Bank, to permit the Bank's representative(s) to visit such
     Party's premises during normal business hours and to examine and make
     photographs, copies and extracts of such Party's property and of its books
     and records; (e) any Party's concealing, removing or permitting to be
     concealed or removed, any part of its property with the intent to hinder or
     defraud any of its creditors; (f) any Party's making or suffering any
     Transfer of any of its property, which Transfer is deemed fraudulent under
     the law of any applicable jurisdiction; (g) the revocation or early
     termination of any Party's obligations under any Agreement with or to the
     Bank (including, but not limited to any of the Liabilities) or the
     validity, binding effect or enforceability of any such obligations being
     challenged or questioned, whether or not by the institution of proceedings.
     (4) ADVERSE CHANGES. (a) the occurrence of a Material adverse change in any
     Party's financial condition; (b) the death or incompetence (if a person) or
     the dissolution or liquidation (if a corporation, partnership or other
     entity) of any Party or such Party's failure to be and remain in good
     standing and qualified to do business in each jurisdiction Material to such
     Party; (c) any Material Default with respect to any Material Agreement
     other than with or to the Bank; (d) any Default pursuant to which any
     Person shall have the power to effect an Acceleration of any Material Debt;
     (e) any Acceleration or demand of payment with respect to any Material
     Debt; (f) any Party's becoming insolvent, as defined in the Uniform
     Commercial Code; (g) the Bank's believing in good faith that the prospect
     of payment of any of the Liabilities or of performance of any other
     obligation of any Party to the Bank is impaired; (h) the Material
     suspension of any Party's business; (i) any Party's Material failure to pay
     any tax when due; (j) the expulsion of any Party from any exchange or self-
     regulatory organization or any loss, suspension, nonrenewal or invalidity
     of any Party's Material license, permit, franchise, patent, copyright,
     trademark or the like; (k) the occurrence of any event which gives any
     Person the right to assert a lien, levy or right of forfeiture against any
     Material part of any Party's property; (l) Borrower's failure to give the
     Bank notice, within 10 Business Days after Borrower had notice or
     knowledge, of the occurrence of any event which, with the giving of notice
     and/or lapse of time, would constitute an Event of Default. (5) BUSINESS
     CHANGES. (a) any
<PAGE>

     change in Control of any Party; (b) any merger or consolidation involving
     any Party; (c) any Party's sale or other Transfer or substantially all of
     its property; (d) any bulk sale by any Party; (e) any Material change in
     the nature or structure of any Party's business. (6) EXCHANGE CONTROLS. (a)
     Any Party's failure to obtain any Exchange Control Permit deemed by the
     Bank to be necessary or appropriate; (b) the failure to obtain the renewal
     of any such Exchange Control Permit at least 30 days prior to its
     expiration.

E.   REMEDIES: (1) ACCELERATION AT BANK'S OPTION. Upon any failure to pay this
     Note in full on demand (if payable on demand) or (if this Note is payable
     other than on demand) upon the occurrence of any Event

                                       2

     of Default other than any Debtor Relief Action, then any and all
     Liabilities, not then due, shall, at the Bank's option, become immediately
     due and payable without notice, which Borrower waives. (2) AUTOMATIC
     ACCELERATION. Upon the occurrence of any Debtor Relief Action, then,
     whether or not any of the Liabilities are payable upon demand and
     notwithstanding paragraph F, any and all Liabilities, not then due, shall
     automatically become immediately due and payable without notice or demand,
     which Borrower waives. (3) Additional Remedies. The Bank shall have all
     rights and remedies available to it under any applicable Agreement or Law.

F.   WAIVER OF PROTEST, ETC.: Notice, presentment, protest, notice of dishonor
     and except for such of the Liabilities as are payable on demand, but
     subject to subparagraph E(2) demand for payment are hereby waived as to all
     of the Liabilities.

G.   PAYMENT: (1) MANNER. Any payment by other than immediately available funds
     shall be subject to collection, interest shall continue to accrue until the
     funds by which payment is made are available to the Bank. If and to the
     extent any payment of any of the Liabilities is not made when due, the Bank
     is authorized in its discretion to effect payment by charging any amount so
     due against any Account of Borrower with the Bank without notice, except as
     may be required by law, whether or not such charge creates an overdraft.
     (2) Application. Any payment received by the Bank (including a deemed
     payment under paragraph A, a set-off under paragraph C or a charge against
     an Account under this paragraph G) shall be applied to pay any obligation
     of indemnification (including but not limited to under paragraph B) and to
     pay any other Liabilities (including interest thereon and the principal
     thereof) in such order as the Bank shall elect in its discretion. Borrower
     will continue to be liable for any deficiency. (3) PREPAYMENT. Borrower
     shall be entitled to pay any outstanding principal amount or installment
     under this Note on any Business Day prior to the applicable Payment Date
     without the prior consent of the Bank provided that (a) any such payment
     shall be together with payment of all Liabilities then due and all interest
     accrued on the Prepaid Principal to the date of such payment, and (b) if
     the Applicable Rate with respect to such Prepaid Principal is not a
     Variable Prime-Based Rate, any such payment shall be on not less than 5
     Business Day's notice to the Bank and shall be accompanied by any amount
     required pursuant to subparagraph B(4). Any such payment shall, unless
     otherwise consented to by the Bank, be applied pro rata to the last
     outstanding principal amount(s) to become due under this Note in inverse
     order of maturity. (4) NON-BUSINESS DAYS. If any payment of any of the
     Liabilities is due on any day that is not a Business Day, it shall be
     payable on the next Business Day. The additional day(s) shall be included
     in the compilation of interest. (5) EXTENSION AT BANK'S OPTION. The Bank
     shall have the option, which may be exercise one or more times by notice(s)
     to Borrower, to extend the date on which any amount is payable hereunder to
     one or more subsequent date(s) set forth in such notice(s).

H.   PARTIES; NO TRANSFER BY BORROWER: If Borrower is more than one Person,

<PAGE>

     all of them shall be jointly and severally liable under the Note. The
     obligations under this Note shall continue in force and shall apply
     notwithstanding any change in the membership of any partnership executing
     this Note, whether arising from the death or retirement of one or more
     partners or the accession of one or more new partners. Without the Bank's
     written consent, Borrower shall have no right to make any Transfer of any
     of the Liabilities, any such purported Transfer shall be void. Subject to
     the foregoing, the provisions of this Note shall be binding on Borrower's
     executors, administrators, successors and assigns.

I.   BANK TRANSFERS: (1) TRANSFERABILITY. Without limiting the Bank's rights
     hereunder, the Bank may make a Transfer of all or any part of (a) any
     obligation of Borrower to the Bank (including but not limited to any of the
     Liabilities); (b) any obligation of any other Party in connection with any
     of the Liabilities; (c) any Agreement of any Party in connection with any
     of the Liabilities; (d) any collateral, mortgage, lien or security
     interest, however denominated, securing any of the Liabilities; and/or (e)
     the Bank's rights and, if any, obligations with respect to any of the
     foregoing. (2) EXTENT OF TRANSFER. In the event the Bank shall make any
     Transfer of any of the foregoing items ("Transferred Items"), then - to the
     extent provided by the Bank with respect to such Transfer, the Transferee
     shall have the rights, powers, privileges and remedies of the Bank. The
     Bank shall thereafter, to the extent of such Transfer, be forever relieved
     and fully discharged from all liability or responsibility, if any, that it
     may have to any Person with respect thereto, except for claims, if any,
     arising prior to or upon such Transfer. The Bank shall retain all its
     rights and powers with respect to any Transferred items to the extent that
     it has not made a Transfer thereof. Without limiting the foregoing, to the
     extent of any such Transfer, paragraph B (indemnification) shall apply to
     any Taxes, Regulatory Costs, Costs and Expenses and Prepayment Costs of, or
     incurred by, any Transferee, and paragraphs C (Set-Off) and G(1) (Payment-
     Manner) shall apply to any Account of Borrower with any Transferee. (3)
     DISCLOSURES. The Bank is authorized to disclose to any prospective or
     actual Transferee any information that the Bank may have or acquire about
     Borrower and any information about any other Person submitted to the Bank
     by or on behalf of Borrower. (4) NEGOTIABILITY DEFENSES WAIVED. IF THIS
     NOTE IS NOT A NEGOTIABLE INSTRUMENT, BORROWER WAIVES ALL DEFENSES (EXCEPT
     SUCH DEFENSES AS MAY BE ASSERTED AGAINST A HOLDER IN DUE COURSE OF A
     NEGOTIABLE INSTRUMENT) WHICH BORROWER MAY HAVE OR ACQUIRE AGAINST ANY
     TRANSFEREE WHO TAKES THIS NOTE, OR ANY COMPLETE OR PARTIAL INTEREST IN IT,
     FOR VALUE, IN GOOD FAITH AND WITHOUT NOTICE THAT IT IS OVERDUE OR HAS BEEN
     DISHONORED OR OF ANY DEFENSE AGAINST OR CLAIM TO IT ON THE PART OF ANY
     PERSON.

J.   NO ORAL CHANGES; NO WAIVER BY THE BANK; PARTIAL UNENFORCEABILITY. This Note
     may not be changed orally. Neither a waiver by the Bank of any of its
     options, powers or rights in one or more instances, nor any delay on the
     part of the Bank in exercising any of them, nor any partial or single
     exercise thereof, shall constitute a waiver thereof in any other instance.
     Any provision of this Note which is prohibited, unenforceable or not
     authorized in any jurisdiction shall, as to such jurisdiction, be
     ineffective to the extent of such prohibition, unenforceability or non-
     authorization, without invalidating the remaining provisions of the Note in
     that or any other jurisdiction and without affecting the validity,
     enforceability or legality of such provision in any other jurisdiction.

K.   DISPUTES AND LITIGATION: (1) GOVERNING LAW. This Note and the rights and
     obligations of the Bank and Borrower hereunder shall be governed by the
     internal laws of the State of New York without giving effect to conflict of
     laws principles. (2) JURISDICTION, VENUES AND SERVICE OF PROCESS. Borrower
     submits to the nonexclusive jurisdiction of the federal and state courts in
     the State of New York in New York County with respect to any dispute that
     may be made on Borrower by personal deliver at, or by mail addressed to,
     any address to which the Bank is authorized to address notices to Borrower.
     (3) WAIVER OF DEFENSES, SETOFFS, COUNTERCLAIMS AND
<PAGE>

     CERTAIN DAMAGES. Borrower waives the right to assert any defense, setoff or
     counterclaim in any proceeding relating in any way to this Note or any
     transaction contemplated hereby. The Bank shall not have any liability for
     negligence,

                                       3

     except solely to the extent required by law and not disclaimable, and
     except for its own gross negligence or willful misconduct. In any event,
     the Bank shall not have any liability for any special, consequential or
     punitive damages. (4) SOVEREIGN IMMUNITY. Borrower irrevocably waives, with
     respect to itself and its property, any sovereign immunity that it may have
     or hereafter acquire, including but not limited to immunity from the
     jurisdiction of any court, from any legal process, from attachment prior to
     judgment, from attachment in aid of execution, from execution or otherwise.

L.   NOTICE. Any notice in connection with any of the Liabilities shall be in
     writing and may be delivered personally or by cable, telex, telecopy or
     other electronic means of communication, or by certified mail, return
     receipt requested, addressed (a) to Borrower as set forth herein or to any
     other address that the Bank believes to be Borrower's address, and (b) to
     the Bank at Bank Hapoalim B.M., 1177 Avenue of the Americas, New York, New
     York 10036, Attention Legal Department. Any such notices shall be addressed
     to such other address(es) as may be designated in writing hereafter. All
     such notices shall be deemed given when delivered personally or
     electronically or when mailed, except notice of change of address, which
     shall be deemed to have been given when received.

M.   DEFINITIONS. The following definitions apply in this Note: (1)
     ACCELERATION. Any acceleration of payment of requirement of prepayment of
     any Debt, or any Debt's becoming due and payable prior to stated maturity.
     (2) ACCOUNT: (a) the balance of any account of Borrower with any Person,
     (b) any claim of Borrower against any Person and/or (c) any property in the
     possession or custody of, or in transit to, any Person, whether for
     safekeeping, collection, pledge or otherwise, as to which Borrower has any
     right, power or interest, in each case whether existing now or hereafter,
     in any jurisdiction worldwide, and whether or not disconnected in the same
     currency as any of the Liabilities. (3) AGREEMENT. Any agreement or
     instrument (including but not limited to this Note), no matter when made,
     under which any Party is obligated to any Person. (4) APPLICABLE RATE.
     Whichever of the Loan Rate or Increased Rate is the applicable interest
     rate at any time. (5) BANK: Bank Hapoalim B.M. (6) BORROWER. The Person(s)
     executing this Note at paragraph 9 or any one or more of them. "Borrower"
     may refer to one or more Persons. (7) BUSINESS DAY. Any day on which both
     (a) banks are regularly open for business in New York City and (b) the
     Office is open for ordinary business in the Bank's discretion, the Office
     may be closed on any Saturday, Sunday, legal holiday or other day on which
     it is lawfully permitted to close. (8) CONTROL. The power, alone or in
     conjunction with others, directly or indirectly, through voting securities,
     by contract or otherwise, to direct or cause the direction of a Person's
     management and policies. (9) COSTS AND EXPENSES. Any and all reasonable
     costs and expenses (including but not limited to attorneys' fees and
     disbursements) incurred in connection with the Borrower and/or the
     Liabilities, including but not limited to those for (a) any action taken,
     whether or not by litigation, to collect, or to protect rights or interests
     with respect to, or to preserve any collateral securing, any of the
     Liabilities; (b) compliance with any legal process or any order or
     directive of any Governmental Authority with respect to any party; (c) any
     litigation or administrative proceeding relating to any Party and/or (d)
     any amendment, modification, extension or waiver with respect to any of the
     Liabilities. (10) DEBT. Any Party's obligation of any sort (in whole or in
     part for the payment of money to any Person, whether (a) absolute or
     contingent, (b) secured or unsecured, (c) joint, several or independent,
     (d) nor or hereafter existing, or (e) due or to become due.
<PAGE>

     (11) DEBTOR RELIEF ACTION. The commencement by any Party or (unless
     dismissed or terminated within 30 days) against any Party of any proceeding
     under any law of any jurisdiction (domestic or foreign) relating to
     bankruptcy, reorganization, insolvency, arrangement, composition,
     receivership, liquidation, dissolution, moratorium or other relief of
     financially distressed debtors, or the making by any Party of any
     assignment for the benefit of creditors. (12) DEFAULT. Any breach, default
     or event of default under, or any failure to comply with, any provision of
     any Agreement. (13) EVENT OF DEFAULT. Any event set forth in paragraph D.
     (14) EXCHANGE CONTROL PERMIT. Any permit or license issued by a
     Governmental Authority outside the United States under which any Party is
     permitted (a) to incur and pay any of the Liabilities in the United States
     in any currency(ies) in which denominated or (b) to enter into, incur and,
     or perform any other obligation or Agreement. (15) GOVERNMENTAL AUTHORITY.
     Any domestic or foreign, national or local (a) government, (b)
     governmental, quasi-governmental or regulatory agency or authority, (c)
     court or (d) central bank or other monetary authority. (16) INCREASED RATE.
     (a) If the Loan Rate is a Variable Prime-Based Rate, the Increased Rate
     with respect to the entire outstanding principal balance shall be the Loan
     Rate plus 2% per year; (b) if the Loan Rate is not a Variable Prime-Based
     Rate, the Increased Rate with respect to any amount of principal or
     installment shall be (i) the Loan Rate plus 2% per year prior to the
     applicable Payment Date and (ii) the Prime Rate plus 4% per year on or
     subsequent to the applicable Payment Date. (17) LAW. Any treaty, law,
     regulation, rule, Judgment, order, decree, guideline, interpretation or
     request (whether or not having the force of law) issued by any Governmental
     Authority. (18) LIABILITIES. (a) any and all of the Debt evidenced by this
     Note, and any and all other Debt of Borrower to, or held or to be held by,
     the Bank in any jurisdiction worldwide for its own account or as agent for
     another or others, whether created directly or acquired by Transfer or
     otherwise, and (b) any and all obligations of any other Party with respect
     to any of such Debt. (19) LOAN RATE. The interest rate determined under
     paragraph 2. (20) MATERIAL. Material to the business or financial condition
     of any Party on a consolidated or consolidating basis. (21) OFFICE. The
     Bank's office at 1177 Avenue of the Americas, New York, New York 10036, or
     such other place as the Bank may specify by notice. (22) PARTY. (a)
     borrower; (b) any maker co-maker or endorser or any Agreement evidencing or
     any guarantor surety, accommodation party or indemnitor with respect to, or
     any Person that provides any collateral as security for, or any Person that
     issues a subordination, comfort letter, standby letter of credit,
     repurchase agreement, put agreement, option, other Agreement or other
     credit support with respect to any of the Liabilities; (c) if any Party is
     a partnership or joint venture, any general partner or joint venturer in
     such Party, and (d) any Person (i) that is under the Control of any Party
     and (ii) whose business or financial condition is Material to such Party.
     (23) PAYMENT DATE. Any Business Day on which any part of the principal or
     any installment of this Note becomes due and payable under paragraph 1 (and
     not on account of an Acceleration). (24) PERSON. Any person, partnership,
     joint venture, company, corporation, uncorporated organization or
     association, trust, estate, Governmental Authority, or any other entity.
     (25) PREPAID PRINCIPAL. Any amount of principal or any installment of this
     Note which Borrower pays prior to the applicable Payment Date for such
     amount. (26) PREPAYMENT COSTS. All losses, costs and expenses incurred as a
     result of receiving Prepaid Principal and of reinvesting it at rate(s)
     which may be less than the Applicable Rate

                                       4

     for such Prepaid Principal. (27) PRIME RATE. The Bank's New York Branch's
     stated Prime Rate as reflected in the books and records as such Prime Rate
     may change from time to time. The Bank's determination of its Prime Rate
     shall be conclusive and final. The Prime Rate is a reference rate and not
     necessarily the lowest interest rate charged by the Bank. (28) REGULATORY
     COSTS. Any and all costs and expenses of complying with any Law, including
     but not limited to with respect to (a) any reserves or
<PAGE>

     special deposits maintained for or with, or pledges to, any Governmental
     Authority, or (b) any capital, capital equivalency ledger account, ratio of
     assets to liabilities, risk-based capital assessment or any other capital
     substitute, risk-based or otherwise. (29) Taxes. Any and all present and
     future taxes, levies, imposts, deductions, charges and withholdings in any
     jurisdiction worldwide, and all liabilities with respect thereto, which are
     imposed with respect to this Note or to any amount payable under this Note,
     excluding taxes determined on the basis of the net income of a Person or of
     any of its offices. (30) TRANSFER. Any negotiation, assignment,
     participation, conveyance, grant of a security interest, lease, delegation,
     or any other direct or indirect transfer of a complete or partial, legal,
     beneficial, economic or other interest or obligation. (31) TRANSFEREE. Any
     Person to whom a Transfer is made. (32) TRANSFERRED ITEMS. Items defined in
     paragraph I. (33) TREASURY OBLIGATIONS. A note, bill or bond issued by the
     United States Treasury Department as a full faith and credit general
     obligation of the United States. (34) VARIABLE PRIME-BASED RATE. Any
     Applicable Rate which is determined based on the Prime Rate. Any such rate
     shall change automatically when and as the Prime Rate changes.

                                       5

                    Multiple-Loan Rider to Promissory Note

                              (Libor-Based Rate)

This Rider is referred to in paragraph 2(c) of, and constitutes a part of, a
note of Borrower to the Bank dated October 11, 2000.

================================================================================

SPECIFIC TERMS

(a)  Margin:  1.00% per year

(b)  Interest Period:  (__) _________ days [x] 1, 2 or 3 months and [x] as
                                agreed from time to time

(c)  Minimum Draw Amount:  U.S. ___________________             [  ]  None

(d)  Minimum Multiple Amount: U.S. $
                                   ----------------             [  ]  None

================================================================================

Borrower agrees to the above Specific Terms and to all of the Terms and
Conditioning set forth below.

Print Borrower's Name:   Level 8 Systems, Inc.
                        ------------------------------------------------------

(Signature) By: /s/ Renee D.Fulk          (Signature) By: /s/ Steven Dmiszewicki
               ------------------------                   ----------------------
Print Name and    Renee D. Fulk,            Print Name and   Steven Dmiszewicki,
         Title    Chief Financial Officer            Title   President

TERMS AND CONDITIONS

Certain capitalized terms are defined in paragraph 4.

1.   Advances. Borrower may receive a Loan in any principal amount upon
<PAGE>

     Borrower's request to the Bank and the Bank's agreement thereto, subject to
     all of the following conditions:

     (a)  Agreement of the Bank and Borrower. Subject to subparagraphs 1(b),
          1(c) and 2(b), the Bank and Borrower shall have agreed, not later than
          the Determination Time, with respect to the Loan's (i) principal
          amount, (ii) LIBOR-Base Rate and (iii) Interest Period; provided,
          however, that if the Bank determines that by such Determination Time,
          Borrower has failed or declined to agree on the LIBOR-Based Rate
          and/or Interest Period with respect to such Outstanding Principal
          Amount, then interest on such Outstanding Principal Amount shall
          accrue at the LIBOR-Based Rate without the agreement of Borrower, and
          the Interest Period shall be of the same duration as

          the Interest Period just ended with respect to such Outstanding
          Principal Amount or, if there was no such prior Interest Period, one
          month.

     (b)  Applicable limitations. (i) The applicable Payment Date shall not be
          later than the Due Date; (ii) the total of the Outstanding Principal
          Amounts of all Loans shall not exceed the principal amount set forth
          in the Note; (iii) the principal amount of any single Loan request
          shall be not less than any Minimum Draw Amount set forth under
          Specific Terms; and (iv) the principal amount of any single Loan
          request shall be an integral multiple of any Minimum Multiple Amount
          set forth under Specific Terms.

     (c)  Borrower's request and agreement. Borrower's request for a Loan and
          Borrower's agreement to the terms thereof shall be communicated to the
          Bank in any form that is acceptable in each instance to the Bank in
          its sole discretion, which may include telephone, telex, telecopy or a
          writing executed by Borrower. Borrower shall have provided the Bank
          with documentation, satisfactory in form and substance to the Bank in
          its sole discretion, confirming the authority of the person(s)
          agreeing to such terms on behalf of Borrower.

2.   Payment of Principal and Interest. Subject to the other provisions of the
     Note:

     (a)  Obligation and Time of Repayment. Each Outstanding Principal Amount
          shall be due and payable at the applicable Payment Date.

     (b)  Loan Rate. Interest on any Outstanding Principal Amount shall accrue
          at the LIBOR-Based Rate; provided, however, that if the Bank
          determines (i) that by the Determination Time (A) by reason of
          circumstances affecting the London Interbank Market generally,
          adequate and fair means do not exist for ascertaining an applicable
          LIBOR rate or it is impractical for the Bank to fund or continue to
          fund the Outstanding Principal Amount during the applicable Interest
          Period, or (B) quotes for funds in United States Dollars in sufficient
          amounts comparable to the relevant Outstanding Principal Amount and
          for the duration of the applicable Interest Period would not be
          available to the Bank in the London Interbank Market, or (C) quotes
          for funds in United States Dollars in the London Interbank Market will
          not accurately reflect the cost to the Bank of making a Loan or of
          funding the relevant Outstanding Principal Amount during the
          applicable Interest Period, or (ii) that at any time the making or
          funding of loans, or charging of interest at rates, based on LIBOR
          shall be unlawful or unenforceable for any reason, then as long as
          such circumstance(s) shall continue, interest on the relevant
          Outstanding Principal Amount shall accrue at the Alternate Rate.
<PAGE>

     (c)  Payment and Calculation of Interest. Interest shall be payable (i) at
          each Payment Date or (whenever the Applicable Rate is a variable
          Prime-Based Rate) monthly, (ii) at the Due Date and (iii) at any time
          that any Outstanding Principal Amount or part thereof is paid.
          Interest shall be calculated as set forth in the Note.

3.   Bank's Conclusive Determinations and Schedule. The Bank's determination
     with respect to any matter hereunder shall be conclusive, final and binding
     on Borrower, absent manifest

                                       2

     error. The Bank shall from time to time record the date and amount of each
     Loan, the Applicable Rate, each date on which any part of principal,
     interest or any other amount shall be due and payable, and the amount and
     date of each payment of principal, interest or any other amount, on a
     schedule, which in the Bank's discretion may be computer-generated, and
     which is incorporated in, and is a part of, the Note and this Rider (the
     "Schedule"). The Schedule shall be conclusive, final and binding upon
     Borrower, absent manifest error; provided, however, that the failure of the
     Bank to record any of the foregoing shall not limit or otherwise affect the
     obligation of Borrower to pay all amounts owed to the Bank under the Note.
     Without limiting the foregoing, Borrower acknowledges that the Interest
     Period and the Applicable Rate with respect to any Outstanding Principal
     Amount are subject to the Bank's consent ordinarily negotiated between
     Borrower and the Bank by telephone, and Borrower agrees that in the event
     of any dispute as to any of the terms of any Loan, the determination of the
     Bank and its respective entry with respect thereto on its books and records
     and/or on the Schedule shall be conclusive, final and binding on Borrower,
     absent manifest error.

4.   Definitions. Each capitalized term not defined herein shall have the
     meaning ascribed thereto in the Note. The following definitions apply in
     this Rider and in the Note, and shall prevail over any different
     definitions in the Note.

     (a)  Alternate Rate: an annual Variable Prime-Based Rate equal to the Prime
          Rate plus the Margin.

     (b)  Applicable Rate: whichever of the Loan Rate or Increased Rate is the
          applicable interest rate at any time with respect to any Outstanding
          Principal Amount.

     (c)  Determination Time: 12:00 noon (or any later time determined by the
          Bank in its sole discretion), New York City time, of a Working Day
          that is three Working Days prior to the date of the Loan.

     (d)  Due Date: the date set forth in paragraph 1(b) of the Note or, if the
          Bank has extended such date pursuant to paragraph G(5) of the Note or
          by an agreement with Borrower, such extended date.

     (e)  Interest Period: any term of 1 day, 1 week, 1 to 6, 9 or 12 months, or
          such other term as may be acceptable to the Bank in its discretion, as
          set forth above under Specific Terms or, if not so set forth, as
          selected or agreed to by the Bank in its discretion. A term shall not
          be considered as "Interest Period" during any period that the
          Applicable Rate is a Variable Prime-Based Rate. Each Interest Period
          shall commence immediately at the end of the preceding Interest
          Period, if any; if there had been no immediately preceding Interest
          Period with respect to any Outstanding Principal Amount, the Interest
          Period shall commence on the first Business Day on which (i) such
          amount shall be outstanding and (ii) the Applicable Rate is not a
          Variable Prime-Based Rate. If any Interest Period would otherwise come
          to an end on a day which is not a Working Day, its termination shall
          be postponed to the next day that is a Working Day unless it would
          thereby terminate in the next calendar month. In such
<PAGE>

                                       3

          case, such Interest Period shall terminate on the immediately
          preceding Working Day.

     (f)  LIBOR: the rate or rates established by the New York Branch of the
          Bank two Working Days prior to the date of the Loan, by applying the
          following: (i) the British Bankers Association ("BBA") Interest
          Settlement Rates for U.S. Dollars, as defined in the BBA official
          definitions and reflected on the Telerate BBA pages, for the
          applicable amounts and interest periods, which rates reflect the
          offered rates at which deposits are being quoted to prime banks in the
          London Interbank Market at 11:00 A.M. London Time calculated as set
          forth in said BBA official definition; or (ii) such other recognized
          source of London Eurodollar deposit rates as the Bank may determine
          from time-to-time. In the event the applicable BBA page or pages shall
          be replaced by another Telerate page or other Telerate pages for
          quoting London Eurocurrency rates, then rates quoted on said
          replacement page or pages shall be applied. If the Bank determines
          that London Eurocurrency rates are no longer being quoted (temporarily
          or permanently) on any Telerate pages or that Telerate is no longer
          functioning (temporarily or permanently) in substantially the same
          manner as on the date hereof, then the Bank shall notify the Borrower
          of a substitute, publicly available reference for the determination of
          LIBOR. If the Bank determines in its sole discretion that LIBOR cannot
          be determined or does not represent its effective cost of maintaining
          Loans under this Note, then interest shall accrue at the effective
          cost to the Bank to maintain the Loans (as determined by the Bank in
          its sole discretion).

     (g)  LIBOR-Based Rate: an annual rate equal to LIBOR plus the Margin, as
          determined by the Bank.

     (h)  Loan: (i) any loan advanced by the Bank to the Borrower under the
          Note; (ii) any rollover by the Bank of any such loan that is otherwise
          due and payable or (iii) any conversion of the Applicable Rate for any
          Outstanding Principal Amount from a rate that is a Variable Prime-
          Based Rate to one that is not, or vice versa.

     (i)  Loan Rate: the interest rate determined under subparagraph 1(a) and/or
          2(b).

     (j)  Margin: as set forth under Specific Terms or, if not so set forth, 2%
          per year.

     (k)  Note: the note of which this Rider is a part (including any and all
          riders and amendments to the Note).

     (l)  Outstanding Principal Amount: the outstanding principal amount of each
          Loan.

     (m)  Payment Date: the last Business Day of the applicable Interest Period
          or, if the applicable Loan Rate is a Variable Prime-Based Rate, the
          Due Date.

     (n)  Working Day: a Business Day on which banks are regularly open for
          business in London.

                                       4SECOND SUPPLEMENTAL INDENTURE

      SECOND SUPPLEMENTAL INDENTURE,  dated as of October 16, 2000, by and among
Delta Financial  Corporation,  a Delaware  corporation (the "Company"),  each of
Delta Funding Corporation,  a New York corporation ("Delta Funding"), DF Special
Holdings Corporation,  a Delaware corporation ("DF Special Holdings"),  Fidelity
Mortgage,  Inc., a Delaware  corporation,  DFC Financial of Canada  Limited,  an
Ontario,  Canada corporation,  DFC Funding of Canada Limited, an Ontario, Canada
corporation,  Continental  Property  Management  Corp.,  a New York  corporation
(collectively, the "Subsidiary Guarantors") and The Bank of New York, a New York
banking corporation, as trustee (the "Trustee"), under the Indenture referred to
below.

      WHEREAS,  the  Company,  the  Subsidiary  Guarantors  and the Trustee have
previously entered into an Indenture dated as of July 23, 1997, as amended, (the
"Indenture")  relating  to the  Company's  9 1/2%  Senior  Notes  Due 2004  (the
"Notes");

      WHEREAS,  Section 9.2 of the  Indenture  provides  that the  Company,  the
Subsidiary  Guarantors  and the Trustee  may,  with the  written  consent of the
holders of at least a majority in  principal  amount of the  outstanding  Notes,
amend or supplement the Indenture as provided herein;

      WHEREAS,  the holders of a majority in principal amount of the outstanding
Notes (the "Consenting  Noteholders") have consented to this Second Supplemental
Indenture  and agreed with the Company to extend the deadline  for  consummating
the Exchange  Offer  contemplated  in the First  Supplemental  Indenture,  dated
August 1, 2000 (the "First Supplemental  Indenture"),  by and among the Company,
the Subsidiary Guarantors and the Trustee; and

      WHEREAS,  all acts and things  prescribed  by law and by the Company's and
the Subsidiary  Guarantors'  Certificates of Incorporation  and By-laws (each as
now in effect)  necessary  to make this  Second  Supplemental  Indenture a valid
instrument legally binding on the Company and the Subsidiary  Guarantors for the
purposes herein expressed, in accordance with its terms, have been duly done and
performed;

      NOW THEREFORE,  in  consideration  of the foregoing and for other good and
valuable  consideration,  the  receipt  of which  is  hereby  acknowledged,  the
Company, the Subsidiary  Guarantors and the Trustee hereby agree for the benefit
of each other and the equal and  ratable  benefit of the holders of the Notes as
follows:

      1.    AMENDMENT OF SECTION 5 OF THE FIRST SUPPLEMENTAL INDENTURE.

      The second  sentence of Section 5 of the First  Supplemental  Indenture is
hereby deleted in its entirety and replaced by the following:

      " If (i) the  definitive  terms of the  Exchange  Offer (as defined in the
Term Sheet) have not been agreed with the Consenting  Noteholders on or prior to
October 24, 2000 or (ii) if the Company does not  consummate  the Exchange Offer
by  exchanging  New Notes (as  defined  in the Term  Sheet)  for Notes  with the
Exchanging Holders on or prior to December 8, 2000, an Event of Default shall be
deemed to have occurred at such time under the Indenture."

      2. AMENDMENT TO ANNEX A OF THE FIRST SUPPLEMENTAL INDENTURE.

      Annex A of the  First  Supplemental  Indenture  is hereby  deleted  in its
entirety and replaced by Annex A attached hereto.

      3. EFFECTIVENESS. This Second Supplemental Indenture shall be effective as
of the date hereof.

      4. CONSTRUCTION.  For all purposes of this Second Supplemental  Indenture,
except as otherwise  herein expressly  provided or unless the context  otherwise
requires: (i) the terms and expressions used herein shall have the same meanings
as corresponding terms and expressions used in the Indenture; and (ii) the words
"herein,"  "hereof" and "hereby" and other words of similar  import used in this
Second Supplemental  Indenture refer to this Second Supplemental  Indenture as a
whole and not to any particular Section hereof.

      5. TRUSTEE ACCEPTANCE.  The Trustee accepts the amendment of the Indenture
effected by this Second  Supplemental  Indenture and agrees to execute the trust
created  by the  Indenture,  as  hereby  amended,  but only  upon the  terms and
conditions set forth in the Indenture,  as hereby  amended,  including the terms
and provisions defining and limiting the liabilities and responsibilities of the
Trustee,  which terms and  provisions  shall in like manner define and limit its
liabilities and  responsibilities in the performance of the trust created by the
Indenture, as hereby amended.  Without limiting the generality of the foregoing,
the Trustee has no  responsibility  for the  correctness of the recitals of fact
herein contained which shall be taken as the statements of the Company and makes
no representations as to the validity,  enforceability  against the Company,  or
sufficiently of this Second Supplemental Indenture.

      6. INDENTURE  RATIFIED.  Except as expressly amended hereby, the Indenture
is in all respects  ratified and  confirmed  and all the terms,  conditions  and
provisions thereof shall remain in full force and effect.

      7. HOLDERS BOUND. This Second Supplemental  Indenture shall form a part of
the  Indenture  for all  purposes,  and every Holder of the Notes  heretofore or
hereafter authenticated and delivered shall be bound hereby.

      8.  SUCCESSORS AND ASSIGNS.  This Second  Supplemental  Indenture shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.

      9. COUNTERPARTS. This Second Supplemental Indenture may be executed in any
number of counterparts,  each of which when so executed shall be deemed to be an
original,  and all of such  counterparts  shall together  constitute one and the
same instrument.

      10.  GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN
AND BE USED TO CONSTRUE  THIS FIRST  SUPPLEMENTAL  INDENTURE  WITHOUT  REGARD TO
PRINCIPLES OF CONFLICTS OF LAW THEREOF.

      [SIGNATURE BLOCK ON FOLLOWING PAGE]

<PAGE>
      IN WITNESS WHEREOF, the Company, the Subsidiary Guarantors and the Trustee
have caused this Second  Supplemental  Indenture to be signed and executed as of
the day and year first above written.

                                    DELTA FINANCIAL CORPORATION

                                    By:   /S/ MARC MILLER
                                          --------------------------
                                          Name:  Marc Miller
                                          Title: Senior Vice President

                                    DELTA FUNDING CORPORATION

                                    By:   /S/ MARC MILLER
                                          --------------------------
                                          Name:  Marc Miller
                                          Title: Senior Vice President

                                    DF SPECIAL HOLDINGS CORPORATION

                                    By:   /S/ MARC MILLER
                                          --------------------------
                                          Name:  Marc Miller
                                          Title: Vice President

                                    FIDELITY MORTGAGE, INC.

                                    By:   /S/ MARC MILLER
                                          --------------------------
                                          Name:  Marc Miller
                                          Title: Vice President

                                    DFC FINANCIAL OF CANADA LIMITED

                                    By:   /S/ MARC MILLER
                                          --------------------------
                                          Name:  Marc Miller
                                          Title: Vice President

                                    DFC FUNDING OF CANADA LIMITED

                                    By:   /S/ MARC MILLER
                                          --------------------------
                                          Name:  Marc Miller
                                          Title: Vice President

                                    CONTINENTAL PROPERTY MANAGEMENT CORP.

                                    By:   /S/ MARC MILLER
                                          --------------------------
                                          Name:  Marc Miller
                                          Title: Vice President

                                    THE BANK OF NEW YORK, Indenture Trustee

                                    By:   /S/ JULIE SALOVITCH-MILLER
                                          --------------------------
                                          Name:  Julie Salovitch-Miller
                                          Title: Vice President

<PAGE>
                  Delta Financial Corporation and Subsidiaries

                   Term Sheet of Informal Noteholder Committee

               FOR RESTRUCTURING (THE "RESTRUCTURING TERM SHEET")

DEBTORS AND OLD               Delta Financial Corporation ("DELTA HOLDINGS"),
SECURITIES                    and all of its subsidiaries (collectively the
                              "DEBTORS") that are guarantors of the 9 1/2%
                              Senior Notes of Delta Holdings (the "OLD
                              Notes").

OVERVIEW                      Certain holders of Old Notes, consisting of
                              beneficial owners of a majority in principal
                              amount thereof, shall consent to a supplemental
                              indenture (the FIRST SUPPLEMENTAL INDENTURE, as
                              amended by the Second Supplemental Indenture,
                              and collectively the "Supplemental Indenture")
                              that shall permit the Debtors to pledge, or
                              transfer to a special purpose entity, of
                              interest-only and residual certificates
                              ("RESIDUALS") and Servicing Receivables, or
                              rights therein, to initially obtain
                              approximately $16 million of interim financing
                              (the "INTERIM FINANCING") from a warehouse
                              lender (the "Warehouse Lender").  The negative
                              pledge under the Old Notes Indenture shall
                              continue to apply to $150MM of Residuals until
                              the Exchange Offer occurs, and thereafter the
                              terms of the Exchange Offer shall govern.
                              This $150MM shall be Senior Residuals, except
                              if the Company deposits $7.125 million into
                              escrow, simultaneous with such deposit, such
                              $150 MM requirement shall be modified to $112.5
                              MM of Senior Residuals and $42.5 MM of other
                              Residuals. Except for this negative pledge,
                              pending consummation of the Exchange Offer, the
                              Debtors will be permitted to do financings
                              currently permitted under the Old Notes
                              Indenture.

                              The   capitalization   of  the  Debtors  shall  be
                              restructured  (the  "EXCHANGE  OFFER")  through an
                              exchange  offer.  Holders  of Old Notes  tendering
                              into the  exchange  shall  receive  new  notes and
                              warrants.  At  the  time  the  Exchange  Offer  is
                              consummated,  the new notes indenture shall permit
                              one  or  more  financing   transactions  utilizing
                              Residuals  and  Servicing   Receivables  to  raise
                              capital  for  the  company,  subject  to  all  the
                              limitations   herein.  The  Exchange  Offer  shall
                              include  covenant-stripping  amendments to the Old
                              Notes Indenture.

                              It  shall  be  a  default   under  the  Old  Notes
                              Indenture if the  Consenting  Noteholders  and the
                              Debtors have not reached  definitive  agreement on
                              the  terms  of an  exchange  offer  on  or  before
                              October 24, 2000.

New Securities                Each holder of Old Notes who tenders into the
                              Exchange Offer shall receive a PRO RATA share
NEW SENIOR SECURED NOTES      of a new issue of up to $150.0 million
                              aggregate principal amount 9 1/2% Senior Secured
                              Notes (the "NEW NOTES") of Delta Holdings.  SEE
                              TERM SHEET FOR NEW NOTES, ATTACHED HERETO AS
                              ANNEX A.

NEW WARRANTS                  Each holder of Old Notes who tenders into the
                              Exchange Offer shall receive a PRO RATA share
                              of a new issue of warrants (the "WARRANTS") of
                              Delta Holdings for 10% of the currently issued
                              and outstanding common stock of Delta
                              Holdings.  SEE TERM SHEET FOR NEW WARRANTS,
                              ATTACHED HERETO AS ANNEX B.

INTERIM FINANCING CONSENT     The Consenting Noteholders shall agree to
                              permit the Interim Financing (the "INTERIM
                              FINANCING  CONSENT").  The Supplemental  Indenture
                              shall  lift  the  negative   pledge  from  certain
                              Residuals  and all other  applicable  covenants to
                              the  extent  necessary  in  order  to  permit  the
                              Interim Financing.

COUPON PAYMENT                At the time of the Interim Financing Consent
                              the Debtors shall direct the Warehouse Lender
                              to make payments out of the proceeds of the
                              Interim Financing directly to the indenture
                              trustee for the Old Notes to pay the August 1,
                              2000 coupon on the Old Notes.

LOCK-UP AGREEMENT

PARTIES TO LOCK-UP            Certain holders of Old Notes will become party
                              to a Lock-up Agreement with the Debtors (such
                              holders being the "CONSENTING NOTEHOLDERS") at
                              the time definitive documentation for the
                              Exchange Offer is consented to by the
                              Consenting Noteholders.

COMMITTEE ADVISORS            During the Lock-up Period, and until the warm
                              back-up servicer is in place, and thereafter
                              (if applicable) following the occurrence of an
                              Event of Default under either of the Old Notes
                              Indenture (if the Exchange Offer is not
                              consummated) or the New Notes Indenture, the
                              Debtors shall pay the fees and expenses of
                              Ropes & Gray (counsel to the Informal
                              Committee) and Houlihan Lokey Howard & Zukin
                              Capital ("HLH&Z") (financial advisor to the
                              Informal Committee).  All such fees shall be
                              paid under retainer agreements similar in form
                              to the payment agreement between the Company
                              and Ropes & Gray, with retainer amounts for
                              HLH&Z acceptable to the Informal Committee and
                              HLH&Z in their reasonable discretion.

                              The Debtors  shall give the  Informal  Committee's
                              advisors  full  reasonable  access  to all  legal,
                              operational and financial  materials to allow them
                              to monitor the Debtor's operations and status.

COVENANTS OF DEBTORS          The Debtors shall use their best efforts to
DURING LOCK-UP PERIOD         have the Exchange Offer consummated with not
                              less than the  percentage  of holders of Old Notes
                              required under the Old Notes  Indenture  tendering
                              into the  exchange,  so as to be  consummated  not
                              later than December 8, 2000. Failure to consummate
                              by December 8, 2000 shall  constitute  an Event of
                              Default under the Old Notes Indenture,  as amended
                              by the First Supplemental Indenture and the Second
                              Supplemental Indenture.

                              Until  consummation  of the  Exchange  Offer,  the
                              Debtors  shall  not  engage  in  any   transaction
                              outside the ordinary course of business,  or enter
                              into   any   agreement   to   consummate   such  a
                              transaction.

ONGOING COVENANTS OF          During the Lock-up Period and thereafter, the
DEBTORS                       Debtors shall make all preparations to be able
                              to facilitate  the  effectuation  of a transfer of
                              servicing  and  other  matters  necessary  for the
                              bondholders   to   effectively   realize   on  the
                              collateral being pledged should a default occur in
                              the  future.   These  preparations  shall  include
                              implementing a warm-back-up  servicer by March 15,
                              2001, if the Exchange Offer is consummated,  or as
                              quickly as is practicable if the Exchange Offer is
                              not  consummated,   such  servicer  and  servicing
                              agreement  to  be  satisfactory  to  the  Informal
                              Committee.  The  requirements  for a warm  back-up
                              servicer  shall be  extinguished  upon the Debtors
                              achieving   Liquidity   of  $40MM   but  shall  be
                              reinstated   if  Debtors   Liquidity   goes  below
                              $32.5MM.

REPRESENTATIONS OF            Each Consenting Noteholder shall represent and
CONSENTING NOTEHOLDERS        warrant, in favor of the Debtors and the
                              Indenture Trustee, that it is the beneficial owner
                              of a stated amount of Old Notes.

TERMINATION OF LOCK-UP        The passage of December 8, 2000 without
PERIOD AND OBLIGATIONS        consummation of the Exchange Offer.
OF CONSENTING
NOTEHOLDERS

FORM OF DOCUMENTATION         All documentation (including all documentation
                              contemplated by Annexes A and B hereto) to be
                              satisfactory in form and substance to both the
                              Consenting Noteholders and to the Debtors in
                              their respective sole discretion.  The Debtors
                              and their officers and directors shall provide
                              such certificates, representations and
                              warranties as the Consenting Noteholders  shall
                              require.

                                                          AS OF AUGUST 1, 2000

                                                                         ANNEX A

                  Restructuring of Delta Financial Corporation
                                and Subsidiaries

                                 TERM SHEET FOR
            9 1/2% SENIOR SECURED NOTES DUE 2004 (THE "NEW NOTES")1

ISSUER                        Delta Financial  Corporation  ("DELTA  HOLDINGS"),
                              under a trust indenture with an indenture  trustee
                              (the "INDENTURE  TRUSTEE") mutually  acceptable to
                              the Debtors and the Consenting
                              Noteholders.

GUARANTORS                    All   subsidiaries   of  Delta   Holdings,   which
                              currently are  guarantors  of the Old Notes,  plus
                              all     additional     subsidiaries     ("eligible
                              subsidiaries")   which   are   not   contractually
                              prohibited from being a guarantor .

PRINCIPAL AMOUNT              up to $150,000,000

INTEREST                      9 1/2% per annum,  payable semiannually in arrears
                              on  February  1 and August 1 of each year (each an
                              "INTEREST PAYMENT DATE"). Interest shall be deemed
                              to accrue  as of the last  interest  payment  date
                              under the Old Notes.

MATURITY                      August 1, 2004.

-------------------------------
 1 Capitalized  terms  defined  in the  Restructuring  Term  Sheet  and  not
otherwise defined herein are used herein with the meanings so defined.

COLLATERAL                    Perfected first priority liens on all
                              contractual rights to be the servicer (and
                              following exercise of such right, in all rights
                              arising by virtue of the servicing rights), in
                              the warm back-up servicing agreement and upon
                              the stock of all eligible subsidiaries of Delta
                              Holdings.

                              Perfected  first  priority liens on the beneficial
                              interests in one or more (in the discretion of the
                              Consenting  Noteholders)  Delaware business trusts
                              that holds Residuals  received by the Debtors (the
                              "RESIDUALS   COLLATERAL  TRUSTS").   The  Residual
                              Collateral Trusts shall be restricted subsidiaries
                              and wholly  owned  subsidiaries  of Delta  Funding
                              Corporation   and/or   of  DF   Special   Holdings
                              Corporation  and each Residuals  Collateral  Trust
                              shall hold Residuals received by its parent.

                              The Debtors will not be permitted to pledge, sell,
                              lease or  securitize  other  assets  following  an
                              uncured default or Event of Default.

                              Amounts   sufficient  to  meet  the  first  coupon
                              payment  on the New  Notes  shall be  placed  into
                              escrow   (immediately   upon   conclusion  of  the
                              so-called NIMS trade). The Debtors shall use their
                              best efforts to conclude the so-called  NIMs trade
                              as  soon  as   practicable   subject   to   market
                              conditions,  but in no event later than January 1,
                              2001.

                              So long  as the New  Notes  are  outstanding,  the
                              Debtors   shall   cause   all   Residuals   to  be
                              transferred  to  the  Residuals  Collateral  Trust
                              immediately  upon  the  Debtors'   obtaining  such
                              Residuals.   Provided  no  Event  of  Default  has
                              occurred and is  continuing,  the Debtors shall be
                              permitted to  substitute  other  Residuals for the
                              Residuals within the Residuals  Collateral  Trusts
                              provided  the  Residuals   being   deposited  were
                              received by the parent of the respective Residuals
                              Collateral Trust and the Residuals  Coverage Ratio
                              is satisfied  after giving pro forma effect to the
                              substitution.

DESCRIPTION OF                RESIDUALS COVERAGE RATIO  The value of
FINANCIAL COVENANTS           Residuals and cash in the Residuals Collateral
                              Trust  shall not be less than $165  million.  Such
                              minimum  value  shall  increase  on the  following
                              schedule:

                                    on and after September 30, 2001     $170MM
                                    on and after September 30, 2002     $175MM
                                    on and after September 30, 2003     $200MM
                                    on and after September 30, 2004     $210MM

                              The  aggregate  value of Senior  Residuals  in the
                              Residuals  Collateral Trust shall initially be not
                              less than  $150  million,  or in the  event  Delta
                              Holdings has deposited  $7.125 million into escrow
                              for  coupon   payments,   such  amount   shall  be
                              decreased to $112.5 million simultaneous with such
                              deposit.  (The  Residuals  Collateral  Trust shall
                              still be required to maintain  the minimum  values
                              of $165 million,  and  increasing  after  9/30/01,
                              aggregate  value of Residuals and cash,  set forth
                              in the  first  sentence.).  The  value  amount  of
                              Senior Residuals in the Residuals Collateral Trust
                              shall be raised to $150MM on the third anniversary
                              of the  Issue  Date of the New Notes and to $155.0
                              million after the fourth  anniversary of the Issue
                              Date.  Residuals  which were  created  through net
                              interest margin securities  transactions  ("NIMS")
                              shall be deemed to be  Senior  Residuals  when the
                              outstanding   principal   amount   of  all   other
                              securities  issued  in  the  applicable  NIMS  has
                              decreased  to  20%  or  less  of  their  aggregate
                              original  principal amount.  For purposes of these
                              covenants,  the value of Senior Residuals shall be
                              calculated in accordance  with GAAP except using a
                              discount  rate of 12%,  and the value of all other
                              Residuals  shall be calculated in accordance  with
                              GAAP except using a discount rate of 18%.

                              MINIMUM  CASH ON HAND The  Debtors  shall not have
                              less than $10,000,000 of cash and cash equivalents
                              on hand at any time  (including  any money held in
                              escrow),  using  the same  requirements  as in the
                              Debtor's warehouse lines of credit (the "Warehouse
                              Lines") ("Liquidity").

DESCRIPTION OF OTHER          IN GENERAL:  As under the Old Notes Indenture
COVENANTS                     (to the extent not inconsistent with this Term
                              Sheet or the  negotiations  of the  parties)  plus
                              covenants set forth in the loan  documents for the
                              Warehouse Lines.

                              LIMITATIONS  ON LIENS OR RIGHTS TO BE  SERVICER OR
                              SALE OF STOCK OF SUBSIDIARIES:  Prohibited without
                              consent of 51% of the New Notes.

                              RESTRICTIONS   ON   REDEMPTIONS   AND   DIVIDENDS.
                              Prohibited for existing  equity without consent of
                              51% of the New Notes. Dividends and redemptions on
                              new equity of Delta  Holdings  are  limited to the
                              aggregate  amount of investment by the new equity.
                              Certain    additional    restrictions   on   other
                              transfers.

                              TRANSACTIONS  WITH  AFFILIATES  As  customary  for
                              secured bank loans.

                              REPORTING:  Within  90 days  following  the end of
                              each  fiscal  year,  KPMG (or such  other  firm of
                              internationally  recognized accountants as is then
                              retained  by the  Company  to audit its  financial
                              statements)  as  part  of its  annual  audit  will
                              confirm  that  the   methodology  and  assumptions
                              employed by the Debtor in determining the value of
                              the Residuals.

                              BACK-UP SERVICER: By March 15, 2001, Delta Funding
                              will, at its own cost, enter into a "warm" back-up
                              servicing  agreement (the  "Servicing  Agreement")
                              with a nationally recognized servicer,  which will
                              provide  for   mapping  and  monthly   back-up  of
                              information   relating  to  the   mortgage   loans
                              underlying Residuals created after 1996.

                              EVENTS OF DEFAULT  As in the Old Notes  Indenture,
                              breach of  covenants or  conditions  under the New
                              Notes   Indenture,   and  cross   default  to  all
                              Warehouse Lines, and to all collateral  agreements
                              and related agreements.

                              RELIEF FROM STAY.  The Debtors shall consent to
                              relief from the automatic stay in the event of
                              a chapter 11 or chapter 7 filing.

                              COUPON PAYMENT.  The Debtors shall certify 30 days
                              prior to the initial due date  (without  grace) of
                              each  coupon  payment  on the New Notes that funds
                              necessary  to pay the  coupon  payment  have  been
                              placed in escrow on terms  identical  to those for
                              the coupon  required to be escrowed at the time of
                              the Exchange Offer.

CHANGE OF CONTROL PUT         As in the Old Notes Indenture.

REGISTRATION RIGHTS           The New Notes shall not be registered under
                              the  Securities  Exchange Act of 1934. The Debtors
                              shall register the New Notes at the request of 51%
                              of the beneficial holders of the New Notes.

AMENDMENTS                    Majority consent required for all non
                              ministerial amendments; PROVIDED, HOWEVER,
                              consent of each holder shall be required for
                              changes to such holder's rights with respect to
                              (i) interest and principal payments and
                              redemption/call/put provisions, (ii) maturity
                              date, (iii) currency of payment, (iv) place of
                              payment and (v) right to bring suit for
                              interest and principal.

OTHER                         PROVISIONS  Customary  certification,  notice  and
                              reporting  provisions  for  collateral  monitoring
                              under a senior  secured bank  facility,  including
                              quarterly and audited annual reporting.

                              Other  provisions to be  consistent  with terms of
                              Indenture for the Old Notes or as otherwise agreed
                              by the Debtors  and a majority  of the  Consenting
                              Noteholders.

                                                            AS OF AUGUST 1, 2000

                                                                         ANNEX B

                  Restructuring of Delta Financial Corporation
                                and Subsidiaries

                                 TERM SHEET FOR
                           WARRANTS (THE "WARRANTS")2

ISSUER                        Delta Financial Corporation ("Delta Holdings").

NUMBER                        Warrants  exercisable  for common  shares equal to
                              10% of  currently  issued and  outstanding  common
                              shares.

EXERCISE                      PERIOD  The  Warrants  shall  expire  on the  10th
                              anniversary  of their  issuance.  The Warrants (if
                              not previously  exercised)  shall expire and be of
                              no further force or effect upon payment of the New
                              Notes in full.

EXERCISE PRICE                At issuance:  $9.10 per share.

                              If  equity  buy-in  of $15MM or more  prior to the
                              second anniversary of their issuance, the exercise
                              price  is reset  to 110% of the per  share  equity
                              buy-in.

                              After the second  anniversary,  the exercise price
                              is $0.01 per share.

DIVIDENDS                     The  Issuer  shall  provide  prior  notice  to the
                              holders  of   Warrants  of  any  record  date  for
                              dividends.

-----------------------------
           2 Capitalized terms defined in the Restructuring Term Sheet and not
   otherwise defined herein are used herein with the meanings so defined.

MAJOR CORPORATE               Upon any sale or disposition of the company, or
TRANSACTIONS                  change of control, Warrant holders shall have
                              the  right  to  exercise  all  Warrants.   Warrant
                              holders  shall have  tag-along  rights with Miller
                              family  shares  sold  in  any  change  of  control
                              transaction.

ADJUSTMENTS;                  The number of Warrants shall be adjusted in the
ANTIDILUTION                  event of stock-splits, combinations,
                              reclassifications        and       stock-for-stock
                              distributions. In the event of any merger or other
                              such  transaction,  the holders of Warrants  shall
                              receive as part of such transaction  consideration
                              equal  in  amount  and  kind to the  consideration
                              given to holders of common stock of the Issuer.

                              The Warrants shall also have provisions to prevent
                              dilution by below-market-price  issuances of stock
                              or other equity interests.

REGISTRATION RIGHTS           Demand registration rights.

MISCELLANEOUS                 Customary notice rights.

                              Customary rights and remedies, including the right
                              to specific performance.

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