Document:

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                                                                   EXHIBIT 10.20

                                                   Dated as of December 15, 2000

                                LOAN AGREEMENT

BANK HAPOALIM B.M.
1177 Avenue of the Americas
New York, New York 10036

Dear Sirs:

This Letter Agreement, including the attached Schedules A-C, and any attached
Riders, Exhibits, Supplements and Modifications (collectively, the "Agreement")
together set forth our mutual agreement as to the terms and conditions of the
fluctuating credit facility extended by Bank Hapoalim B.M. (the "Bank") to Level
8 Systems, Inc. (the "Borrower"). Certain defined terms are set forth in
Paragraph 20 hereof.

1.   The Facility.
     ------------

     The Bank agrees, on the terms and conditions hereinafter set forth, to make
     advances to Borrower under this Agreement (hereinafter "Extensions of
     Credit").  All such Extensions of Credit will be secured as provided in
     this Agreement.  Borrower hereby absolutely and unconditionally promises to
     pay in United States dollars to Bank Hapoalim B.M. or to its order, at its
     office at 1177 Avenue of the Americas, New York, New York, or at such other
     place as it may hereafter designate to Borrower in writing, all then
     outstanding Extensions of Credit made pursuant to this Agreement plus
     interest thereon at the rates and at such time as set forth in this
     Agreement.  This facility is separate and distinct from that certain
     existing line of credit extended by the Bank to the Borrower in the amount
     of $15,000,000.00 having an expiration date of November 30, 2001.

2.   Amount.
     ------

     The aggregate amount of Extensions of Credit shall not exceed at any time
     $10,000,000.00 (the "Line of Credit").

3.   Note and Security Agreement.
     ---------------------------

     All Loans pursuant to this Agreement shall be evidenced by Borrower's
     promissory note, substantially in the form of Exhibit A attached hereto
     (the "Note") in the principal amount of $10,000,000.00 and secured by the
     Borrower Security Agreement dated as of the date hereof between the
     Borrower and the Bank, in form and substance satisfactory to the Bank,
     providing a lien on, among other things, all the account receivables and
     inventory of the Borrower  (the "Security Agreement") and all the UCC
     Financing Statements executed by the Borrower in favor of the Bank related
     thereto (collectively, the "Security Documents"); provided, however, that
                                                       --------
     the principal amount actually payable at any time under the Note shall not
     be more than the advances pursuant to this Agreement which then remain
     unpaid, as reflected on the Bank's books and records; provided further,
                                                           ----------------
     however, that if the aggregate outstanding advances pursuant to this
     Agreement shall exceed the principal amount of the Note, such advances in
     excess of the amount of the Note shall nevertheless be payable as provided
     in this Agreement.  The Extensions of Credit shall be available to the
     Borrower up to December 31, 2002 (the "Commitment Termination Date").  No
     Extension of Credit shall be outstanding for more than eighteen (18)
     months.  The Note shall be dated the date of this Agreement and be payable
     on June 30, 2004 (the "Expiry Date"), and if earlier, at such other times
     as shall be required by the terms of this Agreement.  The Borrower
     reaffirms that the Security Documents are the collateral for the Line of
     Credit.

4.   Availability.
     ------------
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                                       2

     The Facility may be utilized, at the Borrower's option, as follows upon
     three business days' written, telex or telephonic or telephonic
     (immediately confirmed in writing) notice to the Bank for Loans for periods
     of one, two or three months or such other periods as the Bank and the
     Borrower may agree (provided no loan shall have a maturity later than the
     Expiry Date).

5.   Conditions Precedent.
     --------------------

     The Bank shall not be obligated to make any Extensions of Credit to the
     Borrower hereunder unless the following conditions have been satisfied:

     (a)  Prior to the first utilization of credit hereunder, the Bank shall
          have received the following documents, each in form and substance
          satisfactory to the Bank:

          (i)     the Note;

          (ii)    the Security Agreement and all the UCC-1 Financing Statements
                  executed by the Borrower in favor of the Bank related thereto;

          (iii)   a legal opinion of counsel to the Borrower;

          (iv)    a full and accurate disclosure from the Borrower, current as
                  of the date of closing, of all material litigation (including
                  counterclaims, cross-claims and all criminal, arbitration and
                  administrative proceedings and/or investigations) pending or
                  threatened against the Borrower or of which the Borrower shall
                  be aware, and the Bank shall be satisfied, as determined in
                  its sole discretion, as to Borrower's exposure and as to any
                  potential exposure to liability on the Bank's part;

          (v)     an Option Agreement, or similar agreement, allowing the Bank
                  to convert debt to equity in the Borrower, with said
                  conversion option to be pledged in a manner satisfactory to
                  the Bank;

          (vi)    accounts receivables aging statements certified by one of
                  Borrowers' executive officers and accurate as to December 1,
                  2000;

          (vii)   satisfactory evidence as to the removal of all previous liens
                  by third parties against the Collateral; and

          (viii)  a Cash Collateral Pledge Agreement executed by the Borrower in
                  favor of the Bank.

     (b)  Prior to or at the time of the making of the initial Extension of
          Credit, financing statements and termination statements, if any,
          relating to this Agreement shall have been duly recorded or filed in
          such manner and in such places as is required by law to establish,
          preserve, protect and perfect the interests and rights created or
          intended to be created by this Agreement.  Borrower represents and
          warrants that the only termination statements required for filing
          under the previous sentence are related to loans in favor of Greyrock
          Business Credit (or Bank of America).  Borrower further represents and
          warrants that all obligations related to such loans have been
          satisfied in full and Borrower is entitled to have termination
          statements related thereto filed in all necessary offices.

     (c)  Prior to or at the time of any Extension of Credit, there shall exist
          no uncured Event of Default or event which with the giving of notice
          or passage of time or both would become an Event of Default and if
          requested by the Bank there shall be delivered to the Bank a
          certificate of compliance and non-default, dated the date of such
          Extension of Credit, in and form and substance satisfactory to the
          Bank.
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                                       3

     (d)  All representations and warranties made by the Borrower to the Bank
          herein or in any other document executed in connection herewith shall
          be true and correct, unless specifically modified in writing by the
          parties, as if made on the date of such advance shall be deemed as
          restated on the date of any advance or Extension of Credit and shall
          be true and correct as if made on such date (except to the extent any
          such representation or guaranty speaks as of a different date).

6.   Interest and Fees.
     -----------------

     (a)  Interest on all Loans hereunder shall be payable at the rate per
          annum, for each Interest Period, of 1.50% plus the LIBOR Rate (the
          "Loan Rate").

     (b)  Interest on each Loan shall be payable in arrears on the last day of
          each Interest Period.

     (c)  The Borrower shall pay interest on overdue principal and (to the
          extent permitted by applicable law) on overdue interest, on demand, at
          the rate of 2% plus the higher of (x) the Loan Rate applicable to the
          immediately preceding Interest Period and (y) the rate designated by
          the Bank from time to time as its Prime Rate.  The effective interest
          rate payable hereunder shall, in any event, never exceed the
          applicable maximum lawful interest rate; if any provision(s) of this
          Agreement would require any payment in excess of such maximum lawful
          interest rate, such provision(s) shall be deemed amended to provide
          for interest at such maximum lawful rate during such time as it would
          otherwise exceed such rate.

     (d)  The Loan Rate shall be computed on the basis of the actual number of
          days elapsed over a year of 360 days.

     (e)  If the Bank determines in its sole discretion at the time of any
          election of an Interest Period that the LIBOR Rate cannot be
          determined or does not represent its effective cost of maintaining the
          Loan during such Interest Period, then interest on the Loan during
          such Interest Period shall accrue at the Bank's Prime Rate plus 1.5%
          per annum until a new interest rate can be mutually agreed upon by the
          Borrower and the Bank.

     (f)  The Borrower agrees to pay to the Bank a facility fee in respect of
          the total commitment amount of the Line of Credit (irrespective of
          usage) for each day from and after the date hereof at the per annum
          rate of .50%. Such fee shall be payable in advance quarterly during
          the term of this Agreement commencing with the date hereof.

7.   Payments, Prepayments and Indemnity.
     -----------------------------------

     (a)  Mechanics.
          ---------

          All payments hereunder shall be made at the office of the Bank set
          forth below in lawful money of the United States of America and in
          immediately available funds, without set off, counterclaim,
          withholding or deduction of any kind whatsoever.  Any payment due
          hereunder on a day which is not a Business Day shall be payable on the
          next succeeding Business Day (or, if such next succeeding

          Business Day falls in the next succeeding calendar month, on the next
          proceeding Business Day). The Borrower hereby authorizes the Bank, if
          and to the extent payment owed to the Bank is not made when due
          hereunder or under the Note, to charge from time to time against any
          of the Borrower's accounts with the Bank any amount so due.
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                                       4

     (b)  Prepayment.
          ----------

          (i)  In the event any loan is not borrowed on the date specified
               therefor in a notice of borrowing, or is repaid other than at its
               maturity, the Borrower shall pay to the Bank an amount
               (determined by the Bank in its sole discretion which
               determination shall be conclusive and binding absent manifest
               error) as shall compensate the Bank for any costs, expenses or
               loss (including loss of profit) incurred by it in connection with
               its costs of funding such Extension of Credit.

          (ii) If at any time the Bank shall determine that the making or
               continuation of loans at the Libor Rate has become unlawful, the
               loans hereunder shall correct to the Prime Rate plus 1.5% per
               annum.

     (c)  Increased Costs
          ---------------

          If, after the date hereof, any change in law, regulation or directive
          or in the interpretation thereof subjects the Bank to any increase in
          the cost to it of making or maintaining loans to the Borrower
          hereunder, the Borrower shall pay to the Bank, on demand from time to
          time, such additional amounts (determined by the Bank in its sole
          discretion which determination shall be conclusive and binding absent
          manifest error) as shall compensate the Bank for such increased cost;
          provided, however, that the method by which the Bank allocates such
          amount to the Borrower must be applied in good faith and must be a
          method generally used by the Bank for such purpose.

8.   Determination of Eligible Accounts Receivables and Acceptable Inventory.
     -----------------------------------------------------------------------

     The Bank shall, in its sole and unfettered business judgment and
     discretion, have the absolute right to determine which accounts receivable
     shall be Eligible Accounts Receivable.  The Bank may require such
     supporting or confirmatory documentation as it may reasonably deem
     necessary in order to make its determination.

     In furtherance of and without limiting the above sentence, the following
     (in addition to any determination by the Bank pursuant to such sentence)
     shall not in any event be Eligible Accounts Receivable:

     (a)  any account as to which Borrowers are unable to make all of the
          applicable warranties set forth in Paragraph 12 of this Agreement;

     (b)  any account not payable or paid within 180 days (the "Maximum Maturity
          Period of Eligible Accounts Receivable") from the invoice date
          thereof;

     (c)  any account arising from transactions with any party to whom Borrower
          owes any obligation, or with any affiliate of the Borrower;

     (d)  any account arising from "charge-backs", including but not limited to
          restorations to outstanding status of accounts after they have been
          recorded by Borrower as paid (such as those resulting from the return
          unpaid of checks given in payment of accounts), partial payments of
          accounts, additions to accounts resulting from any cause, and
          discounts taken by account debtors without authorization;

     (e)  any account or any portion thereof resulting from services and/or
          finance charges added by Borrowers to accounts in excess of the
          invoice price;

     (f)  any account of an account debtor if 50% or more of the then
          outstanding accounts of such account debtor have then been outstanding
          for longer than 90 days from the invoice date thereof;

     (g)  any account arising from a transaction with an account debtor which
          has sovereign immunity;
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                                       5

     (h)  any account arising from an account debtor not located in the
          countries listed on Schedule B; and

     (i)  any account as to which Bank shall not be satisfied with the credit
          standing of the account debtor.

     As used in this Agreement, "accounts" refers to all accounts as defined in
     Section 9-106 of the New York Uniform Commercial Code as in effect on the
     date of this Agreement, and "Eligible Accounts Receivable" refers solely to
     accounts receivable (i.e., rights to payment for goods sold and shipped or
     services already rendered, which rights are not represented by an
     instrument or chattel paper) which, pursuant to this Paragraph 8 of the
     Agreement, Bank has determined to be acceptable as a base on which to make
     advances.

9.   Events of Default.
     -----------------

          (a)  General.
               -------

          Each of the following shall be an Event of Default: (1) Nonpayment.
                                                                  ----------
          (i) The nonpayment when due of any part of the Liabilities hereunder;
          or (ii) the prohibition by any Law of payment of any part of any
          Liabilities. (2) Bankruptcy; Adverse Proceedings. (i) The occurrence
                           ------------------- -----------
          of any Debtor Relief Action; (ii) 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; (iii) any action taken by any Party to authorize or consent
          to any action set forth in Paragraph 9(a)(2)(i) or (ii); (iv) the
          rendering against any Party of one or more judgments, orders and/or
          decrees and/or arbitration awards (whether for the payment of money or
          injunctive or other relief) which alone or in the aggregate equal or
          exceed the amount of $100,000, if they continue in effect for 30 days
          without being vacated, discharged, stayed, satisfied or performed; (v)
          the issuance or filing of any warrant, process, order of attachment,
          garnishment or other lien or levy, which alone or in the aggregate
          equal or exceed the amount of $100,000, against any Material part of
          any Party's property; (vi) 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 (A)
          relating to the enforcement of judgments or (B) providing for
          forfeiture to, or condemnation, appropriation, seizure or taking
          possession by, or on order of, any Governmental Authority, unless such
          proceeding shall be stopped within 45 days of commencement; (vii) the
          forfeiture to, or the condemnation, appropriation, seizure, or taking
          possession by, or on order of, any Governmental Authority, of any
          Material part of any Party's property; (viii) any Party being charged
          with a crime by indictment, information or the like. (3)
          Noncompliance. (i) Any Default with respect to this Agreement which
          -------------
          remains uncured for five (5) business days; provided, however, such
          cure period shall not apply to a Default described in Section
          9(a)(1)(i) of this Agreement; (ii) 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; (iii)
          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; (iv) 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; (v) 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; (vi) 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; (vii) 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 of such obligations being challenged or
          questioned, whether or not by the institution of proceedings; (viii)
          the failure or cessation at any time of any Security Interest in favor
          of the Bank in connection with any of the obligations of the Borrower
          to the Bank to constitute a valid,
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                                       6

          perfected, first priority Security Interest (or such junior priority
          Security Interest as agreed to by the Bank) in the Property
          purportedly covered by such Security Interest. (4) Adverse Changes.
                                                             ---------------
          (i) The occurrence of a Material adverse change in any Party's
          financial condition; (ii) 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; (iii) any Material Default with respect to any Material
          Agreement other than with or to the Bank; (iv) any Default pursuant to
          which any Person shall have the power to effect an Acceleration of any
          Material Debt; (v) any Acceleration or demand of payment with respect
          to any Material Debt; (vi) any Party's becoming insolvent, as defined
          in the Uniform Commercial Code; (vii) 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; (viii) the Material suspension of any Party's business; (ix)
          any Party's Material failure to pay any tax when due; (x) 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; (xi) 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; (xii) Debtor's
          failure to give the Bank notice, within 10 Business Days after Debtor
          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, or (xiii) failure of Borrower to be and remain in good
          standing and qualified to do business in each jurisdiction Material to
          Borrower and such failure shall continue for thirty (30) consecutive
          days; (5) Business Changes. Without the prior written consent of the
                    ----------------
          Bank (which consent shall not be unreasonably withheld) there shall
          occur or take place (i) any change in Control of any Party; (ii) any
          merger or consolidation involving any Party, except as may be
          permitted, with the consent of the Bank, pursuant to Paragraph 14(d);
          or (iii) any Material change in the nature or structure of any Party's
          business; (6) Termination Statements. The Borrower's failure by
                        ----------------------
          January 31, 2000 to cause all termination statements required by this
          Agreement and the Security Agreement to be filed in accordance with
          Section 5(b) herein.

          (b)  Bank's Rights Upon Default in Payment.
               -------------------------------------

               (i)   Upon the occurrence of any Event of Default (and the
                     expiration of any applicable cure period under this
                     Agreement), all of Borrower's obligations to the Bank under
                     this Agreement and the Note not then due shall, at Bank's
                     option, become forthwith due and payable without further
                     notice or demand, which Borrower waives, provided, however,
                     that such obligations shall automatically become due and
                     payable upon the occurrence of any Debtor Relief Action.
                     Upon any such acceleration of Borrower's Liabilities, Bank
                     shall have and may exercise against Borrower all the rights
                     and remedies granted by the Uniform Commercial Code, this
                     Agreement or any other document executed by Borrower at any
                     time or otherwise by law.

               (ii)  In addition, but without limitation and without impairing
                     Borrower's obligations, upon the occurrence of any Event of
                     Default, Bank may, in Bank's discretion:

                     (a)  take possession of any Collateral and of Borrower's
                          books, records, data processing material and any other
                          instruments or documents relating to accounts and/or
                          other Collateral and, for the purpose of accomplishing
                          the foregoing, enter at any time any premises
                          maintained by Borrower, and

                     (b)  require Borrower to assemble any or all Collateral,
                          and books, records, data processing material,
                          instruments and documents relating to Collateral, and
                          to make them available at a time and place designated
                          by Bank.
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                                       7

               (iii)  At Bank's request, Borrower will take any and all steps,
                      observe such formalities, execute and deliver all papers
                      and instruments, and do any and all acts and things, which
                      are necessary, appropriate or requested by Bank to
                      facilitate Bank's collecting and realizing on Collateral.

               (iv)   In addition to the appointment contained in Paragraph
                      10(d) of this Agreement, Borrower hereby appoints and
                      designates Bank as Borrower's attorney-in-fact, without
                      being required to act as such, with full power of
                      substitution, irrevocably until all Liabilities are fully
                      paid and discharged, which power of attorney is coupled
                      with an interest, to take any and all steps, observe such
                      formalities, execute and deliver all papers and
                      instruments, and do any and all acts and things, which
                      Bank deems in Bank's sole discretion to be necessary,
                      appropriate or desirable to facilitate Bank's collecting
                      and realizing on Collateral, including but not limited to
                      selling and conveying good title to such Collateral.

               (v)    The net proceeds realized from any such sale or other
                      disposition or the exercise of any other remedy, after
                      deducting all expenses relating thereto, including any
                      attorneys' fees incurred by Bank, shall be applied in
                      payment of such of the Liabilities, and in such order as
                      Bank may determine. Bank will return any excess to
                      Borrower, and Borrower shall remain liable for any
                      deficiency.

10.  Collections.
     -----------

     (a)  Until notified at any time to the contrary by the Bank, and except as
          provided in Paragraph 10(b) and (c) herein and in the Security
          Agreement, Borrower will, at Borrower's expense, collect Borrower's
          accounts and other amounts due to Borrower on Collateral.  Borrower
          will not, without Bank's prior written approval, grant any extension,
          modification, release, compromise, discharge, allowance or discount in
          respect of an account or other Collateral except for customary trade
          discounts noted on copies of invoices furnished to Bank; provided,
          however, the Bank's prior written approval is not required in the
          event of any such extensions, modifications, releases, compromises,
          discharges, allowances or discounts that (a) in the case of any
          individual account are less than $100,000 USD, (b) in any calendar
          year are in the aggregate less than $250,000 USD, and (c) over the
          term of this loan are in the aggregate less than $1,000,000 USD.  Bank
          will, in its reasonable determination and at the written request of
          Borrower, release its lien on a specific Eligible Account Receivable.

     (b)  Upon the occurrence of any Event of Default, the Bank may, without
          notice to Borrower, at any time in Bank's or in Borrower's name or
          otherwise: (i) demand, collect, enforce, compromise, release, modify,
          extend and/or discharge accounts, other Collateral, and guaranties
          thereof and security therefor, receive proceeds thereof and give
          receipts therefor, by such means and on such terms and conditions, if
          any, as Bank may deem advisable; (ii) notify account debtors and
          obligors in connection with other Collateral that their accounts and
          amounts due on other Collateral are to be paid directly to Bank; (iii)
          endorse in Borrower's name checks and other instruments payable to
          Borrower in respect of accounts or other Collateral;  (iv) receive and
          open mail addressed to Borrower and retain any relating to accounts or
          other Collateral; (v) notify postal authorities to change the address
          for delivery of mail addressed to Borrower to such address as Bank may
          designate; (vi) file in Borrower's name proofs of claim in
          bankruptcies of Borrower's account debtors and obligors under accounts
          or other Collateral; and (vii) do all other things Bank deems
          advisable to accomplish the purposes of this Agreement.
<PAGE>

                                       8

     (c)  The Bank's taking any action pursuant to Paragraph 10(b)(i) or (ii) or
          the filing of a petition by or against Borrower in any proceeding
          under the Bankruptcy Code or any successor or replacement thereof
          shall immediately and automatically terminate Borrower's authority to
          collect accounts.

     (d)  To facilitate Bank's actions under Paragraph 10(b), Borrower appoints
          Bank as its attorney-in-fact (without requiring Bank to act as such),
          with full power of substitution, irrevocably until all Liabilities are
          fully paid or discharged.  This power of attorney is coupled with an
          interest.

11.  Returns.
     --------

     Borrower will notify Bank promptly of all credits granted or otherwise
     allowed by Borrower on any of the Eligible Accounts Receivable (as defined
     in the Security Agreement); the return or rejection of any merchandise
     relating to an Eligible Account Receivable or of any other recovery of such
     merchandise by Borrower; and on request will pay Bank the amount of such
     Eligible Accounts Receivable.  Until such payment, Borrower will hold such
     merchandise in trust for Bank, subject to Bank's instructions; it shall be
     deemed Collateral for the Liabilities and Bank shall be entitled to
     possession thereof.

12.  Warranties.
     ----------

     Borrower warrants and represents that, at the time of, and as a
     precondition for, each request for an advance hereunder, and at all times
     while advances shall be outstanding, the following shall be true and
     Borrower agrees that:

     As to Receivables and Inventory:
     -------------------------------

     (a)  Records Location.  All Borrower's records pertaining to accounts and
          ----------------
          inventory are now and will hereafter be kept (unless and until
          Borrower receives Bank's written consent to a change) only at
          Borrower's headquarters at the addressstated in Schedule A(1);

     (b)  Bona Fide Transactions.
          ----------------------
          Each Eligible Account Receivable is and will continue to be the valid
          and enforceable obligation, not represented by any Instrument or
          chattel paper, of Borrower's bona fide customer having legal capacity
          to contract, to whom Borrower will have, bona fide in the ordinary
          course of Borrower's business, contracted with or rendered services to
          or sold outright and shipped goods which prior thereto were owned by
          Borrower solely and absolutely, free of all liens, pledges, security
          interests and other encumbrances of every nature, except any security
          interest held by Bank;

     (c)  Fully Payable.
          -------------
          The entire amount of each Eligible Account Receivable stated in each
          schedule or copy of invoice delivered to Bank and/or reflected on
          Borrower's books and records will be payable (without any partial
          payment having been made) by the party named therein, not subject to
          any defense, set-off, counterclaim, reduction or claim for credits,
          allowances or adjustment for any reason except for customary prompt
          payment discounts, and will be due within the Maximum Maturity Period
          of Eligible Accounts Receivable from the invoice date thereof, which
          period will not have  expired; and each such Account Receivable will
          not represent a consignment sale, sale on approval, sale or return or
          other similar transaction;

     (d)  Unencumbered Ownership.
          ----------------------
          Borrower will be the sole and absolute owner of each Eligible Account
          Receivable and all Acceptable Inventory, free of all encumbrances,
          claims and security interests of every nature, except Bank's, and
          Borrower shall have the unrestricted right and power to assign the
          same to Bank;
<PAGE>

                                       9

     (e)  Satisfactory Performance
          ------------------------
 .         All of Borrower's obligations in connection with the transaction from
          which each Eligible Account Receivable arose will have been duly
          performed and accepted by the account debtor; no goods giving rise to
          any such Eligible Account Receivable are or shall have been returned,
          rejected or repossessed; no notice of rejection, breach, nonconformity
          to contract or revocation of acceptance shall have been given to
          Borrower in respect of any such Eligible Account Receivable; no
          dispute with or claim by the account debtor on any such Eligible
          Account Receivable is or will be pending; Borrower shall have no
          knowledge of any fact or circumstance which would impair the validity
          or collectability of any such Eligible Account Receivable; and each
          such Eligible Account Receivable shall comply with all applicable
          local, state and federal laws and regulations (including but not
          limited to the Federal Consumer Credit Protection Act and the Federal
          Reserve Board's Regulation Z) in all material respects, including, but
          not limited to, disclosure, billing, form, content, manner or
          preparation and execution;

     (f)  Endorsement of Instruments.
          --------------------------
          If any of the receivables become evidenced by an Instrument or chattel
          paper, Borrower will notify Bank thereof, and upon request by Bank
          promptly deliver such Instrument to Bank appropriately endorsed to the
          order of Bank, as further security for the satisfaction in full of the
          Liabilities;

     (g)  No Contrary Agreement.
          ---------------------
          There is and will be no agreement between Borrower and any account
          debtor in conflict with or varying from the amount or terms of payment
          of its Eligible Account Receivable as set forth in any schedule or
          copy of invoice delivered to Bank;

     Generally:
     ----------

     (h)  Continued Solvency and Operation of Borrower and Account Debtors.
          -----------------------------------------------------------------

          Borrower and the account debtor on each Eligible Account Receivable
          are and will continue to be solvent and operating in business without
          any controlling owner or general partner of Borrower or such account
          debtor having died or become disabled, without any dissolution,
          bankruptcy proceeding, receivership, assignment for the benefit of
          creditors or liquidation pending against either of Borrower or such
          account debtor and without any custodian, receiver, trustee or other
          fiduciary having been applied for or appointed for the assets of
          either of them;

     (i)  Accurate Information.
          --------------------

          All financial and credit information that Borrower may furnish to Bank
          at any time, whether relating to Borrower or any account debtor, will
          be true, complete and not misleading in all material respects;

     (j)  Good Standing.
          -------------

          Borrower is and will be duly organized and in good standing in
          the State of Borrower's incorporation (stated in Schedule A(2)) and
          duly qualified or licensed in good standing to do business in all
          jurisdictions where the nature of Borrower's activities requires such
          qualification or licensing, and Borrower's business is and will be
          conducted in accordance with law;
<PAGE>

                                      10

     (k)  Authority.
          ---------

          Borrower has full right, power and authority to enter into, execute
          and deliver this Agreement, financing statements (and/or amendments
          thereto), the Note, the Security Agreement, and all other documents to
          be executed and delivered by it in connection herewith or therewith
          (collectively the "Loan Documents"); Borrower has the full right,
          power and authority to perform each and all matters and things
          required to be performed under the Loan Documents, and the Loan
          Documents have been duly authorized, executed and delivered and
          constitute the legal, valid and binding contracts of Borrower,
          enforceable in accordance with their terms (subject to (i) bankruptcy
          and other laws of general application affecting the rights of
          creditors and (ii) the award by courts of monetary damages rather than
          specific performance of contractual provisions involving matters other
          than the payment of money);

     (l)  No Conflict.
          -----------

          The execution and delivery by Borrower of the Loan Documents are not,
          and the performance by Borrower of any of the obligations thereunder
          will not be, in contravention of any provision of law or any charter
          or by-law provision or any covenant, indenture or agreement of or
          affecting Borrower or any property of Borrower;

     (m)  No Claims.
          ---------

          There is no action, suit or proceeding pending or threatened against
          Borrower before any court, administrative or governmental body, or any
          arbitration forum, which if determined against Borrower would affect
          Borrower's ability to enter into any of the Loan Documents or
          prejudice in any way Borrower's ability to fulfill the obligations set
          forth in the Loan Documents;

     (n)  All Liens Disclosed.
          -------------------

          Except as provided on Schedule C, none of Borrower's assets are
          encumbered by security interests, mortgages, pledges, or other liens
          except those granted to Bank;

     (o)  Perfected First Security Interest.
          ---------------------------------

          assuming proper filing of financing statements (and/or amendments
          thereto) under the Uniform Commercial Code, this Agreement and the
          Security Agreement create in Bank's favor a perfected first security
          interest in the Collateral; and

     (q)  Environmental Compliance.
          ------------------------

          (i)    Borrower shall at all times ensure that its properties and the
                 businesses, operations and activities conducted thereon, are in
                 full compliance with all Environmental Laws. Borrower shall
                 permit or suffer any hazardous substance to be brought upon,
                 used, treated, stored, handled, discharged, released,
                 generated, manufactured or disposed of in, on or under any of
                 its properties, except to the extent commonly used in the day-
                 to-day operations of such properties and only in compliance
                 with all Environmental Laws;

          (iii)  if Borrower shall become aware of or receive any notice or
                 other communication concerning any actual, alleged, suspected
                 or threatened violation of or liability under any Environmental
                 Laws, or that any representation of Borrower contained herein
                 relating to hazardous substances is not or is no longer
                 accurate in any material respect, including, but not limited
                 to, any notice or other
<PAGE>

                                      11

                 communication concerning any actual or threatened environmental
                 claim, then Borrower shall deliver to Bank, within ten days
                 after receipt of such notice or other communication, a written
                 description of said violation, liability, or actual or
                 threatened event or condition, together with copies of all
                 documents evidencing same. Receipt of such notice shall not be
                 deemed to create any obligation on the part of Bank to defend
                 or otherwise respond to such notification. Borrower shall
                 promptly take any and all actions and steps necessary to defend
                 such notification or environmental claim, or remedy any
                 condition which gave rise to such notification or environmental
                 claim.

13.  Affirmative Covenants.
     ---------------------

     Until payment in full of all advances and other Liabilities hereunder and
     as a precondition for advances:

     (a)  Financial Records.
          -----------------

          Borrower agrees to the following: at Borrower's expense, to keep
          complete and accurate records relating to accounts and other
          Collateral, including but not limited to shipments, payments received,
          credits and allowances granted and returns, at Bank's request to mark
          those records in a manner satisfactory to Bank to show Bank's security
          interest, and to make said records available for Bank's inspection and
          copying at reasonable times; to turn over to Bank such delivery
          receipts and copies of invoices as Bank may request; and to furnish to
          Bank:

               (i)    within 120 days after Borrower's fiscal year end,
                      Borrower's unqualified audited financial statements
                      addressed to the Bank (including balance sheet and
                      operating statement), prepared in accordance with
                      generally accepted accounting principles by independent
                      accountants acceptable to Bank and accompanied by a
                      covenant compliance report certified by Borrower's Chief
                      Financial Officer including a schedule demonstrating
                      compliance with the financial covenants set forth herein
                      ("Compliance Certificate");

               (ii)   within 45 days after each of the Borrower's first three
                      fiscal quarters, Borrower's unaudited financial statements
                      (including balance sheet and operating statement),
                      prepared in accordance with generally accepted accounting
                      principles, except for the absence of notes and normal
                      year-end adjustments, certified as to its accuracy by
                      Borrower's chief executive, operating or chief financial
                      officer, and accompanied by a Compliance Certificate; and

               (iii)  from time to time such other information as Bank may
                      request.

     (b)  Tax Compliance.
          --------------

          Borrower will pay to the appropriate governmental authorities when
          due, all Federal, state, local and other taxes, assessments or
          contributions required to be paid or deposited by Borrower ("Taxes"),
          except that Borrower may defer any such payment while Borrower is
          diligently contesting the respective Taxes in good faith by
          appropriate proceedings, but any such deferment shall not extend
          beyond the time when such unpaid Taxes would become a lien upon any of
          Borrower's assets.  Borrower will furnish Bank promptly at Bank's
          request with evidence satisfactory to Bank establishing payment of
          such taxes, assessments and contributions.  In Bank's discretion, Bank
          shall have the right (but shall not be obligated) to pay any such tax,
          assessment or contribution (including any interest or penalties
          thereon) for Borrower's benefit in the event Borrower shall fail
          timely to do so; any such payment shall be deemed an advance hereunder
          bearing interest at the rate and in the manner specified in Paragraph
          6
<PAGE>

                                      12

       hereof. Borrower shall, promptly on demand, reimburse Bank for any such
       payment and any costs and expenses (including reasonable attorneys' fees)
       which Bank may incur in connection therewith.

(c)    Insurance.
       ---------

       Borrower shall maintain all insurance required in connection with this
       Agreement and the Collateral in good standing with premiums timely paid,
       and shall promptly provide Bank with evidence satisfactory to it of such
       payment.

(d)    Adverse Changes.
       ---------------

       Borrower shall promptly notify Bank: (i) of any material adverse change
       in Borrower's financial condition, operations or business or (promptly
       upon Borrower's obtaining receipt of notice or knowledge thereof) in that
       Borrower's customers or in the collectability of any of the accounts,
       (ii) if one or more judgments or other claim in excess of $100,000, alone
       or in the aggregate, becomes a lien or encumbrance upon any or all of
       Borrower's assets, or (iii) of any Event of Default or event, which with
       the giving of notice or passage of time or both would become an Event of
       Default and furnish the Bank with a statement setting forth details of
       such Event of Default and the action which the Borrower proposes to take
       with respect thereto.

(e)    Financial Covenants.
       -------------------

       (i)    Borrower must, at all times during which this Facility is in
       effect or any Liabilities remain outstanding and unpaid, maintain a net
       worth (e.g. shareholder's equity) of not less than 23% of total assets.

       (ii)   Borrowers must, at all times during which this Facility is in
       effect or any Liabilities remain outstanding and unpaid, maintain a
       Current Ratio (current assets to current liabilities) of not less than
       .85 to 1.

       (iii)  Borrowers must, at all times during which this Facility is in
       effect or any Liabilities remain outstanding and unpaid, maintain the
       following relationship between Eligible Accounts Receivable plus cash and
       total principal outstanding under this Facility:

       The sum of 50% of the value of Eligible Accounts Receivable plus cash
       (the "Borrowing Base") must equal or exceed the total of all principal
       outstanding under this Facility.

       Any such cash used for purposes of calculating the Borrowing Base must be
       deposited with the Bank at its New York Branch, and Borrower will execute
       all documents required by the Bank to provide the Bank with a perfected
       first priority security interest in such cash deposit. If at any time
       during the term of this Agreement any portion of such cash pledged to the
       Bank is not required for purposes of meeting the above Borrowing Base
       formula, Borrower may withdraw such amounts from the Account (as defined
       in the Cash Collateral Pledge Agreement); provided, however, any
       withdrawal of such amounts by the Borrower shall not relieve the Borrower
       of its obligation to thereafter deposit cash collateral with the Bank as
       required by this paragraph.

       At any time the Borrower fails to maintain the above Borrowing Base
       formula, no further advances will be permitted hereunder, and Borrower
       must repay such amount of outstanding principal under the Facility as
       would bring the relationship between Eligible Accounts Receivable plus
       cash and total principal outstanding back into compliance with such
       formula.
<PAGE>

                                     -13-

14.    Negative Covenants.
       ------------------

       Borrower further agrees that from the date hereof and until payment in
       full of all of advances and other Liabilities hereunder, Borrower will
       not, without Bank's prior written consent after providing Bank with all
       such information and documentation as Bank may request:

       (a)   Type of Business.
             ----------------

             make any substantial change in the character of Borrower's
             business;

       (b)   Accounts Receivable and other Claims.
             ------------------------------------

             sell, discount, assign, lease or otherwise dispose of or grant any
             security interest in any of Borrower's accounts, other Collateral,
             claims or other obligations owing to Borrower (including notes
             payable to Borrower) with or without recourse, except to Bank;

       (c)   Negative Pledge.
             ---------------

             grant, suffer or permit the creation of any security interest
             mortgage, pledge or other lien encumbering any of Borrower's
             assets, except to Bank;

       (d)   Mergers, Consolidations, Sales of Substantial Assets.
             ----------------------------------------------------

             consolidate with or merge into any other corporation or entity, or
             permit any other corporation or entity (other than a wholly-owned
             subsidiary) to merge into Borrower, and Borrower will not sell,
             transfer or lease all or a substantial portion of Borrower's
             assets, unless in each case, and even then subject to Bank's prior
             written consent, which consent shall not be unreasonably withheld:

                   (i)   the Borrower is the resulting or acquiring corporation
                         and, after such transaction, Borrower remains solvent,
                         and

                   (ii)  no default or Event of Default which, with the giving
                         of notice or lapse of time, would be a default or Event
                         of Default under this Agreement or under any other
                         material agreement of Borrower's shall exist
                         immediately after or shall occur as a result of such
                         transaction, or

       (e)   Use of Proceeds.
             ---------------

             use the proceeds of any advances under this Agreement for anything
             other than Borrower's proper business and commercial purposes;

       (f)   ERISA Compliance.
             ----------------

             (i)   not engage in any "prohibited transactions" (as such term is
                   defined in Section 2003(a) of the Employee Retirement Income
                   Security Act of 1974 ("ERISA")) or in any transaction or
                   activity prohibited by Section 406 of ERISA or incur any
                   liability under Section 409 of ERISA;

             (ii)  fail to satisfy the minimum funding requirements of Section
                   412 of the Internal Revenue Code and/or Section 302 of ERISA
                   with respect to any employee pension benefit plan or fail to
                   notify Bank of any application for a funding waiver that
                   Borrower may submit to the Internal Revenue Service with
                   respect to any employee pension benefit plan;
<PAGE>

                                     -14-

             (iii)  not act in any manner in connection with any employee
                    benefit plan (including but not limited to any multi-
                    employer plan) covered by Title IV of ERISA in a manner
                    which could result in plan termination liability to, or
                    imposition of a lien by, the Pension Benefit Guaranty
                    Corporation under Title IV of ERISA, or withdrawal liability
                    to, or imposition of a lien by, the Pension Benefit Guaranty
                    Corporation under Title IV of ERISA, or withdrawal liability
                    under Title IV of ERISA; and

             (iv)   fail to comply with ERISA in any manner such that Borrower
                    could incur a liability which would materially and adversely
                    affect Borrower's ability to meet any of Borrower's
                    obligations arising in connection with this Agreement or any
                    other agreement to which Borrower is a party or by which
                    Borrower is bound.

15.    Term.
       ----

       This Agreement shall have a term expiring on the Expiry Date and all
       Liabilities shall, unless the term shall be extended by written
       agreement, be due and payable on the Expiry Date. Nevertheless, this
       Agreement may be terminated by Bank at any time without further notice
       upon the occurrence of an Event of Default or an event which, with the
       giving of notice or the passage of time, would be an Event of Default.

16.    Miscellaneous.
       -------------

       (a)   Account Verification and Notifications.
             --------------------------------------

             At any time until payment in full of all advances and other
             Liabilities pursuant to this Agreement, Bank may by its agent or by
             any other person or entity selected by Bank, verify accounts,
             directly with account debtors or by other methods, and notify
             account debtors that their accounts have been assigned to Bank.

       (b)   Actions Not Required.
             --------------------

             Bank is not obligated to take any action which Bank is permitted to
             take pursuant to this Agreement.

       (c)   Liability Limited.
             -----------------

             Bank shall have no liability for taking or refraining from taking
             or for the manner of taking any such action or otherwise hereunder,
             except for Bank's gross negligence or willful misconduct, and in no
             event for consequential, special or punitive damages.

       (d)   Obligations Not Assumed.
             -----------------------

             Nothing contained herein or in any other document and no action
             taken by Bank shall be deemed an assumption by Bank of any
             obligation to any account debtor or other party.

       (e)   Notices.
             -------

             Unless otherwise expressly provided for herein, any notice,
             request, approval, demand or other communication provided for
             herein shall be in writing and deemed effectively given or made
             when mailed by registered or certified mail, postage prepaid and
             return receipt requested, addressed to the party for whom intended
             at such party's address stated herein (as to Borrower, in Schedule
             A(3)) or such other address as either party may hereafter designate
             for itself by similar notice, or when actually received if given or
             made in any other manner, except that notice of change of address
             shall be deemed given only when received.
<PAGE>

                                     -15-

       (f)   Financing Statements.
             --------------------

             Borrower will join with Bank in executing such financing statements
             as Bank may request in order to perfect Bank's security interest in
             accounts and other Collateral. Borrower hereby appoints and
             designates Bank as Borrower's attorney-in-fact, without being
             required to act as such, with full power of substitution,
             irrevocably until all Liabilities are fully paid or discharged,
             which power of attorney is coupled with an interest, to execute
             such financing statements. To the extent permitted by law, Bank may
             file financing statements disclosing Bank's security interest
             without Borrower's signature, and/or Bank may file a photocopy or
             other reproduction of this agreement (or part of this agreement) as
             a financing statement. Borrower will execute and deliver to Bank
             such additional documents, and take such other steps, as may be
             necessary or appropriate to protect Bank's interest in accounts and
             other Collateral under any applicable law.

       (g)   Waivers.  No provision hereof and no right or remedy of Bank may be
             -------
             waived by any future action, course of dealing or otherwise, except
             in writing signed by Bank. Borrower waives presentment, protest and
             notice of dishonor of any instrument. No payment due to Bank
             hereunder shall be reduced by Borrower for any reason whatsoever,
             and Borrower hereby waives the right to assert any right of offset,
             recoupment or other deduction and any counterclaim in any
             litigation or other proceeding in which Bank may seek to enforce
             Bank's rights and remedies under this Agreement. Borrower waives
             all rights to special, consequential or punitive damages arising
             from, out of or in connection with this Agreement or any
             performance related to it. Neither any failure nor any delay by
             Bank to exercise any right in connection with this Agreement shall
             operate as a waiver thereof or preclude any other or further
             exercise thereof nor shall any single or partial waiver of any such
             right preclude any other or further exercise thereof, or the
             exercise of any other right.

       (h)   Governing Law, Changes, No Third Party Beneficiaries.
             ----------------------------------------------------

             This Agreement shall be governed by the internal laws of New York
             without giving effect to conflict of laws rules; shall not be
             changed or terminated orally; and shall not be deemed for the
             benefit of any third party.

       (i)   Business Name, Etc.
             ------------------

             (i)    Borrower shall not change Borrower's identity or corporate
                    structure or Borrower's name from, or do business under any
                    name other than, Borrower's name(s) as set forth in Schedule
                    A(4) unless Borrower give 30 days prior written notice to
                    Bank.

             (ii)   In the four months prior to the date of this Agreement,
                    Borrower has not operated under any name other than
                    Borrower's name(s) set forth in Schedule A(4).

       (j)   Addresses.
             ---------

             Address of Borrower is as set forth in Schedule A(1). Borrower
             shall not change without 30 days prior written notice to Bank.

       (k)   Submission to Jurisdiction.
             --------------------------

             Borrower submits to the jurisdiction of federal and state courts
             located within New York State and agrees, to the extent permitted
             by law, that service of process upon Borrower (in the same manner
             as provided in Paragraph 16(e) of this Agreement for the giving of
             notices) shall be sufficient in any action or proceeding brought by
             Bank in connection with this Agreement.

       (l)   Partial Unenforceability.
             ------------------------
<PAGE>

                                     -16-

             Any provision of this Agreement 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 this Agreement in that or any other
             jurisdiction and without affecting the validity, enforceability or
             legality of such provision in any other jurisdiction.

       (m)   Parties.
             -------

             (i)   If more than one party executes this Agreement as Borrower,
                   all of them shall be jointly and severally liable hereunder.

             (ii)  This Agreement is binding upon Borrower and Borrower's
                   executors, administrators, successors and permitted assigns
                   and shall inure to the benefit of Bank and its successors and
                   assigns.

       (n)   Captions.
             --------

             Captions are inserted in this Agreement for reference purposes only
             and shall not modify, explain or limit the texts to which they
             refer.

       (o)   Counterparts.
             ------------

             This Agreement may be executed in counterparts, each of which when
             so executed, shall be deemed an original, but all such counterparts
             shall constitute one and the same instrument.

17.    Costs and Expenses.
       ------------------

       (a)   Expenses of Transaction.
             -----------------------

             Promptly on demand, Borrower shall pay all reasonable costs and
             expenses (including reasonable attorneys' fees) which Bank incurs
             in connection with preparing or amending this Agreement, all other
             agreements that Borrower may have with Bank and any guaranty,
             security agreement and other documents relating to this Agreement
             or any of the Liabilities (collectively, "Related Documents"); in
             perfecting Bank's security interest(s) in accounts and any other
             Collateral; in protecting, enforcing or exercising Bank's rights
             and remedies in connection with this Agreement and any Related
             Documents; and in collecting any Liabilities. Until Borrower shall
             so reimburse Bank, such costs and expenses shall be deemed to be
             advances under this Agreement and shall bear interest at the rate
             and in the manner specified in Paragraph 6 of this Agreement.

       (b)   Withholding Taxes.
             -----------------

             All payments under this Agreement shall be made free and clear of
             and without deduction for any Withholding Taxes. If Borrower shall
             be required to deduct any Withholding Taxes in respect of any sum
             payable under this Agreement, then (x) 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 (y)
             the Borrower shall make such deductions and shall pay the amount
             deducted to the relevant authority. The Borrower shall pay to the
             Bank on demand and shall indemnify and hold the Bank harmless from
             any Withholding Taxes paid by the Bank and any liability (including
             penalties, interest and expenses) with respect thereto. The Bank's
             certificate as to any amounts owing under this paragraph shall be
             prima facie evidence of the Borrower's obligation.

18.    Continuing Representations and Warranties.
       -----------------------------------------
<PAGE>

                                     -17-

       All representations and warranties in this Agreement, and in all other
       Related Documents, statements, certificates, instruments and documents
       furnished to Bank in connection with this Agreement, are continuing and
       shall be deemed repeated each time an advance is made to Borrower, and
       shall survive until all Liabilities have been paid in full.

19.    Transfer by Bank.
       ----------------

       (a)   Without limiting Bank's rights hereunder, Bank may Transfer all or
             any part of (i) this Agreement; (ii) the Note, (iii) any
             Liabilities, (iv) any collateral, mortgage, lien, or security
             interest, however denominated, securing this Agreement or any of
             the Liabilities, (v) any other obligations of Borrower to Bank,
             (vi) any guaranty of, any subordination to, and any other rights of
             Bank against any third party(ies) in connection with, this
             Agreement or any of the Liabilities, (vii) any instruments or
             documents relating to or evidencing any of the foregoing, and/or
             (viii) Bank's rights and, if any, obligations with respect to any
             of the foregoing, all of which are referred to in this Agreement as
             "Transferred Items".

       (b)   In the event Bank shall make any such Transfer, 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 and
             responsibility, if any, that it may have had to Borrower with
             respect thereto. Bank shall retain all its rights and powers with
             respect to any Transferred Items to the extent not so Transferred.

       (c)   Without limiting the foregoing, the provisions of this Agreement
             regarding set-off rights shall apply to any account of Borrower
             with, and any claim of Borrower against, any Transferee to the
             extent of any such Transfer.

       (d)   Bank is authorized to disclose any information it may have or
             acquire about Borrower to any prospective or actual Transferee.

       (e)   If the Note and/or this Agreement is not a negotiable instrument,
             then Borrower hereby 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 the Note, and/or this Agreement, or any
             complete or partial interest in them, for value, in good faith and
             without notice that any obligation thereunder is overdue or has
             been dishonored or of any defense against or claim to them on the
             part of any person.

       (f)   Borrower may not assign any of its rights or delegate any of its
             obligations under this Agreement without the Bank's prior written
             consent; any such assignment or delegation without said consent
             shall be void.

20.    Definitions.
       -----------

       As used in this Agreement, the following words shall, unless otherwise
       defined herein, have the following meanings: (1) Acceleration: any
                                                        ------------
       acceleration of payment or requirement of prepayment of any Debt, or any
       Debt's becoming due and payable prior to stated maturity. (2) Affiliate:
                                                                     ---------
       when used with respect to the Borrower, any other Person controlling,
       controlled by, or under common control with the Borrower. (3) Business
                                                                     --------
       Day: any day on which banks are regularly open for business in New York
       ---
       City. (4) 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. (5) Debt: any Person'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) now or hereafter existing, or (e) due or to become due. (6) 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
<PAGE>

                                     -18-

       bankruptcy, reorganization, insolvency, arrangement, composition,
       receivership, liquidation, dissolution, moratorium or other relief of
       financially distressed debtors, or the making by any Party of an
       assignment for the benefit of creditors. (7) Default: any breach, default
                                                    -------
       or event of default under, or any failure to comply with, any provision
       of this Agreement. (8) Environmental Laws: all federal state, local and
                              ------------------
       foreign laws relating to pollution or protection of the environment,
       including, without limitation, laws relating to emissions, discharges,
       releases or threatened releases of pollutants, contaminants, chemicals,
       or industrial, toxic or hazardous substances or wastes into the
       environment (including, without limitation, ambient air, surface water,
       ground water, or land), or otherwise relating to the manufacture,
       processing, distribution, use, treatment, storage, disposal, transport,
       or handling of pollutants, contaminants, chemicals, or industrial, toxic
       or hazardous substances or wastes, and any and all regulations, codes,
       plans, orders, decrees, judgments, injunctions, notices or demand letters
       issued, entered, promulgated or approved thereunder. (8) Facility: any
                                                                --------
       line, loan, letter of credit, other credit facility or other arrangement
       between the Bank and the Borrower in connection with the Line of Credit.
       (9) 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.
       (10) Instrument: the meaning assigned to it under the Uniform Commercial
            ----------
       Code in any relevant jurisdiction. (11) Interest Period: a period of one,
                                               ---------------
       two, or three months or such other period as the Borrower and Bank may
       agree, with the first Interest period commencing on the date hereof and
       each subsequent Interest Period commencing on the last day of the
       immediately preceding Interest Period, provided that no Interest Period
       shall extend beyond the final maturity date of this Agreement, and if an
       Interest Period would otherwise end a non-Business Day it shall end on
       the next succeeding Business Day, unless such day would be in another
       calendar month, in which case it shall end on the next preceding Business
       Day.(12) 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. (13) Liabilities: any Debts of
                                                       -----------
       any Debtor and of any successor, assign or transferee thereof (including
       any successor of a Debtor that is a partnership or joint venture),
       whether (a) due or to become due to, or held or to be held by, the Bank,
       and (b) for the Bank's own account or as agent for another or others.
       (14) LIBOR: "Libor Rate" for each loan to which it applies shall mean the
            -----
       rate or rates established by the New York Branch of the Bank two Business
       Days prior to the first Business Day of the applicable Interest Period,
       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 as 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 Eurocurrency 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 the Libor Rate. If the Bank determines
       in its sole discretion that the Libor Rate cannot be determined or does
       not represent its effective cost of maintaining Loans under this
       Agreement, then interest shall accrue at the effective cost to the Bank
       to maintain the Loans (as determined by the Bank in its sole discretion).
       (14) Material: material to the business or financial condition of any
            --------
       Party on a consolidated or consolidating basis. (15) Party: (a) any
                                                            -----
       Debtor; (b) any maker, co-maker or endorser of 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. (16) Person: any person, partnership, joint venture,
                           ------
       company, corporation, unincorporated organization or association, trust,
       estate, Governmental Authority, or any other entity. (17) Prime Rate: the
                                                                 ----------
       Bank's stated prime rate as reflected in its 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 rate charged by the Bank. (18)
       Property: any property, whether real, personal or mixed, and whether
       --------
       tangible or intangible. (19)
<PAGE>

                                     -19-

       Security Interest: any security interest, assignment as collateral, lien,
       -----------------
       mortgage, reservation of title or other encumbrance, however denominated,
       in, on, or with respect to any Property. (20) 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.
<PAGE>

                                     -20-

21.    NO REPRESENTATIONS OF NON-ENFORCEMENT. BORROWER HEREBY CERTIFIES THAT
       -------------------------------------
NONE OF THE BANK'S REPRESENTATIVES OR AGENTS HAS REPRESENTED, EXPRESSED OR
OTHERWISE INDICATED TO BORROWER OR ANY OF ITS AGENTS OR REPRESENTATIVES THAT, IN
THE EVENT OF LITIGATION OR OTHERWISE, THE BANK WILL NOT SEEK TO ENFORCE, OR WILL
WAIVE OR MODIFY, ANY OF THE PROVISIONS OF THIS AGREEMENT.

22.    WAIVER OF RIGHT TO JURY TRIAL.  BOTH BORROWER AND BANK WAIVE THE RIGHT TO
       -----------------------------
A TRIAL BY JURY IN ANY LITIGATION ARISING FROM, OUT OF OR IN CONNECTION WITH
THIS AGREEMENT OR ANY TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

                                         Very truly yours,

                                         LEVEL 8 SYSTEMS, INC.

                                         By:_________________________________
                                         (Signature)
                                         Name:_______________________________
                                         Title:______________________________

                                         By:_________________________________
                                         (Signature)
                                         Name:_______________________________
                                         Title:______________________________

Attest:

_______________________________
           Secretary

CONSENTED AND AGREED TO BY:

BANK HAPOALIM B.M.

By: ___________________________
   (Signature)
Name: _________________________
Title: ________________________

By:____________________________
   (Signature)
Name:__________________________
Title:_________________________
<PAGE>

                                     -21-

                                  SCHEDULE A

(1)    Borrower's Chief Executive Office and Address for Location of Books and
       Records:
       8000 Regency Parkway, Cary, North Carolina 27511

(2)    Borrower's State of Incorporation: State of Delaware

(3)    Borrower's Address for Notices: same as in (1) above

(4)    Borrower's Business Name(s): Level 8 Systems, Inc.

                            Initials for Borrower:

                           ________________________
<PAGE>

                                     -22-

                                  SCHEDULE B

                           United States of America
                           ------------------------
                            All European Countries
                            ----------------------
                                    Israel
                                    ------
<PAGE>

                                     -23-

                                  SCHEDULE C

                                     None.<PAGE>

                                                                  EXHIBIT 10.20A

                          BORROWER SECURITY AGREEMENT
                          ---------------------------

     BORROWER SECURITY AGREEMENT dated as of December 15, 2000, made by LEVEL 8
SYSTEMS, INC. (the "Borrower"), in favor of BANK HAPOALIM B.M., (the "Bank"), as
                    --------
holder of the Secured Obligations and as party to the Loan Agreement described
below.

                                  WITNESSETH:
                                  ----------

     WHEREAS, the Borrower, is a party to the Loan Agreement, dated as of
December 15, 2000 (as amended, supplemented or otherwise modified from time to
time, the "Loan Agreement"), between the Borrower and the Bank;
           --------------

     WHEREAS, pursuant to the Loan Agreement, the Bank has agreed to make
certain Extensions of Credit to the Borrower upon the terms and subject to the
conditions set forth therein; and

     WHEREAS, it is a condition precedent to the obligation of the Bank to make
Extensions of Credit to the Borrower under the Loan Agreement that the Borrower
shall have executed and delivered this Borrower Security Agreement to the Bank.

     NOW, THEREFORE, in consideration of the premises and to induce the Bank to
make Extensions of Credit under the Loan Agreement, the Borrower hereby agrees
with the Bank as follows:

     1.   Defined Terms.
          -------------

          1.1. Definitions.
               -----------

               (a)  Unless otherwise defined herein, terms defined in the Loan
Agreement and used herein shall have the meanings given to them in the Loan
Agreement, and the following terms which are defined in the Uniform Commercial
Code in effect in the State of New York on the date hereof are used herein as so
defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, General
Intangibles, Instruments, Inventory and Proceeds.

               (b)  The following terms shall have the following meanings:

          "Agreement":  this Security Agreement, as the same may be amended,
           ---------
     supplemented or otherwise modified from time to time.

          "Code":  the Uniform Commercial Code as from time to time in effect in
           ----
     the State of New York.

          "Collateral": as defined in Section 2.
           ----------

          "Investment Property":  the collective reference to all "investment
           -------------------
     property" as such term is defined in Section 9-115 of the Code.
<PAGE>

                                       2

          "Receivable":  any right to payment for goods sold or leased or for
           ----------
     services rendered, whether or not such right is evidenced by an Instrument
     or Chattel Paper and whether or not it has been earned by performance
     (including, without limitation, any Account).

          "Secured Obligations": shall be the collective reference to the unpaid
           -------------------
     principal of and interest on the Note and all other obligations and
     liabilities (including, without limitation, interest accruing at the then
     applicable rate provided in the Loan Agreement after the maturity of the
     Extension of Credit and interest accruing at the then applicable rate
     provided in the Loan Agreement after the filing of any petition in
     bankruptcy, or the commencement of any insolvency, reorganization or like
     proceeding, relating to the Borrower, whether or not a claim for post-
     filing or post-petition interest is allowed in such proceeding) of the
     Borrower to the Bank whether direct or indirect, absolute or contingent,
     due or to become due, or now existing or hereafter incurred, which may
     arise under, out of, or in connection with, the Loan Agreement, this
     Agreement, the Note, the other Loan Documents or any other document made,
     delivered or given in connection therewith, in each case whether on account
     of principal, interest, reimbursement obligations, fees, indemnities,
     costs, expenses or otherwise (including, without limitation, all fees and
     disbursements of counsel to the Bank that are required to be paid by the
     Borrower pursuant to the terms of the Loan Agreement, this Agreement or any
     other Loan Document).

          "Termination Date":   the date on which the commitment to make
           ----------------
     Extensions of Credit and the Loan Agreement have been terminated and the
     Secured Obligations have been irrevocably paid in full other than
     indemnification obligations not then due and payable.

          1.2. Other Definitional Provisions.
               -----------------------------

               (a)  The words "hereof," "herein", "hereto" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement, and
Section, subsection and Schedule references are to this Agreement unless
otherwise specified.

               (b)  The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.

     2.   Grant of Security Interest.  As collateral security for the prompt and
          --------------------------
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Secured Obligations, the Borrower hereby
grants to the Bank, a security interest in all of the following property now
owned or at any time hereafter acquired by the Borrower or in which the Borrower
now has or at any time in the future may acquire any right, title or interest
(collectively, the "Collateral"):
                    ----------

               (a)  all Accounts;

               (b)  all Chattel Paper;
<PAGE>

                                       3

               (c)  all Documents;

               (d)  all Equipment;

               (e)  all General Intangibles;

               (f)  all Instruments;

               (g)  all Inventory;

               (h)  all Investment Property;

               (i)  all books and records pertaining to the Collateral; and

               (j)  to the extent not otherwise included, all Proceeds and
                    products of any and all of the foregoing and all collateral
                    security and guarantees given by any Person with respect to
                    any of the foregoing.

     3.   Representations and Warranties.  The Borrower hereby represents and
          ------------------------------
warrants that:

          3.1. Title; No Other Liens.  Except for the security interest granted
               ---------------------
to the Bank, pursuant to this Agreement, the Borrower owns each item of the
Collateral free and clear of any and all liens or claims of others.  No
financing statement or other public notice with respect to all or any part of
the Collateral is on file or of record in any public office, except such as have
been filed in favor of the Bank.

          3.2. Perfected First Priority Liens.  The security interests granted
               ------------------------------
pursuant to this Agreement (a) constitute perfected security interests in the
Collateral in favor of the Bank, as collateral security for the Secured
Obligations and (b) are prior to all other liens on the Collateral in existence
on the date hereof.

          3.3. Inventory and Equipment.  The Inventory and the Equipment are
               -----------------------
kept at the locations listed on Schedule 1.
                                ----------

          3.4. Chief Executive Office. The Borrower's chief executive office is
               ----------------------
located at 8000 Regency Parkway, Cary, North Carolina 27511.

          3.5. Farm Products. None of the Collateral constitutes, or is the
               -------------
Proceeds of, Farm Products.

     4.   Covenants. The Borrower covenants and agrees with the Bank that, from
          ---------
and after the date of this Agreement until the Secured Obligations shall have
been paid in full and the commitments to make Extensions of Credit under the
Loan Agreement shall have expired or otherwise been terminated:
<PAGE>

                                       4

          4.1. Delivery of Instruments and Chattel Paper.  If any amount
               -----------------------------------------
payable under or in connection with any of the Collateral shall be or become
evidenced by any Instrument or Chattel Paper, Borrower will notify Bank thereof,
and upon the request of Bank such Instrument or Chattel Paper shall be
immediately delivered to the Bank, duly indorsed in a manner satisfactory to the
Bank to be held as Collateral pursuant to this Agreement.

          4.2. Maintenance of Insurance.  The Borrower will maintain insurance
               ------------------------
in accordance with the Loan Agreement.

          4.3. Maintenance of Perfected Security Interest; Further
               ---------------------------------------------------
Documentation.
-------------

               (a)  The Borrower shall maintain the security interest created by
this Agreement as a perfected security interest having at least the priority
described in subsection 3.2 and shall defend such security interest against the
claims and demands of all Persons whomsoever.

               (b)  At any time and from time to time, upon the written request
of the Bank and at the sole expense of the Borrower, the Borrower will promptly
and duly execute and deliver such further instruments and documents and take
such further actions as the Bank may reasonably request for the purpose of
obtaining or preserving the full benefits of this Agreement and of the rights
and powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in effect
in any jurisdiction with respect to the security interests created hereby.

          4.4. Changes in Locations, Name, etc.  The Borrower will not unless it
               -------------------------------
shall have given the Bank at least 30 days prior written notice of such change
(or, in the case of Inventory and Equipment, at least 10 days prior written
notice, to the extent that the Borrower has taken such action as reasonably may
be required of it to maintain the continuous perfection of the Bank's security
interest in such Inventory or Equipment, as the case may be):

               (a)  permit any of the Inventory (other than goods-in-transit and
immaterial amounts of goods in temporary locations in the ordinary course of
business) or Equipment to be kept at a location other than those listed on
Schedule 1; or
-----------

               (b)  change the location of its chief executive office from that
specified in subsection 3.4; or

               (c)  change its name, identity or corporate structure to such an
extent that any financing statement filed by the Bank in connection with this
Agreement would become seriously misleading.

          4.5. Further Identification of Collateral.  The Borrower will furnish
               ------------------------------------
to the Bank from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Bank may reasonably request, all in reasonable detail.

     5.   Provisions Relating to Receivables.
          ----------------------------------
<PAGE>

                                       5

          5.1. Borrower Remains Liable under Receivables.  Anything herein to
               -----------------------------------------
the contrary notwithstanding, the Borrower shall remain liable under each of the
Receivables to observe and perform all the conditions and obligations to be
observed and performed by it thereunder, all in accordance with the terms of any
agreement giving rise to each such Receivable.  The Bank shall have no
obligation or liability under any Receivable (or any agreement giving rise
thereto) by reason of or arising out of this Agreement or the receipt by the
Bank of any payment relating to such Receivable pursuant hereto, nor shall the
Bank be obligated in any manner to perform any of the obligations of the
Borrower under or pursuant to any Receivable (or any agreement giving rise
thereto), to make any payment, to make any inquiry as to the nature or the
sufficiency of any payment received by it or as to the sufficiency of any
performance by any party under any Receivable (or any agreement giving rise
thereto), to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.

          5.2. Analysis of Receivables.  The Bank shall have the right to make
               -----------------------
test verifications of the Receivables in any manner and through any medium that
it reasonably considers advisable, and the Borrower shall furnish all such
assistance and information as the Bank, may reasonably require in connection
with such test verifications.  One time per calendar year, except if an Event of
Default has occurred and is continuing, in which case at any time, upon the
Bank's reasonable request and at the expense of the Borrower, the Borrower shall
cause independent public accountants or others satisfactory to the Bank, to
furnish to the Bank, reports showing reconciliations, aging and test
verifications of, and trial balances for, the Receivables.  The Bank may during
such time as an Event of Default shall have occurred and be continuing
communicate with the obligors on the Receivables to verify with them to its
satisfaction the existence, amount and terms of any Receivables.  Borrower will
notify Bank promptly if any Receivable does not qualify as an Eligible Account
Receivable pursuant to paragraph 8 of the Loan Agreement.

          5.3. Collections on Receivables.
               --------------------------

               (a)  The Bank hereby authorizes the Borrower to collect the
Receivables subject to the Bank's direction and control, and the Bank may
curtail or terminate said authority at any time when an Event of Default has
occurred and is continuing and may then direct that payments on the Receivables
be made directly to the Bank, in accordance with the provisions of Section 6
herein.

               (b)  At the Bank's request at any time when an Event of Default
has occurred and is continuing the Borrower shall deliver to the Bank, all
original and other documents evidencing, and relating to, the agreements and
transactions which gave rise to the Receivables, including, without limitation,
all original orders, invoices and shipping receipts.

          5.4. Additional Representations and Warranties.
               -----------------------------------------
<PAGE>

                                       6

               (a)  No amount payable to the Borrower under or in connection
with any Receivable is evidenced by any Instrument or Chattel Paper which has
not been disclosed to the Bank under Section 4.1.

               (b)  The amounts represented by the Borrower to the Bank from
time to time as owing to the Borrower in respect of the Receivables will at such
times be accurate in all material respects.

          5.5. Covenants.
               ---------

               (a)  Other than in the ordinary course of business, the Borrower
will not (i) grant any extension of the time of payment of any Receivable, (ii)
compromise or settle any Receivable for less than the full amount thereof, (iii)
release, wholly or partially, any Person liable for the payment of any
Receivable, (iv) allow any credit or discount whatsoever on any Receivable, (v)
amend, supplement or modify any Receivable in any manner that could adversely
affect the value thereof or (vi) fail to exercise promptly and diligently each
and every material right which it may have under each agreement giving rise to a
Receivable (other than any right of termination).

               (b)  The Borrower will deliver to the Bank a copy of each
material demand, notice or document received by it that questions the validity
or enforceability of more than 5% of the aggregate amount of the then
outstanding Receivables.

     6.   Remedies.
          --------

          6.1. Notice to Obligors.  Upon the request of the Bank at any time
               ------------------
when an Event of Default has occurred and is continuing the Borrower shall
notify obligors on the Receivables that the Receivables have been assigned to
the Bank and that payments in respect thereof shall be made directly to the
Bank.

          6.2. Proceeds to be Turned Over To The Bank.  In addition to the
               --------------------------------------
rights of the Bank specified in subsection 5.3 with respect to payments of
Receivables, when an Event of Default has occurred and is continuing all
Proceeds received by the Borrower consisting of cash, checks and other near-cash
items shall be held by the Borrower in trust for the Bank, segregated from other
funds of the Borrower, and shall, forthwith upon receipt by the Borrower, be
turned over to the Bank, in the exact form received by the Borrower (duly
indorsed by the Borrower to the Bank, if required) and held by the Bank.

          6.3. Code Remedies.  If an Event of Default has occurred and is
               -------------
continuing, the Bank may exercise, in addition to all other rights and remedies
granted to it in this Agreement and in any other instrument or agreement
securing, evidencing or relating to the Secured Obligations, all rights and
remedies of a secured party under the Code.  Without limiting the generality of
the foregoing, the Bank, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon the Borrower or any other Person
(all and each of which demands, defenses, advertisements and notices are hereby
waived), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Collateral, or any part thereof, and/or may
<PAGE>

                                       7

forthwith sell, lease, assign, give option or options to purchase, or otherwise
dispose of and deliver the Collateral or any part thereof (or contract to do any
of the foregoing), in one or more parcels at public or private sale or sales, at
any exchange, broker's board or office of the Bank or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Bank shall have the right upon any such public sale or sales, and, to
the extent permitted by law, upon any such private sale or sales, to purchase
the whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Borrower, which right or equity is hereby waived or released.
The Borrower further agrees, at the Bank's request, to assemble the Collateral
and make it available to the Bank, at places which the Bank shall reasonably
select, whether at the Borrower's premises or elsewhere. To the extent permitted
by applicable law, the Borrower waives all claims, damages and demands it may
acquire against the Bank arising out of the exercise by them of any rights
hereunder. If any notice of a proposed sale or other disposition of Collateral
shall be required by law, such notice shall be deemed reasonable and proper if
given at least 10 days before such sale or other disposition.

     7.   Bank, Appointment as Attorney-in-Fact; Bank, Performance of Borrower's
          ----------------------------------------------------------------------
Obligations.
-----------

          7.1. Powers.  The Borrower hereby irrevocably constitutes and
               ------
appoints the Bank and any officer or agent, thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of the Borrower and in the name of
the Borrower or in its own name, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents and instruments which may be necessary or desirable to accomplish
the purposes of this Agreement, and, without limiting the generality of the
foregoing, the Borrower hereby gives the Bank, the power and right, on behalf of
the Borrower, without notice to or assent by the Borrower, to do any or all of
the following:

               (a)  at any time when an Event of Default has occurred and is
continuing in the name of the Borrower or its own name, or otherwise, take
possession of and indorse and collect any checks, drafts, notes, acceptances or
other instruments for the payment of moneys due under any Receivable or with
respect to any other Collateral and file any claim or take any other action or
proceeding in any court of law or equity or otherwise deemed appropriate by the
Bank for the purpose of collecting any and all such moneys due under any
Receivable or with respect to any other Collateral whenever payable;

               (b)  to the extent the Borrower fails to do so, pay or discharge
taxes and liens levied or placed on or threatened against the Collateral, effect
any repairs or any insurance called for by the terms of this Agreement and pay
all or any part of the premiums therefor and the costs thereof;

               (c)  execute, in connection with any sale provided for in
subsection 6.3, any endorsements, assignments or other instruments of conveyance
or transfer with respect to the Collateral; and
<PAGE>

                                       8

               (d)  at any time when an Event of Default has occurred and is
continuing (1) direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due thereunder
directly to the Bank; (2) ask or demand for, collect, receive payment of and
receipt for, any and all moneys, claims and other amounts due or to become due
at any time in respect of or arising out of any Collateral; (3) sign and indorse
any invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications, notices and other
documents in connection with any of the Collateral; (4) commence and prosecute
any suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any thereof and to enforce any other
right in respect of any Collateral; (5) defend any suit, action or proceeding
brought against the Borrower with respect to any Collateral; (6) settle,
compromise or adjust any such suit, action or proceeding and, in connection
therewith, to give such discharges or releases as the Bank may deem appropriate;
and (7) generally, sell, transfer, pledge and make any agreement with respect to
or otherwise deal with any of the Collateral as fully and completely as though
the Bank were the absolute owner thereof for all purposes, and do, at the Bank's
option and the Borrower's expense, at any time, or from time to time, all acts
and things which the Bank deems necessary to protect, preserve or realize upon
the Collateral and the Bank's security interest therein and to effect the intent
of this Agreement, all as fully and effectively as the Borrower might do.

          7.2. Performance by Bank of Borrower's Obligations.  If the Borrower
               ---------------------------------------------
fails to perform or comply with any of its agreements contained herein, the
Bank, at its option, but without any obligation so to do, may perform or comply,
or otherwise cause performance or compliance, with such agreement.

          7.3. Borrower's Reimbursement Obligation.  The expenses of the Bank
               -----------------------------------
incurred in connection with actions undertaken as provided in this Section,
together with interest thereon at a rate equal to the rate per annum at which
interest would then be payable on past due loans under the Loan Agreement, from
the date of payment by the Bank, to the date reimbursed by the Borrower, shall
be payable by the Borrower to the Bank on demand.

          7.4. Ratification; Power Coupled With An Interest.  The Borrower
               --------------------------------------------
hereby ratifies all that said attorneys shall lawfully do or cause to be done by
virtue hereof in accordance with the terms of this Agreement.  All powers,
authorizations and agencies contained in this Agreement are coupled with an
interest and are irrevocable until this Agreement is terminated and the security
interests created hereby are released.

     8.   Duty of the Bank.  The Bank's sole duty with respect to the custody,
          ----------------
safekeeping and physical preservation of the Collateral in its possession, under
Section 9-207 of the Code or otherwise, shall be to deal with it in the same
manner as the Bank, deals with similar property for its own account.  The Bank
shall not be liable for failure to demand, collect or realize upon any of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Borrower or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.  The powers conferred on the Bank hereunder are
solely to protect the Bank's interests in the Collateral and shall not impose
any duty upon the Bank to exercise any such powers.  The Bank, shall be
accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it
<PAGE>

                                       9

nor any of its officers, directors, employees or agents shall be responsible to
the Borrower for any act or failure to act hereunder, except for its own gross
negligence or willful misconduct.

     9.   Execution of Financing Statements.  Pursuant to Section 9-402 of the
          ---------------------------------
Code, the Borrower authorizes the Bank to file financing statements with respect
to the Collateral without the signature of the Borrower in such form and in such
filing offices as the Bank, reasonably determines appropriate to perfect the
security interests of the Bank, under this Agreement.  A carbon, photographic or
other reproduction of this Agreement shall be sufficient as a financing
statement for filing in any jurisdiction.

     10.  Notices.  All notices, requests and demands to or upon the Bank or the
          -------
Borrower hereunder shall be effected in the manner provided for in the Loan
Agreement.

     11.  Severability.  Any provision of this Agreement which is prohibited or
          ------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

     12.  Amendments in Writing; No Waiver; Cumulative Remedies.
          -----------------------------------------------------

          12.1.  Amendments in Writing.  None of the terms or provisions of this
                 ---------------------
Agreement may be waived, amended, supplemented or otherwise modified except by a
written instrument executed by the Borrower and the Bank.

          12.2.  No Waiver by Course of Conduct.  The Bank shall not by any act
                 ------------------------------
(except by a written instrument pursuant to subsection 12.1), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or in any breach of any of the terms and
conditions hereof.  No failure to exercise, nor any delay in exercising, on the
part of the Bank, any right, power or privilege hereunder shall operate as a
waiver thereof.  No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege.  A waiver by the Bank of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Bank would otherwise have on any future occasion.

          12.3.  Remedies Cumulative.  The rights and remedies herein provided
                 -------------------
are cumulative, may be exercised singly or concurrently and are not exclusive of
any other rights or remedies provided by law.

     13.  Section Headings.  The Section and subsection headings used in this
          ----------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.

     14.  Successors and Assigns.  This Agreement shall be binding upon the
          ----------------------
successors and assigns of the Borrower and shall inure to the benefit of the
Bank and its successors and assigns.
<PAGE>

                                       10

     15.  GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
          -------------
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

     16.  Release of Collateral and Termination.  The Bank shall release the
          -------------------------------------
Collateral from the lien created hereby, and this Agreement and all obligations
of the Bank and the Borrower hereunder shall terminate on the Termination Date.
<PAGE>

                                       11

     IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly
executed and delivered as of the date first above written.

                              LEVEL 8 SYSTEMS, INC.

                              By: ____________________________
                                  Name:
                                  Title:
<PAGE>

                                                                   Schedule 1 to
                                                     Borrower Security Agreement
                                                     ---------------------------

                            INVENTORY AND EQUIPMENT

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