Document:

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                                                                   EXHIBIT 10.69

                               AMENDMENT AGREEMENT

            This Amendment Agreement (this "AGREEMENT") is being entered into on
July 10, 2001 by and among AppliedTheory Corporation, a Delaware corporation
(the "COMPANY"), and Halifax Fund, L.P., a Cayman Island limited partnership,
Palladin Partners I, L.P., a Delaware limited partnership, Palladin Overseas
Fund Ltd., a Cayman Islands exempted company, DeAm Convertible Arbitrage Fund,
Ltd., a Cayman Islands exempted company, Lancer Securities (Cayman) Ltd., a
Cayman Islands exempted company, Elliott Associates, L.P., a Delaware limited
partnership and Elliott International, L.P., a Cayman Island limited partnership
(collectively, the "INVESTORS"). Terms used herein but not defined shall have
the meaning set forth in that certain related Amended and Restated Purchase
Agreement dated as of June 5, 2000 (the "PURCHASE AGREEMENT") by and among the
Company and the Investors, except where the context expressly indicates to the
contrary.

                                R E C I T A L S:

            WHEREAS, on January 9, 2001, the Company and the Investors, among
others, entered into that certain Letter Agreement re Distribution of New
Documents (the "LETTER AGREEMENT"), pursuant to which certain transaction
documents were amended and restated (including the Purchase Agreement) and new
securities were issued (to replace ones previously issued);

            WHEREAS, the Company and the Investors desire to enter into this
Agreement to further modify the provisions of the "NEW TRANSACTION DOCUMENTS"
(as defined in the Letter Agreement);

            NOW THEREFORE, for $1.00 and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:

                                   T E R M S:

      1. SECURITY AGREEMENT. The Company and its subsidiaries shall provide the
Investors with a continuing security interest in certain collateral to secure
prompt repayment of any and all indebtedness of the Company to each Investor and
to secure prompt performance by the Company of each of its covenants and duties
under this Agreement and the New Transaction Documents (modified as contemplated
hereby), all as set forth more fully in that certain Security Agreement (the
"SECURITY AGREEMENT") to be entered into between the Company and the Investors,
substantially in the form attached hereto as Exhibit 1, contemporaneously
herewith.

      2. CONVERSION TERMS.

            (a) The following changes shall be effected to the terms and
provisions of the Debentures governing conversion:

                  (i) The term "CONVERSION PRICE" shall be defined to mean the
right to convert the Debentures at the following prices: (i) $0.90, with respect
to (A) $6,500,000

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aggregate principal amount of Debentures and (B) interest accrued thereon from
and after June 5, 2000 (the "ISSUANCE DATE") plus any default payments not
previously added to principal; (ii) $1.22, with respect to (A) $6,500,000
aggregate principal amount of Debentures and (B) interest accrued thereon from
and after the Issuance Date plus any default payments not previously added to
principal; (iii) $1.80, with respect to (A) $6,500,000 aggregate principal
amount of Debentures and (B) interest accrued thereon from and after the
Issuance Date plus any default payments not previously added to principal; (iv)
$2.70, with respect to (A) $6,500,000 aggregate principal amount of Debentures
and (B) interest accrued thereon from and after the Issuance Date plus any
default payments not previously added to principal; (v) $3.60, with respect to
(A) the aggregate principal amount of Debentures in excess of $26,000,000
outstanding on the date hereof and (B) interest accrued thereon from and after
the Issuance Date plus any default payments not previously added to principal.
Each of such prices shall be subject to adjustment in accordance with Section
5(b)(ii) and Section 8 (excluding Section 8(b)(i)) of the Debentures. The
Conversion Prices shall be allocated among the Debentures owned by Investors in
proportion to the Outstanding Principal Amount of Debentures held by each such
Investor on the date hereof.

                  (ii) Sections 4(a), 4(b)(ii), 4(c), 5(b)(i)(B), 5(b)(i)(C),
5(c), 5(d), 6, 7 8(b)(i) and 18(l) of the Debentures are hereby deleted.

                  (iii) Section 5(b)(i)(A) is hereby amended to read as follows:

                        "(A)  Subject to adjustments pursuant to Section
5(b)(ii) and Section 8 hereof, the Holder shall have the right to convert this
Debenture, at any time and from time to time, at the Conversion Price (as
defined in this Debenture). The date on which the Conversion Notice is given
shall be the Holder Conversion Date. Unless otherwise specified by the Holder,
Debentures submitted for conversion shall be converted at the lowest Conversion
Price available to the Holder with respect to such Debentures."

                  (iv) Section 5(b)(ii) of the Debentures is hereby amended to
read as follows:

                        "(ii) In addition to the foregoing and in addition to
any other rights or remedies which may be available to the Holder in this
Debenture or under the Purchase Agreement, the Registration Rights Agreement,
Amendment Agreement or the Security Agreement, if at any time the Company fails
for any reason to redeem the Debenture (or portion thereof, as applicable) in
cash and/or non-cash consideration pursuant to and in accordance with Section 6
of the Amendment Agreement or make any cash payment (other than interest
payments with respect to which the Holder has the right to require the Company,
or the Company has the right to elect and has elected, to pay PIK Interest in
lieu thereof) in accordance with the terms of this Debenture, the Purchase
Agreement, Registration Rights Agreement, the Amendment Agreement or the
Security Agreement, and such failure remains uncured for at least five (5)
Trading Days, then the Conversion Price shall be subject to further adjustment
(downwards only). The Conversion Price shall thereafter be equal to the lesser
of (x) the lowest Market Price for Shares of Common Stock during any of the five
(5) days prior to the date that the Holder submits a Conversion Notice (as
defined above) to the Company and (y) the Conversion Price otherwise applicable
at such time, in each case subject to further adjustment pursuant hereto and
Section 8."

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                  (v) The first clause of Section 8(b)(ii) which currently reads
"the Market Price for Shares of Common Stock on the Trading Day next preceding
such issue or sale," is hereby amended to read "90% of the Market Price for
Shares of Common Stock on the Trading Day next preceding such issue or sale."

                  (vi) The Debentures, as modified in accordance with the terms
of this Agreement, shall sometimes be referred to in this Agreement as the
"AMENDED DEBENTURES".

            (b) Simultaneously with the execution of this Agreement, the Company
shall issue to each Investor one or more Amended Debentures (in such
denominations, aggregating, as to each Investor, the principal amount (plus
accrued interest and unpaid default payments) held by such Investor on the date
hereof, in such denominations requested by each such Investor) containing the
terms set forth in the Debentures as modified by this Agreement, in the form of
Exhibit 2 hereto.

            (c) The right to convert the Amended Debentures in accordance with
the terms thereof (as modified by this Agreement) shall, except in the event
that an Investor shall have the right to convert at the Conversion Price
specified in Section 5(b)(ii) of the Amended Debentures, terminate upon the
closing of a Relevant Sale (as defined in the next sentence). For the purposes
hereof, a "RELEVANT SALE" shall mean a Sale of the Company (as defined below) in
which (i) immediately following such closing of the Sale of the Company, all or
substantially all of the assets of the Company held prior thereto, or all or
substantially all of the voting stock of the Company (depending upon the form of
the transaction), is held by or on behalf of the acquirer in such transaction;
(ii) the consideration paid by the acquirer is (or would be, but for Section 6
of this Agreement) received by the shareholders of the Company in such
transaction; and (iii) such consideration ("RELEVANT SALE CONSIDERATION")
consists solely of cash and/or Marketable Securities (as defined in the next
sentence). For the purposes hereof, "MARKETABLE Securities" shall mean
marketable, free trading shares of common stock of a publicly-traded company
that is traded on the NYSE, the American Stock Exchange, the NASDAQ National
Market System or the Nasdaq Small-Cap Market and that has a market
capitalization of not less than $50,000,000 and a public float of not less than
$37,500,000 as measured by the average closing stock price of the
publicly-traded company for the twenty (20) Trading Days prior to the Sale of
the Company; provided, however, that, if the Relevant Sale Consideration is less
than 50% cash, then such $50,000,000 and $37,500,000 threshold amounts shall be
increased by multiplying such amounts by a number equal to (x) 1 plus (y) a
fraction (A) the numerator of which is the difference between (I) 50% and (II)
the percentage of cash in the Relevant Sale Consideration and (B) the
denominator of which is 50%. By way of example only, if the shareholders were to
receive 25% cash, then the $50,000,000 threshold amount shall be increased to
$75,000,000 and the $37,500,000 threshold amount shall be increased to
$56,250,000.

            (d) Contemporaneously with the execution of this Agreement, the
Debentures shall be delivered by the Investors to the Company in exchange for
the Amended Debentures (which Amended Debentures, collectively with this
Agreement, the Security Agreement and the Participation Certificates (as defined
below), shall be referred to as the "JULY 2001 TRANSACTION Documents"). No
service charge shall be made for such transfer or exchange.

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            (e) Immediately upon the occurrence of the exchange referred to in
Section 2(d) above, and without further action on the part of the Company or the
Investors, the Debentures shall be deemed cancelled, and all references to the
"DEBENTURES" contained in any of the New Transaction Documents or the July 2001
Transaction Documents shall hereinafter be deemed to refer to the "AMENDED
DEBENTURES".

            (f) The Company acknowledges that it will recognize that all of the
Amended Debentures have a Rule 144 holding period under the Securities Act that
commenced on June 5, 2000 for all purposes and further acknowledges that the
Company will act in accordance with that position.

      3. REGISTRATION RIGHTS.

            (a) All shares received and issuable upon conversion of the Amended
Debentures shall be considered Registrable Securities for the purpose of the
Registration Rights Agreement and are registered pursuant to the Company's
Registration Statement (No. 333-54420) that covers the disposition of
Registrable Securities issuable pursuant to the New Transaction Documents. To
the extent required to accomplish the foregoing, within ten (10) Trading Days
from the day hereof, the Company shall deliver to the Investors and file with
the SEC a prospectus supplement to the Registration Statement in accordance with
the rules and regulations under the Securities Act. Any such prospectus
supplement shall be submitted to the Investors at least two (2) Trading Days
prior to its filing for review and shall be subject to the Investors' prior
approval.

            (b) The Company hereby represents that, upon the filing of the
prospectus supplement referred to in Section 3(a) above, the Company shall have
sufficient shares registered under the Company's Registration Statement (No.
333-54420) to cover the disposition of Registerable Securities issuable pursuant
to the conversion of the Amended Debentures if such conversion took place
immediately following the execution of this Agreement.

            (c) (i) (i) Notwithstanding anything to the contrary, for the
purpose of Section 2(b)(ii) of the Registration Rights Agreement only, (A)
"Approved Markets" shall hereinafter mean any of the Nasdaq National Market
System, the American Stock Exchange, the New York Stock Exchange, the Nasdaq
Small Capitalization Market and the Nasdaq Bulletin Board and (B) references in
Section 2(b)(ii)(A) to being "listed with" the Approved Market shall hereinafter
be deemed to include being "quoted on" the Nasdaq Small Capitalization Market or
the Nasdaq Bulletin Board, and references in Section 2(b)(ii)(B) to being
"delisted from" the Approved Market shall hereinafter be deemed to include a
"halt from trading and/or quotation on" the Nasdaq Small Capitalization Market
or the Nasdaq Bulletin Board and not immediately thereafter being listed or
quoted on another Approved Market.

                  (ii) Section 2(f) of the Registration Rights Agreement is
hereby amended to read as follows:

                        "The Company shall file a Registration Statement with
respect to any Registrable Securities not included in the initial Registration
Statement within ten (10) business days of the date that there are Registrable
Securities not included in such initial

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Registration Statement (the "TRIGGERING DATE"). The Company shall use its best
efforts to (i) cause any such additional Registration Statement, when filed, to
become effective under the Securities Act within ninety (90) days of the
Triggering Date, and (ii) keep such additional Registration Statement effective
during the period described in Section 5 below. All of the registration rights
and remedies under this Agreement shall apply to the registration of such new
Registrable Securities, including without limitation the provisions providing
for Default Payments and Premium Redemption Price contained herein, except that
for the purpose of this Section 2(f) references to April 11, 2001 shall be
deemed to refer to the ninetieth (90th) day following the Triggering Date and
references to June 11, 2001 shall be deemed to refer to the ninetieth (90th) day
following the Triggering Date."

                  (iii) Notwithstanding anything to the contrary in the
Registration Rights Agreement, notices to the Company shall be sent to the
Company as provided in the Purchase Agreement.

                  (iv) All references to the Registration Rights Agreement
contained in any of the New Transaction Documents of the July 2001 Transaction
Documents shall hereinafter be deemed to refer to the Registration Rights
Agreement as hereby amended.

      4. PURCHASE AGREEMENT.

            (a) Section 3.6(A)(b)(x), Section 3.6(A)(b)(y) and Section
3.6(A)(b)(z) of the Purchase Agreement are hereby deleted.

            (b) Section 3.17 of the Purchase Agreement is hereby deleted.

            (c) Notwithstanding anything to the contrary in the Purchase
Agreement, notices to the Company shall be sent to the addresses set forth in
the Security Agreement.

            (d) All references to the Purchase Agreement contained in any of the
New Transaction Documents of the July 2001 Transaction Documents shall
hereinafter be deemed to refer to the Purchase Agreement as hereby amended.

            (e) The Company covenants that as long as any Amended Debenture or
Participation Certificate is outstanding: (i) the Company will not, either
directly or indirectly, sell or otherwise issue (other than (x) issuances or
sales of securities pursuant to employee or director option plans of the Company
approved by shareholders or up to 75,000 shares pursuant to contracts currently
in effect and disclosed to the Investors, (y) arrangements with the Investors
and (z) without the Investors' consent, the issuances or sales of securities in
connection with strategic acquisitions of other entities by the Company which
engage in businesses related or complementary to the Company's business and that
are not essentially capital raising transactions on behalf of the Company) in
the aggregate more than 4,068,000 shares of Common Stock (subject to adjustment
for stock splits and reverse splits) to any third parties in the aggregate; and
(ii) at no time shall the Company issue any shares of Common Stock at an
effective Per Share Selling Price (as defined in the Amended Debentures) equal
to less than a 20% discount of the average of the daily VWAP (as defined in the
Amended Debentures) for the 20 Trading Days immediately preceding the date of
such issuance. For purposes of the restriction set forth in Section 4(e)(i)
above, in the case of the issuance of any convertible

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securities, warrants, options or other rights to subscribe for or to purchase or
exchange for, shares of Common Stock ("DERIVATIVE SECURITIES"), the maximum
number of shares of Common Stock issuable upon exercise, exchange or conversion
of such Derivative Securities shall be deemed to be issued. With respect to
Derivative Securities, for purposes of the restriction set forth in Section
4(e)(ii) above, the Per Share Selling Price shall be equal to the lowest price
at which shares of Common Stock may be issued on conversion, exercise or
exchange of the Derivative Securities as of the issuance date of such Derivative
Securities or any subsequent date, whichever results in the lower Per Share
Selling Price. If such lowest price may change after issuance of the Derivative
Securities (for example, by reason of adjustments or resets resulting from
changes in the Market Price for shares of the Common Stock, or for any other
reason) then this restriction shall be recomputed to reflect such new "lowest
price."

      5. WARRANTS. Contemporaneously with the execution of this Agreement, all
outstanding Warrants held by the Investors shall be automatically, and without
further action on the part of the Company or the Investors, cancelled, for no
additional consideration. Prior to or contemporaneously with the execution of
this Agreement, each Investor agrees to deliver to the Company all of its
outstanding Warrants (or an affidavit of lost certificate) for cancellation.

      6. SALE OF THE COMPANY.

            (a) The Company agrees to use its best efforts to (i) immediately
enter into negotiations with one or more third parties and (ii) try to reach an
agreement with such third parties pursuant to which there will occur a Relevant
Sale (as defined above).

            (b) In the event of one or more Sales of the Company which occur on
or before the earlier of the Last Sale Date (as defined below) and the date of a
Relevant Sale, the Company shall be obligated to pay, or cause to be paid, to
the Investors a percentage of all consideration paid and payable, directly or
indirectly, by or on behalf of the acquirer to the Company, its subsidiaries,
its shareholders, its affiliates or any other person on behalf of the Company
(each a "PAYEE"), in accordance with the schedule set forth in Section 6(c)
below. Such payments shall be applied, as to each Investor, first, to redeem the
Outstanding Principal Amount of each Investor's Amended Debentures at a cash
redemption price equal to 100% of the Outstanding Principal Amount (plus all
accrued but unpaid interest and default payments (not previously added to
principal)) being redeemed. After all of an Investor's Amended Debentures have
been redeemed and/or converted in full, such Investor shall continue to be
entitled to receive the percentages of consideration set forth in Section 6(c)
resulting from each Sale of the Company, up to and including the first Relevant
Sale (as defined in Section 2(c) above) which occurs on or before the later of
(i) June 5, 2003 and (ii) the eighteen month anniversary of the first date upon
which there are no longer any Amended Debentures outstanding (the "LAST SALE
DATE"). For the avoidance of doubt, consideration paid and/or payable, directly
or indirectly, by or on behalf of the acquirer after the Last Sale Date and/or
the date of a Relevant Sale with respect to a Sale of the Company which occurred
prior to the earlier of the Last Sale Date and the date of a Relevant Sale are
covered by this Section 6. After an Investor's Amended Debentures have been
redeemed and/or converted in full, payments to be made to such Investor pursuant
to this Section 6(b) shall be made in accordance with the Participation
Certificates to be delivered by the Company to each Investor contemporaneously
herewith, the form of which is attached hereto as Exhibit 3 (the "PARTICIPATION
CERTIFICATES").

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            A "SALE OF THE COMPANY" shall mean (i) a Change in Control
Transaction (as defined in the Amended Debentures) or (ii) a sale or transfer
(in a single transaction or a series of transactions) of all or substantially
all of the Company's assets either by the Company or any one or more
subsidiaries thereof, provided that the Company is not subject to bankruptcy
proceedings at any time from the date of the announcement of such sale through
the closing date thereof.

            (c) In the case of any Sale of the Company which occurs on or before
the earlier of the Last Sale Date or the date of a Relevant Sale, the following
schedule shall govern.

                  (i) 100% of the consideration payable by or on behalf of the
acquirer in the Sale of the Company, up to $10,000,000, shall be paid to the
Investors;

                  (ii) 60% of the consideration between $10,000,000 and
$30,000,000 shall be paid to the Investors;

                  (iii) 20% of the consideration between $30,000,000 and
$50,000,000 shall be paid to the Investors; and

                  (iv) 10% of the consideration above $50,000,000 shall be paid
to the Investors.

            For the avoidance of doubt, in a case where an initial Sale of the
Company resulted in consideration of $10,000,000, then, with respect to the next
Sale of the Company, the schedule would commence with paragraph (ii) above of
this Section 6(c).

            (d) Any payments made to the Investors pursuant to this Section 6
shall occur, unless otherwise agreed to in writing by the Company and the
Investors, on the same date or dates as consideration is (or would be, but for
Section 6(c) above) first given to any Payee (the Company shall notify in
writing each Investor of such date at least twenty (20) Trading Days prior
thereto) (the "PAYMENT DATE"). On the Payment Date, if such payment is on
account of the redemption of an Investor's Amended Debentures, such Investor
shall (if such Amended Debenture is being redeemed in full) surrender the
Amended Debentures being redeemed to the Company and the Company shall redeem,
or cause to be redeemed, in cash the full Outstanding Principal Amount (plus all
accrued but unpaid interest and default payments (not previously added to
principal)). Unless otherwise agreed to in writing, any such payment shall occur
at the office of the Investors' counsel on the Payment Date. To the extent that
the schedule set forth in Section 6(c) does not result in the redemption in full
of the Amended Debentures following a Sale of the Company, then the remaining
Amended Debentures shall remain outstanding (subject to subsequent Sales of the
Company ), in full force and effect and secured pursuant to the terms of the
Security Agreement.

            (e) If, subsequent to the date hereof and prior to the date of a
Sale of the Company, the Amended Debentures are converted into shares of Common
Stock in accordance with the terms of this Agreement and the Amended Debentures,
then there shall be a pro rata reduction in the dollar amounts set forth in the
schedule contained in Section 6(c) above. For the avoidance of doubt, if 50% of
the Amended Debentures are so converted, then paragraph (i) of Section 6(c)
would provide for 100% of the consideration up to $5 million; paragraph (ii)
would provide for 60% of the consideration between $5 million and $15 million;
and so on.

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            (f) Amended Debentures shall be redeemed and consideration shall be
allocated among the Investors in proportion to the amount of Amended Debentures
owned by the Investors at the time of a Sale of the Company. In the event that
no Amended Debentures remain outstanding, consideration shall be allocated among
the Investors pursuant to the Participation Certificates in proportion to the
amount of Amended Debentures owned by the Investors as of the date hereof.

            (g) If the consideration paid in connection with the Sale of the
Company is not cash, then each Investor, as to itself must approve the
consideration before it may be applied to redeem the Amended Debentures. If the
consideration is part cash and part securities, the Investors may elect to have
the Amended Debentures redeemed to the extent of the cash consideration only, or
may have their Amended Debentures redeemed based upon the amount of the cash
plus the value of the other consideration. If the consideration consist solely
of securities or other non-cash consideration, then the Investors may elect to
have their Amended Debentures redeemed to the extent provided in the schedule
contained in Section 6(c) or in such lesser amount as they may elect. In the
event that no Amended Debentures remain outstanding, consideration shall be paid
to the Investors in accordance with this Agreement and the Participation
Certificates. Consideration not consisting of cash but consisting of marketable
securities shall be valued at the lower of (i) the average of the closing price
of such security on its principal market during the twenty (20) Trading Days
immediately following the public announcement of the Sale of the Company or (ii)
the average of the closing price of the securities on the principal market
during the twenty (20) Trading Days immediately preceding the Sale of the
Company.

            (h) If the consideration consists in whole or in part of non-cash
consideration, then the consideration paid to the Investors, assuming that they
agree to accept non-cash consideration, shall consist of the same proportions of
cash and non-cash consideration as is (or would be but for Section 6(c) above)
received by the Payees in connection with such Sale of the Company. In the event
that two or more Payees receive different proportions of cash and non-cash
consideration, each Investor shall be entitled to select which of such
proportions shall apply to such Investor.

            (i) The Company shall give the Investors not less than thirty (30)
days' notice of the effective date of each Sale of the Company which is to occur
on or before the Last Sale Date. To the extent applicable, following the receipt
of such notice, if a portion of the consideration is to consist of non-cash
consideration, the Investors shall be entitled, up to the business day
immediately preceding the effective date of the Sale of the Company, to make
their election to have their Amended Debentures redeemed in consideration for
the non-cash assets. Each Investor shall be entitled to make its election with
respect to its Amended Debentures separately from the election made by any other
Investor. In addition, Amended Debentures may be converted up to closing of the
applicable redemptions.

            (j) Nothing contained in this Section shall be deemed to reduce or
limit the rights and remedies available to the Investors in the case of an Event
of Default under the Amended Debentures.

      7. REPLACEMENT OF THE BOARD.

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            (a) For the purpose of this Section 6, "REPLACEMENT OF THE BOARD"
shall mean (i) a replacement of more than one-half of the members of the
Company's Board of Directors which is not approved by those individuals who are
members of the Company's Board of Directors on the date hereof, or (ii) Danny E.
Stroud ceases for any reason to serve as Chief Executive Officer or as a member
of the Company's Board of Directors.

            (b) For so long as any Amended Debentures remain outstanding or any
Participation Certificate is still in effect, in the event of a Replacement of
the Board, the Company shall reconstitute its Board of Directors such that two
persons designated by the Majority-in-Interest (as defined in Section 7(f)
below) shall replace two members of the then-existing Board as members of the
Board. However, if necessary to avoid the obligation to file disclosure
documents under Rule 14f-1 under the Exchange Act with respect to the
Majority-in-Interest, in the event that there have been additional departures
from the Board at the time of reconstitution of the Board, the
Majority-in-Interest may (but shall not be obligated to) opt to reduce the
number of its designees.

            (c) Thereafter, for so long as any of the Amended Debentures remain
outstanding or any Participation Certificates are still in effect, if one of the
members of the Board of Directors designated by the Majority-in-Interest to be
added to the Company's Board of Directors resigns, dies or becomes
incapacitated, the Company shall within one week fill such vacancy with a person
selected or approved by the Majority-in-Interest.

            (d) The Company covenants not to increase the size of its Board of
Directors above 5 directors without the prior approval of the
Majority-in-Interest or in order to meet its obligations under Section 7(e)
below.

            (e) If (i) the Company fails for any reason to take all actions
required of it pursuant to Section 7(b) and (c) above (whether by designating
the Majority-in-Interest's selections to vacancies (created through
resignations, removals or by increasing the size of the Board), designating the
Majority-in-Interest's selections as the Company's candidates at the Company's
annual meeting or otherwise) or (ii) the stockholders of the Company shall not
have voted in favor of the selections of the Majority-in-Interest at the next
meeting of stockholders at which directors are elected and the
Majority-in-Interest's selections are not otherwise appointed to serve on the
Board of Directors, then (x) an Event of Default under the Amended Debentures
and (y) a default under the Participation Certificates shall each be deemed to
have occurred and the Investors shall have all rights and remedies associated
therewith.

            (f) For the purpose hereof, "Majority-in-Interest" means the
Investors holding a majority of the Amended Debentures outstanding at the time
of a Replacement of the Board. In the event that no Amended Debentures remain
outstanding, "Majority-in-Interest" shall mean Halifax Fund, L.P.

      8. PRESS RELEASE AND FORM 8-K. Immediately following the execution of this
Agreement by all of the parties, the Company shall issue a press release in the
form of Exhibit 4 hereto. If the Company fails to issue the press release within
two (2) Trading Days following the date hereof, the Investors may issue a press
release covering the July 2001 Transaction Documents and complying with any
legal requirement applicable to the Investors. In addition, as

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soon as practical after the issuance of the press release, the Company shall
file a Form 8-K with the SEC which discloses the transactions contemplated by
the July 2001 Transaction Documents. The Investors shall have the opportunity to
review such Form 8-K prior to its filing.

      9. EVENT OF DEFAULT. Section 18 of the Debentures is hereby amended to add
the following as additional Events of Default (as defined in the Amended
Debentures) under the Amended Debentures:

            (a) the Company shall be in default under any of the July 2001
Transaction Documents (including, without limitation, breach of any of the
representations, warranties or covenants contained therein), and such default
continues beyond the applicable cure period provided therefor (if any);

            (b) the Company and/or one or more of its affiliates shall be in
default of any of its indebtedness or other obligations (including, without
limitation, obligations consisting of one or more covenants or agreements)
currently owed, or owing in the future, by the Company and/or any of its
affiliates to one or more Lenders (as defined in the Security Agreement and
expressly including their successors and/or assigns), and such default continues
beyond the applicable cure period provided therefor (if any), other than an
Event of Default solely arising under Section 8.1(8) or 8.1(14) of the Revolving
Credit Agreement as defined in the Security Agreement;

            (c) the Company and/or one or more of its affiliates shall be in
default of any indebtedness or other obligation currently owed, or owing in the
future, by the Company and/or any of its affiliates provided that such
obligation involves an amount equal to or greater than $100,000, and such
default continues beyond the applicable cure period provided therefor (if any).

      10. DUE AUTHORIZATION. The Company hereby represents and warrants to each
of the Investors as of the date hereof that the Company has all requisite
corporate power and authority to enter into and perform this Agreement and the
other July 2001 Transaction Documents and the transactions contemplated hereby
and thereby. The Company further represents and warrants that this Agreement and
the other July 2001 Transaction Documents constitute valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.

      11. INDEMNITY. The Company shall indemnify each of the Investors against
any loss, cost or damages (including reasonable attorney's fees and expenses but
excluding consequential damages) incurred as a result of the Company's breach of
any representation, warranty, covenant or agreement contained in any July 2001
Transaction Document or incurred as a result of the enforcement of this
indemnity.

                                       10
<PAGE>   11

      12. EXPENSES. The Company shall pay in immediately available funds, all
reasonable expenses (including, without limitation, UCC filing fees and
reasonable attorneys' fees and expenses of the Investors' Counsel) not to exceed
$175,000 incurred by the Investors in connection with the preparation,
negotiation, execution and delivery of the July 2001 Transaction Documents and
the related agreements and documents and the transactions contemplated hereunder
and thereunder. Contemporaneously with the execution of this Agreement, the
Company shall pay the amount estimated to be due for such fees and expenses
(which may include fees and expenses estimated to be incurred for completion of
the transaction including post-closing matters). In the event such amount is
ultimately less than the actual fees and expenses, the Company shall promptly
pay such deficiency upon receipt of an invoice regarding same. In the event such
amount is ultimately greater than the actual fees and expenses, such excess
shall promptly be returned to the Company.

      13. CLOSING DOCUMENTS. Prior to or contemporaneously with the execution
and delivery of this Agreement, the Company shall deliver each of the Closing
Documents (as defined below) to the Investors. The obligations of each Investor
hereunder are subject to the Investors' receipt of such Closing Documents. The
requirement that the Investors receive the Closing Documents is for each
Investor's benefit and may be waived by each Investor at any time in writing in
its sole discretion. "CLOSING DOCUMENTS" means (v) an opinion of independent
counsel of the Company, in the form annexed hereto as Exhibit 5(a); (w) an
executed copy of the officer's certificate in the form attached hereto as
Exhibit 5(b); (x) the Amended Debentures issued by the Company in accordance
with this Agreement; (y) the Security Agreement executed by the Company; and (z)
the Participation Certificates issued by the Company in accordance with this
Agreement.

      14. MISCELLANEOUS.

            (a) Section 6 (other than Section 6.3 and Section 6.4) of the
Purchase Agreement is hereby incorporated herein by reference with such changes
as may be necessary mutatis mutandis to conform with this Agreement.

            (b) All other provisions of the New Transaction Documents shall be
deemed to be changed mutatis mutandis to conform to the changes contemplated
herein.

            (c) Except as set forth above, the New Transaction Documents and the
terms thereof shall remain unmodified and in full force and effect.

            (d) In the event of any inconsistency or conflict between this
Agreement and the New Transaction Documents, the terms, provisions and
conditions of this Agreement shall govern and control.

            (e) The Company hereby represents that all of the Company's
representations and warranties contained in the New Transaction Documents were
true and correct as of June 5, 2000 and, except as set forth on Schedule 1
hereto, are true and correct as of the date hereof (except for representations
and warranties made as of an earlier date, which shall be true and correct as of
such date).

                                       11
<PAGE>   12

            (f) The Company hereby represents that it has performed all
agreements and satisfied all conditions required to be performed or satisfied
prior to the date hereof by the July 2001 Transaction Documents when and as
required.

            (g) The Company hereby acknowledges and agrees that it has no
pending claims against any of the Investors and hereby releases, acquits and
forever discharges each of the Investors from any and all actions, causes of
action, claims, demands, damages, judgments, debts, dues and suits of every
kind, nature and description whatsoever, which the Company ever had, now has or
may have against any Investor on or by reason of any matter, cause or thing
whatsoever through the date hereof (immediately prior to the execution of this
Agreement and the other July 2001 Transaction Documents).

            (h) Each of the Investors hereby acknowledges and agrees that, to
its knowledge, it has no pending claims against the Company arising under the
New Transaction Documents and hereby releases, acquits and forever discharges
the Company from any and all actions, causes of action, claims, demands,
damages, judgments, debts, dues and suits of every kind, nature and description
whatsoever, which such Investor, as the case may be, ever had, now has or may
have against the Company from breaches of representations and warranties and
breaches of covenants arising under the New Transaction Documents through the
date hereof (immediately prior to the earlier of the execution of this Agreement
or the execution of any of the other July 2001 Transaction Documents).

            (i) The Company hereby represents that no Event of Default (as
defined in the Amended Debentures) has occurred, is likely to occur or (except
to the extent resulting from the entry of judgment in pending litigation
disclosed in the Pre-Closing SEC Documents) is threatened, and no event has
occurred which constitutes or would constitute an Event of Default with notice
or the passage of time or both, as of the date hereof.

            (j) This Agreement may be executed in two or more counterparts, all
of which when taken together shall be considered one and the same Agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the executing party with the same force and effect as if such
facsimile signature page were an original thereof.

            (k) Each party shall indemnify each other party against any loss,
cost or damages (including reasonable attorney's fees but excluding
consequential damages) incurred as a result of such parties' breach of any
representation, warranty, covenant or agreement in this Agreement; or incurred
as a result of the enforcement of this indemnity.

            (l) This Amendment Agreement, the other July 2001 Transaction
Documents, the other New Transaction Documents and the agreements and other
documents referred to herein and therein constitute the full and entire
understanding and agreement of the parties with respect to the matters covered
hereby and thereby, supercedes any prior understanding, memoranda or other
written or oral agreements between or among any of them respecting the matters
covered hereby and thereby and, except as specifically set forth herein or
therein, neither

                                       12
<PAGE>   13

the Company nor any Investor makes any representation, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement may be
waived or amended other than by a written instrument signed by the party against
whom enforcement of any such amendment or waiver is sought.

            (m) Notices to the parties hereto shall be sent to the addresses set
forth in the Security Agreement.

                       *** Signatures on the next page ***

                                       13
<PAGE>   14

ACCEPTED AND AGREED TO AS OF
THE DATE FIRST ABOVE WRITTEN:

COMPANY:

APPLIEDTHEORY CORPORATION

By:   /s/ Danny Stroud
      --------------------------------------------
      Name:  Danny Stroud
      Title:    President

INVESTORS:

HALIFAX FUND, L.P.
By: The Palladin Group, L.P., as Attorney-in-Fact

      By:   /s/ Maurice Hryshko
           ---------------------------------------
            Name: Maurice Hryshko
            Title: Counsel

PALLADIN PARTNERS I, L.P.
By: The Palladin Group, L.P., as Attorney-in-Fact

      By:   /s/ Maurice Hryshko
           ---------------------------------------
            Name: Maurice Hryshko
            Title: Counsel

PALLADIN OVERSEAS FUND LTD.
By: The Palladin Group, L.P., as Attorney-in-Fact

      By:   /s/ Maurice Hryshko
           ---------------------------------------
            Name: Maurice Hryshko
            Title: Counsel

DeAM CONVERTIBLE ARBITRAGE FUND, LTD.
By: The Palladin Group, L.P., as Attorney-in-Fact

      By:   /s/ Maurice Hryshko
           ---------------------------------------
            Name: Maurice Hryshko
            Title: Counsel

                     [SIGNATURE PAGE TO AMENDMENT AGREEMENT]

                    *** Signatures continue on next page ***

<PAGE>   15

LANCER SECURITIES (CAYMAN) LTD.
By: The Palladin Group, L.P., as Attorney-in-Fact

      By:   /s/ Maurice Hryshko
           ---------------------------------------
            Name: Maurice Hryshko
            Title: Counsel

ELLIOTT ASSOCIATES, L.P.

By:   /s/ Paul E. Singer
      ---------------------------------------------
      Name:  Paul E. Singer
      Title:  General Partner

ELLIOTT INTERNATIONAL, L.P.
By: Elliott International Capital Advisors Inc., as Attorney-in-Fact

      By:   /s/ Paul E. Singer
           ---------------------------------------
            Name:  Paul E. Singer, President

                     [SIGNATURE PAGE TO AMENDMENT AGREEMENT]<PAGE>   1

                                                                   EXHIBIT 10.70

                               SECURITY AGREEMENT

                  This SECURITY AGREEMENT dated as of July 10, 2001, is made by
APPLIED THEORY CORPORATION, a corporation organized under the laws of the State
of Delaware ("Borrower"), with its principal offices located at 1500 Broadway,
3rd Floor, New York, New York 10036 and each of the Borrower's undersigned
subsidiaries ("Subsidiaries"), in favor of the undersigned Lenders ("Lenders")
and HALIFAX FUND, L.P., as collateral agent (the "Collateral Agent") (the
Borrower and Subsidiaries are hereinafter sometimes referred to collectively as
"Obligors" or individually as an "Obligor").

                              W I T N E S S E T H :

                  WHEREAS, pursuant to the terms of a certain Purchase
Agreement, dated as of June 5, 2000, as amended and restated (the "Purchase
Agreement") by and among the Borrower and the Lenders, the Lenders were issued
(i) 5% Convertible Debentures due June 5, 2003 (the "Debentures") and (ii)
certain warrants ("Warrants") to purchase shares of the Borrower's common stock,
par value $.01 per share ("Common Stock");

                  WHEREAS, pursuant to the terms of a certain Registration
Rights Agreement, dated as of June 5, 2000, by and among the Borrower and the
Lenders, as amended and restated (the "Registration Rights Agreement") the
Lenders received registration rights with respect to the Common Stock issuable
upon conversion of the Debentures and exercise of the Warrants;

                  WHEREAS, the Borrower and the Lenders have entered into a
certain letter agreement dated as of January 9, 2001 (the "Letter Agreement")
with respect to the Purchase Agreement, Debentures, Warrants and Registration
Rights Agreement and, pursuant to the Letter Agreement, have amended and
restated the Purchase Agreement, Debentures, and Registration Rights Agreement,
terminated the Warrants and the Borrower has issued new Warrants to the Lenders;

                  WHEREAS, the Lenders have agreed to certain amendments and
modifications to the Current Indebtedness at the request of the Borrower
pursuant to the Amendment Agreement dated the date hereof and to induce the
Lenders to agree to such changes, the Obligors have agreed to provide certain
security for the Current Indebtedness pursuant to the terms of this Agreement;

                  WHEREAS, the Borrower, the Subsidiaries and the Lenders agree
that all of the Borrower's obligations under the Debentures, Purchase Agreement,
Letter Agreement and Registration Rights Agreement, as the same may be amended
and/or supplemented on or after the date hereof, including by the Amendment
Agreement ("Current Indebtedness"), shall be secured by a first priority lien
(except as provided herein) on certain assets of the Obligors, pursuant to the
terms of this Agreement; and

                  WHEREAS, pursuant to the terms of a Revolving Credit
Agreement, dated as of the date hereof, by and between the Obligors and the
Lenders ("Revolving Credit Agreement") and the Revolving Credit Notes issued
thereunder ("Revolving Credit Notes"), the financing
<PAGE>   2
provided thereunder to the Obligors, together with all obligations of the
Obligors to the Lenders thereunder and under the Subsidiary Guarantees
("Subsidiary Guarantees") delivered by each of the Subsidiaries and the Parent
Guarantee ("Parent Guarantee") delivered by the Borrower (the "Receivables
Financing," and together with the "Current Indebtedness," the "Indebtedness")
shall be secured by a first priority lien (except as provided herein) on certain
assets of the Obligors, pursuant to the terms of this Agreement.

                  NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein and in order to induce the Lender to enter into the
Receivables Financing, the Obligors hereby agree with Lenders as follows:

                  SECTION 1. DEFINITIONS

                  1.1. Definitions. The following words shall have the following
meanings when used in this Security Agreement. All terms used herein not
otherwise defined in this Security Agreement shall have the meanings attributed
to such terms in the New York Uniform Commercial Code, as may be amended from
time to time. All references to dollar amounts shall mean amounts in lawful
money of the United States of America.

                  "Account Debtor" means any person who is or who may become
obligated under, with respect to, or on account of an Account.

                  "Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owed or owing now
or in the future to an Obligor, including without limitation obligations arising
out of the sale or lease of goods or the rendition of services by an Obligor, or
arising out of the sale or lease of goods or the rendition of services by a
person other than an Obligor and acquired by an Obligor from such person by
assignment or purchase.

                  "Bankruptcy Code" means The Bankruptcy Reform Act of 1978, as
heretofore and hereinafter amended, and codified as 11 U.S.C. Section 101
et seq.

                  "Borrower's Books" means all of the Obligors' books and
records including: ledgers; records indicating, summarizing, or evidencing each
Obligor's assets or liabilities, or the Collateral; all information relating to
each Obligor's business operations or financial condition; and all computer
programs, disc or tape files, printouts, runs, or other computer prepared
information, and the equipment containing such information.

                  "Collateral" means each of the following (whether currently
owned or hereafter acquired or owned by an Obligor): the Pledged Securities;
Accounts; Borrower's Books; Equipment; General Intangibles; Goods; Inventory;
Negotiable Collateral (other than Pledged Securities); any money or other assets
of the Obligors which hereafter come into the possession, custody or control of
the Collateral Agent; and the proceeds and products, whether tangible or
intangible, of any of the foregoing including proceeds of insurance covering any
or all of the Collateral, and any and all Accounts, Equipment, General
Intangibles, Goods, Inventory, Negotiable Collateral, money, deposit accounts,
or other tangible or intangible, real or personal, property resulting from the
sale, exchange, collection, or other disposition of the Collateral, or any
portion thereof or interest therein, and the proceeds thereof.

                                       2
<PAGE>   3
                  "Default" shall mean any condition, act or event which, with
notice or lapse of time or both, would constitute an Event of Default.

                  "Eligible Accounts" shall mean Accounts created by an Obligor
in the ordinary and regular course of its business, but only to the extent such
Accounts are and at all times continue to be acceptable to the Lenders in all
respects. Standards of eligibility may be fixed and revised from time to time
solely by the Lenders in their good faith judgment. In determining eligibility
the Lenders may, but need not, rely on agings reports and schedules of Accounts
furnished by Borrower, but reliance thereon by the Lenders from time to time
shall not be deemed to limit the Lenders' rights to revise standards of
eligibility for any item. Without limitation, an Account shall not be deemed
acceptable unless the Account Debtor on such Account is and at all times
continues to be acceptable to the Lenders in their good faith judgment and
unless each Account complies in all respects with representations, covenants and
warranties hereinafter set forth. Without limitation, non-governmental Accounts
shall not be treated as acceptable unless such Accounts are less than 90 days
old, and governmental Accounts shall not be treated as acceptable unless such
Accounts are less than 100 days old. Lenders shall have the right to require
that any or all Accounts be more current in order to be acceptable. No Account
that is contested by the Account Debtor shall be treated as an Eligible Account.
Except as contemplated by Section 2.2(r) hereof, no Account shall be treated as
an Eligible Account unless the Lenders have a perfected, first priority security
interest therein.

                  "Equipment" means all of Obligors' present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, dies,
jigs, goods (other than consumer goods, farm products, or Inventory), and any
interest in any of the foregoing, wherever located, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located.

                  "Event of Default" means and includes any of the Events of
Default set forth in Section 3.1.

                  "General Intangibles" means all of the Obligors' present and
future general intangibles and other personal property (including contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, patents, trade names, trademarks, service marks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, monies due under any royalty or
licensing agreements, infringements, claims, computer programs, computer discs,
computer tapes, seismic data, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds, and tax refund claims, as well as all
cash collateral that is hypothecated to secure letters of credit or bonding
obligations) other than goods and Accounts.

                  "Negotiable Collateral" means all of an Obligor's present and
future letters of credit, notes, drafts, instruments, certificated securities,
documents, personal property leases (wherein the Obligor is the lessor), chattel
paper, and Borrower's books relating to any of the foregoing.

                                       3
<PAGE>   4
                  "Net Worth" of an entity shall mean (A) the sum of such
entity's property at fair valuation, exclusive of property transferred,
concealed, or removed with intent to hinder, delay or defraud such entity's
creditors and property that may be exempted from property of the estate under
section 522 of the Bankruptcy Code, less (B) the sum of such entity's debts
(including contingent liabilities). In construing this definition, words used
herein that are also used in Section 101(32) of the Bankruptcy Code shall be
interpreted in the same manner as such words are interpreted with respect to
such Section.

                  "Pledged Securities" means (i) all capital stock of all
current and future Subsidiaries, whether currently issued or issued in the
future ("Subsidiary Shares"); (ii) any capital stock or other securities
currently owned or received by the Obligors in the future, other than securities
received by the Obligors in respect of the stock of Red Hat and Center for
American Jobs now owned by them ("Further Securities"); (iii) all other
securities which may be delivered to and held by the Collateral Agent in respect
of the Further Securities and Subsidiary Shares pursuant to the terms hereof;
(iv) all dividends, cash, instruments, securities and other property from time
to time received, receivable or otherwise distributed, in respect of, in, for,
or upon the exchange or conversion of the securities referred to in clauses (i),
(ii) and (iii) above; and (v) all rights and privileges of the Obligors with
respect to the Pledged Securities and other properties referred to in clauses
(i), (ii), (iii) and (iv).

                  "Receivables Ratio" shall mean 44.44 percent.

                  "Security Agreement" means this Security Agreement, as this
Security Agreement may be amended or modified from time to time, together with
all exhibits and schedules attached to this Security Agreement from time to
time.

                  "Subsidiaries" shall mean all current subsidiaries (as defined
in Rule 405 of the Securities Act of 1933) of the Borrower, each of which is a
party hereto, as well as all future subsidiaries.

                  SECTION 2. GRANT OF SECURITY INTEREST; OBLIGATIONS OF BORROWER

                  2.1. Grant of Security Interest.

                           (a) As collateral security for all of the
Indebtedness, the Obligors hereby grant to the Collateral Agent for its benefit
and the ratable benefit of the Lenders a continuing first priority (subject to
any express exceptions herein) security interest in all currently existing and
hereafter acquired or arising Collateral to secure prompt repayment of any and
all Indebtedness and to secure prompt performance by Obligors of each of their
respective covenants and duties under (i) the Debentures, the Purchase
Agreement, the Registration Rights Agreement, the Letter Agreement and the
Amendment Agreement in each case as may be amended on or after the date hereof
("the Debenture Documents") and (ii) the Revolving Credit Agreement, the
Revolving Credit Notes, the Subsidiary Guarantees and the Parent Guarantee (the
"Revolving Credit Documents", and collectively with the Debenture Documents, the
"Related Documents"). Each of the Obligors further agrees that the Collateral
Agent and the

                                       4
<PAGE>   5
Lenders shall have the rights stated in this Security Agreement with respect to
the Collateral in addition to all other rights which they may have by law.

                           (b) Concurrently with the execution of this Security
Agreement, the Borrower is delivering to the Collateral Agent, certificates
representing all of the outstanding Subsidiary Shares, together with all stock
powers duly executed in blank. Upon the issuance of any additional Subsidiary
Shares, Borrower shall immediately deliver such Shares to the Collateral Agent,
together with stock powers duly executed in blank and corporate resolutions
authorizing the transfer of title of such stock to Lenders, the Collateral Agent
or their respective designee or designees upon an Event of Default pursuant to
the terms of this Security Agreement.

                           (c) Upon receipt of Further Securities by any
Obligor, such Obligor shall immediately deliver the certificates representing
such securities, together with stock powers duly executed in blank to the
Collateral Agent and corporate resolutions of the type described in (b) above.

                           (d) A reasonably detailed list of the Collateral
existing as of the date hereof is set forth on Schedule A attached hereto.
Schedule A identifies Accounts, including Eligible Accounts, sorted by the Loan
Obligor owning such Accounts and ageing, and also identifies any liens (other
than the liens created by this Agreement) with respect to such Accounts. For
other items of Collateral, Schedule A provides the location, description and
ownership and, for items of Collateral which have a certificate of title, the
jurisdiction of such certificates, and for those items of Collateral which are
mobile goods (goods that are mobile and generally used in more than one
jurisdiction such as motor vehicles, trailers and similar items) the present
location of such goods.

                  2.2. Representations, Warranties and Covenants of the
Obligors. Each of the Obligors jointly and severally represents, warrants and
covenants as follows:

                           (a) Perfection of Security Interest. Each Obligor
agrees to execute at any time and from time to time such financing statements
and to take whatever other actions are reasonably requested by the Collateral
Agent to perfect and continue the Collateral Agent's security interest in the
Collateral. Upon request of the Collateral Agent, each Obligor will deliver to
the Collateral Agent any and all of the documents constituting the Collateral or
possession of which is required in order for the Collateral Agent and the
Lenders to perfect their security interests therein, and such Obligor will note
the Collateral Agent's interest, as the case may be, upon any and all Accounts
if not delivered to the Collateral Agent for possession by the Collateral Agent.
The Collateral Agent may at any time and from time to time, and without further
authorization from the Obligors, file a carbon, photographic or other
reproduction of any financing statement or of this Security Agreement for use as
a financing statement. Borrower will reimburse the Collateral Agent for all
expenses for the perfection and the continuation of the perfection of the
Collateral Agent's security interest in the Collateral. Borrower promptly will
notify the Collateral Agent of any change in an Obligor's name including any
change to the assumed business names of an Obligor. This is a continuing
Security Agreement and will continue in effect until all of the Indebtedness is
paid in full and the Collateral Agent shall release its interest in the
Collateral upon the full and final payment and satisfaction of the

                                       5
<PAGE>   6
Indebtedness. Upon such release, the Collateral Agent will execute and deliver
to Borrower such Uniform Commercial Code termination statements and such other
documentation as Borrower shall reasonably request to effect the termination and
release of the security interest in the Collateral. If payment is made by or on
behalf of Borrower, whether voluntarily or otherwise, or by any third party, on
the Indebtedness and thereafter the Collateral Agent is forced to remit the
amount of that payment to an Obligor's trustee in bankruptcy or to any similar
person under any federal, state or foreign bankruptcy law or other law for the
relief of debtors, the Indebtedness shall be considered unpaid for the purpose
of enforcement of this Security Agreement. If permitted or required under
applicable law, the Collateral Agent may file any financing statements with
respect to the Collateral without the signatures of any of the Obligors. Any
financing statements may state that the Lenders have a lien in all of the
Obligors' assets.

                           (b) Power of Attorney. Each of the Obligors hereby
irrevocably makes, constitutes, and appoints the Collateral Agent (and any of
the Collateral Agent's officers, employees, or agents designated by the
Collateral Agent) as such Obligor's true and lawful attorney, with power to: (i)
sign such Obligor's name on any of the documents described hereunder or on any
other similar documents to be executed, recorded, or filed in order to perfect
or continue perfected the Collateral Agent's security interest in the
Collateral; (ii) at any time that an Event of Default has occurred and is
continuing, execute, sign and endorse such Obligor's name on any invoice or bill
of lading relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account
Debtors; (iii) send requests for verification of Accounts; (iv) at any time that
an Event of Default has occurred and is continuing, execute, sign and endorse
such Obligor's name on any checks, notices, instruments, acceptances, money
orders, drafts, warrants or other item of payment or security that may come into
the Collateral Agent's possession; (v) at any time that an Event of Default has
occurred is continuing, demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due, owing
or payable from the Collateral; (vi) at any time that an Event of Default has
occurred and is continuing, file any claim or claims or to take any action or
institute or take part in any proceedings, either in its own name or in the name
of such Obligor, or otherwise, which in the discretion of the Collateral Agent
may seem to be necessary or advisable to protect, preserve or realize upon the
Collateral; (vii) at any time that an Event of Default has occurred and is
continuing, notify the post office authorities to change the address for
delivery of such Obligor's mail to an address designated by the Collateral
Agent, to receive and open all mail addressed to such Obligor, and to retain all
mail relating to the Collateral and forward all other mail to such Obligor;
(viii) at any time that an Event of Default has occurred and is continuing,
make, settle, and adjust all claims under such Obligor's policies of insurance
and make all determinations and decisions with respect to such policies of
insurance; and (ix) at any time that an Event of Default has occurred and is
continuing, settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms which the Collateral
Agent determines to be reasonable, and the Collateral Agent may cause to be
executed and delivered any documents and releases which the Collateral Agent
determines to be necessary. The appointment of the Collateral Agent as the
Obligor's attorney, and each and every one of the Collateral Agent's rights and
powers, being coupled with an interest, is irrevocable and shall remain in full
force and effect until all of the Indebtedness has been fully repaid and
performed and the Collateral Agent renounces such appointment.

                                       6
<PAGE>   7
                           (c) No Violation. The execution and delivery of this
Security Agreement will not violate any law or agreement governing the Obligors
or to which the Obligors are parties, and Obligors' certificates or articles of
incorporation and bylaws or other organizational documents do not prohibit any
term or condition of this Security Agreement. The execution and delivery hereof
is in the interest of the each of the Obligors.

                           (d) Enforceability of Collateral. With respect to the
Accounts, the Collateral is enforceable in accordance with its terms, is
genuine, and complies with applicable laws concerning form, content and manner
of preparation and execution, and, to the best knowledge of the Obligors, all
persons appearing to be obligated on the Collateral have authority and capacity
to contract and are in fact obligated as they appear to be on the Collateral. At
the time any Accounts included in the calculation of Eligible Accounts, the
Account shall be a good and valid Account representing an undisputed, bona fide
indebtedness incurred by the Account Debtor; there shall be no set-offs or
counterclaims against any such Account; and no agreement under which any
deductions or discounts may be claimed shall have been made with the Account
Debtor.

                           (e) Removal of Collateral; Transactions Involving
Collateral.

                               (i) To the extent the Collateral consists of
          Accounts, General Intangibles, Negotiable Collateral or Borrower's
          Books, the records and other documents pertaining to the Collateral
          shall be kept at 1500 Broadway, New York, New York 10036 and 224
          Harrison Street, Syracuse, New York 13202, which are the offices of
          the Borrower, the offices of the Obligor owning such Collateral, or at
          such other locations as are acceptable to the Collateral Agent.
          Schedule A lists the Borrower's Books and other documentation and
          records with respect to the Collateral and the particular offices at
          which they are kept. Obligors shall keep the non-mobile tangible
          Collateral at the location(s) and the particular office at which they
          are kept specified on Schedule A attached hereto and shall maintain
          any certificate of title of any tangible Collateral in the same
          jurisdiction as indicated on Schedule A. Except for transactions in
          the ordinary course of business, Obligors shall not sell, offer to
          sell, or otherwise transfer, dispose of or encumber the Collateral
          (except that Obligors may encumber the Accounts, to the extent
          permitted by Section 2.2(r)). However, the Obligors may dispose of
          Collateral consisting of

              (A)    General Intangibles relating to the Telecom Network
                     provided that the following three conditions are satisfied:
                     (a) the disposition is pursuant to an arm's length
                     transaction to an unaffiliated third party in which
                     Borrower receives a fair market price and the consideration
                     received by Borrower is made up of at least 50% cash and
                     any non-cash consideration is limited to an in-kind credit
                     for services from the buyer that is for a period not longer
                     than 2 years; (b) the following amounts are applied to
                     prepay Debentures (A) 50% of cash proceeds up to $2,000,000
                     and (B) 50% of cash proceeds over $2,500,000; and (c) the
                     Debenture holders get credit (in the form of cash payment)
                     for such in-kind consideration in a cash amount equal to
                     the Credit Amount (as defined below), if the total

                                       7
<PAGE>   8
                     Net Proceeds (as defined below) from asset sales under this
                     Section 2.2(e)(i) (including both subparagraphs (A) and
                     (B)) exceeds $7,500,000.

              (B)    General Intangibles relating to Delta Edge provided that
                     the following two conditions are satisfied: (a) the
                     disposition is pursuant to an arm's length transaction to
                     an unaffiliated third party in which Borrower receives a
                     fair market price and the consideration received by
                     Borrower is made up of at least 80% cash and non-cash
                     consideration is limited to an in-kind credit for services
                     from the buyer that is for a period not longer than 2
                     years; and (b) the following amounts are applied to prepay
                     Debentures (i) 50% of the cash proceeds and (ii) cash in an
                     amount equal to the Credit Amount, if the total Net
                     Proceeds from asset sales under this Section 2.2(e)(i)
                     (including both subparagraphs (A) and (B)) exceeds
                     $7,500,000.

              (C)    Tangible assets with total aggregate book value of $100,000
                     in accordance with Section 7.2 of the Revolving Credit
                     Agreement.

              (D)    Custom or customized software code developed in the
                     ordinary course of business of Obligor pursuant to a
                     contract with a Customer consistent with past practice.

              (E)    The stock of Red Hat and Center for American Jobs or Center
                     for American Jobs now owned by the Obligors or received in
                     the future in respect of such stock, provided that the
                     proceeds from the sale of such stock are used in the
                     business of the Obligor that owned such stock.

              The definition of Net Proceeds for purposes of Section
2.2(e)(i)(A) and (B) shall be the same as the definition contained in the
Revolving Credit Agreement with the following modifications: (i) only clause (a)
of such definition shall apply, (ii) service credits received by an Obligor in
respect of the sale or other disposition of an asset shall be included under
(a)(i) of the definition and (iii) the reserves referred to in (a)(ii)(D) of the
definition shall be limited to a maximum of $2,000,000 in the aggregate and must
solely and directly relate to the sale of the asset with respect to which the
Net Proceeds is being determined.

              The term "Credit Amount" shall mean an amount equal to the product
of (i) (x) the total credits to be received by the Loan Obligors resulting from
a disposition referred to in either Section 2.2(e)(i)(A) or (B), divided by (y)
the number of whole months over which such credits are to be received and (ii)
12 (or if less, the number of whole months over which such credits are to be
received by the Loan Obligors) and (iii) .5.

                     (ii) Obligors shall not pledge, mortgage, encumber or
     otherwise permit the Collateral to be subject to any lien, security
     interest, encumbrance, or charge, other than the security interest provided
     for in this Security Agreement or security agreements granted in connection
     with New Financings (as defined below), or Permitted Liens under the
     Revolving Credit Agreement, without the prior written consent of the
     Lenders which may be withheld for any reason in the Lender's reasonable
     discretion. Notwithstanding the foregoing, the Collateral Agent and the
     Lenders hereby

                                       8
<PAGE>   9
     consent to the grant by the Borrower of a lien on an undivided percentage
     of the Collateral (excluding General Intangibles and Accounts), that does
     not exceed in value 25% of the Collateral value (that excludes the
     Collateral value deriving from General Intangibles and Accounts), which
     shall rank pari passu with the Lender's lien on the Collateral, for the
     purpose of securing certain settlement obligations, which hereafter may
     exist with regard to certain claims against Borrower existing on the date
     hereof. The grant of such lien shall be subject to the recipient of such
     lien entering into an intercreditor agreement with the Lenders in form and
     substance reasonably satisfactory to the Lenders.

                  (f) Title. Each of the Obligors represents and warrants to the
Collateral Agent that it holds good and marketable title to its Collateral, free
and clear of all liens and encumbrances except for the lien of this Security
Agreement and as expressly permitted herein. No financing statement or other
evidence of a lien or transfer covering any of the Collateral is on file in any
public office in any jurisdiction other than those which reflect the security
interest created by this Security Agreement or as otherwise permitted hereunder.
Each of the Obligors shall defend the Collateral Agent's rights in the
Collateral against any and all claims and demands.

                  (g) Receivables Ratio. While any Indebtedness pursuant to the
Receivables Financing ("Receivables Financing Indebtedness") shall be
outstanding, the amount of Receivables Financing Indebtedness for each Obligor
shall at all times be equal to, or less than, 44.44% (the "Receivables Ratio")
of the amount of the Eligible Accounts for such Obligor. To the extent that the
ratio of Receivables Financing Indebtedness to Eligible Accounts (expressed as a
percentage) ("Debt Ratio") becomes greater than 44.44% with respect to an
Obligor, then such Obligor shall within 3 business days, either: (i) prepay
Receivables Financing Indebtedness in an amount sufficient to lower the Debt
Ratio to 44.44% or less or (ii) provide additional Eligible Accounts, such that
the Debt Ratio is restored to 44.44% or less.

                  (h) Collateral Schedules and Locations. On a monthly basis,
Obligors shall deliver to the Collateral Agent schedules of such Collateral,
including such information as the Collateral Agent may reasonably require,
including without limitation names and addresses of Account Debtors and agings
of Accounts, whether such Accounts are Eligible Accounts and the location of
mobile goods or changes in any certificates of title. The Obligors will not
identify any Account as an Eligible Account unless such Account satisfies the
criteria in the definition of Eligible Account. Schedule A attached hereto is
true, accurate and complete in all respects on the date hereof and shall be
updated, as set forth in the preceding sentence, to reflect any changes thereto.

                  (i) Application of Payments Received With Respect to
Collateral. Unless an Event of Default has occurred and is continuing, any
amounts received by or on behalf of an Obligor upon collection in the ordinary
course with respect to any Account pledged as collateral may be used by such
Obligor in the ordinary course of its business. Following the occurrence and
continuation of an Event of Default, any amounts received by or on behalf of an
Obligor with respect to any Account or other item of Collateral pledged as
Collateral hereunder shall be applied in the following order: (i) costs and
expenses of the Lenders incurred in connection with collecting the Indebtedness
and enforcing this Agreement; (ii) unpaid interest

                                       9
<PAGE>   10
due and owing on the Indebtedness as of such date; and (iii) unpaid principal
due and owing with respect to the Indebtedness as of such date.

                  (j) Maintenance and Inspection of Collateral. The Obligors
shall maintain or cause to be maintained all tangible Collateral in good
condition and repair except for ordinary wear and tear. The Obligors will not
commit or permit damage to or destruction of the Collateral or any part of the
Collateral. The Collateral Agent and its designated representatives and agents
shall have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located and the books, records or any property which is
otherwise used in connection with the Collateral. The Obligors shall immediately
notify the Collateral Agent of all material cases involving the return,
rejection, repossession, loss or damage of or to any Collateral; of any material
request for credit or adjustment or of any other dispute arising with respect to
the Collateral; and generally of all happenings and events materially adversely
affecting the Collateral or the value or the amount of the Collateral.

                  (k) Taxes, Assessments and Liens. Obligors will pay when due
all taxes, assessments and liens upon the Collateral, its use or operation, upon
this Security Agreement, upon any promissory note or notes evidencing the
Indebtedness, or upon any of the other Related Documents. An Obligor may
withhold any such payment or may elect to contest any lien if such Obligor is in
good faith conducting an appropriate proceeding to contest the obligation to pay
and so long as the Collateral Agent's interest in the Collateral is not
jeopardized in the Collateral Agent's sole reasonable opinion. If any of the
Collateral is subjected to a lien which is not discharged or bonded, or the
enforcement thereof stayed (in either case without granting any security
interests in any of the assets of any Obligor), within fifteen (15) days,
Obligors shall deposit with the Collateral Agent cash, a sufficient corporate
surety bond or other security satisfactory to the Collateral Agent in an amount
adequate to provide for the discharge of the lien plus any interest, costs,
attorneys' fees or other charges that could accrue as a result of foreclosure or
sale of the applicable Collateral. In any contest the Obligor or Obligors shall
defend itself or themselves and the Collateral Agent and shall satisfy any final
adverse judgment before enforcement against the Collateral. The Obligors shall
name the Collateral Agent as an additional obligee under any surety bond
furnished in such contest proceedings.

                  (l) Incorporation by Reference. The Obligors hereby represent,
restate and affirm all representations, warranties and agreements contained in
the Related Documents (as of each date and time such representations and
warranties are made under each of the Related Documents), the terms and
conditions of which are hereby incorporated herein by reference.

                  (m) Compliance With Governmental Requirements. The Obligors
shall comply promptly with all laws, ordinances and regulations of all
governmental authorities applicable to the production, disposition, or use of
the Collateral. Obligors may contest in good faith any such law, ordinance or
regulation and withhold compliance during any proceeding, including appropriate
appeals, so long as the Collateral Agent's interest in the Collateral, in the
Collateral Agent's sole reasonable opinion, is not jeopardized.

                                       10
<PAGE>   11
                  (n) Insurance. The Obligors shall comply with all insurance
requirements and provisions set forth in the Related Documents.

                  (o) Obligors' Rights to Possession and to Collect Accounts.
Until the occurrence and continuance of an Event of Default or acceleration of
Indebtedness and except as otherwise provided in Section 2.2(i) herein, and any
arrangement entered into in connection with the Receivables Financing, Obligors
may have possession of the tangible personal property and beneficial use of all
the Collateral and may use it in any lawful manner not inconsistent with this
Security Agreement or the Related Documents, provided that the Obligors' rights
to possession and beneficial use shall not apply to any Collateral where
possession of the Collateral by the Collateral Agent is required by law to
perfect the Collateral Agent's security interest in such Collateral. After the
occurrence and during the continuation of an Event of Default, the Collateral
Agent may exercise its right to directly collect the Accounts and to notify
Account Debtors to make payments directly to the Collateral Agent for
application to the Indebtedness, and Obligors authorize and direct the Account
Debtors, if the Collateral Agent exercises such right, to make payments on the
Account to the Collateral Agent. If the Collateral Agent at any time has
possession of any Collateral, whether before or after an Event of Default, the
Collateral Agent shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral if the Collateral Agent takes such
action for that purpose as the Obligors shall request or as the Collateral
Agent, in the Collateral Agent's sole reasonable discretion, shall deem
appropriate under the circumstances, but failure to honor any request by the
Obligors shall not of itself be deemed to be a failure to exercise reasonable
care. The Collateral Agent shall not be required to take any steps necessary to
preserve any rights in the Collateral against prior parties, nor to protect,
preserve or maintain any security interest given to secure the Collateral. The
Collateral Agent shall have the right to direct who shall collect and service
the Accounts.

                  (p) Transactions with Others. After the occurrence and during
the continuation of an Event of Default, the Lenders may (i) extend time for
payment or other performance, (ii) grant a renewal or change in terms or
conditions, or (iii) compromise, compound or release any obligation, with an
Account Obligor, as the Lenders deem advisable, without obtaining the prior
written consent of the Obligors, and no such act or failure to act shall affect
the Lenders' rights against the Obligors or the Collateral.

                  (q) Expenditures by the Collateral Agent. If not discharged or
paid when due, the Collateral Agent may (but shall not be obligated to)
discharge or pay any amounts required to be discharged or paid by or any other
Obligor under this Security Agreement, including without limitation all taxes,
liens, security interests, encumbrances, and other claims, at any time levied or
placed on the Collateral, other than liens, security interests and other
encumbrances placed on the Collateral in connection with a New Financing. The
Collateral Agent also may (but shall not be obligated to) pay all costs for
insuring, maintaining and preserving the Collateral. All such expenditures
incurred or paid by the Collateral Agent for such purposes will then bear
interest at the rate charged under the Debentures from the date incurred or paid
by the Collateral Agent to the date of repayment by Borrower or Other Obligor.
All such expenses shall become a part of the Indebtedness and, at the Collateral
Agent's option, will (i) be payable on demand or (ii) be added to the balance of
the Debentures. This Security Agreement also will secure payment of these
amounts. Such right under this Subsection shall be

                                       11
<PAGE>   12
in addition to all other rights and remedies to which the Collateral Agent may
be entitled upon the occurrence of an Event of Default.

                  (r) Sale or Factoring of Accounts; Release of Accounts. The
Obligors shall not sell or otherwise transfer or encumber any of the Accounts or
other Collateral (except as permitted in Section 4(e) above) without the
Lenders' written consent. It is expressly agreed that the Lenders are under no
obligation to grant such a consent and will do so only in its sole and absolute
discretion on terms and conditions it deems acceptable in its sole and absolute
discretion. Notwithstanding the foregoing, the Collateral Agent and the Lenders
hereby agree to the grant by the Obligors of a first priority lien in its
Accounts for the purpose of securing obligations providing new financing (the
"New Financing") to the Obligors and that the lien granted hereunder with
respect to Accounts securing the Indebtedness shall be second to such first
priority lien so long as the New Financing obligations remain outstanding;
provided however, that: (i) the amount of the New Financing as to any Obligor
shall not at any time exceed 60% of the Eligible Accounts of such Obligor; (ii)
the value of the Eligible Accounts of the Obligors must at all times exceed the
amount of the indebtedness under the New Financing by at least $7,000,000, (iii)
all of the proceeds thereof must be used to repay the Receivable Financing, (iv)
all Obligations of the Loan Obligors under the Receivables Financing must be
completely satisfied and paid in full to the Lenders and (iv) all commitments to
loan of the Lenders under the Receivables Financing must be terminated.

                  (s) Compliance Certificate. The Loan Obligors shall furnish to
Lenders the certificate referred to in Section 6.5 of the Revolving Credit
Agreement at the times specified therein and within five (5) days of a request
of the Lenders while this Security Agreement remains in force, whether or not
the Receivables Financing has been terminated, for the purpose, among other
things, of demonstrating that an Event of Default described in either Sections
3.1(i) and (j) has not occurred.

         SECTION 3. EVENTS OF DEFAULT; REMEDIES

         3.1. Events of Default. Each of the following shall constitute an Event
of Default under this Security Agreement:

              (a) Default on Indebtedness. Failure of any Obligor to make any
payment when due on the Indebtedness.

              (b) Other Defaults. Failure of any Obligor to comply with or to
perform when due or required (after the expiration of applicable stated cure
periods) any term, obligation, covenant or condition contained in this Security
Agreement,. If any failure, other than a failure to pay money, is curable and
the Obligors have not been given a prior notice of a breach of the same
provision of this Security Agreement, it may be cured (and no Event of Default
will have occurred) if Borrower or Other Obligor, after receiving written notice
from the Collateral Agent or Lenders demanding cure of such failure, (i) cures
the failure within ten (10) days; or (ii) if the cure requires more than ten
(10) days, immediately initiates steps sufficient to cure the failure and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical but in no event more than
twenty (20) days.

                                       12
<PAGE>   13
                  (c) False Statements. Any warranty, representation or
statement made or furnished to Lender by or on behalf of any Obligor under this
Security Agreement or any schedule, certificate or exhibit delivered pursuant to
the Security Agreement is false or misleading in any material respect, either
now or at the time made or furnished.

                  (d) Defective Collateralization. This Security Agreement or
any of the Related Documents ceases to be in full force and effect (including
failure to create a valid and perfected security interest or lien as intended)
at any time and for any reason, other than by reason of actions or failures to
act of the Lenders or the Collateral Agent.

                  (e) Insolvency. The dissolution or termination of any Obligor
as a going business, the insolvency of any Obligor, the appointment of a
receiver for any part of an Obligor's property, any assignment for the benefit
of creditors, or the commencement of any insolvency proceeding by or against any
Obligor, unless, in the case of the commencement of any such proceeding against
such Obligor, such proceeding is dismissed within forty-five (45) days.

                  (f) Creditor Proceedings. Commencement of foreclosure, whether
by judicial proceeding, self-help, repossession or any other method, by any
creditor of any Obligor against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of an Obligor's accounts,
including without limitation deposit accounts. However, this Event of Default
shall not apply if there is a good faith dispute by an Obligor as to the
validity or reasonableness of the claim which is the basis of the creditor
proceeding and if Obligor gives the Collateral Agent written notice of the
creditor proceeding and Obligor diligently contests such proceedings.

                  (g) Event of Default under Related Documents. The occurrence
of an Event of Default under any of the Related Documents.

                  (h) The Debt Ratio for any Obligor shall exceed 44.44% for
more than 3 business days.

                  (i) The aggregate Eligible Accounts of all Obligors less the
total outstanding indebtedness of all Obligors, if any, under the Receivables
Financing or the New Financing (the "Eligible Account Cushion") is less than
$7,000,000. If the Eligible Account Cushion is less than $7,000,000 and can be
restored to a number greater than or equal to $7,000,000 by a prepayment of the
Receivables Financing or the New Financing, an Event of Default shall not exist
by means of this paragraph (i) if such prepayment is made concurrently with
delivery of the certificate referred to in Section 2.2(s).

                  (j) The aggregate Eligible Accounts of all Obligors is less
than $7,000,000 at any time the Loan Obligors are required to determine the
Eligible Accounts pursuant to Section 2.2(s).

             3.2. Rights and Remedies on Default. If an Event of Default occurs
and is continuing under this Security Agreement, at any time thereafter, the
Collateral Agent and the Lender shall have all the rights and remedies of a
secured party under the New York Uniform

                                       13
<PAGE>   14
Commercial Code. In addition and without limitation, the Collateral Agent and
Lenders may exercise any one or more of the following rights and remedies:

                  (a) Assemble Collateral. The Collateral Agent may require the
Obligors to deliver to the Collateral Agent all or any portion of the Collateral
and other documents relating to the Collateral Agent. The Collateral Agent may
require the Obligors to assemble the Collateral and make it available to the
Collateral Agent at a place to be designated by the Collateral Agent. The
Collateral Agent also shall have full power to enter upon the property of the
Obligors to take possession of and remove the Collateral. If the Collateral
contains other goods not covered by this Security Agreement at the time of
repossession, the Obligors agree Lenders may take such other goods, provided
that Lenders makes reasonable efforts to return them to the appropriate Obligor
after repossession.

                  (b) Sell the Collateral. The Collateral Agent shall have full
power to sell, lease, transfer, or otherwise deal with the Collateral or
proceeds thereof in its own name or that of any Obligor. The Collateral Agent
may sell the Collateral at public auction or private sale. Unless the Collateral
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Collateral Agent will give the Obligors reasonable notice
of the time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice shall be met
if such notice is given at least ten (10) days before the time of the sale or
disposition. All expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking, holding, insuring,
preparing for sale and selling the Collateral, shall become a part of the
Indebtedness secured by this Security Agreement and shall be payable on demand,
with interest at the lower of eighteen percent (18%) per annum or the highest
rate permitted by law from date of expenditure until repaid.

                  (c) Foreclosure. Maintain a judicial suit for foreclosure and
sale of the Collateral.

                  (d) Appoint Receiver. To the extent permitted by applicable
law, the Collateral Agent shall have the following rights and remedies regarding
the appointment of a receiver: (i) the Collateral Agent may have a receiver
appointed as a matter of right, (ii) the receiver may be an employee of the
Collateral Agent and may serve without bond, and (iii) all fees of the receiver
and his attorney shall become part of the Indebtedness secured by this Security
Agreement and shall be payable on demand, with interest at the lower of eighteen
percent (18%) per annum or the highest rate permitted by law from date of
expenditure until repaid.

                  (e) Transfer Title. Effect transfer of title upon sale of all
or part of the Collateral. For this purpose, each Obligor irrevocably appoints
the Collateral Agent as its attorney-in-fact to execute endorsements,
assignments and instruments in the name of such Obligor as shall be necessary or
reasonable.

                  (f) Collect Revenues, Apply Accounts. The Collateral Agent,
either itself or through a receiver, may collect the payments, rents, income,
and revenues from the Collateral. the Collateral Agent may at any time in its
discretion transfer any Collateral into its own name or that of its nominee and
receive the payments, rents, income, and revenues

                                       14
<PAGE>   15
therefrom and hold the same as security for the Indebtedness or apply it to
payment of the Indebtedness in such order of preference as the Collateral Agent
may determine. The Collateral Agent may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Collateral as the
Collateral Agent may determine. For these purposes, the Collateral Agent may, on
behalf of and in the name of an Obligor, receive, open and dispose of mail
addressed to such Obligor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of title,
instruments and items pertaining to payment, shipment, or storage of any
Collateral. To facilitate collection, the Collateral Agent may notify Account
Debtors and obligors on any Collateral to make payments directly to the
Collateral Agent.

                  (g) Obtain Deficiency. If the Collateral Agent chooses to sell
any or all of the Collateral, the Collateral Agent may obtain a judgment against
Obligors for any deficiency remaining on the Indebtedness due to the Lenders
after application of all amounts received from the exercise of the rights
provided in this Security Agreement. The Obligors shall be liable for a
deficiency even if the transaction described in this Subsection is a sale of
accounts or chattel paper.

                  (h) Application of Proceeds. The proceeds of any foreclosure
or realization upon the Collateral shall be applied:

                      (i) First, to the costs and expenses of collection;

                      (ii) Second, to overdue interest;

                      (iii) Third, to the outstanding principal amount of the
          Indebtedness; and

                      (iv) Fourth, any excess to Borrower or other party or
          parties in accordance with applicable law or court order.

                  (i) Other Rights and Remedies. The Collateral Agent and the
Lenders shall have all the rights and remedies of a secured creditor under the
provisions of the New York Uniform Commercial Code, as may be amended from time
to time. In addition, the Collateral Agent and the Lenders shall have and may
exercise any or all other rights and remedies it may have available at law, in
equity, or otherwise.

             3.3. Cumulative Remedies. All of Lenders' rights and remedies,
whether evidenced by this Security Agreement, or the Related Documents or by any
other writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lenders to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of an Obligor under this Security Agreement, after such
Obligor's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.

             SECTION 3A. PLEDGED SECURITIES

                                       15
<PAGE>   16
                  (a) So long as no Event of Default shall have occurred and be
continuing:

                           (i) The applicable Obligor shall be entitled to
         exercise any and all voting and other consensual rights pertaining to
         the Pledged Securities or any part thereof for any purpose not
         inconsistent with the terms of this Security Agreement or the Related
         Documents; provided, however, that the Borrower shall not exercise or
         refrain from exercising any such right if such action would have a
         material adverse effect on the value of the Pledged Securities or any
         part thereof; and provided further that the Borrower shall give the
         Collateral Agent at least five days' prior written notice of the manner
         in which it intends to exercise, or the reasons for refraining from
         exercising, any such right.

                           (ii) The applicable Obligor shall be entitled to
         receive and retain any and all dividends and interest paid in respect
         of the Pledged Securities; provided, however, that in the case of
         Pledged Securities other than Subsidiary Shares, any and all

                                (A) dividends and interest paid or payable other
                           than in cash in respect of, and instruments and other
                           property received, receivable or otherwise
                           distributed in respect of, or in exchange for, such
                           Pledged Securities,

                                (B) dividends and other distributions paid or
                           payable in cash in respect of such Pledged Securities
                           in connection with a partial or total liquidation or
                           dissolution or in connection with a reduction of
                           capital, capital surplus or paid-in-surplus, and

                                (C) cash paid, payable or otherwise distributed
                           in respect of principal of, or in redemption of, or
                           in exchange for, such Pledged Securities

         shall be, and shall be forthwith delivered to the Collateral Agent to
         hold as, Collateral and shall, if received by an Obligor, be received
         in trust for the benefit of the Collateral Agent, be segregated from
         the other property or funds of such Obligor and be forthwith delivered
         to the Collateral Agent as Collateral in the same form as so received
         (with any necessary endorsement) and such cash received by the
         Collateral Agent will be deposited in an account held by the Collateral
         Agent. The Obligors, promptly upon the request of the Collateral Agent,
         shall execute such documents and do such acts as may be necessary or
         desirable in the reasonable judgment of the Collateral Agent to give
         effect to this clause (ii).

                           (iii) The Borrower shall deliver to the Collateral
         Agent any distribution consisting of Subsidiary Shares or Further
         Securities immediately upon receipt, together with executed stock
         powers and corporate resolutions authorizing the transfer of title of
         such shares after an Event of Default pursuant to the terms of this
         Security Agreement.

                                       16
<PAGE>   17
                           (iv) The Collateral Agent shall execute and deliver
         (or cause to be executed and delivered) to the Obligors all such
         proxies and other instruments as Obligors may reasonably request for
         the purpose of enabling the Obligors to exercise the voting and other
         rights that they are entitled to exercise pursuant to clause (i) above
         and to receive the dividends or interest payments that it is authorized
         to receive and retain pursuant to clause (ii) above.

                       (b) Upon the occurrence and during the continuance of an
Event of Default:

                           (i) All rights of Obligors to exercise or refrain
         from exercising the voting and other consensual rights that it would
         otherwise be entitled to exercise pursuant to Section 3A(a)(i) shall,
         upon notice to the Obligors by the Collateral Agent, cease and (y) to
         receive the dividends and interest payments that it would otherwise be
         authorized to receive and retain pursuant to Section 3A(a)(ii) shall
         automatically cease, and all such rights shall thereupon become vested
         in the Collateral Agent, which shall thereupon have the sole right to
         exercise or refrain from exercising such voting and other consensual
         rights and to receive and hold as Pledge Securities such dividends,
         interest payments and other distributions. For the avoidance of doubt,
         the Collateral Agent is hereby granted an irrevocable proxy coupled
         with an interest to exercise all voting power with respect to the
         Subsidiary Shares and/or Further Securities, effective upon the
         occurrence of an Event of Default.

                           (ii) All dividends, interest payments and other
         distributions that are received by an Obligor contrary to the
         provisions of clause (i) of this Section 3A(b) shall be received in
         trust for the benefit of the Collateral Agent, shall be segregated from
         other funds of such Obligor and shall be forthwith paid over to the
         Collateral Agent as Collateral in the same form as so received (with
         any necessary endorsement).

            SECTION 3B. The Collateral Agent's Duties.

            (a) Other than as specified in this Security Agreement and any
     amendment hereto, the Collateral Agent shall not be required to take or
     refrain from taking any actions, to exercise or refrain from exercising any
     rights, or to make or refrain from making any requests unless it shall
     first receive proper instructions from the Lenders (or their respective
     successors or assigns).

            (b) The Collateral Agent shall hold all Collateral received by it,
     and shall make disposition thereof, only in accordance with this Security
     Agreement or any amendment thereto. Except for the safe custody of any
     Collateral in its possession and the accounting for moneys actually
     received by it hereunder, the Collateral Agent shall have no duty as to any
     Collateral, as to ascertaining or taking action with respect to calls,
     conversions, exchanges, maturities, tenders or other matters relative to
     any Pledged Securities, whether or not the Collateral Agent or any Lender
     has or is deemed to have knowledge of such matters, or as to the taking of
     any necessary steps to preserve rights against any parties or any other
     rights pertaining to any Collateral.

                                       17
<PAGE>   18
          (c) The Collateral Agent shall not be under any duty or obligation to
     inspect, review or examine any document, instrument, certificate, agreement
     or other papers to determine that they are enforceable or that they are
     other than what they purport to be on their face. The Collateral Agent
     shall hold any Collateral delivered to the Collateral Agent as the agent of
     the Lenders.

          (d) The duties and obligations of the Collateral Agent shall be
     determined solely by the express provisions of this Security Agreement or
     any amendment hereto or any instructions permitted hereby. The Collateral
     Agent shall have no obligation with respect to any other matters covered in
     any other document other than as expressly provided herein, or any
     amendment hereto. The Collateral Agent shall not be liable except for the
     performance of such duties and obligations as are specifically set forth in
     this Security Agreement or as set forth in a written amendment to this
     Security Agreement executed by the parties hereto or their successors or
     assigns. No representations, warranties, covenants or obligations of the
     Collateral Agent shall be implied with respect to this Agreement or the
     Collateral Agent's services hereunder. Without limiting the generality of
     the foregoing, the Collateral Agent:

               (i) shall use the same degree of care and skill as a reasonably
          prudent person would use in similar circumstances (without limiting
          the generality of the foregoing, the Collateral Agent shall be deemed
          to have exercised reasonable care in the custody and preservation of
          any Collateral in its possession if such Collateral is accorded
          treatment substantially equal to that which the Collateral Agent
          accords its own property of like tenor);

               (ii) shall not be obligated to take any legal action hereunder
          that might in its reasonable judgment involve any expense or liability
          unless it has been furnished with reasonable indemnity;

               (iii) may rely on and shall be protected in acting in good faith
          upon any certificate, instrument, opinion, notice, letter, telegram or
          other document, or any security, delivered to it and in good faith
          believed by it to be genuine and to have been signed by the proper
          party or parties;

               (iv) may rely on and shall be protected in acting in good faith
          upon the written instructions of the Lenders;

               (v) may consult its own independent counsel satisfactory to it
          and the opinion of such counsel shall be full and complete
          authorization and protection in respect of any action taken, suffered,
          or omitted by it hereunder in good faith and in furtherance of its
          duties hereunder, in accordance with the opinion of such counsel;

               (vi) may execute any of the powers hereunder or perform any
          duties hereunder either directly or through agents or attorneys; and

                                       18
<PAGE>   19
               (vii) will be regarded as making no representation and having no
          responsibilities (except as expressly set forth herein) as to the
          validity, sufficiency, value, genuineness, ownership or
          transferability of any portion of the Collateral, and will not be
          required to and will not make any representations as to the validity,
          value or genuineness of any portion of the Collateral.

          (e) Neither the Collateral Agent nor any of its partners, agents or
     employees, shall be liable for any error in judgment, for any mistake of
     fact or for any action taken or omitted to be taken by it or them hereunder
     or in connection herewith in good faith and believed by it or them to be
     within the purview of this Security Agreement, except for its or their own
     gross negligence, lack of good faith or willful misconduct. In no event
     shall the Collateral Agent or its partners, officers, agents and employees
     be held liable for any special, indirect or consequential damages resulting
     from any action taken or omitted to be taken by it or them hereunder in
     connection herewith even if advised of the possibility of such damages.

          (f) Whenever, in the administration of this Security Agreement, the
     Collateral Agent reasonably shall deem it necessary that a matter be proved
     or established prior to taking, suffering or omitting any action under this
     Security Agreement, such matter (unless other evidence in respect thereof
     be herein specifically prescribed) may be deemed to be conclusively proved
     and established by a certificate of the Lenders, and such certificate shall
     be full warranty to the Collateral Agent for any action taken, suffered or
     omitted under the provisions of this Agreement, upon the faith thereof.

          SECTION 4. MISCELLANEOUS PROVISIONS

          4.1. Entire Agreement; Amendments. This Security Agreement, together
with the Related Documents, constitutes the entire understanding and agreement
of the parties as to the matters set forth in this Security Agreement. No
alteration of or amendment to this Security Agreement shall be effective unless
given in writing and signed by the party or parties sought to be charged or
bound by the alteration or amendment.

          4.2. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS
SECURITY AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE
RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. THE
PARTIES IRREVOCABLY AND UNCONDITIONALLY AGREE (1) THAT ALL ACTIONS OR
PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK,
NEW YORK COUNTY AND THAT THE PARTIES SHALL BE SUBJECT TO THE JURISDICTION OF
SUCH COURTS, AND (2) THAT SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, SHALL CONSTITUTE PERSONAL SERVICE. EACH OBLIGOR AND THE COLLATERAL
AGENT AND THE LENDERS WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY
RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT
TO VENUE TO THE EXTENT ANY

                                       19
<PAGE>   20
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 4.2. EACH OBLIGOR AND THE
COLLATERAL AGENT AND THE LENDERS HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS SECURITY
AGREEMENT OR ANY OF THE ACTIONS CONTEMPLATED HEREIN, INCLUDING WITHOUT
LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH OBLIGOR AND THE COLLATERAL AGENT AND THE
LENDERS REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.

          4.3. Attorneys' Fees; Expenses. The Obligors agree to pay upon demand
all of Lenders' costs and expenses, including reasonable attorneys' fees and
legal expenses, incurred in connection with the enforcement of this Security
Agreement. The Collateral Agent may pay someone else to help enforce this
Security Agreement, and the Obligors shall pay the costs and expenses of such
enforcement. Costs and expenses include the Collateral Agent's reasonable
attorneys' fees and legal expenses whether or not there is a lawsuit, including
reasonable attorneys' fees and legal expenses for bankruptcy proceedings (and
including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. The Obligors
also shall pay all court costs and such additional fees as may be directed by
the court.

          4.4. Caption Headings. Caption headings in this Security Agreement are
for convenience purposes only and are not to be used to interpret or define the
provisions of this Security Agreement.

          4.5. Notices. All notices required to be given under this Security
Agreement shall be given in writing and shall be effective when actually
delivered or two (2) days after being deposited in the United States mail, first
class, postage prepaid, addressed to the party to whom the notice is to be given
or, if via facsimile, when sent via facsimile transmission to the party to whom
the notice is to be given and confirmation of such transmission has been
received, at the address and/or facsimile number shown below:

          If to Borrower or other Obligor:

          224 Harrison Street, 8th Floor
          Syracuse, New York 13202
          Attn: Chief Executive Officer
          Facsimile No.: (315) 479-0824

          with a copy to:

          224 Harrison Street, 8th Floor
          Syracuse, New York 13202
          Attn: Chief Financial Officer

                                       20
<PAGE>   21
          Facsimile No.: (315) 479-0824

          And a copy to:

          224 Harrison Street, 8th Floor
          Syracuse, New York 13202
          Attn: General Counsel
          Facsimile No.: (315) 479-0824

          If to the Collateral Agent:
          c/o The Palladin Group, L.P.
          195 Maplewood Avenue
          Maplewood, New Jersey 07040
          Facsimile No: (973) 313-6491
          Attn: Robert L. Chender, Esq.

          with a copy to:

          Kleinberg, Kaplan, Wolff & Cohen, P.C.
          551 Fifth Avenue, 18th Floor
          New York, New York 10176
          Facsimile No: (212) 986-8866
          Attn: Stephen M. Schultz, Esq.

          If to Lenders:

          To each Lender at the address
          and or fax number set forth on
          Schedule I to the Purchase Agreement

          with a copy to: Kleinberg, Kaplan, Wolff & Cohen, P.C.

          551 Fifth Avenue, 18th Floor
          New York, New York 10176
          Facsimile No: (212) 986-8866
          Attn: Stephen M. Schultz, Esq.

Any party may change its address for notices under this Security Agreement by
giving formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. For notice purposes, the
Obligors agree to keep the Collateral Agent informed at all Obligors' current
addresses.

          4.6. Severability. If a court of competent jurisdiction finds any
provision of this Security Agreement to be invalid or unenforceable as to any
person or circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so

                                       21
<PAGE>   22
modified, it shall be stricken, and all other provisions of this Security
Agreement in all other respects shall remain valid and enforceable and such
offending provision shall not be affected in any other jurisdiction.

          4.7. Successor Interests. Subject to the limitations set forth above
on transfer of the Collateral, this Security Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns. The Obligors
shall not, however, have the right to assign this Security Agreement without the
prior written consent of the Collateral Agent which may be withheld for any
reason in the Collateral Agent's sole discretion.

          4.8. Waiver. No party shall be deemed to have waived any rights under
this Security Agreement unless such waiver is given in writing and signed by
such party. No delay or omission on the part of a party in exercising any right
shall operate as a waiver of such right or any other right. A waiver by the
Collateral Agent or a Lender of a provision of this Security Agreement shall not
prejudice or constitute a waiver of such party right otherwise to demand strict
compliance with that provision or any other provision of this Security
Agreement. No prior waiver by a party, nor any course of dealing among the
parties, shall constitute a waiver of any of such party's rights or of any of
the other party's obligations as to any future transactions. Whenever the
consent of the Collateral Agent or Lenders is required under this Security
Agreement, the granting of such consent by the Collateral Agent in any instance
shall not constitute continuing consent to subsequent instances where such
consent is required and in all cases such consent may be granted or withheld in
the sole discretion of the Collateral Agent.

          4.9. Indemnity. Except to the extent caused directly by the Collateral
Agent or the Lenders' gross negligence or willful misconduct, as the case may
be, the Obligors agree to indemnify, pay and hold the Collateral Agent and each
Lender and their respective officers, partners, directors, employees, agents and
affiliates (collectively, the "indemnitees") harmless from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, claims, costs, expenses and disbursements of any kind or nature
whatsoever (including, without limitation, the reasonable fees and disbursements
of counsel) that may be imposed on, incurred by, or asserted against any
indemnitee, in any manner relating to or arising out of this Security Agreement
and any action undertaken or contemplated hereby, including the enforcement of
this Section 4.9. This indemnification shall survive the satisfaction and
payment of the Indebtedness and termination of this Security Agreement.

          4.10. Subsidiary Liability. Anything herein or in any other document
related to the Indebtedness ("Indebtedness Documents") to the contrary
notwithstanding, the maximum liability of each Subsidiary hereunder and under
the other Indebtedness Documents shall in no event exceed the amount allowed
under applicable federal and state laws, including laws relating to the
insolvency of debtors, fraudulent conveyance or transfer or laws affecting the
rights of creditors generally (after giving effect to the right of contribution
established in Section 4.11).

          4.11. Right Of Contribution. Each Obligor hereby agrees that to the
extent that a Obligor shall have paid more than its proportionate share of any
payment made hereunder, such Obligor shall be entitled to seek and receive
contribution from and against any other Obligor hereunder which has not paid its
proportionate share of such payment. Each Obligor's right of contribution shall
be subject to the terms and conditions of Section 4.12. The provisions of this

                                       22
<PAGE>   23
Section 4.11 shall in no respect limit the obligations and liabilities of any
Obligor to the Lenders, and each Obligor shall remain liable to the Lenders for
the full amount for which such Obligor is obligated hereunder.

          4.12. No Subrogation. Notwithstanding any payment made by any Obligor
hereunder or any set-off or application of funds of any Obligor by the Lenders,
no Obligor shall be entitled to be subrogated to any of the rights of the
Lenders against a Obligor or any collateral security or guarantee or right of
offset held by the Lenders for the payment of the Obligations, nor shall any
Obligor seek or be entitled to seek any contribution or reimbursement from
another Obligor in respect of payments made by such Obligor hereunder, until all
amounts owing to the Lenders by the Obligors under any Indebtedness Documents
are paid in full. If any amount shall be paid to any Obligor on account of such
subrogation rights at any time when any such amounts shall not have been paid in
full, such amount shall be held by such Obligor in trust for the Lenders,
segregated from other funds of such Obligor, and shall, forthwith upon receipt
by such Obligor, be turned over to the Lenders in the exact form received by
such Obligor (duly indorsed by such Obligor to the Lenders, if required), to be
applied against the Obligations of the Obligors under the Indebtedness
Documents, whether matured or unmatured, in such order as the Lenders may
determine.

                           [Signature Page to Follow]

                                       23
<PAGE>   24
                  IN WITNESS WHEREOF, the parties hereto have caused this
Security Agreement to be executed as of the date first written above.

                                   BORROWER:

                                   APPLIEDTHEORY CORPORATION

                                   By:               /s/ Danny E. Stroud
                                            ------------------------------------
                                            Name:  Danny E. Stroud
                                            Title:  President and CEO

                                   SUBSIDIARIES:

                                   APPLIEDTHEORY GEORGIA CORPORATION

                                   By:      /s/ Danny E. Stroud
                                      ------------------------------------------
                                            Danny E. Stroud, President

                                   APPLIEDTHEORY SEATTLE CORPORATION

                                   By:      /s/ Danny E. Stroud
                                      ------------------------------------------
                                            Danny E. Stroud, President

                                   APPLIEDTHEORY CALIFORNIA CORPORATION

                                   By:      /s/ Danny E. Stroud
                                      ------------------------------------------
                                            Danny E. Stroud, President

                                   APPLIEDTHEORY VIRGINIA CORPORATION

                                   By:      /s/ Danny E. Stroud
                                      ------------------------------------------
                                            Danny E. Stroud, President

                                   APPLIEDTHEORY AUSTIN CORPORATION

                                   By:      /s/ Danny E. Stroud
                                      ------------------------------------------
                                            Danny E. Stroud, President

                                   APPLIEDTHEORY COLORADO CORPORATION

                                   By:      /s/ Danny E. Stroud
                                      ------------------------------------------
                                            Danny E. Stroud, President
<PAGE>   25
                                   LENDERS:

                                   HALIFAX FUND, L.P.
                                   By:      THE PALLADIN GROUP, L.P.
                                            Attorney-in-Fact

                                   By:               /s/ Maurice Hryshko
                                            ------------------------------------
                                            Name:  Maurice Hryshko
                                            Title:  Counsel

                                   PALLADIN PARTNERS I, L.P.
                                   By:      THE PALLADIN GROUP, L.P.
                                             Attorney-in-Fact

                                   By:               /s/ Maurice Hryshko
                                            ------------------------------------
                                            Name:  Maurice Hryshko
                                            Title:  Counsel

                                   PALLADIN OVERSEAS FUND LTD.
                                   By:        THE PALLADIN GROUP, L.P.
                                              Attorney-in-Fact

                                   By:               /s/ Maurice Hryshko
                                            ------------------------------------
                                            Name:  Maurice Hryshko
                                            Title:  Counsel

                                   DEAM CONVERTIBLE ARBITRAGE FUND, LTD.

                                   By:               /s/ Maurice Hryshko
                                            ------------------------------------
                                            Name:  Maurice Hryshko
                                            Title:  Counsel

         SIGNATURE PAGE TO APPLIED THEORY CORPORATION SECURITY AGREEMENT
<PAGE>   26
                               LANCER SECURITIES (CAYMAN) LTD.
                               By:        THE PALLADIN GROUP, L.P.
                                          Attorney-in-Fact

                               By:      By:               /s/ Maurice Hryshko
                                                 -------------------------------
                                        Name:  Maurice Hryshko
                                        Title:  Counsel

                               ELLIOTT ASSOCIATES, L.P.

                               By:               /s/ Paul E. Singer
                                        ----------------------------------------
                                        Name:  Paul E. Singer
                                        Title:  General Partner

                               ELLIOTT INTERNATIONAL, L.P.
                               By:        ELLIOTT INTERNATIONAL CAPITAL
                                       ADVISORS INC.
                                          Attorney-in-Fact

                               By:               /s/ Paul E. Singer
                                        ----------------------------------------
                                        Name:  Paul E. Singer
                                        Title:  President

                               COLLATERAL AGENT:
                               By:        HALIFAX FUND, L.P.

                               By:      By:               /s/ Maurice Hryshko
                                                 -------------------------------
                                        Name:  Maurice Hryshko
                                        Title:  Counsel

         Signature page to Applied Theory Corporation Security Agreement

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