Document:

<PAGE>   1
                                                                   Exhibit 4(y)

REGISTERED                                                            REGISTERED
                       AMERICAN INTERNATIONAL GROUP, INC.
                    FLOATING RATE MEDIUM-TERM NOTE, SERIES F

     THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED
IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE
LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A
NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY.

     UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OR TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

No.                                                     $

<TABLE>
<S>                   <C>                     <C>
ORIGINAL ISSUE DATE: INITIAL INTEREST RATE:  MATURITY DATE:

INTEREST RATE BASIS: INDEX MATURITY:          SPREAD:
[ ] LIBOR             -- TELERATE PAGE 7051:  SPREAD MULTIPLIER:     %
[ ] TREASURY RATE     -- TELERATE PAGE 7052   SPECIFIED CURRENCY: U.S. DOLLARS
[ ] CMT RATE          (WEEKLY/MONTHLY):       U.S. DOLLARS FOR ALL PAYMENTS
                                              UNLESS OTHERWISE SPECIFIED BELOW:
[ ] COMMERCIAL PAPER RATE                     -- CMT INDEX MATURITY:
                                              - PAYMENTS OF PRINCIPAL AND OF ANY
[ ] PRIME RATE          CALCULATION AGENT:      PREMIUM:
[ ] CD RATE                                   - PAYMENTS OF INTEREST:
[ ] FEDERAL FUNDS RATE                        - EXCHANGE RATE AGENT:

MAXIMUM INTEREST RATE:     %                  REDEMPTION COMMENCEMENT
                                              DATE:
MINIMUM INTEREST RATE:     %

INTEREST RESET DATES:                         REDEMPTION PRICE:
</TABLE>

INTEREST PAYMENT DATES:

INTEREST DETERMINATION DATE:

INTEREST PAYMENT PERIOD: (MONTHLY, QUARTERLY, SEMI-ANNUALLY OR ANNUALLY)

INTEREST RATE RESET PERIOD: (DAILY, WEEKLY, MONTHLY, QUARTERLY, SEMI-ANNUALLY,
ANNUALLY OR OTHERWISE)
<PAGE>   2

AMERICAN INTERNATIONAL GROUP, INC., a corporation duly organized and
existing under the laws of Delaware (herein called the "Company", which term
includes any successor corporation under the Indenture hereinafter referred to),
for value received, hereby promises to pay to

or registered assigns, the principal sum of
                                                                         DOLLARS

     on the Maturity Date shown above, and to pay interest thereon from the
Original Issue Date shown above or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, at a rate per annum equal to
the Initial Interest Rate shown above until the first Interest Reset Date
specified above and thereafter at a rate determined in accordance with the
provisions on the reverse hereof under the heading "Determination of LIBOR",
"Determination of EURIBOR", "Determination of Treasury Rate", "Determination of
CMT Rate", "Determination of Commercial Paper Rate", "Determination of Prime
Rate" "Determination of CD Rate", or "Determination of Federal Funds Rate",
depending upon whether the Interest Rate Basis is LIBOR, EURIBOR, Treasury Rate,
CMT Rate, Commercial Paper Rate, Prime Rate, CD Rate, or Federal Funds Rate, as
indicated by the marked box above, until the principal hereof is paid or duly
made available for payment. The Company will pay interest monthly, quarterly,
semi-annually or annually as shown above under "Interest Payment Period",
commencing with the Interest Payment Date next succeeding the Original Issue
Date shown above, and ending on the Maturity Date; provided, however, that if
the Original Issue Date is after a Regular Record Date (as herein defined) and
prior to the related Interest Payment Date, interest payments will commence on
the Interest Payment Date following the next succeeding Regular Record Date.
Except as provided above and in the Indenture referred to on the reverse hereof,
monthly interest payments will be made on the third Wednesday of each month,
quarterly interest payments will be made on the third Wednesday of March, June,
September and December, semi-annual interest payments will be made on the third
Wednesday of the two months set forth above and annual interest payments will be
made on the third Wednesday of the month set forth above. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in the Indenture, be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the close of business
on the Regular Record Date for such interest, which shall be the fifteenth day
(whether or not a Business Day) immediately preceding such Interest Payment
Date. Any such interest which is payable, but is not punctually paid or duly
provided for, on any Interest Payment Date, will cease to be payable to the
registered Holder on such Regular Record Date, and may either be paid to the
Person in whose name this Note (or one or more Predecessor Notes) is registered
at the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to
the Holders of Notes not less than 10 days prior to such Special Record Date, or
be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be listed, and
upon such notice as may be required by such exchange, all as more fully provided
in said Indenture.
     If any Interest Payment Date would otherwise be a day that is not a
Business Day with respect to this Note, the Interest Payment Date shall be the
next succeeding day that is a Business Day, except that if the Interest Rate
Basis specified on the face hereof is LIBOR or EURIBOR and the next succeeding
Business Day falls in the next calendar month, such Interest Payment Date shall
be the immediately preceding Business Day. In all cases, an Interest Payment
Date that falls on the Maturity will not be changed.
     Payment of the principal of (and premium, if any) and interest on this Note
will be made at the office or agency of the Company maintained for that purpose
in the Borough of Manhattan, The City of New York, in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that at the option of
the Company payment of interest may be made by check mailed to the address of
the Person entitled thereto as such address shall appear in the Security
Register.
     Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place. Unless the certificate of
authentication hereon has been executed by the Trustee referred to on the
reverse hereof, by manual signature, this Note shall not be entitled to any
benefit under the Indenture or be valid or obligatory for any purpose.
     IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

                                                  AMERICAN INTERNATIONAL GROUP,
                                                  INC.
DATED:                                            By

<TABLE>
<S>                                                           <C>

   TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated
therein referred to in the within-mentioned Indenture.

                  THE BANK OF NEW YORK                                                          Chairman
                              as Trustee
                                                              Attest
By
                        Authorized Signatory                                                   Secretary

</TABLE>
<PAGE>   3

                       AMERICAN INTERNATIONAL GROUP, INC.
                    FLOATING RATE MEDIUM-TERM NOTE, SERIES F

     This Note is one of a duly authorized issue of securities of the Company,
issued and to be issued in one or more series under an Indenture, dated as of
July 15, 1989 (herein called the "Indenture"), between the Company and The Bank
of New York, as trustee (herein called the "Trustee", which term includes any
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the Notes and the terms upon which the Notes are,
and are to be, authenticated and delivered. This Note is one of the series
designated on the face hereof (herein called the "Notes"), which is limited in
aggregate principal amount to $780,546,000.

     The rate of interest on this Note will be reset daily, weekly, monthly,
quarterly, semi-annually, annually or otherwise, as specified on the face hereof
under Interest Rate Reset Period (each date upon which interest is so reset as
provided below being hereinafter referred to as an "Interest Reset Date").
Unless otherwise specified on the face hereof, the Interest Reset Date with
respect to this Note will be as follows: if the Interest Rate Reset Period
specified on the face hereof is daily, each Business Day; if the Interest Rate
Reset Period specified on the face hereof is weekly (for Notes using an Interest
Rate Basis, as specified on the face hereof, other than the Treasury Rate),
Wednesday of each week; if the Interest Rate Reset Period specified on the face
hereof is weekly and the Interest Rate Basis specified on the face hereof is the
Treasury Rate, except as otherwise provided in the definition of Treasury
Interest Determination Date under "Determination of Treasury Rate" below, the
Tuesday of each week; if the Interest Rate Reset Period specified on the face
hereof is monthly, the third Wednesday of each month; if the Interest Rate Reset
Period specified on the face hereof is quarterly, the third Wednesday of each
March, June, September and December; if the Interest Rate Reset Period specified
on the face hereof is semi-annually, the third Wednesday of each of the two
months specified on the face hereof; and if the Interest Rate Reset Period
specified on the face hereof is annually, the third Wednesday of the month
specified on the face hereof; provided, however, that (i) the interest rate in
effect from the date of issue to the first Interest Reset Date will be the
Initial Interest Rate specified on the face hereof and (ii) except as otherwise
specified on the face hereof, if the Interest Rate Reset Period on the face
hereof is daily or weekly, the interest rate in effect for each day following
the second Business Day prior to an Interest Payment Date to, but excluding,
such Interest Payment Date, and for each day following the second Business Day
prior to the maturity date, shall be the rate in effect on such second Business
Day. If, pursuant to the preceding sentence, any Interest Reset Date would
otherwise be a day that is not a Business Day with respect to this Note, the
Interest Reset Date shall be the next succeeding day that is a Business Day with
respect to this Note, except that, unless otherwise specified on the face
hereof, if the Interest Rate Basis specified on the face hereof is LIBOR and the
next succeeding Business Day falls in the next succeeding calendar month, such
Interest Reset Date shall be the immediately preceding Business Day.

     Subject to applicable provisions of law and except as specified herein, on
each Interest Reset Date, the rate of interest on this Note shall be the rate
determined in accordance with the provisions of the applicable heading below.

     "Euro Business Day" means any day on which the Trans-European Automated
Real-Time Gross Settlement Express Transfer (TARGET) System, or any successor
system, is open for business.

     "London Business Day" means any day on which dealings in the relevant
specified currency are transacted in the London interbank market.

     "Business Day" means, for any note, a day that meets all the following
applicable requirements: (i) for all notes, is a Monday, Tuesday, Wednesday,
Thursday or Friday that is not a day on which banking institutions in New York
City generally are authorized or obligated by law regulation or executive order
to close; (ii) if the note is a LIBOR note, is also a London Business Day; (iii)
if the note has a specified currency other than U.S. dollars or euro, is also a
day on which banking institutions are not authorized or obligated by law,
regulation or executive order to close in the principal financial center of the
country issuing the specified currency; and (iv) if the note is EURIBOR note or
has a specified currency of euros, or is a LIBOR note for which the specified
currency is euros, is also a Euro Business Day.

     DETERMINATION OF LIBOR. If the Interest Rate Basis is LIBOR, the Interest
Rate Basis that takes effect on any Interest Reset Date shall be LIBOR on the
corresponding LIBOR Interest Determination Date (as defined below) and shall be
determined in accordance with the following provisions:

          (a) LIBOR will be the offered rate appearing on the Telerate LIBOR
     Page (as defined below), as of 11:00 A.M., London time, on such LIBOR
     Interest Determination Date, for deposits of the Specified Currency having
     the Index Maturity beginning on such Interest Reset Date.

          (b) If the rate described in (a) does not appear on the Telerate LIBOR
     Page, then LIBOR will be determined on the basis of the rates, at
     approximately 11:00 A.M., London time, on such LIBOR Interest Determination
     Date, at which deposits of the Specified Currency having the Index Maturity
     beginning on such Interest Reset Date, and in a Representative Amount (as
     defined below) are offered to prime banks in the London interbank market by
     four major banks in that market selected by the Calculation Agent. The
     Calculation Agent will request the principal London office of each of these
     banks to provide a quotation of its rate. If at least two such quotations
     are provided, LIBOR for such LIBOR Interest Determination Date will be the
     arithmetic mean of such quotations.

          (c) If fewer than two quotations are provided as described in (b)
     LIBOR for such LIBOR Interest Determination Date will be the arithmetic
     mean of the rates for loans of the Specified Currency having the Index
     Maturity, beginning on such Interest Reset Date, and in a Representative
     Amount to leading European banks quoted, at approximately 11:00 A.M., in
     the principal financial center for the country of the Specified Currency,
     on such LIBOR Interest Determination Date, by three major banks in that
     financial center selected by the Calculation Agent.

          (d) If fewer than three banks selected by the Calculation Agent are
     quoting as described in (c) LIBOR for the new Interest Rate Reset Period
     will be LIBOR in effect for the prior Interest Rate Reset Period. If the
     Initial Interest Rate has been in effect for the prior Interest Rate Reset
     Period, however, it will remain in effect for the new Interest Rate Reset
     Period.

     The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

     "LIBOR Interest Determination Date" means, in relation to a particular
Interest Reset Date, the second London Business Day preceding such Interest
Reset Date, unless the Specified Currency is pounds sterling, in which case the
LIBOR Interest Determination Date will be the Interest Reset Date.

     "Telerate Page" means the display on Bridge Telerate Inc., or any successor
service, on the page or pages specified herein, or any replacement page or pages
on that service.

     "Telerate LIBOR Page" means Telerate Page 3750 or any replacement page or
pages on which London interbank rates of major banks for the Specified Currency
are displayed.

     "Representative Amount" means an amount that, in the Calculation Agent's
judgment, is representative of a single transaction in the relevant market at
the relevant time.

     DETERMINATION OF EURIBOR. If the Interest Rate Basis is EURIBOR, the
Interest Rate Basis that takes effect on any Interest Reset Date shall equal the
interest rate for deposits in euros designated as "EURIBOR" and sponsored
jointly by the European Banking Federation and ACI -- the Financial Market
Association (or any company established by the joint sponsors for purposes of
compiling and publishing that rate) on the corresponding EURIBOR Interest
Determination Date (as defined below), and shall be determined in accordance
with the following procedures:

          (a) EURIBOR will be the offered rate for deposits in euros having the
     Index Maturity beginning on the Interest Reset Date after such EURIBOR
     Interest Determination Date, as that rate appears on Telerate Page 248 as
     of 11:00 A.M., Brussels time, on such EURIBOR Interest Determination Date.

          (b) If the rate described in (a) does not appear on Telerate Page 248,
     EURIBOR will be determined on the basis of the rates, at approximately
     11:00 A.M., Brussels time, on such EURIBOR Interest Determination Date, at
     which euro deposits having the Index
<PAGE>   4

   Maturity, beginning on the Interest Reset Date, and in a Representative
   Amount are offered to prime banks in the Euro-zone (as defined below)
   interbank market by the principal Euro-zone office of each of four major
   banks in that market selected by the Calculation Agent. The Calculation Agent
   will request the principal Euro-zone office of each of these banks to provide
   a quotation of its rate. If at least two quotations are provided, EURIBOR for
   the relevant EURIBOR interest determination date will be the arithmetic mean
   of the quotations.

      (c) If fewer than two quotations are provided as described in (b) EURIBOR
   for such EURIBOR Interest Determination Date will be the arithmetic mean of
   the rates for euro loans having the Index Maturity, beginning on the Interest
   Reset Date, and in a Representative Amount to leading Euro-zone banks quoted,
   at approximately 11:00 A.M., Brussels time on such EURIBOR Interest
   Determination Date, by three major banks in the Euro-zone selected by the
   Calculation Agent.

      (d) If fewer than three banks selected by the Calculation Agent are
   quoting as described in (c), EURIBOR for the new Interest Rate Reset Period
   will be EURIBOR in effect for the prior Interest Rate Reset Period. If the
   Initial Interest Rate has been in effect for the prior Interest Rate Reset
   Period, however, it will remain in effect for the new Interest Rate Reset
   Period.

   The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

   "EURIBOR Interest Determination Date" means, in relation to a particular
Interest Reset Date, the second Euro Business Day preceding such Interest Reset
Date.

   "Euro-zone" means, at any time, the region comprised of the member states of
the European Economic and Monetary Union that, as of that time, have adopted a
single currency in accordance with the Treaty on European Union of February
1992.

   DETERMINATION OF TREASURY RATE. If the Interest Rate Basis is the Treasury
Rate, the Interest Rate Basis that takes effect on any Interest Reset Date shall
equal the rate for the auction on the corresponding Treasury Interest
Determination Date (as defined below) of direct obligations of the United States
("Treasury Bills") having the Index Maturity, as that rate appears on Telerate
Page 56 or 57 under the heading "Investment Rate". If the Treasury Rate cannot
be determined in this manner, the following procedures will apply in determining
the Treasury Rate:

      (a) If the rate described above does not appear on either page at 3:00
   P.M., New York City time, on the Calculation Date corresponding to such
   Treasury Interest Determination Date (unless the calculation is made earlier
   and the rate is available from that source at that time), the Treasury Rate
   will be the Bond Equivalent Yield (as defined below) of the rate, for such
   Treasury Interest Determination Date, for the type of Treasury Bills
   described above, as published in H.15 Daily Update (as defined below), or
   another recognized electronic source used for displaying that rate, under the
   heading "U.S. Government Securities/Treasury Bills/Auction High".

      (b) If the rate described in (a) does not appear in H.15 Daily Update or
   another recognized electronic source by 3:00 P.M., New York City time, on
   such Calculation Date (unless the calculation is made earlier and the rate is
   available from one of those sources at that time), the Treasury Rate will be
   the Bond Equivalent Yield of the auction rate, for such Treasury Interest
   Determination date and for Treasury Bills of the kind described above, as
   announced by the U.S. Department of the Treasury.

      (c) If the auction rate described in (b) is not so announced by 3:00 P.M.,
   New York City time, on such Calculation Date, or if no such auction is held
   for the relevant week, then the Treasury Rate will be the Bond Equivalent
   Yield of the rate, for such Treasury Interest Determination Date and for
   Treasury Bills having a remaining maturity closest to the Index Maturity, as
   published in H.15(519)(as defined below) under the heading "U.S. Government
   Securities/Treasury Bills/Secondary Market".

      (d) If the rate described in (c) does not appear in H.15(519) by 3:00
   P.M., New York City time, on such Calculation Date unless the calculation is
   made earlier and the rate is available from one of those sources at that
   time), then the Treasury Rate will be the rate, for such Treasury Interest
   Determination Date and for Treasury Bills having a remaining maturity closest
   to the Index Maturity, as published in H.15 Daily Update, or another
   recognized electronic source used for displaying that rate, under the heading
   "U.S. Government Securities/Treasury Bills/Secondary Market".

      (e) If the rate described in (d) does not appear in H.15 Daily Update or
   another recognized electronic source by 3:00 P.M., New York City time, on
   such Calculation Date (unless the calculation is made earlier and the rate is
   available from one of those sources at that time), the Treasury Rate will be
   the Bond Equivalent Yield of the arithmetic mean of the secondary market bid
   rates as of approximately 3:30 P.M., New York City time, on such Treasury
   Interest Determination Date, by three primary U.S. government securities
   dealers in New York City selected by the Calculation Agent for the issue of
   Treasury Bills with a remaining maturity closest to the Index Maturity.

      (f) If fewer than three dealers selected by the Calculation Agent are
   quoting as described in (e), the Treasury Rate in effect for the new Interest
   Rate Reset Period will be the Treasury Rate in effect for the prior Interest
   Rate Reset Period. If the Initial Interest Rate has been in effect for the
   prior Interest Rate Reset Period, however, it will remain in effect for the
   new Interest Rate Reset Period.

   The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

   "Treasury Interest Determination Date" means the day of the week in which the
Interest Reset Date falls on which Treasury Bills would normally be auctioned.
If as the result of a legal holiday an auction is held on the preceding Friday,
that Friday will be the Treasury Interest Determination Date relating to the
Interest Reset Date occurring in the next succeeding week. If the auction is
held on a day that would otherwise be an Interest Reset Date, then the Interest
Reset Date will instead be the first Business Day following the auction date.

   "Bond Equivalent Yield" means a yield expressed as a percentage and
calculated in accordance with the following formula:

<TABLE>
<C>                     <C>          <S>
                           D x N
 bond equivalent yield = ---------   x 100
                         360-(DxM)

</TABLE>

where "D" means the annual rate for Treasury Bills quoted on a bank discount
basis and expressed as a decimal; "N" means 365 or 366, as the case may be; and
"M" means the actual number of days in the applicable Interest Reset Period.

   "H.15(519)" means the weekly statistical release entitled "Statistical
Release H.15(519)", or any successor publication, published by the Board of
Governors of the Federal Reserve System.

   "H.15 Daily Update" means the daily update of H.15(519) available through the
worldwide-web site of the Board of Governors of the Federal Reserve System, at
http:// www.bog.frb.fed.us/releases/h15/update, or any successor site or
publication.

   DETERMINATION OF CMT RATE. If the Interest Rate Basis is the CMT Rate, the
Interest Rate Basis that takes effect on any Interest Reset Date shall equal the
CMT Rate on the CMT Interest Determination Date (as defined below). "CMT Rate"
means the following rate displayed on the Designated CMT Telerate Page (as
defined below) under the Heading "...Treasury Constant Maturities...Federal
Reserve Board Release H.15...Mondays Approximately 3:45 P.M.", under the column
for the Designated CMT Index Maturity (as defined below):

      (x) if the Designated CMT Telerate Page is Telerate Page 7051, the rate
   for such CMT Interest Determination Date; or

      (y) if the Designated CMT Telerate Page is Telerate Page 7052, the weekly
   or monthly average, as specified on the face hereof, for the week that ends
   immediately before the week in which such CMT Interest Determination Date
   falls, or for the month that ends immediately before the month in which such
   CMT Interest Determination Date falls, as applicable.

If the CMT Rate cannot be determined in this manner, the following procedures
will apply in determining the CMT Rate.

      (a) If the applicable rate described above is not displayed on the
   relevant Designated CMT Telerate Page at 3:00 P.M., New York City time, on
   the Calculation Date corresponding to such CMT Interest Determination Date
   (unless the calculation is made earlier and the rate is available from one of
   those sources at that time), then the CMT Rate will be the applicable
   Treasury constant maturity rate described above as published in H.15(519).

      (b) If the applicable rate described in (a) does not appear in H.15(519)
   by 3:00 P.M., New York City time, on such Calculation Date (unless the
   calculation is made earlier and the rate is available from one of those
   sources at that time), then the CMT Rate will be the
<PAGE>   5

   Treasury constant maturity rate, or other U.S. Treasury rate, for the
   Designated CMT Index Maturity and with reference to such CMT Interest
   Determination Date, that:

         (i) is published by the Board of Governors of the Federal Reserve
      System, or the U.S. Department of the Treasury; and

         (ii) is determined by the Calculation Agent to be comparable to the
      applicable rate formerly displayed on the Designated CMT Telerate Page and
      published in H.15(519).

      (c) If the rate described in (b) does not appear by 3:00 P.M., New York
   City time, on such Calculation Date (unless the calculation is made earlier
   and the rate is available from one of those sources at that time), then the
   CMT Rate will be the yield to maturity of the arithmetic mean of secondary
   market offered rates as of approximately 3:30 P.M., New York City time, on
   such CMT Interest Determination Date, of three primary U.S. government
   securities dealers in New York City selected by the Calculation Agent for the
   most recently issued direct, non-callable, fixed rate obligations of the U.S.
   government ("Treasury Notes") having an original maturity of approximately
   the Designated CMT Index Maturity and a remaining term to maturity of not
   less than the Designated CMT Index Maturity minus one year and in a
   Representative Amount. In selecting such offered rates, the Calculation Agent
   will request quotations from five such primary dealers and will disregard the
   highest quotation -- or, if there is equality, one of the highest -- and the
   lowest quotation -- or, if there is equality, one of the lowest.

      (d) If the Calculation Agent is unable to obtain three quotations of the
   kind described in (c) the CMT Rate will be the yield to maturity of the
   arithmetic mean of secondary market offered rates as of approximately 3:30
   P.M., New York City time, on such CMT Interest Determination Date, of three
   primary U.S. government securities dealers in New York City selected by the
   Calculation Agent for Treasury Notes with an original maturity longer than
   the Designated CMT Index Maturity, with a remaining term to maturity closest
   to the Designated CMT Index Maturity and in a Representative Amount. In
   selecting such offered rates, the Calculation Agent will request quotations
   from five such primary dealers and will disregard the highest
   quotation -- or, if there is equality, one of the highest -- and the lowest
   quotation -- or, if there is equality, one of the lowest. If two Treasury
   Notes with an original maturity longer than the Designated CMT Index Maturity
   have remaining terms to maturity that are equally close to the Designated CMT
   Index Maturity, the Calculation Agent will obtain quotations for the Treasury
   Note with the shorter remaining term to maturity.

      (e) If fewer than five but more than two such primary dealers are quoting
   as described in (d) the CMT Rate for such CMT Interest Determination Date
   will be based on the arithmetic mean of the offered rates so obtained, and
   neither the highest nor the lowest of those quotations will be disregarded.

      (f) If two or fewer primary dealers selected by the Calculation Agent are
   quoting as described in (e) the CMT Rate in effect for the new Interest Rate
   Reset Period will be the CMT Rate in effect for the prior Interest Rate Reset
   Period. If the Initial Interest Rate has been in effect for the prior
   Interest Rate Reset Period, however, it will remain in effect for the new
   Interest Rate Reset Period.

   The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

   "CMT Interest Determination Date" means, in relation to a particular Interest
Reset Date, the second Business Day immediately preceding such Interest Reset
Date.

   "Designated CMT Index Maturity" means the Index Maturity specified on the
face hereof and will be the original period to maturity of a U.S. Treasury
security -- specified on the face hereof, provided that, if no such original
maturity period is so specified, the Designated CMT Index Maturity will be 2
years.

   "Designated CMT Telerate Page" means the Telerate Page specified on the face
hereof that displays Treasury constant maturities as reported in H.15(519);
provided, however, that, if no Telerate Page is so specified, then the
applicable page will be Telerate Page 7052, and provided further, that if
Telerate Page 7052 applies but it is not specified on the face hereof whether
the weekly or monthly average applies, the weekly average will apply.

   DETERMINATION OF COMMERCIAL PAPER RATE. If the Interest Rate Basis is the
Commercial Paper Rate, the Interest Rate Basis that takes effect on any Interest
Reset Date shall equal the Money Market Yield (as defined below) of the discount
rate, for the Commercial Paper Interest Determination Date (as defined below),
for commercial paper having the Index Maturity specified on the face hereof, as
published in H.15(519) under the heading "Commercial Paper -- Non-financial". If
the Commercial Paper Rate cannot be determined in this manner, the following
procedures will apply in determining the Commercial Paper Rate:

      (a) If the rate described above does not appear in H.15(519) by 3:00 P.M.,
   New York City time, on the Calculation Date corresponding to such Commercial
   Paper Interest Determination Date (unless the calculation is made earlier and
   the rate is available from that source at that time), then the Commercial
   Paper Rate will be the rate, for such Commercial Paper Interest Determination
   Date, for commercial paper having the Index Maturity specified on the face
   hereof, as published in H.15 Daily Update or any other recognized electronic
   source used for displaying that rate, under the heading "Commercial
   Paper -- Non-financial".

      (b) If the rate described in (a) does not appear in H.15(519), H.15 Daily
   Update or another recognized electronic source by 3:00 P.M., New York City
   time, on such Calculation Date (unless the calculation is made earlier and
   the rate is available from one of those sources at that time), the Commercial
   Paper Rate will be the Money Market Yield of the arithmetic mean of the
   offered rates as of 11:00 A.M., New York City time, on such Commercial Paper
   Interest Determination Date, by three leading U.S. dollar commercial paper
   dealers in New York City selected by the Calculation Agent for U.S. dollar
   commercial paper that has the Index Maturity and is placed for an industrial
   issuer whose bond rating is "AA", or the equivalent, from a nationally
   recognized rating agency.

      (c) If fewer than three dealers selected by the Calculation Agent are
   quoting as described in (b) the Commercial Paper Rate for the new Interest
   Rate Reset Period will be the Commercial Paper Rate in effect for the prior
   Interest Rate Reset Period. If the Initial Interest Rate has been in effect
   for the prior Interest Rate Reset Period, however, it will remain in effect
   for the new Interest Rate Reset Period.

   The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

   "Commercial Paper Interest Determination Date" means, in relation to a
particular Interest Reset Date, the first Business Day immediately preceding
such Interest Reset Date.

   "Money Market Yield" means a yield expressed as a percentage and calculated
in accordance with the following formula:

<TABLE>
<C>                     <C>         <S>
                         D x 360
  money market yield =  ----------- x 100
                        360-(D x M)
</TABLE>

where "D" means the annual rate for commercial paper quoted on a bank discount
basis and expressed as a decimal; and "M" means the actual number of days in the
applicable Interest Reset Period.

   DETERMINATION OF PRIME RATE. If the Interest Rate Basis is the Prime Rate,
the Interest Rate Basis that takes effect on any Interest Reset Date shall equal
the rate, for the Prime Interest Determination Date (as defined below),
published in H.15(519) under the heading "Bank Prime Loan". If the Prime Rate
cannot be determined in this manner, the following procedures will apply in
determining the Prime Rate:

      (a) If the rate described above does not appear in H.15(519) by 3:00 P.M.,
   New York City time on the Calculation Date corresponding to such Prime
   Interest Determination Date (unless the calculation is made earlier and the
   rate is available from that source at that time), then the Prime Rate will be
   the rate, for such Interest Determination Date, as published in H.15 Daily
   Update or another recognized electronic source used for the purpose of
   displaying that rate, under the heading "Bank Prime Loan".

      (b) If the rate described in (a) is not published in H.15(519), H.15 Daily
   Update or another recognized electronic source by 3:00 P.M., New York City
   time, on such Calculation Date (unless the calculation is made earlier and
   the rate is available from one of those sources at that time), then the Prime
   Rate will be the arithmetic mean of the rates of interest publicly announced
   by each bank appearing on that page as that bank's prime rate or base lending
   rate, as of 11:00 A.M., New York City time, on such Prime Interest
   Determination Date as they appear on the Reuters Screen US PRIME 1 Page (as
   defined below).

      (c) If fewer than four of the rates referred to in (b) appear on the
   Reuters Screen US PRIME 1 Page, the Prime Rate will be the arithmetic mean of
   the prime rates or base lending rates, as of the close of business on such
   Prime Interest Determination Date, of three
<PAGE>   6

   major banks in New York City selected by the Calculation Agent. For this
   purpose, the Calculation Agent will use rates quoted on the basis of the
   actual number of days in the year divided by a 360-day year.

      (d) If fewer than three banks selected by the Calculation Agent are
   quoting as described in (c), the Prime Rate for the new Interest Rate Reset
   Period will be the Prime Rate in effect for the prior Interest Rate Period.
   If the Initial Interest Rate has been in effect for the prior Interest Rate
   Reset Period, however, it will remain in effect for the new Interest Rate
   Reset Period.

   The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

   "Prime Interest Determination Date" means, in relation to a particular
Interest Reset Date, the first Business Day immediately preceding such Interest
Reset Date.

   "Reuters Screen US PRIME 1 Page" means the display on the "US PRIME 1" page
on the Reuters Monitor Money Rates Service, or any successor service, or any
replacement page or pages on that service, for the purpose of displaying prime
rates or base lending rates of major U.S. banks.

   DETERMINATION OF CD RATE. If the Interest Rate Basis is the CD Rate, the
Interest Rate Basis that takes effect on any Interest Reset Date shall equal the
rate, on the CD Interest Determination Date (as defined below), for negotiable
U.S. dollar certificates of deposit having the Specified Index Maturity as
published in H.15(519) under the heading "CDs (Secondary Market)". If the CD
Rate cannot be determined in this manner, the following procedures will apply in
determining the CD Rate:

      (a) If the rate described above does not appear published in H.15(519) by
   3:00 P.M., New York City time, on the Calculation Date corresponding to such
   CD Interest Determination Date, then the CD Rate will be the rate, for such
   CD Interest Determination Date, as published in H.15 Daily Update, or another
   recognized electronic source used for displaying that rate, under the heading
   "CDs (Secondary Market)".

      (b) If the rate described in (a) does not appear in H.15 (519), H.15 Daily
   Update or another recognized electronic source by 3:00 P.M., New York City
   time, on such Calculation Date (unless the calculation is made earlier and
   the rate is available from one of those sources at that time), the CD Rate
   will be the arithmetic mean of the secondary market offered rates as of 10:00
   A.M., New York City time, on such CD Interest Determination Date, by three
   leading nonbank dealers in negotiable U.S. dollar certificates of deposit in
   New York City, as selected by the Calculation Agent for negotiable U.S.
   dollar certificates of deposit of major U.S. money center banks with a
   remaining maturity closest to the Index Maturity, and in a Representative
   Amount.

      (c) If fewer than three dealers selected by the Calculation Agent are
   quoting as described in (b) , the CD Rate in effect for the new Interest Rate
   Reset Period will be the CD Rate in effect for the prior Interest Rate Reset
   Period. If the Initial Interest Rate has been in effect for the prior
   Interest Rate Reset Period, however, it will remain in effect for the new
   Interest Rate Reset Period.

   The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

   "CD Interest Determination Date" means, in relation to a particular Interest
Reset Date, the second Business Day immediately preceding such Interest Reset
Date.

   DETERMINATION OF FEDERAL FUNDS RATE. If the Interest Rate Basis is the
Federal Funds Rate, the Interest Rate Basis that takes effect on any Interest
Reset Date shall equal the rate, on the Federal Funds Interest Determination
Date (as defined below), for U.S. dollar federal funds, as published in
H.15(519) under the heading "Federal Funds (Effective)", as that rate is
displayed on Telerate Page 120. If the Federal Funds Rate cannot be determined
in this manner, the following procedures will apply in determining the Federal
Funds Rate:

      (a) If the rate described above is not displayed on Telerate Page 120 at
   3:00 P.M., New York City time, on the Calculation Date corresponding to such
   Federal Funds Interest Determination Date (unless the calculation is made
   earlier and the rate is available from that source at that time), then the
   Federal Funds Rate will be the rate, for such Federal Funds Interest
   Determination Date, described above as published in H.15 Daily Update, or
   another recognized electronic source used for displaying that rate, under the
   heading "Federal Funds (Effective)".

      (b) If the rate described in (a) is not displayed on Telerate Page 120 and
   does not appear in H.15(519), H.15 Daily Update or another recognized
   electronic source by 3:00 P.M., New York City time, on such Calculation Date
   (unless the calculation is made earlier and the rate is available from one of
   those sources at that time), the Federal Funds Rate will be the arithmetic
   mean of the rates for the last transaction in overnight, U.S. dollar federal
   funds arranged, before 9:00 A.M., New York City time, on such Federal Funds
   Interest Determination Date, by three leading brokers of U.S. dollar federal
   funds transactions in New York City selected by the Calculation Agent.

      (c) If fewer than three brokers selected by the Calculation Agent are
   quoting as described in (b), the Federal Funds Rate in effect for the new
   Interest Rate Reset Period will be the Federal Funds Rate in effect for the
   prior Interest Rate Reset Period. If the Initial Interest Rate has been in
   effect for the prior Interest Rate Reset Period, however, it will remain in
   effect for the new Interest Rate Reset Period.

   The Interest Rate Basis determined in accordance with the foregoing
provisions will be adjusted by the addition or subtraction of the Spread, if
any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if
any.

   "Federal Funds Interest Determination Date" means, in relation to a
particular Interest Reset Date, the first Business Day immediately preceding
such Interest Reset Date.

   Any reference to a Telerate Page, H.15(519),H.15 Daily Update, Reuters Screen
US Prime 1 Page or heading shall include any successor page or heading as
determined by the Calculation Agent.

   The "Calculation Date" pertaining to any Treasury Interest Determination
Date, CMT Interest Determination Date, Commercial Paper Interest Determination
Date, Prime Rate Interest Determination Date, CD Interest Determination Date or
Federal Funds Interest Determination Date, as the case may be, shall be the
earlier of (i) the tenth calendar day after such Interest Determination Date or,
if any such day is not a Business Day, the next succeeding Business Day; and,
(ii) the Business Day immediately preceding the Interest Payment Date or the
Maturity, whichever is the day on which the payment of interest will be due. If
LIBOR or EURIBOR is the specified Interest Rate Basis on the face hereof, LIBOR
and EURIBOR will be calculated on the relevant LIBOR Interest Determination Date
or EURIBOR Interest Determination Date.

   The Calculation Agent's determination of the interest rate on this Note will
be final and binding in the absence of manifest error. In calculating an
Interest Rate Basis, the Calculation Agent may obtain quotations from banks and
dealers that are affiliates of the Calculation Agent and/or the Company.

   All percentages resulting from any calculation with respect to this Note will
be rounded upwards, or downwards, as appropriate, to the next higher or lower
one hundred-thousandth of a percentage point, and all amounts used in or
resulting from such calculations will be rounded to the nearest cent in the case
of U.S. dollars, or to the nearest corresponding hundreth of a unit, in the case
of a currency other than U.S. dollars (with one-half cent or one-half of a
corresponding unit or more being rounded upwards).

   Notwithstanding the foregoing, the interest rate hereon shall not be greater
than the Maximum Interest Rate, if any, or less than the Minimum Interest Rate,
if any, shown on the face hereof, and, in any event, the interest rate hereon
shall not be higher than the maximum rate permitted by New York law as the same
may be modified by United States law of general application.

   Accrued Interest hereon from the Original Issue Date or from the last date to
which interest hereon has been paid, as the case may be, shall be an amount
calculated by multiplying the face amount hereof by an accrued interest factor.
Such accrued interest factor shall be computed by adding the interest factors
calculated for each day from the Original Issue Date or from the last date to
which interest shall have been paid or duly provided for, as the case may be, to
but excluding the date for which accrued interest is being calculated. The
interest factor (expressed as a decimal) for each such day shall be computed by
dividing the interest rate (expressed as a decimal) applicable to such day by
360, in the case of Notes with a LIBOR, EURIBOR, Commercial Paper, Prime Rate,
CD Rate or Federal Funds Interest Rate Basis, or by the actual number of days in
the year, in the case of Notes with a Treasury Rate or CMT Interest Rate Basis.
<PAGE>   7

   Unless a Redemption Commencement Date is specified on the face hereof, this
Note shall not be redeemable at the option of the Company before the Maturity
Date. If a Redemption Commencement Date is so specified, and unless otherwise
specified on the face hereof, this Note is subject to redemption upon not less
than 30 days' nor more than 60 days' notice at any time and from time to time on
or after the Redemption Commencement Date, in each case as a whole or in part,
at the election of the Company and at the applicable Redemption Price specified
on the face hereof (expressed as a percentage of the principal amount of this
Note to be redeemed), together with accrued interest to the Redemption Date, but
interest installments due on or prior to such Redemption Date will be payable to
the Holder of this Note, or one or more Predecessor Notes, of record at the
close of business on the relevant record date, all as provided in the Indenture.

   If an Event of Default with respect to Notes shall occur and be continuing,
the principal of the Notes may be declared due and payable in the manner and
with the effect provided in the Indenture.

   As set forth in, and subject to, the provisions of the Indenture, no Holder
of this Note will have any right to institute any proceeding with respect to the
Indenture or for any remedy thereunder, unless such Holder shall have previously
given to the Trustee written notice of a continuing Event of Default, the
Holders of not less than 25% in principal amount of the Outstanding Notes shall
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the Holders of a majority in principal amount of the Outstanding Notes a
direction inconsistent with such request and shall have failed to institute such
proceeding within 60 days; provided, however, that such limitations do not apply
to a suit instituted by the Holder hereof for the enforcement of payment of the
principal of (and premium, if any) or any interest of this Note on or after the
respective due date expressed herein.

   The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of 66 2/3% in principal amount of Securities at the time
Outstanding of each series to be affected. The Indenture also contains
provisions permitting the Holders of specified percentages in principal amount
of Securities of each series at the time Outstanding, on behalf of the Holders
of Securities of such series, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the Holder of this Note shall
be conclusive and binding upon such Holder and upon all future Holders of this
Note and of any Note issued upon the registration of transfer hereof or in
exchange herefor or in lieu hereof, whether or not notation of such consent or
waiver is made upon this Note.

   No reference herein to the Indenture and no provision of this Note or of the
Indenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of (and premium, if any) and interest
(if any) on this Note at the times, place and rate, and in the coin or currency,
herein prescribed.

   As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Note is registrable in the Security Register, upon
surrender of this Note for registration of transfer at the office or agency of
the Company in any place where the principal of (and premium, if any) and
interest (if any) on this Note are payable, duly endorsed by, or accompanied by
a written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Notes of authorized
denominations and for the same aggregate principal amount will be issued to the
designated transferee or transferees.

   The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples of $1,000 in excess thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Notes are exchangeable for a like aggregate principal amount of Notes of a
different authorized denomination, as requested by the Holder surrendering the
same.

   No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.

   Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

   All terms used in this Note which are defined in the Indenture shall have the
meanings assigned to them in the Indenture.
<PAGE>   8
                       _________________________________

                                 ABBREVIATIONS

   The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

  TEN COM  --  as tenants in common         UNIF GIFT MIN ACT -- ___Custodian___
  TEN ENT  --  as tenants by the entireties                     (Cust)   (Minor)
   JT TEN  --  as joint tenants with right                      Under Uniform
               of survivorship and not as                       Gifts to Minors
               tenants in common                                Act ____________
                                                                       (State)

Additional abbreviations may also be used though not in the above list.

                      _________________________________

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s)
unto

                     PLEASE INSERT SOCIAL SECURITY OR OTHER
                         IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________

________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE

________________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing ____________________________________________________________ attorney
to transfer said Note on the books of the Company, with full power of
substitution in the premises.

Dated:  __________________________   ___________________________________________
                                     NOTICE: The signature to this assignment
                                     must correspond with the name as written
                                     upon the face of the within instrument in
                                     every particular, without alteration or
                                     enlargement or any change whatever.<PAGE>   1
                                                                  EXHIBIT 10.56

                         PROFESSIONAL SERVICES AGREEMENT

                                     BETWEEN

                     THE NEW YORK STATE DEPARTMENT OF LABOR

                                       AND

                           APPLIED THEORY CORPORATION

THIS PROFESSIONAL SERVICES AGREEMENT ("Agreement") is entered into by and
between AppliedTheory Corporation, ("AppliedTheory") and the New York State
Department of Labor (" Department"). In consideration of the terms and
conditions and mutual promises contained herein, the parties agree as follows:

1. SCOPE OF AGREEMENT

         1.1 This Agreement will be implemented annually through one or more
Statements of Work entered into from time to time by AppliedTheory and the
Department. Each Statement of Work will specify the services to be performed by
AppliedTheory ("Services"). Software programming and development services
("Software Development Services") will be performed on a time and materials
basis. Other related Services including "Web Hosting" and "Internet Access" will
be performed on a fixed price basis. The initial description of work to be
performed ("Scope of Work"), attached hereto as Appendix B and hereby
incorporated by reference, sets forth the overview of work to be completed
during the term of the contract. Specific Statements of Work will become
effective upon execution by authorized representatives of both parties.
Statements of Work will be numbered consecutively.

         1.2 The parties shall jointly develop specified plans for each project
("Project Plans") which shall identify the deliverables, including a description
of the work to be performed, the personnel assigned to perform the work, the
time frames for completion of each step in the project and any other relevant
factors or contingencies that may be required. AppliedTheory shall deliver an
updated Project Plan to the Department on a bi-monthly basis. The parties agree
and understand that the nature of the services further requires that the Project
Plans may be modified as reasonably requested by the Department and the U.S.
Department of Labor. These changes may result in modifications to the Project
Plan, deliverables, associated work plans, resource allocations, schedules and
costs. Any modification to a Project Plan must be set forth in writing and
agreed to by the parties. All time periods for completion of work as well as
acceptance and testing set forth in a Project Plan shall be amended in
accordance with the modified Project Plan.

2. DEVELOPMENT OF THE WORK

         2.1 AppliedTheory shall develop the software (the "Software") and
perform all other Services specified in each Statement of Work and Project Plan
subject to and in accordance with the terms of this Agreement. AppliedTheory
shall exercise best efforts to deliver the Services and other deliverables set
forth in a Project Plan (together, the "Deliverables") according to the delivery
schedule set forth in such Project Plan (the "Delivery Schedule"). Changes in
scope of the deliverable, requirements, functional specifications, personnel
resources or schedule will result in amended plans as either jointly developed
by the parties or as submitted by AppliedTheory and not objected to in writing
by the Department within five (5) business days.

         2.2 The Department shall provide to AppliedTheory such information and
cooperation as AppliedTheory may reasonably request to assist AppliedTheory in
the development of the Deliverables, and AppliedTheory may use such information
in connection with such development. In the event of a delay by the Department
in providing such information to and cooperation with AppliedTheory or in
approving the Deliverables within the time set forth in this Agreement, or in
the event of a delay caused by third parties, the delivery date for the affected
Deliverables shall be deemed postponed for at least an equivalent period and the
Delivery Schedule shall be amended accordingly. Where such delays impact other
projects and/or deliverables all plans shall be modified as appropriate.

3. TERM AND TERMINATION

         3.1 This Agreement shall commence on June 15, 2000 and, unless earlier
terminated pursuant to Paragraphs 3.2, 3.3, 3.4 or 4.5, continue for a period of
five years.

         3.2 Either party may terminate this Agreement by written notice if the
other party commits a material breach of any of its obligations under this
Agreement and has not remedied such breach within thirty (30) days of receiving
written notice of the breach.

                                     Page 1
<PAGE>   2
         3.3 Either party may terminate this Agreement by written notice if the
other party shall cease conducting business in the normal course, become
insolvent or bankrupt, make a general assignment for the benefit of creditors,
suffer or permit the appointment of a receiver for its business or assets, or
become the subject of any proceeding relating to insolvency or the protection of
creditors' rights which is not dismissed within sixty (60) days.

         3.4 The Department may terminate this Agreement without cause within
(60) sixty days written notice.

         3.5 Termination of this Agreement shall not relieve the Department of
its obligation to pay charges that accrued prior to termination except to the
extent such charges relate to services that form the basis for termination of
this Agreement for cause pursuant to Paragraph 3.2.

4. COMPENSATION AND PAYMENT TERMS

         4.1 Payment to AppliedTheory shall be made monthly in arrears for all
time and materials expended by AppliedTheory during the preceding month. Any
estimated time requirements for such work which are set forth in the Statement
of Work are solely AppliedTheory's estimate, and should not be construed as a
limitation on services or a cap on fees. The Department shall pay AppliedTheory
one flat monthly fee in arrears for Web Hosting, Internet Access, or other
fixed-priced Services. The Department shall pay AppliedTheory for all authorized
expenses incurred by AppliedTheory in connection with performance hereunder. The
Department will pay the amount stated in each invoice within thirty days of date
of invoice in accordance with Appendix A and the attachments (including
certifications) thereto, which are attached hereto and hereby incorporated by
reference.

         4.2 The rates charged for services including time and materials are set
forth in Appendix C, which is hereby incorporated by reference. The rates shall
remain fixed at the same rates for a period of one year. The parties agree to
negotiate in good faith annually for rates applicable for the next succeeding
year. In no event shall any rate increase exceed the Consumer Price Index for
the location at which work is performed. AppliedTheory hereby warrants that such
rates represent the most favorable pricing terms available to any of its
customers for similar quantity and quality of services and shall reduce its
prices to the lowest price given to any other customer for the same products and
Services in similar quantities and qualities.

         4.3 The charges do not include taxes or duties. The Department is
exempt from the payment of federal, state and local taxes. The Department shall
not be responsible for paying taxes based on AppliedTheory's net income.

         4.4 If the Department fails to pay any sum due under a Statement of
Work, any late payment fees shall be determined in accordance with Article 11-A
of the State Finance Law.

         4.5 In accordance with section 41 of the State Finance Law, the State
shall have no liability under this contract to AppliedTheory beyond funds
appropriated and made available for this contract by the New York State
Legislature pursuant to one or more grants issued to the Department by the U.S.
Department of Labor.

         4.6 The anticipated scope of the contract provides for expenditures of
up to Eighty Two Million Dollars ($82,000,000) during the term of this Agreement
in annual increments set forth in Appendix B. The amount available for
expenditure for the first year through June 15, 2001 is Nineteen Million Dollars
($19,000,000.00). The Department shall seek additional funding in the amounts
set forth in Appendix B from the U.S. Department of Labor.

5. STAFFING BY EACH PARTY

         5.1 When members of one party's staff are employed on the premises of
the other party, they will comply with such rules and regulations of which they
are notified for the conduct of staff on those premises.

         5.2 All members of both parties' staff participating in the performance
of the Services will possess the appropriate skills, authority and experience
for the tasks assigned to them, and will be available at such times as are
agreed by the parties.

         5.3 Where required under a Statement of Work, each of the parties will
provide appropriate office accommodations, equipment and support to members of
the other party's staff.

         5.4 Upon execution of this Agreement, each party will designate a
member of its staff as contract coordinator, responsible for all administrative
matters relating to this Agreement and the Services. Additionally, each party
will designate a member of its staff as Project Manager who will have the
authority to represent such party on all technical and staffing matters relating
to the Services. A party may change its designated coordinator or project
manager on notice to the other party.

6. DELIVERY OBLIGATIONS; ACCEPTANCE

                                     Page 2
<PAGE>   3
         6.1 AppliedTheory will deliver to the Department one copy of the
Software in object code form, and one copy of the Software in Source Code Form
at the time completion of work for each Deliverable set forth in the Project
Plan for acceptance testing. For purposes hereof, the term "Source Code Form"
shall mean a well-documented listing in printed form of the source code (i.e.,
human intelligible version) of the Software, the related instructions and
compilers necessary for building that software into object code and written
materials sufficient to permit a person skilled in the language of the source
code to follow and understand the theory and sequence of program operation and
to maintain and modify the program. Upon termination of this Agreement, the
Department shall retain the Software and the Source Code Form for its continued
and uninterrupted use and development subject to the license provisions of
Section 12.

         6.2 Upon delivery to the Department of a Deliverable, the Department
shall have fifteen (15) days to conduct acceptance testing and approve or reject
such Deliverable. A Deliverable shall include all functional specifications
(and, if applicable, performance specifications) set forth in a Project Plan.
The Department shall deliver to AppliedTheory a written notice of either
acceptance or rejection within such period. The Department may not reject a
Deliverable unless such Deliverable fails to comply materially with the relevant
specifications or other descriptions contained in a Project Plan and Statement
of Work. A Deliverable shall not be rejected for bugs that do not affect the
operation of the Software in accordance with the Project Plan and Statement of
Work in any material respect. If the Department rejects any Deliverable, its
notice of rejection shall include the reasons for its rejection and the
Department shall return the rejected Deliverable to AppliedTheory. AppliedTheory
shall make best efforts to correct and/or replace such Deliverable promptly.
This process shall continue until the Department approves the Deliverable
without any additional costs beyond that specified for the anticipated hours set
forth in a Project Plan. Any modification to a Project Plan must be set forth in
writing and agreed to by the parties. All time periods for completion of work as
well as acceptance and testing set forth in a Project Plan shall be modified in
accordance with the modified Project Plan.

7. INFRINGEMENT INDEMNITY

         7.1

                  A.       AppliedTheory will defend, indemnify and hold
                           harmless the Department against any claim that any
                           information, design, specification, instruction,
                           software, data, or material furnished by
                           AppliedTheory ("Material") and used by the Department
                           infringes a copyright, patent, or trademark, provided
                           that: (a) the Department notifies AppliedTheory in
                           writing within thirty (30) days of the claim; (b)
                           AppliedTheory has control of the defense and all
                           related settlement negotiations; and (c) the
                           Department provides AppliedTheory with the
                           assistance, information, and authority reasonably
                           necessary to perform the above. The Department shall
                           be reimbursed by AppliedTheory for any reasonable
                           out-of-pocket expenses incurred by providing such
                           assistance. The Department may participate in the
                           defense of and settlement negotiations relating to
                           any such claim, at its own expense.

                  B.       AppliedTheory shall have no liability for any claim
                           of infringement resulting from: (a) the Department's
                           use of a superseded or altered release of some or all
                           of the Material if infringement would have been
                           avoided by the use of a subsequent unaltered release
                           of the Material which AppliedTheory has provided to
                           the Department; or (b) any information, design,
                           specification, instruction, software, data, or
                           material not furnished by AppliedTheory.

                  C.       In the event that some or all of the Material is held
                           or is believed by AppliedTheory to infringe,
                           AppliedTheory shall have the option, at its expense:
                           (a) to modify the Material to be non-infringing; or
                           (b) to obtain for the Department a license to
                           continue using the Material. If it is not
                           commercially feasible to perform either of the above
                           options, then AppliedTheory may require that the
                           Department return the infringing Material, and all
                           rights of the Department thereto shall cease. Upon
                           return of the infringing Material to the
                           AppliedTheory, the Department may terminate the
                           affected Statement of Work upon ten (10) days'
                           written notice and: the Department shall be entitled
                           to a refund of the fees paid for the Deliverables
                           which contain the infringing Material. This Section
                           states the parties' entire liability and exclusive
                           remedy for infringement.

8. REPRESENTATIONS AND WARRANTY

         8.1

                  A.       Expertise. AppliedTheory represents and warrants that
                           it is highly skilled and experienced in performing
                           the services described in the Statements of Work and
                           Project Plans. AppliedTheory acknowledges that the
                           Department is relying upon the skill and expertise of
                           AppliedTheory for the performance of this Agreement.

                                     Page 3
<PAGE>   4
                           AppliedTheory warrants that it will perform the
                           services described herein in a good and workmanlike
                           manner and in accordance with the specifications
                           contained in the Statements of Work and Project Plan.

                  B.       Non-Infringement of Third Party Rights. Services
                           provided under this Agreement will not violate or in
                           any way infringe upon the rights of third parties,
                           including property, trade secrets, proprietary rights
                           and non-disclosure rights, or any trademark,
                           copyright or patent rights.

                  C.       AppliedTheory does not warrant that the Work will
                           operate at all times without interruption or will be
                           error free.

                  D.       AppliedTheory warrants that the Web Hosting and
                           Access Service will perform in accordance with the
                           service descriptions contained in Appendices F and G.

         8.2 Additional work on the Deliverables will be charged on a time and
materials basis in accordance with the consulting rates established herein.

         8.3 The warranty herein is exclusive and in lieu of all other
warranties, whether express or implied. APPLIEDTHEORY HEREBY DISCLAIMS ALL
IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.

9. ALLOWANCE FOR SERVICE INTERRUPTIONS (ACCESS AND WEB HOSTING)

         9.1 The Department's sole and exclusive remedy for Service
interruptions in connection with Access and Web Hosting Services will be credits
based upon the accumulated interruption of Service, measured from the time of
notification to the AppliedTheory Customer Support Center ("CCC") to the
restoration of Service as described below. Any claim for credit must be
submitted in writing by Department to AppliedTheory within ten business days of
the interruption.

                  A.       If the accumulated interruption of Service is equal
                           or greater than one (1) hour, but less than four (4)
                           hours in any one day, Department shall receive a
                           credit equal to the pro-rated monthly charges for the
                           period that such interruption existed.

                  B.       If the accumulated interruption of Service is more
                           than four (4) hours in any one day, Department shall
                           receive a credit equal to the pro-rated charges for
                           one (1) day's service.

                  C.       If the accumulated interruption within any seven (7)
                           day period equals or exceeds ninety-six (96) hours,
                           Department shall receive a credit equal to the
                           pro-rated charges for 1 week's Service or may
                           terminate the affected Access or Web Hosting Service
                           with no penalty.

         The Department shall not receive credit if an interruption is (a)
         caused by the negligence or willful misconduct of the Department or
         others authorized by the Department to use the Services provided by
         AppliedTheory; (b) due to a failure of power, or any problem of any
         type occurring at the Department's side of the Service Demarcation; (c)
         caused by the failure of access to AppliedTheory's network, unless such
         failure is solely caused by AppliedTheory; (d) a result of scheduled
         maintenance, or (e) due to any cause beyond AppliedTheory's control.
         The Department shall also not receive credit if correction of the
         problem requires access to the Department's premises and such access is
         denied or delayed by the Department.

         AppliedTheory provides no service level guarantees or credits for
         optional or additional services including POP mail and Network News and
         temporary outages may occur as a result of scheduled or unscheduled
         maintenance.

         AppliedTheory shall provide the Department with a report setting forth
         the reason for any outage including the time period of any outage and
         the plan for preventing reoccurrence of such outage in the future
         within five days.

10. LIMITATION OF LIABILITY

         10.1 In no event shall either party be liable for any indirect,
incidental, special, or consequential damages, or damages for loss of profits,
revenue, data, or use, incurred by the other party or any third party, whether
in an action in contract or tort, even if such party has been advised of the
possibility of such damages.

         10.2 AppliedTheory's liability for damages hereunder shall in no event
exceed the lesser of $10,000,000 or the amounts paid for the Deliverables under
the applicable Statement of Work; provided however that AppliedTheory's
liability for damages with respect to Section 7 and sub-Section 10.4 herein
shall be without limitation.

                                     Page 4
<PAGE>   5
         10.3 The provisions of this Agreement allocate the risks under this
Agreement between AppliedTheory and the Department. The Department acknowledges
that AppliedTheory's pricing reflects this allocation of risk and the
limitations of liability specified herein.

         10.4 AppliedTheory shall fully defend, indemnify and save harmless the
Department from suits, actions, damages and costs of every name and description
relating to personal injury, damage to real or personal tangible or intangible
property, or any other claim for direct damages arising as a result of acts or
omissions of AppliedTheory, its officers, employees, subcontractors, partners or
agents

11. NON-DISCLOSURE

         11.1 The parties may provide to one another information that is
confidential ("Confidential Information"). Confidential Information shall be
limited to information clearly identified in writing as confidential when
delivered. Confidential Information shall not include information which: (a) is
or becomes a part of the public domain through no act or omission of the
receiving party; (b) was in the receiving party's lawful possession prior to the
disclosure and has been obtained by the receiving party either directly or
indirectly from the disclosing party; (c) is lawfully disclosed by the
disclosing party to a third party without restriction on disclosure; (d) is
independently developed by the receiving party; or (e) is disclosed by operation
of law. The parties agree to hold each other's Confidential Information in
confidence while the Services are being performed and for a period of three
years thereafter provided however, Software and Source code shall be subject to
the provisions of Section 12 and the Sub-License Agreement and held in
confidence in perpetuity.

         11.2 The Department shall: (a) keep confidential the Software and the
source code therefor, and limit access to the same to those of its employees,
agents and subcontractors who are engaged in the use of the Software and shall
not, except as expressly permitted herein, publish, communicate or disclose, or
permit to be published, communicated or disclosed, to third parties such
information and data without AppliedTheory's prior written consent; (b)
reproduce on any copy of the Software copyright notices; and (c) notify
AppliedTheory immediately if the Department becomes aware of any unauthorized
use of the whole or any part of the Software.

12. PROPRIETARY RIGHTS

         12.1 Subject to the terms and conditions set forth herein,
AppliedTheory grants to the Department a perpetual, non-exclusive, royalty-free
license:

                  a.       To use, copy and reproduce the Software in any and
                           all forms and media now known or hereafter invented
                           for any purpose relating to the Department's
                           programs;

                  b.       To recast, reorganize, convert, translate, modify,
                           improve and edit the Software and to prepare or have
                           prepared one or more derivative works of any sort
                           therefrom or based thereon for any purpose relating
                           to the Department's programs;

                  c.       To sublicense other governmental entities or
                           authorized providers of such entities (hereinafter
                           "Sublicensees") to use (but without the right to
                           sublicense) the Software in object code form for any
                           purpose relating solely to Workforce Development
                           Services provided by the Department; and

                  d.       Solely in the event that the grant funding from the
                           U.S. Department of Labor to the Department which is
                           being used to fund the development and support of the
                           Software is permanently terminated, the Department
                           shall have the right to sublicense the source code to
                           Sublicensees to use, modify, improve and edit (but
                           without the right to sublicense) the Software solely
                           for purposes of completing the development of the
                           Software related to the provision of Workforce
                           Development Services; and

                  e.       To copy and to grant to its Sublicensees the right to
                           copy the Software in support of the foregoing
                           permitted uses and sublicenses set forth in the above
                           clauses (a), (b), (c) and (d).

         12.2 Preexisting Works. Title to all works, including any software,
codes, data, interfaces and documentation or portions thereof, used and/or
developed by AppliedTheory prior to the date of agreement number C000525 or
developed by AppliedTheory for purposes other than in connection with the
Software, and to all algorithms, know-how, ideas, techniques, and concepts used
by AppliedTheory in the performance of this Agreement, whether or not

                                     Page 5
<PAGE>   6
incorporated in the Software (collectively, "Preexisting Works"), will remain
the property of AppliedTheory, subject only to the license rights granted to the
Department in Paragraph 12.1.

         12.3 Developed Works. All computer software programs (including codes,
data, interfaces and documentation) which have been and will be created by
AppliedTheory in the performance of this Agreement, including without limitation
the Software, is the exclusive property of AppliedTheory, subject only to the
license rights granted to the Department in Paragraph 12.1. The Department
hereby assigns to AppliedTheory any rights it may have in the Software and in
any associated copyrights, subject to the licenses expressly granted in this
Agreement. The Department agrees to assist AppliedTheory in obtaining copyrights
to the Software and will execute any documents that AppliedTheory may reasonably
request for use in obtaining or enforcing such copyrights. Any expenses incurred
in obtaining such copyrights shall be the sole responsibility of AppliedTheory.

         12.4 The Department hereby agrees that all sublicenses of the Software
granted by the Department shall be in writing and contain appropriate and
adequate protections of AppliedTheory's intellectual property, confidentiality
and other rights. The parties acknowledge and agree that the Sub-License
Agreement, attached hereto as Appendix D and hereby incorporated by reference,
contains such appropriate and adequate protections. The Department shall enforce
the terms of such sublicenses to the extent necessary to protect AppliedTheory's
intellectual property, confidentiality and other rights.

         12.5 Until the Termination Date, AppliedTheory shall not use the
Software (but may use components thereof ) for or on behalf of, or license the
Software (but may license components thereof ) to, any third parties except on
terms agreed to between the Department and AppliedTheory in a separate agreement
negotiated in good faith. Nothing in this Agreement shall limit AppliedTheory's
right to use or license Preexisting Works which may be incorporated into the
Deliverables.

         12.6 For purposes of this Section 12, the following terms shall have
the following meanings:

                  (a)      "Software" Shall mean the software AppliedTheory
                           provides to the Department including that provided
                           under previous agreements as more particularly
                           described in Appendix E hereto, which is hereby
                           incorporated by reference, including all
                           modification, enhancements and revisions to such
                           software made by or through either of the parties
                           hereto.

                  (b)      "Termination Date." Shall mean the (i) the date this
                           Agreement expires or is otherwise terminated by the
                           parties, or, if earlier (ii) the last date for which
                           funding of Software Development Services is
                           permanently terminated by the U.S. Department of
                           Labor and no longer available to the Department.

                  (c)      "Workforce Development Services" means services
                           relating to job searches, including management of
                           "welfare-to-work" programs, collection of labor
                           market information and tracking of employers, job
                           seekers and job training programs under federal and
                           state programs.

13. ADDITIONAL SERVICES

         13.1 AppliedTheory shall provide web hosting services to the Department
including hardware, software, networking, and help desk services for national
and state sites and for Association sites, ACINet and ALX at rates set forth in
Appendix C and in accordance with the Service Description contained in Appendix
F, attached hereto and hereby incorporated by reference. AppliedTheory shall,
upon request and approval of the Department, purchase equipment in support of
the web hosting site on behalf of the Department at competitive market prices
and, where applicable, pursuant to State centralized contracts. Such equipment
shall reside at AppliedTheory's web hosting facilities during the term of the
Agreement Title and ownership to all equipment purchased under the contract
shall vest with the State of New York . Such equipment shall be returned to the
Department at the termination of the contract or upon removal from service,
whichever is earlier.AppliedTheory will invoice the Department for all labor and
expenses incurred by AppliedTheory related to de-installation, packaging, and
shipping of the Department's equipment.

         13.2 AppliedTheory shall provide access to Internet service at rates
established in Appendix C and in accordance with the Service Description
contained in Appendix G, attached hereto and hereby incorporated by reference.

                                     Page 6
<PAGE>   7
         13.4 AppliedTheory will provide, upon request of the Department, the
services specified herein to other states at such states sites in furtherance of
the terms of the Department's technical support responsibilities under the
federal grant issued by the U.S. Department of Labor. Such services shall be
provided pursuant to the rates and terms of this Agreement.

14. REVENUE SHARING ARRANGEMENT

         14.1 The Department grants AppliedTheory an exclusive right to provide
services related to the Association version of the Software to certain private
not-for-profit entities and other for-profit entities. In the event that
AppliedTheory charges fees for such services during the term of this Agreement,
AppliedTheory and the Department agree to share a portion of such fees in
accordance with the terms and conditions established by the parties in a
separate written agreement which shall be paid by AppliedTheory as credit for
fees owing under this Agreement.

15. YEAR 2000 DATE CHANGE WARRANTY

         15.1. Definitions

         For purposes of this warranty, the following definitions shall apply:

                  a.       "PRODUCT" shall include, without limitation: any
                           piece or component of equipment, hardware, firmware,
                           middleware, custom or commercial software, or
                           internal components or subroutines therein which
                           perform any date/time data recognition function,
                           calculation, comparing or sequencing. Where services
                           are being furnished, e.g. consulting, systems
                           integration, code or data conversion or data entry,
                           the term "Product" shall include resulting
                           deliverables.

                  b.       "APPLIEDTHEORY'S PRODUCT" shall include all Product
                           delivered under this Agreement by AppliedTheory other
                           than Third Party Product.

                  c.       "THIRD PARTY PRODUCT" shall include product
                           manufactured or developed by a corporate entity
                           independent from AppliedTheory and provided by
                           AppliedTheory on a non-exclusive licensing or other
                           distribution Agreement with the third party
                           manufacturer. "Third Party Product" does not include
                           product where AppliedTheory is: a) a corporate
                           subsidiary or affiliate of the third party
                           manufacturer/developer; and/or b) the exclusive
                           re-seller or distributor of product manufactured or
                           developed by said corporate entity.

15.2. Warranty Disclosure

At the time of bid, Product order or Product quote, AppliedTheory is required to
disclose the following information in writing to the Department:

                  a)       FOR APPLIEDTHEORY PRODUCT AND FOR PRODUCTS
                           (INCLUDING, BUT NOT LIMITED TO, APPLIEDTHEORY AND/OR
                           THIRD PARTY PRODUCTS AND/OR DEPARTMENT'S INSTALLED
                           PRODUCT) WHICH HAVE BEEN SPECIFIED TO PERFORM AS A
                           SYSTEM: Compliance or non-compliance of the Products
                           individually or as a system with the Warranty
                           Statement set forth below; and

                  b)       FOR THIRD PARTY PRODUCT NOT SPECIFIED AS PART OF A
                           SYSTEM: Third Party Manufacturer's statement of
                           compliance or non-compliance of any Third Party
                           Product being delivered with Third Party
                           Manufacturer/Developer's Year 2000 warranty. If such
                           Third Party Product is represented by Third Party
                           Manufacturer/Developer as compliant with Third Party
                           Manufacturer/Developer's Year 2000 Warranty,
                           AppliedTheory shall pass through said Third Party
                           Warranty from the Third Party Manufacturer to the the
                           Department but shall not be liable for the testing or
                           verification of Third Party's compliance statement.

An absence or failure to furnish the required written warranty disclosure shall
be deemed a statement of compliance of the Product(s) or System(s) in question
with the Year 2000 Warranty Statement set forth below.

15.3. Warranty Statement

Year 2000 warranty 'compliance' shall be defined in accordance with the
following warranty statement:

AppliedTheory warrants that Product(s) furnished pursuant to this Agreement
shall, when used in accordance with the Product documentation, be able to
accurately process date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000, including leap year
calculations. Where a purchase requires that specific Products must perform as a
package or system, this warranty shall apply to the Products as a system.

                                     Page 7
<PAGE>   8
In the event of any breach of this warranty, AppliedTheory shall restore the
Product to the same level of performance as warranted herein, or repair or
replace the Product with conforming Product so as to minimize interruption to
the Department's ongoing business processes, time being of the essence, at
AppliedTheory's sole cost and expense. This warranty does not extend to
correction of the Department's errors in data entry or data conversion.

This warranty shall survive beyond termination or expiration of the Agreement.

Nothing in this warranty shall be construed to limit any rights or remedies
otherwise available under this Agreement.

16. RELATIONSHIP OF PARTIES

         16.1 AppliedTheory is an independent contractor. Nothing in this
Agreement shall be construed to create a partnership, joint venture, or agency
relationship between the parties. Each party will be solely responsible for
payment of all compensation owed to its employees, as well as employment related
taxes. Each party will maintain appropriate worker's compensation insurance and
unemployment insurance for its employees as well as general liability insurance.

17. ASSIGNMENT

         17.1 This Agreement may not be assigned or delegated by AppliedTheory
without the prior written approval of the other party, which consent will not
unreasonably be withheld. Subject to the foregoing, this Agreement is binding on
the parties and their successors and assigns.

18. NOTICES

         18.1 All notices, including notices of address change, required to be
sent hereunder shall be in writing and shall be deemed to have been given to
AppliedTheory when mailed by first class mail to the following address:

                                  AppliedTheory

                               224 Harrison Street

                               Syracuse, NY 13202

                             Attn: Contracts Manager

         18.2 Notice to the Department shall be sent to the address and to the
person identified as the Department Project Coordinator identified in the
Statement of Work.

19. GENERAL

         19.1 This Agreement will be governed by and construed in accordance
with the laws of the State of New York, without reference to its choice of law
rules.

         19.2 This Agreement, including all exhibits, serves to document
formally the entire agreement between AppliedTheory and the Department. As such,
this Agreement supersedes and replaces any prior or contemporaneous agreements,
negotiations or understandings (whether oral or written), relating generally to
the same subject matter. However, any licensing rights to software obtained by
the Department under such prior agreements are hereby transferred and
incorporated into this Agreement without any loss of rights established
thereunder.

         19.3 No modification of, or waiver of rights under, this Agreement will
be effective unless it is in writing and signed by the party against which
enforcement is sought. A waiver of a provision shall in no way be construed as a
waiver of any succeeding breach of such provision or a waiver of the provision
itself.

         19.4 If any provision of this Agreement is determined to be invalid or
unenforceable, the validity or enforceability of the other provisions of this
Agreement shall not be affected; and, in such event, such provision shall be
changed and interpreted so as best to accomplish the objectives of such
provision within the limits of applicable law or applicable court decision.

         19.5 Department acknowledges and agrees that in the development of the
Deliverables, AppliedTheory may use one or more independent contractors upon the
prior approval of the Department.

         19.6 Neither party shall be responsible for its failure to perform due
to circumstances or causes beyond its reasonable control, including, without
limitation, acts of God, wars, riots, embargoes, acts of civil or military
authorities, fires, floods, earthquakes, accidents, strikes, failure of
suppliers or shortages of transportation, facilities, fuel or energy.

                                     Page 8
<PAGE>   9
         IN WITNESS WHEREOF the parties have executed this Agreement as of the
date of last signature below.

FOR: AppliedTheory Corporation

  /s/  Angelo Gencarelli
---------------------------------------------------
Name:  Angelo Gencarelli
Title: V.P. Business Integration and Administration
Date:  11/2/2000

FOR: The New York State Department of Labor

  /s/  Paul D. Danaher
---------------------------------------------------
Name:  Paul D. Danaher
Title: Principal Accountant (ES)
Date:  11/2/00

                                     Page 9

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