<PAGE>

                                                                   EXHIBIT 10.35
 
IMPERIAL BANK
Entertainment Industries Group

Subject: CREDIT TERMS AND CONDITIONS

Gentlemen:

     To induce you to make loans to the undersigned (herein called "Borrower"),
and in consideration of any loan or loans you ("Bank"), in your sole discretion,
may make to Borrower, Borrower warrants and agrees as follows:

A.   Borrower represents and warrants that:

     1.   EXISTENCE AND RIGHTS.  Borrower is a corporation duly organized and
existing and in good standing under the laws of the State of Delaware, without
limit as to the duration of its existence and is authorized and in good standing
to do business in the State of Texas and California; Borrower has powers and
adequate authority, rights and franchises to own its property and to carry on
its business as now conducted, and is duly qualified and in good standing in
each State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement.

     2.   AGREEMENT AUTHORIZED.  The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.

     3.   NO CONFLICT.  The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound or affected, and do not cause any lien, charge or
other encumbrance to be created or imposed upon any such property by reason
thereof.

     4.   LITIGATION.  There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority.

     5.   FINANCIAL CONDITION.  The unaudited balance sheet of Borrower as of
March 31, 1996, a copy of which has heretofore been delivered to you by
Borrower, and all other statements and data submitted in writing by Borrower to
you in connection with this request for credit are true and correct, and said
balance sheet truly presents the financial condition of Borrower as of the date
thereof, and has been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date there have been
no material adverse changes in the financial condition or business of borrower.
Borrower has no knowledge of any liabilities, contingent or otherwise, at such
date not reflected in said balance sheet, and Borrower has not entered into any
special commitments or substantial contracts which are not reflected in said
balance sheet, other than in the ordinary and normal course of its business,
which may have a materially adverse effect upon its financial condition,
operations or business as now conducted.

     6.   TITLE TO ASSETS.  Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section C.2 hereof.
<PAGE>
 
     7.   TAX STATUS.  Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.

     8.   TRADEMARKS, PATENTS.  Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.

     9.   REGULATION U.  The proceeds of this loan shall not be used to purchase
or carry margin stock (as defined within Regulation U of the Board of Governors
of the Federal Reserve system).

B.   Borrower agrees that so long as it is indebted to you, under borrowings, or
other indebtedness, it will, unless you shall otherwise consent in writing:

     1.   RIGHTS AND FACILITIES.  Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.

     2.   INSURANCE.  Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment.

     3.   TAXES AND OTHER LIABILITIES.  Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and all
its other liabilities at any time existing, except to the extent and so long as:

          a.   The same are being contested in good faith and by appropriate
          proceedings in such manner as not to cause any materially adverse
          effect upon its financial condition or the loss of any right of
          redemption from any sale thereunder; and

          b.   It shall have set aside on its books reserves (aggregated to the
          extent required by generally accepted accounting practice) deemed by
          it adequate with respect thereto.

     4.   FINANCIAL COVENANTS.  Borrower shall A) maintain tangible net worth
(meaning the excess of all assets, excluding any value for goodwill, trademarks,
patents, copyrights, organization expense, all amounts due from affiliates,
officers, directors, stockholders and affiliated entities, and other similar
intangible items, over its liabilities) of not less than $25,000,000 increasing
to $29,000,000 at 12/31/97; B) maintain a ratio of current assets to current
liabilities of not less than 3.0 to 1.0; C) maintain cash and cash equivalent
balances of not less than $11,000,000; D) maintain cash and cash equivalents
plus trade accounts receivable of not less than 20,000,000; E) maintain cash and
cash equivalent balances at Imperial Bank of not less than $4,000,000 and F)
beginning with the year end 1997, maintain a ratio of EBIDA (earnings before
interest, depreciation and amortization for the 12 months ended as of the date
of compliance testing) to debt service (total principal and interest due during
the following 12 month period from the date of compliance testing) of not less
than 1.25 to 1; all as computed and determined in accordance with generally
accepted accounting principles on a basis consistently maintained by Borrower.

Covenant compliance is to be tested on a quarterly basis with the exception of
C, D, and E which are to be tested on a monthly basis.


7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 2 OF 6
<PAGE>
 
At any point that cash and cash equivalent balances fall below $15,000,000,
Borrower shall cause at least 65% of the balances to be held either at Imperial
Bank or in investments purchased through Imperial Bank's Investment Department
or Imperial Trust Company.

     5.   RECORDS AND REPORTS.  Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit your representatives to have access to,
and to examine its properties, books and records at all reasonable times during
normal business hours; and furnish you:

          a.   As soon as available, and in any event within thirty days after
          the close of each month, financial statements including information
          necessary to establish compliance with section B.4. above.

          b.   As soon as available, and in any event within forty-five (45)
          days after the close of each quarter of each fiscal year of Borrower,
          commencing with the quarter next ending, a balance sheet, profit and
          loss statement and reconciliation of Borrower's capital accounts (Form
          10-Q) as of the close of such period and covering operations for the
          portion of Borrower's fiscal year ending on the last day of such
          period, all in reasonable detail, prepared in accordance with
          generally accepted accounting principles on a basis consistently
          maintained by Borrower and certified by an appropriate officer of
          Borrower, subject, however, to year-end audit adjustments.

          c.   As soon as available, and in any event within ninety (90) days
          after the close of each fiscal year of Borrower, an audit report (Form
          10-K) of Company as of the close of and for such fiscal year, all in
          reasonable detail, with the unqualified opinion of accountants
          satisfactory to you.

          d.   Such other information relating to the affairs of Borrower as you
          reasonably may request from time to time.

     6.   NOTICE OF DEFAULT.  Promptly notify Bank in writing of the occurrence
of any event of default hereunder or which would be such an event upon notice
and lapse of time.

C.   Borrower agrees that so long as it is indebted to you, it will not, without
your written consent:

     1.   OUTSIDE INDEBTEDNESS.  Create, incur, assume or permit to exist any
indebtedness for borrowed moneys in excess of $100,000 other than loans from you
except obligations now existing as shown in the financial statement dated March
31, 1996, and excluding those obligations being refinanced by your bank; and
loan for the land and building to be constructed in Richardson, Texas; or sell
or transfer, either with or without recourse, any accounts or notes receivable
or any moneys due or to become due.

     2.   LIENS AND ENCUMBRANCES.  Create, incur, or assume any mortgage,
pledge, encumbrance, lien or charge of any kind upon any asset now owned, other
than liens for taxes not delinquent and liens in your favor except for those
already existing as of March 31, 1996 and security interests to secure the
subject loan limited to the land and building to be constructed in Richardson,
Texas.
 

7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 3 OF 6
<PAGE>
 
     3.   LOANS, INVESTMENTS, SECONDARY LIABILITIES.  Make any loans or advances
to any person or other entity which as defined shall be deducted from the
tangible net worth of Borrower, or any other loans or advances other than in the
ordinary and normal course of its business as now conducted or make any
investment in the securities of any person or other entity other than the United
States Government, with the exception of investments in commercial paper of a
rating not lower than "P-1" or "A-1" as rated by Standard & Poor's and Moody's,
respectively; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business.

     4.   ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION.  Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business as
now conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same. Permission for the actions referenced in this paragraph will not be
unreasonably withheld by the Bank.

D.   The occurrence of any of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you immediately
due and payable, all without demand, presentment or notice, all of which are
hereby expressly waived:

     1.   FAILURE TO PAY NOTE.  Failure to pay any installment of principal of
or interest on any indebtedness of Borrower to you, ten (10) days after its due
date.

     2.   BREACH OF COVENANT.  Failure of Borrower to perform any other term or
condition of this Letter of Inducement binding upon Borrower, where such breach
has a material financial consequence, that could reasonably result in a material
adverse effect on the financial condition of the Borrower.

     3.   BREACH OF WARRANTY.  Any of Borrower's material representations or
material warranties made herein or any statement or certificate at any time
given in writing pursuant hereto or in connection herewith shall be false or
misleading in any material respect, that could reasonably result in a material
adverse effect on the financial condition of the borrower.

     4.   INSOLVENCY; RECEIVER OR TRUSTEE.  Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.

     5.   JUDGMENTS, ATTACHMENTS.  Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated, unbonded or unstayed for a period
later than five days prior to the date of any proposed sale thereunder, that
could reasonably result in a material adverse effect on the financial condition
of the Borrower.

     6.   BANKRUPTCY.  Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.

     7.   FINANCIAL COVENANTS. Failure to maintain minimum financial covenants
as stated.


7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 4 OF 6
<PAGE>
 
E.   Miscellaneous Provisions.


     1.   FAILURE OR INDULGENCE NOT WAIVER.  No failure or delay on the part of
Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that Bank may make hereunder, are cumulative to, and not
exclusive of, any rights or remedies otherwise available.

With respect to all future software products of Borrower (and all components
thereof including, without limitation, all characters contained therein) and
with respect to all subsequently developed, created, acquired, written or
produced software products (and all components including, without limitation,
all characters contained therein) as soon as any of such software products of
Borrower (or any component thereof) (whether or not it is a derivative of a
software product, which has already been registered for copyright) may be
registered for copyright, the Borrower shall take any and all actions as may be
necessary to register and/or cause to be registered all of the Borrower's rights
in such software product (and/or all components thereof including, without
limitation, all characters contained therein) all in conformity with the laws of
the United States of America and any and all relevant foreign jurisdiction; and
immediately deliver to the Bank, written evidence of each such filing and/or
actual registration of such rights, which rights shall constitute part of the
Collateral hereunder and under all other agreements and documents among the
Borrower and Bank; and as soon as practicable, execute and deliver to the Bank
for filing with the U.S. Copyright Office a copyright mortgage for such software
product(s) (and/or component(s) thereof) substantially in the form attached
hereto as Exhibit A. In addition, with respect to any of Borrower's current
software products (and all components thereof, including, without limitation,
all characters contained therein) in the event Borrower registers the copyright
for any of such software products or any components thereof, including, without
limitation, the characters therein, Borrower shall promptly inform the Bank of
such fact and the Borrower shall execute and deliver to Bank for filing with the
U.S. Copyright Office a copyright mortgage for such software product(s) (and/or
component(s) thereof) substantially in the form hereto as Exhibit A.

The Borrower shall use all reasonable commercial efforts (i) to obtain from all
persons, corporations, partnerships, limited liability companies and other
entities from whom the Borrower has obtained or from time to time will obtain
licenses in connection with the software products which it sells (the
"Licensors") the consent of such Licensors to the Borrower's granting to the
Bank of a security interest in such licenses, (ii) to obtain from the Licensors
their cooperation in connection with the Bank obtaining a perfected first
priority security interest in such licenses, which cooperation shall include,
without limitation, the execution and delivery by the Licensors of memoranda of
licenses and other documents which may be filed in the U.S. Copyright Office to
evidence the licenses granted to the Borrower, and (iii) to obtain from
Licensors the right of the Bank to have a reasonable period of time in which to
foreclose on Borrower's inventory and liquidate the same before said Licensors
terminate the right of the Borrower (or the Bank) to sell the remaining
inventory.

 
7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 5 OF 6
<PAGE>
 
Executed on behalf of the Borrower by its duly authorized representative.


7th Level, Inc.



By:/s/ David W. Craig              Sept. 6, 1996
   ---------------------------     ------------------------------
                                   Date
Its:CFO
    --------------------------



By:/s/ C. Rominger                 Sept. 6, 1996
   ---------------------------     ------------------------------
                                   Date
Its:Treasurer
    --------------------------
 

7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 6 OF 6
<PAGE>
 
                                 Imperial Bank

                                     NOTE

$6,000,000.00    Beverly Hills, California,      September 6, 1996

On September 6, 2000, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Entertainment Industries Group office, the
principal sum of $6,000,000.00 or such sums up to the maximum if so stated, as
the Bank may now or hereafter advance to or for the benefit of the undersigned
in accordance with the terms hereof, together with interest from date of
disbursement or N/A, whichever is later, on the unpaid principal balance at the
rate of 0.750% per year in excess of the rate of interest which Bank has
announced as its prime lending rate (the "Prime Rate"), which shall vary
concurrently with any change in such Prime Rate, or $250.00, whichever is
greater.  Interest shall be computed at the above rate on the basis of the
actual number of days during which the principal balance is outstanding, divided
by 360, which shall, for Interest computation purposes, be considered one year.

Interest shall be payable monthly in addition to principal beginning October 6,
1996, and if not so paid shall become a part of the principal.  All payments
shall be applied first to interest, and the remainder, if any, on principal.
Principal shall be payable in installments of $375,000.00, or more, each
installment on the 6/th/ day of each quarter, beginning  December 6, 1996.
Advances not to exceed any unpaid balance owing at any one time equal to the
maximum amount specified above, may be made at the option of Bank.

     Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity.  Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.

     Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, Insecure.

     If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the holder
of this note to accept payment of any installment past due or less than the
total unpaid principal balance after maturity.

     If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon.  Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and extension
of time for payment hereof, before, at, or after maturity; consents to the
acceptance, release or substitution of security for this note; and waives demand
and protest and the right to assert any statute of limitations.  Any married
person who signs this note agrees that recourse may be had against separate
property for any obligations hereunder.  The indebtedness evidenced hereby shall
be payable in lawful money of the United States.  In any action brought under or
arising out of this note, each Obligor including successor(s)  or assign(s)
hereby consents 
<PAGE>
 
to the application of California law, to the jurisdiction of any competent court
within the State of California, and to service of process by any means
authorized by California law.

     No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power.  The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security.  Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.

                                   7th Level, Inc.
                                   /s/ David W. Craig, CFO
                                   /s/ Carolyn Rominger, Treasurer
<PAGE>
 
                                 Imperial Bank

                                     NOTE

$5,000,000.00    Beverly Hills, California,      September 6, 1996

On March 6, 1998, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Entertainment Industries Group office, the
principal sum of $5,000,000.00 MAXIMUM, or such sums up to the maximum if so
stated, as the Bank may now or hereafter advance to or for the benefit of the
undersigned in accordance with the terms hereof, together with interest from
date of disbursement or N/A, whichever is later, on the unpaid principal balance
at the rate of 0.500% per year in excess of the rate of interest which Bank has
announced as its prime lending rate (the "Prime Rate"), which shall vary
concurrently with any change in such Prime Rate, or $250.00, whichever is
greater.  Interest shall be computed at the above rate on the basis of the
actual number of days during which the principal balance is outstanding, divided
by 360, which shall, for Interest computation purposes, be considered one year.

Interest shall be payable monthly beginning October 6, 1996, and if not so paid
shall become a part of the principal.  All payments shall be applied first to
interest, and the remainder, if any, on principal. Advances not to exceed any
unpaid balance owing at any one time equal to the maximum amount specified
above, may be made at the option of Bank.

     Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity.  Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.

     Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, Insecure.

     If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the holder
of this note to accept payment of any installment past due or less than the
total unpaid principal balance after maturity.

     If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon.  Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and extension
of time for payment hereof, before, at, or after maturity; consents to the
acceptance, release or substitution of security for this note; and waives demand
and protest and the right to assert any statute of limitations.  Any married
person who signs this note agrees that recourse may be had against separate
property for any obligations hereunder.  The indebtedness evidenced hereby shall
be payable in lawful money of the United States.  In any action brought under or
arising out of this note, each Obligor including successor(s)  or assign(s)
hereby consents 
<PAGE>
 
to the application of California law, to the jurisdiction of any competent court
within the State of California, and to service of process by any means
authorized by California law.

     No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power.  The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security.  Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.

                                   7th Level, Inc.
                                   /s/ David W. Craig, CFO
                                   /s/ Carolyn Rominger, Treasurer
<PAGE>
 
                                 IMPERIAL BANK
                                  Member FDIC
                          GENERAL SECURITY AGREEMENT
                  (Tangible and Intangible Personal Property)


This Agreement is executed on  September 6, 1996,by 7TH Level, Inc. 
(hereinafter called "Obligor").  In consideration of financial accommodations
given, to be given or continued, the Obligor grants to IMPERIAL BANK
(hereinafter called "Bank") a security interest in (a) all property (i)
delivered to Bank by Obligor, (ii) which shall be in Bank's possession or
control in any matter or for any purpose, (iii) described below, (iv) now owned
or hereafter acquired by Obligor of the type or class described below and/or in
any supplementary schedule hereto, or in any financing statement filed by Bank
and executed by or on behalf of Obligor; (b) the proceeds, increase and products
of such property all accessions thereto, and all property which Obligor may
receive on account of such collateral which Obligor will immediately deliver to
Bank (collectively referred to as "Collateral") to secure payment and
performance of all of Obligor's present or future debts or obligations to Bank,
whether absolute or contingent (hereafter referred to as "Debt"). Unless
otherwise defined, words used herein have the meanings given them in the
California Uniform Commercial Code.

Collateral:

A. VEHICLE, VESSEL, AIRCRAFT:
-----------------------------

                                    Identification      License or        New
Year   Make/Manufacturer   Model    and Serial No.   Registration No.   or Used
--------------------------------------------------------------------------------




--------------------------------------------------------------------------------
Engine or other equipment:_______________________________________
(For aircraft original ink signature on copy to FAA)

B. DEPOSIT ACCOUNTS:

Type _________________ Account Number _________ Amount $ __________________

In name of____________________ Depository _________________________________ AND
ALL EXTENSIONS OR RENEWALS THEREOF.
<PAGE>
 
C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe)


       All personal property, whether presently existing or hereafter created or
       acquired, including but not limited to: All accounts, chattel paper,
       documents, instruments, money, deposit accounts and general intangibles
       including returns, repossessions, books and records relating thereto, and
       equipment containing said books and records. All goods including
       equipment and inventory. All proceeds including, without limitation,
       insurance proceeds. All guarantees and other security therefor.



The collateral not in Bank's possession will be located at: 1110 E. Collins
Blvd, Ste. 122, Richardson, TX  75081; 1420 Presidential Ave. Richardson. TX
75081;  900  Allen Ave., Glendale, Ca. 9l2Ol; l945 Walnut Hill Lane, Irving, TX
75038;  101 California St., #1775, San Francisco, Ca. 94111; 30 Garfield PI.,
#600, Cincinnati, Oh.  45202

  [_] If checked, the Obligor is executing this Agreement as an Accommodation
Debtor only and the Obligor's liability is limited to the security interest
granted in the Collateral described herein. The party being accommodated is

                                                            ("Borrower").

All the terms and provisions on the reverse side hereof are incorporated herein
as though set forth in full, and constitute a part of this Agreement.

                               Signature
Name                (indicate title, if applicable)      Address

--------------------------------------------------------------------------------
7th Level, Inc.    By /s/ David W. Craig, CFO   1110 E. Collins Blvd.,
--------------------------------------------------------------------------------
                   By /s/ Carolyn Rominger,     Ste. 122 Richardson, TX
--------------------------------------------------------------------------------
                                   Treasurer    75081
--------------------------------------------------------------------------------
<PAGE>
 
                        SECURITY AGREEMENT (CONTINUED)

Obligor represents, warrants and agrees:

1.  Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of
collecting the Debt, of protecting, insuring or realizing on Collateral, end any
expenditure of Bank pursuant hereto, including attorneys' fees and expenses,
with interest at the rate of 24% per year, or the rate applicable to the Debt,
whichever is less, from the date of expenditure, and (c) any deficiency after
realization of Collateral.

2.  Obligor will use the proceeds of any loan that becomes Debt hereunder for
the purpose indicated on the application therefore, and will promptly contract
to purchase and pay the purchase price of any property which becomes Collateral
hereunder from the proceeds of any loan made for that purpose.

3.  As to all Collateral in Obligor's possession (unless specifically otherwise
agreed to by Bank in writing), Obligor will:
    (a) Have, or has, possession of the Collateral at the location disclosed to
    Bank and will not remove the Collateral from the location,
    (b) Keep the Collateral separate and identifiable.
    (c) Maintain the Collateral in good and saleable condition, repair it if
    necessary clean, feed, shelter, water, medicate, fertilize, cultivate,
    irrigate, prune and otherwise deal with the Collateral in all such ways as
    are considered good practice by owners of like property, use it lawfully and
    only as permitted by insurance policies, and permit Bank to inspect the
    Collateral at any reasonable time.
    (d) Not sell, contract to sell, lease, encumber or transfer the Collateral
    (other than inventory Collateral) until the Debt has been paid, even though
    Bank has a security interest in proceeds of such Collateral.

4.  As to Collateral which is inventory and accounts, Obligor:
    (a) May, until notice from Bank, sell, lease or otherwise dispose of
    inventory Collateral in the ordinary course of business only, and collect
    the cash proceeds thereof.
    (b) Will, upon notice from Bank, deposit all cash proceeds as received in a
    demand deposit account with Bank, containing only such proceeds and deliver
    statements identifying units of inventory disposed of, accounts which gave
    rise to proceeds, and all acquisitions and returns of Inventory as required
    by Bank.
    (c) Will receive in trust, schedule on forms satisfactory to the Bank and
    deliver to Bank all non-cash proceeds other than inventory received in
    trade.
    (d) If not in default, may obtain release of Bank's Interest in individual
    units of inventory upon request, therefore, payment to Bank of the release
    price of such units shown on 
<PAGE>
 
    any Collateral schedule supplementary hereto,
    and compliance herewith as to proceeds thereof.

5.  As to Collateral which are accounts, chattel paper, general intangibles and
proceeds described in 4(c) above, Obligor warrants, represents and agrees:
    (a) All such Collateral is genuine, enforceable in accordance with its
    terms, free from default, prepayment, defense and conditions precedent
    (except as disclosed to and accepted by Bank in writing), and is supported
    by consecutively numbered invoices to, or rights against, the debtors
    thereon. Obligor will supply Bank with duplicate invoices or other evidence
    of Obligor's rights on Bank's request;
    (b) All persons appearing to be obligated on such Collateral have authority
    and capacity to contract;
    (c) All chattel paper is in compliance with law as to form, content and
    manner of preparation and execution and has been properly registered,
    recorded, and/or filed to protect Obligor's interest thereunder;
    (d) If an account debtor shall also be indebted to Obligor on another
    obligation, any payment made by him not specifically designated to be
    applied on any particular obligation shall be considered to be a payment on
    the account in which Bank has a security interest, Should any remittance
    include a payment not on an account, it shall be delivered to Bank and, if
    no event of default has occurred, Bank shall pay Obligor the amount of such
    payment;
    (e) Obliger agrees not to compromise, settle or adjust any account or renew
    or extend the time of payment thereof without Bank's prior written
    consent. /s/ DWC
             -------

6.  Obligor owns all Collateral absolutely, and no other person has or claims
any interest in any Collateral, except as disclosed to and accepted by Bank in
writing. Obligor will defend any proceeding which may affect title to or Bank's
security interest in any Collateral, and will indemnify and hold Bank free and
harmless from all costs and expenses of Bank's defense.

7.  Obligor will pay when due all existing or future charges, liens or
encumbrances on and all taxes and assessments now or hereafter imposed on or
affecting the Collateral and, if the Collateral is in Obligor's possession, the
realty on which the Collateral is located.

8.  Obligor will insure the Collateral with Bank as loss payee in form and
amounts with companies, and against risks and liability satisfactory to Bank,
and hereby assigns such policies to Bank, agrees to deliver them to Bank at
Bank's request, and authorizes Bank to make any claim thereunder, to cancel the
insurance on Obligor's default, and to receive payment of and endorse any
instrument in payment of any loss or return premium. If Obligor should fail to
deliver the required policy or policies to the Bank, Bank may, at Obligor's cost
and expense, without any duty to 
<PAGE>
 
do so, get and pay for insurance naming as the insured, at Bank's option, either
both Obligor and Bank, or only Bank, and the cost thereof shall be secured by
this Security Agreement, and shall be repayable as provided in Paragraph 1
above.

9.  Obligor will give Bank any information it requires. All information at any
time supplied to Bank by Obligor (including, but not limited to, the value and
condition of Collateral, financial statements, financing statements, and
statements made in documentary Collateral) is correct and complete, and Obligor
will notify Bank of any adverse change in such information. Obligor will
promptly notify Bank of any change of Obligor's residence, chief executive
office or mailing address.

10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act which
Obligor is obligated hereby to do, to exercise such rights as Obligor may
exercise, to use such equipment as Obligor might use, to enter Obligor's
premises to give notice of Bank's security interest, and to collect Collateral
and proceeds and to execute and file in Obligor's name any financing statements
and amendments thereto required to perfect Bank's security interest hereunder,
all to protect and preserve the Collateral and Bank's rights hereunder. Bank
may:
    (a) Endorse, collect and receive delivery or payment of instruments and
    documents constituting Collateral;
    (b) Make extension agreements with respect to or affecting Collateral,
    exchange it for other Collateral, release persons liable thereon or take
    security for the payment thereof, and compromise disputes in connection
    therewith;
    (c) Use or operate Collateral for the purpose of preserving Collateral or
    its value and for preserving or liquidating Collateral.

1l. If more than one Obligor signs this Agreement, their liability is joint and
several. Any Obligor who is married agrees that recourse may be had against
separate property for the Debt. Discharge of any Obligor except for full
payment, or any extension, forbearance, change of rate of interest, or
acceptance, release or substitution of Collateral or any impairment or
suspension of Bank's rights against an Obligor, or any transfer of an Obligor's
interest to another shall not affect the liability of any other Obligor. Until
the Debt shall have been paid or performed in full, Bank's rights shall continue
even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank
to proceed against any Obligor before any other, or to pursue any other remedy;
(b) presentment, protest and notice of protest, demand and notice of nonpayment,
demand or performance, notice of sale, and advertisement of sale; (c) any right
to the benefit of or to direct the application of any Collateral until the Debt
shall have been paid; (d) and any right of subrogation to Bank until Debt shall
have been paid or performed in full.

12. Upon default, at Bank's option, without demand or notice, all 
<PAGE>
 
or any part of the Debt shall immediately become due, Bank shall have all rights
given by law, and may sell, in one or more sales, Collateral in any county where
Bank has an office. Bank may purchase at such sale. Sales for cash or on credit
to a wholesaler, retailer or user of the Collateral, or at public or private
auction, are all to be considered commercially reasonable. Bank may require
Obligor to assemble the Collateral and make it available to Bank at the entrance
to the location of the Collateral, or a place designated by Bank.

    Defaults shall include:
     (a) Obligor's failure to pay or perform this or any agreement with Bank or
     breach of any warranty herein, or Borrower's failure to pay or perform any
     agreement with Bank.
     (b) Any change in Obligor's or Borrower's financial condition which in
     Bank's judgment impairs the prospect of Borrower's payment or performance.
     (c) Any actual or reasonably anticipated deterioration of the Collateral or
     in the market price thereof which causes it, in Bank's judgment, to become
     unsatisfactory as security.
     (d) Any levy or seizure against Borrower or any of the Collateral.
     (e) Death, termination of business, assignment for creditors, insolvency,
     appointment of receiver, or the filing of any petition under bankruptcy or
     debtor's relief laws of, by or against Obligor or Borrower or any guarantor
     of the Debt.
     (f) Any warranty or representation which is false or is believed in good
     faith by Bank to be false.

13. Bank's acceptance of partial or delinquent payments or the failure of Bank
to exercise any right or remedy shall not waive any obligation of Obligor or
Borrower or right of Bank to modify this Agreement, or waive any other similar
default.

14. On transfer of all or any, part of the Debt, Bank may transfer all or any
part of the Collateral. Bank may deliver all or any part of the Collateral to
any Obligor at any time. Any such transfer or delivery shall discharge Bank from
all liability and responsibility with respect to such Collateral transferred or
delivered. This Agreement benefits Bank's successors and assigns and binds
Obligor's heirs, legatees, personal representatives, successors and assigns.
Obligor agrees not to assert against any assignee of Bank any claim or defense
that may exist against Bank, Time is of the essence. This Agreement and
supplementary schedules hereto contain the entire security agreement between
Bank and Obligor. Obligor will execute any additional agreements, assignments or
documents reasonably required by Bank to carry this Agreement into effect.

15. This Agreement shall be governed by and construed in accordance with the
laws of the State of California, to the jurisdiction of whose courts the Obligor
hereby agrees to submit. Obligor agrees that service of process may be
accomplished by any means authorized by California law.  All words used herein
in the 
<PAGE>
 
singular shall be considered to have been used in the plural where the context
and construction so require.
<PAGE>
 
              MORTGAGE, ASSIGNMENT AND GRANT OF SECURITY INTEREST
                          WITH RESPECT TO TRADEMARKS


     KNOW ALL MEN BY THESE PRESENTS, that for good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the undersigned, 7th
Level, Inc., a Delaware corporation ("Debtor") , the principal offices of which
are located at 1110 East Collins Boulevard, Suite 122, Richardson, Texas 75081,
does hereby irrevocably mortgage, pledge, assign and grant a continuing security
interest to IMPERIAL BANK, a California chartered bank (the "Secured Party" or
"Bank") having an office located at 9777 Wilshire Boulevard, Beverly Hills,
California 90212, and to the Secured Party's successors and assigns, in and to
all right, title and interest of Debtor, now owned or hereafter acquired
throughout the universe, in and to all of the trade names, trademarks, service
names and/or service marks listed on Schedule A attached hereto, all
applications pending with respect thereto and all renewals and extensions
thereof and the good will associated with such marks and names (collectively,
the "Trademarks"), as security for the payment and performance (whether
presently existing or hereafter arising) of any and all indebtedness and
obligations of the Debtor to the Bank pursuant to the terms of (i) that certain
Credit Terms and Conditions, dated September 6, 1996, by and among Debtor and
Secured Party, (ii) the General Security Agreement, by and among Debtor and
Secured Party, dated September 6, 1996, (iii) all promissory notes of Debtor in
favor of Secured Party now existing or hereafter executed by Debtor and (iv) all
other agreements and documents among Debtor and Secured Party now existing or
hereafter entered into, as any of the foregoing may be amended or modified from
time to time (collectively the "Loan Documents").  The obligations of Debtor to
Bank pursuant to the Loan Documents are also secured by other personal property
of Debtor pursuant to the Loan Documents.

     This Mortgage, Assignment and Grant of Security Interest With Respect to
Trademarks is subject to all of the applicable terms and conditions in the Loan
Documents.  Upon the occurrence of a default or breach by the Debtor under any
of the Loan Documents, the Bank may exercise any and all rights and remedies of
the Bank under the Loan Documents, and the laws of State of California and of
the United States of America and any other relevant jurisdictions.

     The Debtor does hereby irrevocably appoint the Bank as such Debtor's
attorney in fact to do all acts and things permitted or contemplated by the
terms hereof and/or the Loan Documents.  This power of attorney is coupled with
an interest and is irrevocable.

     The Debtor agrees that if any person, corporation, partnership, trust,
limited liability company, or other entity, shall do or perform any acts which
the Bank believes (i) constitutes a trademark infringement on any of the
Trademarks, (ii) infringes any right of the Debtor or the Bank, or (iii)
constitutes an unauthorized or unlawful use thereof, then the Bank may and shall
have the right to take such steps and institute such suits or proceedings as the
Bank may deem advisable or necessary to prevent such acts and conduct and to
secure damages and other relief by reason thereof and to generally take such
steps as may be advisable or necessary or proper for the full protection of the
rights of the parties, but the Bank shall not be obligated to do any of the
foregoing.  The Bank may take such steps or institute such suits or proceedings
in its own name or in the name of the Debtor or in the names of the parties
jointly.

     This Mortgage, Assignment and Grant of Security Interest With Respect to
Trademarks shall in all respects be subject to, construed in accordance with and
governed by, the laws of the State of California without giving effect to that
State's choice of law 
<PAGE>
 
rules.

     IN WITNESS WHEREOF, the undersigned have executed this instrument as of
September 6, 1996.


                                        7TH LEVEL, INC.,
                                        A DELAWARE CORPORATION


                                        By:  /s/ David W. Craig
                                             -----------------------------------

                                        Its:  CFO
                                              ----------------------------------

                                       2
<PAGE>
 
ALL-PURPOSE ACKNOWLEDGMENT

<TABLE>
<CAPTION>
==============================================================================================================================
State of Texas      )                                                                            CAPACITY CLAIMED
County of   Dallas      )                                                                           BY SIGNER
<S>                                                                                 <C>
On  Sept. 6          , 1996_before me, Shelly Roberts                               *  INDIVIDUAL(S)
    -----------------                  ----------------------------                 *X  CORPORATE ____________________________
        DATE                                                                         OFFICER(S)            CFO
personally appeared   David W. Craig                                                          --------------------------------
                    -----------------------------------------------                                        TITLE(S)
                                 NAME(S) OF SIGNER(S)                               *  PARTNER(S)
                                                                                    *  ATTORNEY-IN-FACT
*X   personally known to me -OR-                                                    *  TRUSTEE(S)
                                                                                    *  SUBSCRIBING WITNESS
*    proved to me on the basis of satisfactory evidence to be the                   *  GUARDIAN/CONSERVATOR
     person(s) whose name(s) is/are subscribed to the within                        *  OTHER:_________________________________
     instrument and acknowledged to me that he/she/they executed
     the same in his/her/their authorized capacity(ies), and                        __________________________________________
     that by his/her/their signature(s) on the instrument the
     person(s), or the entity upon behalf of which the person(s)                    __________________________________________
     acted, executed the instrument.
                                                                                    SIGNER IS REPRESENTING:
     Witness my hand and official seal.                                             NAME OF PERSON(S) OR ENTITY(IES)

                                                                                      7/th/ Level, Inc.
          /s/ Shelly Roberts                                                        ------------------------------------------
     --------------------------------------------------------------
         SIGNATURE OF NOTARY                                                        __________________________________________

                                                                                    __________________________________________

==============================================================================================================================
                                                       OPTIONAL SECTION
THIS CERTIFICATE MUST BE ATTACHED TO THE                  TITLE OR TYPE OF DOCUMENT:   Mortgage, Assignment and Grant of
DOCUMENT DESCRIBED AT RIGHT:                                                           ---------------------------------
--------------------------------                          Security Interest With Respect to Copyrights and Other Collateral
Though the data requested here is not required by law,    -----------------------------------------------------------------
it could prevent fraudulent reattachment of this form.
                                                          NUMBER OF PAGES________DATE OF DOCUMENT_____________

                                                          SIGNER(S) OTHER THAN NAMED ABOVE  xxx
==============================================================================================================================
</TABLE>

                                       3
<PAGE>
 
                                  SCHEDULE A
                                  ----------
                                        
                           DESCRIPTION OF TRADEMARKS
                           -------------------------


DEBTOR:                             7th Level, Inc.,
------                                                     
                                    a Delaware corporation


SECURED PARTY:                      Imperial Bank, a California chartered bank
-------------                                                                 

<TABLE>
<CAPTION>
                                 Regis. or  Regis. or
     Mark                        File No.   Serial No.  Filing Date
     ----                        ---------  ----------  -----------
     <S>                         <C>        <C>         <C>
     7th Level                      21,643   1,867,516     12/13/94
 
     Virgil Reality                 21,786  74/381,029      4/19/93
 
     Tuneland                       21,907   1,870,434     12/27/94
 
     Desktop Playground             22,534   1,907,829      7/25/95
 
     Earmax                         22,861  74/508,151      3/30/94
 
     Top Gun                        22,943  74/511,906      4/13/94
 
     Infinity One                   23,170  74/557,316       8/4/94
 
     Battle Beast                   23,548  74/636,527      2/21/95
 
     Lil' Howies Fun House          23,555  74/628,554       2/1/95
 
     The Great Word Adventure       23,571  74/628,613       2/2/95
 
     Alphabot                       23,610  74/636,529      2/21/95
 
     Arcade America                 23,611  74/636,546      2/21/95
 
     Take Your Best Shot            23,643   1,953,162      1/30/96
 
     Genome                         23,702  74/660,520      4/13/95
 
     Shark Boy                      23,963  74/700,373      7/12/95
 
     Musicopolis                    24,243  75/002,813     10/10/95
 
     IQN                            24,350  75/028,642      12/6/95
 
     Kid's World                    24,407  75/039,371       1/2/96
 
     The Great Math Adventure       24,437  75/055,193       2/8/96
</TABLE> 
 
                                      A-1
<PAGE>
 
<TABLE> 
     <S>                            <C>     <C>             <C> 
     The Great Reading
      Adventure                     24,438  75/055,197       2/8/96
 
     The Great Writing
      Adventure                     24,438  75/055,196       2/8/96
 
     The Great Geo-
     graphy Adventure               24,515  75/067,485       3/5/96
 
     Digibot                        24,518  75/077,913      3/25/96
 
     Edubot                         24,519  75/077,912      3/25/96
 
     Cold Blooded                   24,536  75/075,030      3/19/96
 
     Finn                           24,537  75/075,031      3/19/96
 
     The Universal Order            24,576  75/085,935       4/9/96
 
     Netcomix                       24,591  75/098,790       5/6/96
 
     The Great Grammar
      Adventure                     24,629  75/098,789       5/6/96
 
     Studio 7                       24,699
 
     Annie                          24,732   1,787,986      8/17/93
</TABLE>

                                      A-2
<PAGE>
 
              MORTGAGE, ASSIGNMENT AND GRANT OF SECURITY INTEREST
                WITH RESPECT TO COPYRIGHTS AND OTHER COLLATERAL


          KNOW ALL MEN BY THESE PRESENTS, that for good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
undersigned, 7th Level, Inc., a Delaware corporation ("Debtor") , the principal
offices of which are located at 1110 East Collins Boulevard, Suite 122,
Richardson, Texas 75081, does hereby irrevocably mortgage, pledge, assign and
grant a continuing security interest to IMPERIAL BANK, a California chartered
bank (the "Secured Party" or "Bank") having an office located at 9777 Wilshire
Boulevard, Beverly Hills, California 90212, and to the Secured Party's
successors and assigns, in and to all right, title and interest of Debtor, now
owned or hereafter acquired throughout the universe, in and to all of the
collateral described in Schedule A attached hereto including, without
limitation, (a) the "Software Products" (as such term is defined on Schedule A
attached hereto), (b) the "Animation Characters" (as such term is defined on
Schedule A attached hereto), (c) all "Literary Properties" (as such term is
defined in Schedule A attached hereto), (d) all copyrights in and related to the
foregoing (including any and all renewals and extensions thereof) and all
accounts, accounts receivable and contracts receivable generated by such
copyrights, and (e) all other collateral described in Schedule A attached hereto
(all of the foregoing collateral is hereinafter severally and collectively
referred to as the "Collateral"), as security for the payment and performance
(whether presently existing or hereafter arising) of any and all indebtedness
and obligations of the Debtor to the Bank pursuant to the terms of (i) that
certain Credit Terms and Conditions, dated September 6, 1996, by and among
Debtor and Secured Party, (ii) the General Security Agreement, by and among
Debtor and Secured Party, dated September 6, 1996, (iii) all promissory notes of
Debtor in favor of Secured Party now existing or hereafter executed by Debtor
and (iv) all other agreements and documents among Debtor and Secured Party now
existing or hereafter entered into, as any of the foregoing may be amended or
modified from time to time (collectively the "Loan Documents").

          This Mortgage, Assignment and Grant of Security Interest With Respect
to Copyrights and Other Collateral is subject to all of the applicable terms and
conditions in the Loan Documents.  Upon the occurrence of a default or breach by
the Debtor under any of the Loan Documents, the Bank may exercise any and all
rights and remedies of the Bank under the Loan Documents, and the laws of State
of California and of the United States of America and any other relevant
jurisdictions.

          The Debtor does hereby irrevocably appoint the Bank as such Debtor's
attorney in fact to do all acts and things permitted or contemplated by the
terms hereof and/or the Loan Documents.  This power of attorney is coupled with
an interest and is irrevocable.

          The Debtor agrees that if any person, corporation, partnership, trust,
limited liability company, or other entity, shall do or perform any acts which
the Bank believes (i) constitutes a copyright infringement on any of the
Literary Properties, any of the Software Products or any of the Animation
Characters, (ii) constitutes a plagiarism or violation, (iii) infringes any
right of the Debtor or the Bank, or (iv) constitutes an unauthorized or unlawful
distribution, exhibition, or use thereof, then the Bank may and shall have the
right to take such steps and institute such suits or proceedings as the Bank may
deem advisable or necessary to prevent such acts and conduct and to secure
damages and other 

                                       1
<PAGE>
 
relief by reason thereof and to generally take such steps as may be advisable or
necessary or proper for the full protection of the rights of the parties, but
the Bank shall not be obligated to do any of the foregoing. The Bank may take
such steps or institute such suits or proceedings in its own name or in the name
of the Debtor or in the names of the parties jointly.

          This Mortgage, Assignment and Grant of Security Interest With Respect
to Copyrights and Other Collateral shall in all respects be subject to,
construed in accordance with and governed by, the laws of the State of
California without giving effect to that State's choice of law rules.

          IN WITNESS WHEREOF, the undersigned have executed this instrument as
of September 6, 1996.


                            7TH LEVEL, INC.,
                            A DELAWARE CORPORATION


                            By:   /s/ David W. Craig
                                  ------------------------------------------

                            Its:  CFO
                                  ------------------------------------------

                                       2
<PAGE>
 
<TABLE>
<CAPTION> 
================================================================================================================
ALL-PURPOSE ACKNOWLEDGMENT
<S>                                                            <C>                                  
State of Texas      )                                                 CAPACITY CLAIMED          
County of Dallas        )                                                BY SIGNER             
                                                                                                            
On Sept. 6               , 1996 before me, Shelly Roberts
   ----------------------                  -------------------------          x  INDIVIDUAL(S)       
    DATE                                                                      x  CORPORATE ______________________    
personally appeared David W. Craig                                              OFFICER(S)---CFO-----------------
                   ----------------------------------                                          TITLE(S)                             
                          NAME(S) OF SIGNER(S)                                x PARTNER(S)                        
                                                                              x ATTORNEY-IN-FACT                  
                                                                              x TRUSTEE(S)                        
                                                                              x SUBSCRIBING WITNESS               
xx   personally known to me -OR-                                              x GUARDIAN/CONSERVATOR              
x    proved to me on the basis of                                             x OTHER:___________________________   
     satisfactory evidence to be the                                                                            
     person(s) whose name(s) is/are                                           ___________________________________       
     subscribed to the within                                                                                   
     instrument and acknowledged to                                           ___________________________________       
     me that he/she/they executed                                                                               
     the same in his/her/their                                                SIGNER IS REPRESENTING:              
     authorized capacity(ies), and                                            NAME OF PERSON(S) OR ENTITY(IES)     
     that by his/her/their                                                                                      
     signature(s) on the instrument                                           ___7th Level, Inc._________________  
     the person(s), or the entity                                                                               
     upon behalf of which the                                                 ___________________________________       
     person(s) acted, executed the                                                                              
     instrument.                                                              ___________________________________        
 
     Witness my hand and official
     seal.
 
 
   /s/ Shelly Roberts
   -----------------------------------------
   SIGNATURE OF NOTARY
 
 
  
================================================================================================================
                               OPTIONAL SECTION

THIS CERTIFICATE MUST BE           TITLE OR TYPE OF DOCUMENT:   Mortgage, Assignment and 
                                                                ------------------------  
ATTACHED TO THE DOCUMENT           Grant of Security Interest With Respect to Copyrights
                                   ----------------------------------------------------
DESCRIBED AT RIGHT:                and Other Collateral
                                   --------------------
--------------------------------   

Though the data requested here
is not required by law, it        NUMBER OF PAGES __________ DATE OF DOCUMENT ___________
could prevent fraudulent          
reattachment of this form.        SIGNER(S) OTHER THAN NAMED ABOVE  xxx
                                    
=============================================================================================
</TABLE>

                                       3
<PAGE>
 
                                   SCHEDULE A
                                   ----------

                           DESCRIPTION OF COLLATERAL
                           -------------------------


DEBTOR:                    7th Level, Inc.,
------                              
                           a Delaware corporation


SECURED PARTY:             Imperial Bank, a California chartered bank
-------------                                                 


The term "Collateral" shall mean all of Debtor's now owned or hereafter acquired
personal property, including, without limitation, all assets, accounts, accounts
receivable, goodwill, contract rights, license agreements, distribution
agreements, Rights-In-Agreements, general intangibles, inventory, equipment,
fixtures, goods, documents, instruments, returned merchandise, chattel paper,
trade names, trade marks, service names and service marks, all applications with
respect thereto and all renewals and extensions thereof (including, without
limitation, those listed on Exhibit 1 attached hereto), and the good will
associated with such marks and names, cash, deposit accounts, policies of
insurance and all products, replacements or substitutions for, and proceeds
(including, without limitation, insurance proceeds) of, and accessions,
accretions and additions to any and all of the foregoing property and interests
in property, and all books and records relating to any of the foregoing
Collateral.  Without in any way limiting the generality of the foregoing, the
Collateral shall specifically include all of Debtor's right, title and interest,
now owned or hereafter acquired, throughout the entire universe, in and to each
and all of the following:

          1.   All Software Products (whether such Software Products are in
     preproduction, production, principal photography, post-production or
     completed), Animation Characters and Literary Properties, including,
     without limitation, all of Debtor's right, title and interest in and to:

               1.1  All common law and statutory copyrights and copyright
          registrations, and applications for registration, now existing or
          hereafter arising, United States of America and foreign, obtained or
          to be obtained on or in connection with the Software Products, the
          Animation Characters, the Literary Properties or any parts thereof or
          any underlying or component element of any Software Product, Animation
          Character or Literary Property, including, but not limited to, all
          copyrights on the property described in Paragraphs 1.2 through 1.5
          hereof together with the right to copyright and all rights to renew or
          extend such copyrights and the right (but not the obligation) of the
          Secured Party to sue in its own name and/or in the name of any Debtor
          for past, present and future infringements of copyright (collectively,
          the "Copyrights");

               1.2  All rights in and to all music, musical compositions, lyrics
          and recordings used and to be used in, or derived from, any of the
          Software Products, including, without limitation, all rights to
          record, re-record,

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------
          
          produce, reproduce, license, synchronize or publish all or any of said
          music and musical compositions;

               1.3  All physical properties of every kind or nature of or
          relating to any of the Software Products and Animation Characters and
          all versions thereof, to the extent now or hereafter in existence,
          including, without limitation, exposed film, developed film,
          positives, negatives, prints, answer prints, special effects, preprint
          materials (including, without limitation, negatives, positives,
          duplicate negatives, inter-negatives, inter-positives, color
          reversals, intermediates, lavenders, fine grain master prints and
          matrixes, master tapes, discs, cassettes and cartridges, soundtracks,
          recordings, audio and video tapes, discs, cassettes and cartridges,
          master magnetic tracks, other optical soundtrack recordings and music
          cue sheets, and all other forms of preprint elements used in any way
          to produce prints or other copies or additional preprint elements,
          whether now known or hereafter devised or created), audio and video
          tapes, cassettes and discs (including, without limitation, 8mm, CD-I,
          CD-ROM and DVD) of all types and gauges and any and all other physical
          properties of every kind and nature relating to any of the Software
          Products and Animation Characters in whatever state of completion (all
          of the foregoing collectively referred to as the "Physical
          Materials"), and any and all rights of access to removal and transfer
          of, and duplication and reproduction of, any and all of the Physical
          Materials;

               1.4  All production, sale, distribution, subdistribution,
          leasing, subleasing, license, sublicense, exhibition, telecasting,
          broadcasting, transmission, ancillary, publishing, spinoff,
          collateral, allied, subsidiary, remake, sequel, merchandising and
          other exploitation rights pertinent or related to the Software
          Products and Animation Characters, including, without limitation, the
          following:  (i) all rights throughout the world to sell copies of the
          Software Products and Animation Characters in the form of cassettes,
          cartridges, tapes, discs (including, without limitation, CD-I, CD-ROM
          and DVD), stills, posters, magazines, books or any other devices now
          known or hereafter created, conceived or devised; and (ii) all other
          merchandising rights, including, without limitation, all rights to
          use, exploit and license others to use and exploit any and all
          commercial tie-ups of any kind arising out of or connected with the
          Literary Properties, the Software Products, the Animation Characters,
          and the title or titles of the Software Products, the Animation
          Characters and Literary Properties.

               1.5  All accounts, accounts receivable, general intangibles,
          contract rights and other rights which may arise or may have arisen in
          connection with the creation, production, distribution,
          subdistribution, exhibition, telecasting, publishing, broadcasting,
          licensing, sublicensing, renting,

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------


          leasing, subleasing, sale, merchandising or other exploitation of all
          or any part of the Software Products, the Animation Characters, the
          Literary Properties and/or copies thereof.

               1.6  All products and proceeds of, replacements and substitutions
          for and accessions, accretions and additions to any or all of the
          foregoing.

"LITERARY PROPERTIES"
---------------------

The term "Literary Properties" shall mean all literary and other properties
which are or may form the basis of any Software Product or which are or may be
incorporated into any Software Product, including, without limitation all
preliminary and final computer programs (including, without limitation, all
computer source codes and object codes), software, software engines, photoplays,
treatments, scenarios, screenplays, scripts, bibles and storyboards at every
stage thereof used or to be used in connection with any Software Product; all
component parts of any Software Product consisting of such literary or other
properties; and all other literary material upon which any Software Product is
or may be adapted or based in whole or in part; in each case whether now in
existence or hereafter made, produced, created, acquired or written and whether
or not in possession of Debtor.  The Literary Properties include, without
limitation, those listed on Exhibit 2 hereto.



"ANIMATION CHARACTERS"
----------------------

The term "Animation Characters" shall mean all animation characters contained in
or which form the basis of any Software Product and/or Literary Property or
which may be incorporated into any Software Product or Literary Property.  The
Animation Characters include, without limitation, those listed on Exhibit 2
attached hereto.


"SOFTWARE PRODUCTS"
-------------------

The term "Software Products" shall mean all entertainment, educational,
commercial and other interactive and non-interactive software properties in
which Debtor now has or hereafter acquires any right, title or interest
including, without limitation, the software titles and/or the components thereof
listed in Exhibit 2 attached hereto.

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------


"RIGHTS-IN AGREEMENTS"
----------------------

The term "Rights-In Agreements" shall mean any agreement, arrangement or
understanding now existing or hereafter entered into, to which Debtor, directly
or by assignment, other transfer or operation of law, is a party and pursuant to
which Debtor has been granted, sold, conveyed, licensed, sublicensed, leased,
subleased or otherwise transferred rights with respect to the creation,
production, manufacture, sale, distribution, subdistribution, leasing,
subleasing, license, sublicense, exhibition, telecasting, broadcasting or other
exploitation of any Software Product or any elements thereof and/or the
Copyrights in any of the foregoing.

NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, DEBTOR DOES NOT HEREBY PLEDGE,
MORTGAGE, ASSIGN, HYPOTHECATE OR GRANT A SECURITY INTEREST IN (I) ANY AGREEMENT
OR CONTRACT WHICH BY THE TERMS OF WHICH MAY NOT BE PLEDGED, MORTGAGED, ASSIGNED,
HYPOTHECATED OR ENCUMBERED WITHOUT THE CONSENT OF THE OTHER PARTY OR PARTIES
THERETO OR (II) ANY  COPYRIGHT OR COPYRIGHTABLE PROPERTY WHICH BY THE TERMS OF
THE AGREEMENT OR CONTRACT PURSUANT TO WHICH DEBTOR ACQUIRED ITS RIGHTS IN SUCH
COPYRIGHT OR COPYRIGHTABLE PROPERTY, MAY NOT BE PLEDGED, MORTGAGED, ASSIGNED,
HYPOTHECATED OR ENCUMBERED, WITHOUT THE CONSENT OF THE OTHER PARTY OR PARTIES
THERETO, IN EACH CASE WHERE SUCH CONSENT HAS NOT BEEN OBTAINED.

<PAGE>
 
                                   EXHIBIT 1
                                   ---------
                                        
                           DESCRIPTION OF TRADEMARKS
                           -------------------------


DEBTOR:                    7th Level, Inc.,
------                     
                           a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------                                                                 
<TABLE>
<CAPTION> 
 
                                 Regis. or  Regis. or
Mark                             File No.   Serial No.  Filing Date
----                             ---------  ----------  -----------
<S>                              <C>        <C>         <C>
 
7th Level                        21,643   1,867,516     12/13/94
 
Virgil Reality                   21,786  74/381,029      4/19/93
 
Tuneland                         21,907   1,870,434     12/27/94
 
Desktop Playground               22,534   1,907,829      7/25/95
 
Earmax                           22,861  74/508,151      3/30/94
 
Top Gun                          22,943  74/511,906      4/13/94
 
Infinity One                     23,170  74/557,316       8/4/94
 
Battle Beast                     23,548  74/636,527      2/21/95
 
Lil' Howies Fun House            23,555  74/628,554       2/1/95
 
The Great Word Adventure         23,571  74/628,613       2/2/95
 
Alphabot                         23,610  74/636,529      2/21/95
 
Arcade America                   23,611  74/636,546      2/21/95
 
Take Your Best Shot              23,643   1,953,162      1/30/96
 
Genome                           23,702  74/660,520      4/13/95
 
Shark Boy                        23,963  74/700,373      7/12/95
 
Musicopolis                      24,243  75/002,813     10/10/95
 
IQN                              24,350  75/028,642      12/6/95
 
</TABLE> 

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation No.       Filing Date
       MARK                                                 -----------
       ---- 

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------

<TABLE> 
<CAPTION> 
<S>                              <C>     <C>             <C> 
Kid's World                      24,407  75/039,371      1/2/96
 
The Great Math Adventure         24,437  75/055,193      2/8/96
 
The Great Reading
 Adventure                       24,438  75/055,197      2/8/96
 
The Great Writing
 Adventure                       24,438  75/055,196      2/8/96
 
The Great Geo-
 graphy Adventure                24,515  75/067,485      3/5/96
 
Digibot                          24,518  75/077,913      3/25/96
 
Edubot                           24,519  75/077,912      3/25/96
 
Cold Blooded                     24,536  75/075,030      3/19/96
 
Finn                             24,537  75/075,031      3/19/96
 
The Universal Order              24,576  75/085,935      4/9/96
 
Netcomix                         24,591  75/098,790      5/6/96
 
The Great Grammar
 Adventure                       24,629  75/098,789      5/6/96
 
Studio 7                         24,699
 
 Annie                           24,732   1,787,986      8/17/93
</TABLE>

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation No.       Filing Date
      MARK                                                  -----------
      ----     
SECURED PARTY:             Imperial Bank, a California chartered bank
-------------




<TABLE>
<CAPTION>
     United Kingdom
     --------------
     <S>                    <C>     <C>      <C> 
     Battle Beast           23,949  2025258  6/26/95
 
     Arcade America         23,951  2025260  6/28/95
 
     7th Level              23,976  2026709  7/12/95
 
     Germany
     -------
 
     Battle Beast           23,950  WZ41168  6/28/95
 
     Arcade America         23,952  WZ41169  6/28/95
 
     7th Level              23,975  WZ41262  7/13/95
</TABLE>

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------
                                   
                                   EXHIBIT 2

                          List of Literary Properties
                          ---------------------------

1.

2.

3.



                          List of Animation Characters
                          ----------------------------

<TABLE>
<CAPTION>  
Title                 Character's Name      Date of         Registration
----------------  ------------------------  Registration    Number    
                                            ------------    -------------
                                                                              
<S>               <C>                       <C>             <C>
Cold Blooded      Child Finn / CB
Cold Blooded      Teen Finn / CB
Cold Blooded      Action Finn / CB
Cold Blooded      Finn / CB
Cold Blooded      Willem / CB
Cold Blooded      Rudolph / CB
Cold Blooded      Halfbeard / CB
Cold Blooded      Auntie Claws / CB
Cold Blooded      Drul Brynner / CB
Cold Blooded      Wax Dummies / CB
Cold Blooded      Moby / CB
Cold Blooded      Lucretius (Lenny) / CB
Cold Blooded      Lucretius 3D Eye / CB
Cold Blooded      Squigglies / CB
Cold Blooded      Mara / CB
Howie 2           Stinky / H2               Feb/01/96       VAu354-836
</TABLE> 
<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------

<TABLE> 
<CAPTION> 
Title             Character's Name          Date of             Registration
-----             ----------------                       
                                            Registration        Number
                                            ------------        ------------
<S>               <C>                       <C>                 <C> 
Howie 2           Alphabot / H2             Feb/01/96             VAu354-834
Howie 2           Sarabear / H2             Feb/01/96             VAu354-835
Howie 2           Ladybear / H2             Feb/01/96             VAu354-833
Howie 2           Gus the Goose / H2        Feb/01/96             VAu354-832
Howie 2           Manny the Moose / H2      Feb/01/96             VAu358-222
Howie 2           Drippy the Duck / H2      Feb/01/96             VAu358-220
Howie 2           Don the Round Worm / H2   Feb/01/96             VAu354-842
Howie 2           Walleye Rabbit / H2       Feb/01/96             VAu354-831
Howie 2           Wacky the Squirrel / H2   Feb/01/96             VAu354-841
Howie 2           Macky the Squirrel / H2   Feb/01/96             VAu354-840
Howie 2           Stuffy the Pig / H2       Feb/01/96             VAu354-839
Howie 2           Croc the Crocodile / H2   Feb/01/96             VAu354-838
Howie 2           Ardy the Aardvark / H2    Feb/01/96             VAu354-837
Howie 2           Possy the Possum / H2     Feb/02/96             VAu332-575
Howie 2           Old Bill the Goat / H2    Feb/01/96             VAu354-830
Howie 2           Woody the Woodchuck / H2  Feb/01/96             VAu354-843
Howie 2           Beav the Beaver / H2      Feb/02/96             VAu332-577
Battle Beasts     Sparky / BB               Feb/13/96
Battle Beasts     Sparticus / BB            Feb/13/96
Battle Beasts     Kuli / BB                 Feb/13/96
Battle Beasts     Kulapesh / BB             Feb/13/96
Battle Beasts     Vernie / BB               Feb/13/96
Battle Beasts     Vermie / BB               Feb/13/96             VAu357-002
Battle Beasts     Nicky / BB                Feb/13/96             VAu357-001
Battle Beasts     Nasator / BB              Feb/13/96
</TABLE> 

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------

<TABLE> 
<CAPTION> 
Title             Character's  Name         Date of               Registration
-----             -----------------
                                            Registration          Number
                                            ------------          ------
<S>               <C>                       <C>                   <C>  
Battle Beasts     Tor / BB                  Feb/13/96
Battle Beasts     Torkuda / BB              Feb/13/96
Battle Beasts     Mortie / BB               Feb/13/96
Battle Beasts     Morden  BB                Feb/13/96
Battle Beasts     Toad / BB                 Feb/13/96
Battle Beasts     Beast Toad / BB           Feb/13/96
Battle Beasts     The General / BB          April/25/96           VAu295-565
Battle Beasts     Toadman / BB              April/25/96           VAu295-566
Battle Beasts     Wart / BB                 April/25/96           VAu329-767
Arcade America    Belch / AA                Feb/21/95             VAu319-216
Arcade America    Bluefood / AA             Feb/21/95             VAu330-768
Arcade America    Broadway Bill / AA        Feb/23/95             VAu329-321
Arcade America    Clamp / AA                Feb/21/95             VAu319-214
Arcade America    Joey / AA                 Feb/21/95             VAu319-213
Arcade America    Lil' Suzie / AA           Feb/21/95             VAu319-212
Arcade America    Plant / AA                Feb/21/95             VAu319-291
Arcade America    The Roadkill / AA         Feb/21/95             VAu319-209
Arcade America    Rotunda Splat / AA        Feb/21/95             VAu319-211
Arcade America    Surf / AA                 Feb/21/95             VAu319-210
Arcade America    Wedgie / AA               Feb/21/95             VAu319-215
Arcade America    Bat / AA                  Feb/27/95             VAu325-497
Arcade America    Skull / AA                Feb/27/95             VAu321-061
 
                  List of Software Titles
Title             ------------------------  Date of Registration  Registration
-----                                       --------------------  Number
                                                                  -------------
Arcade America                              Feb/27/95
</TABLE> 

<PAGE>
 
DEBTOR:                    7th Level, Inc,
------                     a Delaware corporation

SECURED PARTY:             Imperial Bank, a California chartered bank
-------------

<TABLE> 
<CAPTION> 
Title                      Character's Name      Date of          Registration
-----                      ---------------- 
                                                 Registration     Number
                                                 ------------     ------------
<S>                        <C>                   <C>              <C>          
Joey's Room                                      Feb/27/95        PAu 1-983-020
Cold Blooded
Howie 2
Battle Beasts
</TABLE>