<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-Q
 
(MARK ONE)
 
  /X/    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
 
                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
                                       OR
 
  / /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
 
        FOR THE TRANSITION PERIOD FROM ______________ TO ______________
 
                         COMMISSION FILE NUMBER 0-24936
 
                                7TH LEVEL, INC.
 
             (Exact name of registrant as specified in its charter)
 
                  DELAWARE                             75-2480669
        (State or other jurisdiction                (I.R.S. Employer
     of incorporation or organization)             Identification No.)
 
           925 WESTCHESTER AVENUE                         10604
           WHITE PLAINS, NEW YORK
  (Address of principal executive offices)             (Zip Code)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 682-4300
 
                            ------------------------
 
    Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days. Yes
/X/  No / /
 
    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
 
       COMMON STOCK, $0.01 PAR VALUE                   30,648,835
           (Title of Each Class)             Number of Shares Outstanding at
                                                       May 7, 1999
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                7TH LEVEL, INC.
                                   FORM 10-Q
                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
                                     INDEX
 
<TABLE>
<CAPTION>
PART I     FINANCIAL INFORMATION                                                        PAGE NO.
                                                                                      -------------
 
<S>        <C>                                                                        <C>
Item 1     Condensed Consolidated Balance Sheets as of March 31, 1999 and
             December 31, 1998......................................................            3
 
           Condensed Consolidated Statements of Operations for the three months
             ended March 31, 1999 and 1998..........................................            4
 
           Condensed Consolidated Statements of Stockholders' Equity for the three
             months ended March 31, 1999............................................            5
 
           Condensed Consolidated Statements of Cash Flows for the three months
             ended March 31, 1999 and 1998..........................................            6
 
           Notes to Condensed Consolidated Financial Statements.....................            7
 
Item 2     Management's Discussion and Analysis of Financial Condition and Results
             of Operations..........................................................           10
 
PART II    OTHER INFORMATION
 
Item 1     Legal Proceedings........................................................           15
 
Item 2     Changes in Securities....................................................           15
 
Item 6     Exhibits and Reports on Form 8-K.........................................           16
 
           SIGNATURE................................................................           17
</TABLE>
 
                                       2
<PAGE>
PART 1 -- FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                                7TH LEVEL, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                MARCH 31, 1999  DECEMBER 31, 1998
                                                                                --------------  -----------------
<S>                                                                             <C>             <C>
                                    ASSETS
Current assets:
  Cash and cash equivalents...................................................   $ 10,635,068     $  11,215,702
  Accounts receivable, net....................................................      1,295,872            42,317
  Other current assets........................................................        519,420           286,238
                                                                                --------------  -----------------
      Total current assets....................................................     12,450,360        11,544,257
Fixed assets, net.............................................................        403,284         1,399,652
Capitalized software, net.....................................................     15,132,013                --
Intangible assets, net........................................................      3,491,116             7,059
Goodwill......................................................................      9,763,140                --
Other assets..................................................................        107,138            65,421
                                                                                --------------  -----------------
      Total assets............................................................   $ 41,347,051     $  13,016,389
                                                                                --------------  -----------------
                                                                                --------------  -----------------
 
                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable............................................................   $    536,471     $     197,962
  Accrued expenses and other current liabilities..............................      3,980,550         2,504,299
  Current portion of deferred revenue.........................................      2,083,949                --
  Notes payable...............................................................         27,027           485,135
                                                                                --------------  -----------------
      Total current liabilities...............................................      6,627,997         3,187,396
Deferred revenue..............................................................      1,050,313                --
Other.........................................................................         31,994            45,916
                                                                                --------------  -----------------
      Total liabilities.......................................................      7,710,304         3,233,312
Commitments and contingencies
Stockholders' equity:
  Series B convertible preferred stock, par value $0.01 per share, 15,000
    shares authorized; 0 and 1,395 shares issued and outstanding in 1999 and
    1998, respectively ($1,395,000 liquidation value).........................             --           628,800
  Series D convertible preferred stock, par value $0.01 per share, 35,000
    shares authorized; 21,644 and 0 shares issued and outstanding in 1999 and
    1998, respectively ($21,644,000 liquidation value)........................            216                --
  Common stock, par value $0.01 per share, 100,000,000 shares authorized;
    31,090,042 and 23,763,622 shares issued and outstanding in 1999 and 1998,
    respectively..............................................................        310,900           237,636
  Additional paid-in capital..................................................    134,032,791        93,965,769
  Notes and accounts receivable from directors (Note 5).......................     (1,934,000)               --
  Accumulated deficit.........................................................    (98,773,160)      (85,049,128)
                                                                                --------------  -----------------
      Total stockholders' equity..............................................     33,636,747         9,783,077
                                                                                --------------  -----------------
      Total liabilities and stockholders' equity..............................   $ 41,347,051     $  13,016,389
                                                                                --------------  -----------------
                                                                                --------------  -----------------
</TABLE>
 
  The accompanying notes are an intregral part of these condensed consolidated
                             financial statements.
 
                                       3
<PAGE>
                                7TH LEVEL, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED   THREE MONTHS ENDED
                                                                           MARCH 31, 1999       MARCH 31, 1998
                                                                         -------------------  -------------------
<S>                                                                      <C>                  <C>
Net revenues...........................................................    $       755,565       $     461,753
Cost of revenues.......................................................            118,961              84,920
                                                                         -------------------  -------------------
      Gross profit.....................................................            636,604             376,833
                                                                         -------------------  -------------------
Operating expenses:
  Research and product development.....................................            558,633             817,362
  Sales and marketing..................................................            442,338             271,823
  General and administrative...........................................            700,535           1,107,240
  Depreciation and amortization........................................            374,086             565,054
  Restructuring charges................................................          2,492,917                  --
  Acquired in-process technology.......................................          9,676,898                  --
                                                                         -------------------  -------------------
      Total operating expenses.........................................         14,245,407           2,761,479
                                                                         -------------------  -------------------
      Operating loss...................................................        (13,608,803)         (2,384,646)
Interest and other, net................................................            (42,054)           (156,829)
                                                                         -------------------  -------------------
Net loss available to common stockholders..............................    $   (13,650,857)      $  (2,541,475)
                                                                         -------------------  -------------------
                                                                         -------------------  -------------------
Basic and diluted loss per common share................................    $         (0.50)      $       (0.18)
                                                                         -------------------  -------------------
                                                                         -------------------  -------------------
Basic and diluted weighted average shares outstanding..................         27,163,775          13,783,736
                                                                         -------------------  -------------------
                                                                         -------------------  -------------------
</TABLE>
 
The accompanying notes are an intregral part of these condensed consolidated
financial statements.
 
                                       4
<PAGE>
                                7TH LEVEL, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                       CONVERTIBLE              CONVERTIBLE
                                              COMMON STOCK          PREFERRED SHARES B      PREFERRED SERIES D     ADDITIONAL
                                         -----------------------  ----------------------  -----------------------    PAID-IN
                                           SHARES      AMOUNT       SHARES      AMOUNT      SHARES      AMOUNT       CAPITAL
                                         ----------  -----------  ----------  ----------  ----------  -----------  -----------
<S>                                      <C>         <C>          <C>         <C>         <C>         <C>          <C>
Balance at December 31, 1998             23,763,622  $   237,636       1,395  $  628,800          --  $        --  $93,965,769
  Common stock issued on conversion of
    Series B Preferred Stock...........     697,500        6,975      (1,395)   (628,800)         --           --      621,825
  Stock issued in connection with
    Street Technologies, Inc.
    acquistion.........................   4,948,182       49,482          --          --      21,644          216   36,438,818
  Series B dividends paid in common
    stock..............................      24,356          243          --          --          --           --       72,886
  Common stock issued upon exercise of
    warrants...........................     375,000        3,750          --          --          --           --           --
  Common stock issued upon conversion
    of notes payable...................     186,982        1,870          --          --          --           --      570,856
  Warrants and options issued to
    non-employees                                --           --          --          --          --           --      185,481
  Notes and accounts receivable from
    directors from the exercise of
    stock options......................          --           --          --          --          --           --           --
  Common stock issued under stock
    option plan and stock purchase
    plan...............................   1,094,400       10,944          --          --          --           --    2,177,156
  Net loss.............................          --           --          --          --          --           --           --
                                         ----------  -----------  ----------  ----------  ----------  -----------  -----------
Balance at March 31, 1999..............  31,090,042  $   310,900          --  $       --      21,644  $       216  $134,032,791
                                         ----------  -----------  ----------  ----------  ----------  -----------  -----------
                                         ----------  -----------  ----------  ----------  ----------  -----------  -----------
 
<CAPTION>
                                          NOTES AND
                                           ACCOUNTS
                                          RECEIVABLE
                                             FROM                       TOTAL
                                          DIRECTORS    ACCUMULATED   STOCKHOLDERS'
                                           (NOTE 5)      DEFICIT        EQUITY
                                         ------------  ------------  ------------
<S>                                      <C>           <C>           <C>
Balance at December 31, 1998              $       --   ($85,049,128)  $9,783,077
  Common stock issued on conversion of
    Series B Preferred Stock...........           --            --            --
  Stock issued in connection with
    Street Technologies, Inc.
    acquistion.........................           --            --    36,488,516
  Series B dividends paid in common
    stock..............................           --       (73,175)          (46)
  Common stock issued upon exercise of
    warrants...........................           --            --         3,750
  Common stock issued upon conversion
    of notes payable...................           --            --       572,726
  Warrants and options issued to
    non-employees                                 --            --       185,481
  Notes and accounts receivable from
    directors from the exercise of
    stock options......................   (1,934,000)           --    (1,934,000)
  Common stock issued under stock
    option plan and stock purchase
    plan...............................           --            --     2,188,100
  Net loss.............................           --   (13,650,857)  (13,650,857)
                                         ------------  ------------  ------------
Balance at March 31, 1999..............   $(1,934,000) ($98,773,160)  $33,636,747
                                         ------------  ------------  ------------
                                         ------------  ------------  ------------
</TABLE>
 
  The accompanying notes are an intregral part of these condensed consolidated
                             financial statements.
 
                                       5
<PAGE>
                                7TH LEVEL, INC.
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                                  (UNAUDITED)
 
1. BASIS OF PRESENTATION
 
    In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of 7th Level, Inc. and subsidiaries (the
"Company") as of March 31, 1999 and the results of operations and cash flows for
the three month periods ended March 31, 1999 and March 31, 1998. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company contained in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998.
 
    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for any interim period are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1999.
 
    Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
 
2. STREET TECHNOLOGIES, INC. ACQUISITION
 
    On February 16, 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc., a privately held company, and began doing business as
7th Street.com, Inc. The Company began marketing and developing training
solutions delivered over intranets and the Internet. To consummate the
transaction, the Company issued 4,948,182 shares of common stock, par value $.01
per share (the "Common Stock"), of the Company and 21,644 shares of Series D 8%
Preferred Stock (the "Series D Stock") with an aggregate liquidation preference
of $21,644,000. Upon the receipt of the common stockholders' approval, the
Series D Stock will automatically convert into 7,214,666 shares of Common Stock.
The Series D stockholders are entitled to participate with the common
stockholders in dividends and distributions and to vote on most matters on an
"as converted" basis with the common stockholders and as a separate class,
except for the vote on whether to convert the Series D Stock. The total value of
the transaction was approximately $40,331,000 including $3,133,000 of assumed
liabilities which consisted primarily of deferred revenue. The transaction was
accounted for using the purchase method of accounting. The results of Street
Technologies, Inc. subsequent to February 16, 1999 are included in the Company's
condensed consolidated statement of operations.
 
    The aggregate purchase price of $40,331,000 consisted of the following:
 
<TABLE>
<CAPTION>
DESCRIPTION                                                                         AMOUNT
-------------------------------------------------------------------------------  -------------
<S>                                                                              <C>
Common stock...................................................................  $  14,845,000
Preferred stock................................................................     21,644,000
                                                                                 -------------
      Subtotal.................................................................     36,489,000
Assumed liabilities............................................................      3,133,000
Acquisition costs..............................................................        709,000
                                                                                 -------------
      Total....................................................................  $  40,331,000
                                                                                 -------------
                                                                                 -------------
</TABLE>
 
                                       7
<PAGE>
                                7TH LEVEL, INC.
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                                  (UNAUDITED)
 
    The purchase price was allocated to the net assets aequired based upon their
fair values. The fair values were determined by an independent appraisal. The
appraisal incorporated proven valuation procedures and techniques. The purchase
price has been allocated as follows:
 
<TABLE>
<CAPTION>
DESCRIPTION                                                                         AMOUNT
-------------------------------------------------------------------------------  -------------
<S>                                                                              <C>
Current assets.................................................................  $   1,763,000
Fixed assets...................................................................        343,000
Other assets...................................................................        490,000
Capitalized software...........................................................     14,717,000
Intangible assets..............................................................      3,519,000
Acquired in-process technology (written-off)...................................      9,677,000
Goodwill.......................................................................      9,822,000
                                                                                 -------------
      Total....................................................................  $  40,331,000
                                                                                 -------------
                                                                                 -------------
</TABLE>
 
    The acquired in-process technology has been expensed as a charge against
operations and is included in the accompanying condensed consolidated statement
of operations for the three months ended March 31, 1999. The amount allocated to
acquired in-process technology relates to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. These projects require substantial development and
testing prior to reaching technological feasibility. However, there can be no
assurance that these projects will reach technological feasibility or develop
into products that may be sold by the Company. The acquired in-process
technology has required, and may require substantial development by the Company.
The intangible assets are being amortized over seven to twenty years. The
Company recorded approximately $204,000 amortization expense relating to these
intangible assets during the three months ended March 31, 1999.
 
    The operations of 7th Street.com have been included in the Company's
condensed consolidated financial statements since the date of acquisition. The
accompanying condensed consolidated statement of operations for the three months
ended March 31, 1999 includes charges of approximately $9,677,000 associated
with the write-off of acquired in-process technology and approximately
$2,493,000 associated with a restructuring charge which includes the write-off
of redundant assets, excess office space and employee severance. The following
unaudited pro forma information has been prepared assuming that this acquisition
had taken place at the beginning of the period; it is not necessarily indicative
of results that may occur in the future.
 
<TABLE>
<CAPTION>
                                                                     PRO FORMA
                                                                    (UNAUDITED)
<S>                                                   <C>                  <C>
                                                      THREE MONTHS ENDED   THREE MONTHS ENDED
                                                        MARCH 31, 1999       MARCH 31, 1998
                                                      -------------------  -------------------
Revenue.............................................    $     1,000,000       $     739,000
Loss from operations................................        (14,276,000)         (3,153,000)
Net loss............................................        (14,240,000)         (3,141,000)
Loss per share......................................    $         (0.48)      $        (.17)
</TABLE>
 
3. LOSS PER COMMON SHARE
 
    Basic and diluted loss per share was determined by dividing the net loss by
the weighted average common shares outstanding during the period. Common stock
equivalents are excluded from the loss per share calculation as their effect
would be antidilutive.
 
                                       8
<PAGE>
                                7TH LEVEL, INC.
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                                  (UNAUDITED)
 
4. CONVERSION OF 7% CONVERTIBLE NOTES PAYABLE
 
    The 7% Convertible Notes Payable (the "Notes") were due and payable on
February 11, 1999. To induce the holders to convert the Notes into Common Stock,
the Company on February 10, 1999 agreed with the holders of the Notes to amend
the Notes to provide that the conversion price should be reduced to a price
equal to 80% of the then current market price of the Common Stock. During
February 1999, the Company issued 186,982 shares of Common Stock in exchange for
approximately $458,000 of the Notes. The difference between the stated
conversion price and the actual conversion price was approximately $115,000 and
is included as interest expense in the accompanying condensed consolidated
statement of operations. As of March 31, 1999, the remaining balance of $27,027
has not been paid to the one remaining holder.
 
5. STOCKHOLDERS' EQUITY
 
    In the first quarter of 1999, three members of the Board of Directors
exercised their options to purchase an aggregate of 960,000 shares of Common
Stock for an aggregate exercise of $1,940,000. In connection with these
exercises, approximately $247,000 is currently due and the Company received
promissory notes from these directors in the approximate amount of $1,687,000.
The outstanding balance of $1,934,000 is included as notes and accounts
receivable from directors in the stockholders' equity section of the condensed
consolidated balance sheet. Under the terms of the promissory notes, interest
accrues at a rate of 6% payable quarterly, or at the option of the holders, will
accrue at a rate of 7% payable upon the maturity of the loan. The notes mature
at various dates in 2004.
 
    As of March 31, 1999, all shares of the Company's Series B Convertible
Preferred Stock had been converted into shares of Common Stock.
 
6. COMMITMENTS AND CONTINGENCIES
 
    The Company is involved in various claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
 
7. INDUSTRY SEGMENTS
 
    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 superseded SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
In the initial year of application, comparative information for earlier years
must be restated. Management has determined that it does not have any separately
reportable business segments.
 
                                       9
<PAGE>
                                7TH LEVEL, INC.
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                                  (UNAUDITED)
 
8. SUBSEQUENT EVENTS
 
    In May of 1999, the Company acquired Panmedia Corporation. Panmedia is the
parent company of Learn2.com, a leading online consumer learning community. To
consummate the transaction, the Company issued 1,543,860 shares of Common Stock.
The total value of the transaction was approximately $9,649,000.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS
 
    The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998. This analysis
is provided pursuant to applicable Securities and Exchange Commission
regulations and is not intended to serve as a basis for projections of future
events.
 
    In order to keep our stockholders informed of the Company's future plans and
objectives, this Quarterly Report on Form 10-Q and other reports and statements
issued by the Company and our officers from time-to-time contain, among other
things, certain statements concerning the Company's future plans, objectives,
performance, intentions and expectations that are or may be deemed to be
"forward-looking statements". When we use the words "believe," "expect,"
"anticipate," "project" and similar expressions, this should alert you that this
is a forward-looking statement. Forward-looking statements speak only as of the
date the statement is made. The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995, which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement. The
Company believes that it is in the best interests of its stockholders to take
advantage of the "safe harbor" provisions of that Act.
 
    Although the Company believes that its expectations are based on reasonable
assumptions, these forward-looking statements are subject to a number of known
and unknown risks and uncertainties that could cause the Company's actual
results, performance and achievements to differ materially from those described
or implied in the forward-looking statements. These factors include among
others, the Company's ability to complete new products at planned costs and on
planned schedules, the Company's ability to attract and retain strategic
partners, the Company's ability to leverage intangible assets in its technology,
and the Company's ability to maintain a sufficient level of financing for its
business strategy. Additional factors which are beyond the Company's control and
could influence results include market acceptance of the Company's products and
services and adoption of the Internet as a medium of commerce and
communications. See the discussion of the Company's business and a description
of the various factors that could materially affect the ability of the Company
to achieve the anticipated results described in the forward looking statement
which is included in Item 1 of the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1998.
 
                                       10
<PAGE>
OVERVIEW
 
    7th Level, Inc. was founded in 1993 with the goal of becoming a leading
developer and publisher of interactive entertainment and educational products as
well as a creator of state of the art tools and technologies. In 1998, our
research and development activities were focused primarily on developing and
enhancing our Agent7-TM- technology. We recognized that appropriate applications
of this technology were in the delivery of learning, education and enhanced
communications. To strengthen our position in the marketplace, we searched for a
viable and complementary partner with the appropriate technological assets,
distribution channel, management expertise and abandoned our interactive
entertainment business.
 
    On February 16, 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc, a privately held company, and changed the name of
Street to 7th Street.com, Inc. 7th Street.com markets and develops technology
based training solutions delivered over intranets and the Internet. The Board of
Directors has approved the change of the name of the Company from 7th Level,
Inc. to 7th Street.com, Inc. and the renaming of the new subsidiary. The name
change will be effective if approved by the stockholders. To consummate the
transaction, the Company issued 4,948,182 shares of Common Stock and 21,644
shares of Series D 8% Preferred Stock (the "Series D Stock") with an aggregate
liquidation preference of $21,643,970. Upon the receipt of common stockholders'
approval the Series D Stock will automatically convert into 7,214,666 shares
Common Stock. The Series D 8% Preferred Stockholders are entitled to participate
with the Common Stockholders in dividends and distributions and to vote on most
matters on an "as converted" basis with the Common Stockholders and as a
separate class, except for the vote on whether to convert the Series D Stock.
The total value of the transaction was approximately $40,331,000 including
$3,133,000 of assumed liabilities (primarily deferred revenue) and is being
accounted for using the purchase method of accounting, and accordingly, the
assets and liabilities were recorded based upon their fair values at the date of
acquisition. In connection with the acquisition of Street Technologies, Inc.,
the Company recorded approximately $13,341,000 in goodwill and other intangible
assets, which are being amortized on a straight-line basis over periods of seven
to twenty years and wrote-off approximately $9,677,000 of acquired in-process
technology.
 
    The Company continues to use cash and operate at a loss (See "Liquidity and
Capital Resources").
 
GENERAL
 
    As set forth in Note 2 in the accompanying condensed consolidated financial
statements, the Company's reported results of operations for all periods prior
to February 16, 1999 reflect only the results of operations of 7th Level, Inc.
and, accordingly do not reflect the results of Street Technologies, Inc. The
results prior to February 16, 1999 and the Company's balance sheet at December
31, 1998 are not reflective of the operations and financial position of the
Company as presently constituted.
 
    The Company plans to significantly increase its operating expenses to
increase its research and product development and sales and marketing
operations, to help attain the Company's goal of being the world's leading
provider of Internet and network delivered learning, education, and enhanced
communications. The Company may be unable to adjust spending quickly enough to
offset any unexpected revenue shortfall. If the Company has a shortfall in
revenues in relation to expenses, or if the Company's expenses exceed its
revenues, then the Company's business, results of operations and financial
condition would be materially and adversely affected. As a result of these
factors, there can be no assurance that the Company will not incur losses on a
quarterly and annual basis for the foreseeable future.
 
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
 
    Revenues increased $294,000 from $462,000 to $756,000 for the three months
ended March 31, 1999 primarily resulting from the integration of the two
businesses (thus adding 7th Street.com's revenues from the period subsequent to
the merger date to 7th Level's revenues). In 1999, approximately 69% of total
revenues were related to 7th Street.com and the remaining 31% was attributed to
the operations of 7th
 
                                       11
<PAGE>
Level, Inc. The revenues in 1998 were primarily from royalties while the
revenues in 1999 were primarily from technology licenses and content sales.
 
    Cost of revenues for the three months ended March 31, 1999 was $119,000 or
15.7% of net revenues compared to $85,000 or 18.4% of revenues for the three
months ended March 31, 1998. The decrease in 1999 as a percentage of net
revenues is primarily due to the change in the composition of revenues.
 
    Research and product development expenses were $559,000 and $817,000 for the
three months ended March 31, 1999 and 1998, respectively. Research and product
development costs decreased 31.7% in 1999 due primarily to lower headcount and
related cost structure at 7th Level.
 
    Sales and marketing expenses were $442,000 and $272,000 for the three months
ended March 31, 1999 and 1998, respectively. Sales and marketing expenses
increased $170,000 or 62.7% for the three months ended March 31, 1999 primarily
due to the addition of 7th Street.com sales and marketing staff.
 
    General and administrative expenses were $701,000 and $1,107,000 for the
three months ended March 31, 1999 and 1998, respectively. General and
Administrative expenses decreased $407,000 or 36.7% for the three months ended
March 31, 1999 primarily due to lower headcount and related cost structure at
the newly merged company.
 
    Restructuring charges related to the merger were $2,493,000 for the three
months ended March 31, 1999. The charges were comprised of the following:
$1,400,000 to the write-off of redundant assets, $493,000 excess office space
and other costs, and $600,000 in employee severance costs.
 
    Depreciation and amortization expenses were $374,000 and $565,000 for the
three months ended March 31, 1999 and 1998, respectively. Depreciation and
amortization expenses decreased $191,000 or 33.8% for the three months ended
March 31, 1999 primarily due to lower fixed assets in 1999 as a result of the
write-off of approximately $1,400,000 of fixed assets. The 1999 expenses
included $135,000 of depreciation on fixed assets, $35,000 of amortization of
computer software and $204,000 of amortization on goodwill and intangible assets
related to the merger. The 1998 expenses related primarily to depreciation and
amortization on fixed assets.
 
    In connection with the acquisition of Street Technologies, Inc., the Company
allocated $9,677,000 of the purchase price to acquired in-process technology.
Accordingly, these costs were expensed as of the acquisition date. The amount
allocated to acquired in-process technology relates to projects that had not yet
reached technological feasibility and that, until completion of development, had
no alternative future use. The technologies acquired in the acquisition of
Street Technologies, Inc. will continue to require substantial additional
development by the Company.
 
    Interest and other expenses were $42,000 and $157,000 for the three months
ended March 31, 1999 and 1998, respectively. Interest and other expenses
decreased $115,000 or 73.2%. Interest expense for the three months ended March
31, 1999 consisted primarily of a $62,000 obligation due to Fletcher
International Limited and $115,000 of interest expense related to the conversion
of 7% Convertible Notes. This decrease was partially offset by interest income
of $141,000. For the three months ended March 31, 1998, interest and other
expenses included the sale of surplus equipment that resulted in a loss of
$160,000.
 
NET LOSS
 
    The net loss for the three months ended March 31, 1999 was $13,651,000 or
$.50 per basic and diluted common share, compared to $2,541,000 or $.18 per
basic and diluted common share for the three months ended March 31, 1998. The
net loss was attributable to the factors discussed above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    Cash and cash equivalents decreased $581,000 during the first three months
of the year to $10,635,000 at March 31,1999. Operating activities used $647,000
of cash in the first three months of 1999. The primary factor related to the use
of cash from operating activities was the net loss of $13,651,000. The net loss
was
 
                                       12
<PAGE>
substantially offset by non-cash charges of $12,729,000 (principally $374,000 of
depreciation and amortization, $185,000 non-cash warrant expense, $2,493,000 of
restructuring charges, and $9,677,000 for the write-off of acquired in-process
technology).
 
    The principal factors in the cash used in investing activities of $135,000
were the expenditures for fixed assets of $200,000 which was offset by the cash
acquired in the acquisition of Street Technologies, Inc. of $774,000 reduced by
acquisition costs of 709,000.
 
    Financing activities provided $201,000 of cash. This was primarily due to
the issuances of common stock under the stock option and purchase plans, as well
as the excerise of common stock options and warrants totaling $252,000. This was
offset by repayments on existing capital leases totaling $51,000.
 
    In the normal course of business, the Company evaluates potential
acquisitions, joint ventures and strategic alliances that may complement the
Company's business. While the Company has no present commitments or agreements
with respect to any material business combinations, the Company may in the
future consummate transactions which may require the Company to issue additional
capital and such issuances may be significant.
 
    To date, the Company continues to use cash and operate at a loss. The
Company's ability to achieve positive cash flow depends upon a variety of
factors, including the timely introduction and market success of its products,
the costs of developing, producing and marketing such products, adoption of the
Internet as a medium of commerce and communications and various other factors,
some of which may be beyond the Company's control. If the Company requires
additional capital, it would seek such funding through additional public or
private financing, although there can be no assurance that the Company will be
able to obtain such financing.
 
YEAR 2000
 
    Many currently installed computer systems may be coded to accept only
two-digit entries in the date code field and cannot distinguish 21st century
dates from 20th century dates. As a result, many software and computer systems
may need to be upgraded or replaced. We are in the process of assessing the Year
2000 issue and expect to complete the program in the second quarter of 1999. To
date we have not incurred material costs. We do not believe that the cost of
additional actions will have a material effect on our consolidated financial
position, results of operations or cash flows. Our current systems and products
may contain undetected errors or defects with Year 2000 date functions that may
result in material costs. In addition, we utilize third-party equipment,
software and content, including non-information technology systems that may not
be Year 2000 compliant. We are in the process of completing our activities
relative to assessing whether our internally developed software, third-party
systems and non-information technology systems are adequately addressing the
Year 2000 issue. Failure of third-party equipment, software or content to
operate properly with regard to the Year 2000 issue could require unanticipated
expenses, which could have a material adverse effect on our business. We are
assessing whether our suppliers are adequately addressing their Year 2000
compliance issues. We have initiated formal communications with our significant
suppliers and service providers to determine the extent to which their systems
or services may be vulnerable if they fail to address and correct their own Year
2000 issues. We cannot guarantee that the systems of suppliers or other
companies on which we rely will be Year 2000 compliant. We are in the process of
developing a contingency plan that will address situations that may result
should Year 2000 compliance for critical operations not be fully achieved in
1999.
 
RECENTLY ISSUED ACCOUNTING PRINCIPLES
 
    Not applicable
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    Not applicable
 
                                       13
<PAGE>
                                7TH LEVEL, INC.
                           PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
    The Company is involved in certain claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
 
ITEM 2. CHANGES IN SECURITIES
 
    In February of 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc. Pursuant to the Agreement and Plan of Merger, the
Company issued 4,948,182 shares of Common Stock and 21,644 shares of Series D
Preferred Stock which will be converted upon common stockholders' approval into
7,214,666 shares of Common Stock. Additionally, there were options and warrants
of Street Technologies, Inc. that were convertible into shares of common stock
of Street Technologies Inc. Pursuant to the merger agreement, these options and
warrants are excercisable into 5,007 shares of Series D Preferred Stock which
will be converted upon stockholder approval into 1,669,184 shares of Common
Stock.
 
    In February of 1999, the Company entered into an Employment Agreement,
employing Stephen P. Gott as Chief Executive Officer of the Company. As an
inducement to enter into this agreement, the Board of Directors granted to Mr.
Gott an option to purchase 1,000,000 shares of Common Stock exercisable at a
price equal to $3.25 per share.
 
    The Company believes that the issuance of the Common Stock and the Series D
Preferred Stock issued in connection with the acquisition of Street
Technologies, Inc. qualifies as a transaction by an issuer not involving a
public offering within the meaning of Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), based on the manner of offering (a
negotiated sale to four "accredited investors" (as defined in Rule 501 of
Regulation D under the Securities Act) and four non-accredited investors without
general solicitation) and the purchasers' financial status, investment
experience and investment intent, as represented to the Company.
 
    In February of 1999, the Board of Directors approved the grant of a warrant
to purchase 250,000 shares of Common Stock to Ladenburg Thalmann & Co. Inc. in
connection with an engagement letter executed in February 1999 to act as a
financial advisor to the Company. Under the engagement letter, 150,000 shares of
Common Stock will be issued at $5.00 per share and 100,000 shares at $7.50 per
share.
 
    In March of 1999, the Board of Directors granted an option to purchase
20,000 shares of Common Stock to Robert Alan Ezrin exercisable at a price equal
to $3.00 per share which was issued in consideration for the Company's
obligations regarding Mr. Ezrin's severance entitlement as a former President
and Chief Executive Officer of the Company.
 
                                       15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
    (a) Exhibits
 
<TABLE>
<C>          <S>        <C>
       2.2   --         Agreement and Plan of Merger, dated as of May 13, 1999, by and among the Company,
                        7th Level Acquisition Corporation, Panmedia Corporation, Jason Roberts and
                        Patricia Roberts.
      10.46  --         Employment Agreement, dated as of May 13, 1999, by and between the Company and
                        Jason Roberts
      10.47  --         Registration Rights Agreement, dated May 13, 1999, by and among the Company,
                        Jason and Patricia Roberts.
      27     --         Financial data schedule
</TABLE>
 
    (b) Reports on Form 8-K
 
    Registrant filed a Current Report on Form 8-K, dated January 15, 1999. As of
January 15, 1999, the Registrant retained the services of Arthur Andersen LLP as
their principal accountant to audit the Registrant's financial statements. The
Registrant dismissed KPMG LLP as their principal accountant. The decision to
change accountants was recommended by the Board.
 
    Registrant filed a Current Report on Form 8-K, dated February 16, 1999.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of February
16, 1999, 7th Level Merger Corporation, a wholly owned subsidiary of the
Registrant merged with and into Street Technologies, Inc.
 
    Registrant filed a Current Report on Form 8-K/A on April 16, 1999. This Form
8-K/A was filed as an amendment to the Current Report on Form 8-K filed by the
Company on February 25, 1999 in connection with the Company's acquisition of all
of the common stock and preferred stock of Street Technologies, Inc.
 
                                       16
<PAGE>
                                7TH LEVEL, INC.
 
                                   SIGNATURE
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
<TABLE>
<S>                             <C>  <C>
                                7TH LEVEL, INC.
 
Date: May 14, 1999              By:              /s/ MARC E. LANDY
                                     -----------------------------------------
                                                   Marc E. Landy
                                     Vice President and Chief Financial Officer
                                           (Principal Financial Officer)
</TABLE>
 
                                       17