Senior Secured Promissory Note: $3,000,000

EXHIBIT 10.38


7TH LEVEL, INC.


SENIOR SECURED PROMISSORY NOTE


THIS NOTE WAS ISSUED WITH "ORIGINAL ISSUE DISCOUNT." THE NAME AND TELEPHONE NUMBER OF THE REPRESENTATIVE OF THE ISSUER WHO CAN PROVIDE (i) THE TOTAL AMOUNT OF ORIGINAL ISSUE DISCOUNT, (ii) THE ISSUE DATE, AND (iii) THE YIELD TO MATURITY ON THE ISSUE DATE IS DONALD SCHUPAK AT (212) 582-4210.


THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH ACT, OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH ACT, PROVIDED THAT, IF REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM AND SUBSTANCE IS FURNISHED TO THE COMPANY THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE.


$3,000,000 May 6, 1998


FOR VALUE RECEIVED, 7TH LEVEL, INC., a Delaware corporation ("Company"), with its principal office at 1110 E. Collins Boulevard, Richardson, Texas 75081, promises to pay to the order of Alpine Associates, a New Jersey Limited Partnership residing at 100 Union Avenue, Cresskill, New Jersey 07626 ("Holder"), or registered assigns, on the 7-year anniversary of the date hereof (the "Maturity Date"), the principal amount of Three Million Dollars ($3,000,000), together with interest, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public or private debts, together with interest accrued thereon as provided below.


Interest shall accrue from and after September 1, 1998 on the unpaid balance of said principal amount from time to time outstanding at the rate per annum set forth below; provided, however, that if the Company has not filed the amendment to the Company's Certificate of Incorporation contemplated by the Series A Preferred Stock Certificate of Designations (as


defined in the Purchase Agreement (defined below)) with the Secretary of State of the State of Delaware (the "Amendment") on or before September 1, 1998, interest shall accrue on the outstanding principal hereof commencing from the date hereof. Interest hereunder shall accrue from the date set forth in the prior sentence at a rate of 10% per annum, increasing by two percentage points for every three month period that interest under this Note is accruing. Notwithstanding the foregoing, this Note may be prepaid or called by the Company at any time in whole or in part without penalty or premium, but with at least five days notice to the Holder. Interest shall accrue from the date set forth above to and include the date on which prepayment is made. This Note shall be paid (and prepaid, if applicable) pro rata with certain additional notes of like tenor being issued simultaneously herewith. Payments of principal and interest are to be made at the address of the Holder designated above or at such other place as the Holder shall have notified the Company in writing at least five days before such payment is due.


Reference to the Amendment shall in no way impair the absolute and unconditional obligation of the Company to pay both principal and interest as herein stated.


This Note is one of a duly authorized issue of senior secured notes ("Notes") limited to an aggregate principal amount of $4,500,000 issued by the Company pursuant to a Securities Purchase Agreement by and among the Company, Alpine Associates, a New Jersey Limited Partnership ("Alpine") and East West Capital Associates, Inc. ("Purchase Agreement"), and is secured by certain collateral ("Collateral") more specifically described in that certain Security Agreement entered into by the Company for the benefit of the Holder, among others (the "Security Agreement"), both of which are available for inspection at the Company's principal office. Reference herein to the Purchase Agreement and the Security Agreement shall in no way impair the absolute and unconditional obligation of the Company to pay both principal and interest hereon as provided herein. Certain rights and remedies of the Holder are described in the Security Agreement which appoints Alpine, as collateral agent ("Agent") for the Holder thereunder and hereunder to exercise the powers delegated to it, including without limitation, powers with respect to the enforceability and collectibility of all amounts due hereunder. Reference to the Security Agreement is made for a complete description of the rights, powers and obligations of the Agent, including the Agent's duty to act in certain circumstances at the direction of the "Required Lenders," as such term is defined therein.


1. Events of Default. (a) Upon the occurrence of any of the following events (herein called "Events of Default"):


(i) The Company shall fail to pay in full the principal of or
interest on this Note on the Maturity Date;


(ii) (A) The Company shall commence any proceeding or other
action relating to it in bankruptcy or seek reorganization, arrangement,
readjustment of its debts, receivership, dissolution, liquidation,
winding-up, composition or any other relief under any bankruptcy law, or
under any other insolvency, reorganization, liquidation,


2


dissolution, arrangement, composition, readjustment of debt or any other
similar act or law, of any jurisdiction, domestic or foreign, now or
hereafter existing; or (B) the Company shall admit the material allegations
of any petition or pleading in connection with any such proceeding; or (C)
the Company shall apply for, or consent or acquiesce to, the appointment of
a receiver, conservator, trustee or similar officer for it or for all or a
substantial part of its property; or (D) the Company shall make a general
assignment for the benefit of creditors;


(iii) (A) The commencement of any proceedings or the taking of
any other action against the Company in bankruptcy or seeking
reorganization, arrangement, readjustment of its debts, liquidation,
dissolution, arrangement, composition, or any other relief under any
bankruptcy law or any other similar act or law of any jurisdiction,
domestic or foreign, now or herea ...