<PAGE>

                       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 September 30, 1999

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________

Commission file number  0-22622

                       INTERACTIVE ENTERTAINMENT LIMITED
             (Exact name of registrant as specified in its charter)

         BERMUDA                                    98-0170199
(State or other Jurisdiction of                  (I.R.S. Employer
Incorporation or Organization)                Identification Number)

                                P. O. Box 241603
                             MEMPHIS, TN 38124-1603
                    (Address of principal executive offices)

                                 (901) 685-0200
              (Registrant's telephone number, including area code)

Indicate by check mark whether the 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes __X__  No _____

The registrant had 46,475,000 shares of common stock outstanding as of October
20, 1999.

Exhibit index is located on page 13.


<PAGE>

                       INTERACTIVE ENTERTAINMENT LIMITED

                                     INDEX


<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION                                                           PAGE

Item 1. Consolidated Financial Statements
<S>                                                                               <C>
        Consolidated Balance Sheets - September 30, 1999 and December 31, 1998            3

        Consolidated Statements of Operations - Three Months ended September 30,
        1999 and September 30, 1998                                                       4

        Consolidated Statements of Operations - Nine Months ended September 30,
        1999 and September 30, 1998                                                       4

        Consolidated Statements of Cash Flows - Nine Months ended September 30,
        1999 and September 30, 1998                                                       5

        Notes to Consolidated Financial Statements                                        6

Item 2. Management's Discussion and Analysis of Financial Condition and                  10
        Results of Operations

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders                              12

Item 6.(a) Exhibits                                                                      13
</TABLE>

                                       2
<PAGE>

                        PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

              INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                         ASSETS
                         ------
                                                          September 30,   December 31,
                                                               1999           1998
                                                          -------------   ------------
<S>                                                        <C>            <C>
Current Assets
  Cash and cash equivalents                                $     46,101   $     95,642
  Accounts and notes receivable, less allowance
    for doubtful accounts of $46,828                            119,618         82,356
  Prepaid expenses                                              120,379        115,232
                                                           ------------   ------------
      Total current assets                                      286,098        293,230
                                                           ------------   ------------
Furniture, fixtures and equipment, at cost                      724,241        729,578
  Less: accumulated depreciation                               (377,751)      (259,457)
                                                           ------------   ------------
    Furniture, fixtures and equipment, net                      346,490        470,121

Game software (net of amortization)                             491,483        702,117

Goodwill (net of amortization)                                  658,469      1,043,289
                                                           ------------   ------------
      Total assets                                         $  1,782,540   $  2,508,757
                                                           ============   ============

          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------

Current liabilities
  Accounts payable and accrued expenses                    $    876,176   $    623,614
                                                           ------------   ------------
      Total current liabilities                                 876,176        623,614

Shareholders' equity
  Class A preferred shares, $0.01 par value,
    authorized - 3,000 shares,  outstanding - 2,237 shares           22             22
  Class B preferred shares, $0.01 par value,
    authorized - 5,000,000 shares, outstanding - 2,075
    and 2,662 shares                                                 21             27
  Common shares, $0.01 par value authorized - 50,000,000
    shares; outstanding 46,475,000 and 24,367,414 shares        464,750        243,674
  Additional paid-in-capital                                 65,651,563     65,895,695
  Accumulated deficit                                       (65,209,992)   (64,254,275)
                                                           ------------   ------------
                                                                906,364      1,885,143
                                                           ------------   ------------
      Total liabilities and shareholders' equity           $  1,782,540   $  2,508,757
                                                           ============   ============
</TABLE>

                                       3
<PAGE>

              INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                            Three Months Ended             Nine Months Ended
                                                              September 30,                  September 30,
                                                        --------------------------     --------------------------
                                                            1999          1998            1999           1998
                                                        -----------    -----------     -----------    -----------
<S>                                                     <C>            <C>             <C>            <C>
Revenue                                                 $   120,075    $    58,045     $   372,574    $   169,650

Operating Expenses
     General and administrative                              95,125        681,005         266,269      2,233,575
     Consulting and contract labor                                -        102,762          27,276        275,992
     Marketing                                                5,650         30,315           6,200        146,126
     Legal                                                    7,788         72,507          42,996        224,586
     Business discontinuation                                     -              -          17,877              -
     Depreciation and amortization                          238,479      2,518,523         715,439      7,194,909
                                                        -----------    -----------     -----------    -----------
                                                            347,042      3,405,112       1,076,057     10,075,188

Other (Income) and Expense
     Interest expense                                           787              -             787        188,249
     Interest income                                           (754)       (13,901)         (1,920)       (29,143)
                                                        -----------    -----------     -----------    -----------
                                                                 33        (13,901)         (1,133)       159,106

                                                        -----------    -----------     -----------    -----------
Net loss                                                $   227,000    $ 3,333,166     $   702,350    $10,064,644
                                                        ===========    ===========     ===========    ===========

BASIC AND DILUTED LOSS PER SHARE
Numerator for basic and diluted loss per share:
     Net loss                                           $   227,000    $ 3,333,166     $   702,350    $10,064,644
     Preferred stock dividends                               90,722        108,741         276,429        281,314
                                                        -----------    -----------     -----------    -----------
     Loss to common shareholders                        $   317,722    $ 3,441,907     $   978,779    $10,345,958
                                                        ===========    ===========     ===========    ===========

Denominator for basic and diluted loss per share:
     Weighted average shares outstanding                 46,475,000     20,841,778      43,807,716     20,438,746
                                                        ===========    ===========     ===========    ===========

Net loss per share                                      $     0.007    $     0.165     $     0.022    $     0.506
                                                        ===========    ===========     ===========    ===========
</TABLE>

                                       4
<PAGE>

              INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
                            STATEMENTS OF CASH FLOW
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          Nine Months      Nine Months
                                                                             Ended           Ended
                                                                          September 30,    September 30,
                                                                              1999            1998
                                                                           ---------      -----------
<S>                                                                        <C>            <C>
OPERATING ACTIVITIES
 Net Loss                                                                  $(702,350)     $(10,064,644)
Reconciliation of net loss to net cash used in operating activities:
      Depreciation and amortization                                          715,430        7,194,909
      Issuance of options for consulting                                           -           51,000
      Non-cash interest expensse                                                   -          171,092
      Other                                                                        -           12,819
      Changes in assets/liabilities: (excluding effect of acquisition)
           Accounts receivable                                               (37,262)         (67,180)
           Prepaid expenses                                                   (5,147)         (58,344)
           Accounts payable and accrued expenses                             209,203          (35,982)
                                                                           ---------      -----------
              Net cash provided by (used in) operating activities            179,883       (2,796,330)
                                                                           ---------      -----------

INVESTING ACTIVITIES
     (Purchases) sales of property and equipment                               3,646           (7,672)
      Software development                                                         -         (101,280)
                                                                           ---------      -----------
              Net cash provided by (used in) investing activities              3,646         (108,952)
                                                                           ---------      -----------

FINANCING ACTIVITIES
      Issuance of preferred stock                                                  -        2,041,623
      Issuance of common stock                                                     -        1,310,563
      Redemption of preferred stock                                                -         (500,000)
      Issuance of notes payable                                               86,717                -
      Payment of notes payable                                               (43,358)               -
      Payment of preferred stock dividends                                  (276,429)        (281,314)
                                                                           ---------      -----------
              Net cash provided by (used in) financing activities           (233,070)       2,570,872
                                                                           ---------      -----------

      Net increase (decrease) in cash                                        (49,541)        (334,410)
      Cash, beginning of period                                               95,642        1,239,864
                                                                           ---------      -----------
      Cash, end of period                                                  $  46,101      $   905,454
                                                                           =========      ===========
</TABLE>

                                       5
<PAGE>

               INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - NATURE OF OPERATIONS

The consolidated financial statements of Interactive Entertainment Limited and
Subsidiaries ("IEL" or the "Company") included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC").  In management's opinion, these financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for the interim periods
presented.  Pursuant to SEC rules and regulations, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from these statements unless significant changes have taken place since
the end of the most recent fiscal year.  For this reason, the consolidated
financial statements and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.

The Company is a Bermuda exempted company which, in June 1997, changed its name
from Sky Games International, Ltd. ("SGI") to Interactive Entertainment Limited.
The Company's activities had been focused on providing inflight gaming software
and services by developing, implementing and operating a computer-based
interactive video entertainment system of gaming and other entertainment
activities on, but not limited to, the aircraft of international commercial air
carriers. In November, 1998, the Company ceased operations of its inflight
gaming business and current operations are limited to its Sky Play entertainment
games business.

On January 13, 1998, the Company completed the acquisition of all the
outstanding capital stock of Inflight Interactive Limited ("IIL") in exchange
for 500,000 shares of the Company's $.01 par value common stock (the "Common
Stock"). IIL is a United Kingdom developer and provider of amusement games to
the airline industry. The games are marketed under the name Sky Play and, as of
September 30, 1999 were operating on a number of airlines, including Air China,
American Airlines, Cathay Pacific, Continental, Egyptair, Japan Air Lines, Lauda
Air, Malaysia Airlines, and Virgin Atlantic. The purchase agreement provides for
the Company to issue up to 250,000 additional shares of Common Stock to the
previous owners of IIL upon achievement of certain milestones regarding
implementation of the Company's Sky Games gaming software with an international
airline to be designated by the parties. The acquisition was accounted for using
the purchase method.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries: Sky Games International Corp. (a Nevada
corporation), Creator Island Equities Inc., (a Yukon Territory corporation), IEL
(Singapore) Pte. Ltd. (a Singapore corporation) and, (since January 13, 1998),
Inflight Interactive Limited (a U.K. corporation).  All material intercompany
transactions have been eliminated in consolidation.

                                       6
<PAGE>

Goodwill

The goodwill, which arose from the acquisition of IIL is being amortized on a
straight-line basis over three years.  Management regularly evaluates whether or
not the future undiscounted cash flows are sufficient to recover the carrying
amount of this asset.  Additionally, management continually monitors such
factors as the competitive environment and advances in the computer software and
hardware industries.  If the estimated future undiscounted cash flows are not
sufficient to recover the carrying amount of this asset and, accordingly, an
impairment has occurred, management intends to write down the carrying amount to
its estimated fair value based on discounted cash flows.

Software Development

All software production costs have been capitalized until the software was
available for general release to customers in accordance with the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed."  Amortization of
the software costs over a three year period started in June, 1998.

Comprehensive Income

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") effective January 1, 1998.
SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements.  The Company's comprehensive income (loss) is
substantially equivalent to net income (loss) for the nine months ended
September 30, 1999 and 1998, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes and
in determining the impairment of long-lived assets.  Actual results could differ
from those estimates.


NOTE 3 - ACQUISITION OF MINORITY INTEREST

Prior to June 17, 1997, the Company operated its principal business activities
under the name Sky Games International, Ltd. through its indirectly 80%-owned
subsidiary then known as Interactive Entertainment Limited ("Old IEL").  The
remaining 20% of Old IEL was held by an affiliate of Harrah's Entertainment,
Inc. (which, together with its affiliates, is referred to herein as "Harrah's").
Harrah's also managed the operations of Old IEL pursuant to a management
agreement effective December 30, 1994, (the "Management Agreement").

Effective June 17, 1997, pursuant to a Plan and Agreement of Merger and
Amalgamation dated May 13, 1997, Old IEL was merged into the Company (the
"Amalgamations").  As part of the Amalgamations, the Management Agreement with
Harrah's was terminated.  Harrah's received a total of 5,879,040 shares of
Common Stock in exchange for its 20% ownership interest in Old IEL and as
consideration for the termination of the Management Agreement.  The Amalgamation
has been accounted for under the purchase method.  The shares issued to Harrah's
were valued at $26,255,793 based on the average quoted market price of the
Company's Common Stock when the Amalgamations were announced, or $4.466 per
share.

                                       7
<PAGE>

NOTE 4 - CONVERTIBLE DEBENTURES

During the ten months ended December 31, 1997, the Company issued $2,163,250 of
8% convertible debentures due in 1999.  All of the debentures outstanding as of
December 31, 1997 were converted into shares of Common Stock during the first
quarter of 1998, and all remaining deferred interest charges and placement fees
were expensed during the period and are included as interest expense during the
nine month period ended September 30, 1998.


NOTE 5 - SHAREHOLDERS' EQUITY

In December 1994, the Company discontinued an engineering and marketing
arrangement with B/E Aerospace, Inc. ("BEA"). As part of the termination, the
Company issued to BEA a promissory note in the original principal amount of $2.5
million at 12% per annum. On February 28, 1997, an agreement was reached with
BEA to exchange the note, in the amount of $2,737,000, including accrued and
unpaid interest, for Class A Preference Shares at a stated value of $1,000 per
share. The exchange for 2,737 Class A Preference Shares was completed in June,
1997. During 1998, the Company and BEA agreed that the Company would redeem the
Class A Preference Shares in installments beginning June 30, 1998. The Company
redeemed 500 shares at their redemption price of $1,000 per share during 1998,
but has been unable to redeem additional shares.

The Class A Preference Shares are convertible at any time into a number of
shares of Common Stock determined by dividing $1,000 per share of Class A
Preference Shares, plus any accrued and unpaid dividends thereon by a
conversion price equal to 60% of the average mean of the closing bid and ask
prices of the Common Stock for the 20 trading days prior to the conversion.
Dividends on the Class A Preference Shares are cumulative and payable quarterly
at an annual dividend rate of 9%. The Company, at its option, may redeem the
Class A Preference Shares, in whole or in part, at any time and from time to
time, at a redemption price of $1,000 per share plus any accrued and unpaid
dividends thereon. The Company is not required to redeem the Class A Preference
Shares. Upon liquidation, holders of the Class A Preference Shares will be
entitled to repayment of an amount equal to $1,000 per share plus accrued and
unpaid dividends, prior to any distributions to holders of common Stock. Unpaid
dividends of $201,400 were in arrears as of September 30, 1999 and are included
on the Consolidated Balance Sheets in accounts payable and accrued expenses. The
Class A Preference Shares do not have any voting rights.

As part of the Amalgamation, Harrah's entered into the "Registration and
Preemptive Rights Agreement" under which, among other things, Harrah's has the
right to receive additional shares of Common Stock at $.01 per share in order to
maintain their ownership percentage in the Company in the event that the Class A
Preference Shares held by BEA are converted into Common Stock.  The value of any
such shares of Common Stock issued to Harrah's will be accounted for as an
adjustment to the purchase price incurred in the Amalgamation when and if such
shares are issued.

On December 17, 1997, the Company issued 1,000 shares of Series A Convertible
Preference Shares of the Company's Class B Preferred Stock to two investors for
a total consideration of $1,000,000.  The Class B Series A Preferred Shares are
convertible into a number of shares of Common Stock, determined by dividing the
stated value of $1,000 per share by the lesser of: $3.2038 (the "Fixed
Conversion Price") and a price (the "Floating Conversion Price") calculated by
(i) determining the average of the three lowest closing bid prices for the
Common Stock during the thirty trading days occurring immediately prior to, but
not including, the conversion date, and (ii) multiplying such average by 85%.
On July 24, 1998, the Company issued 2,000 shares of the

                                       8
<PAGE>

Class B Series A Preferred shares to the same investors for an aggregate
purchase price of $2,000,000. Dividends are cumulative and may be paid, at the
option of the Company and with prior notice, in additional shares of Common
Stock at an annual dividend rate of 8%. Warrants for the purchase 185,152 shares
of Common Stock were issued in connection with the issuance of the Class B
Series A Preferred Shares. The warrants, which have an exercise price of
$3.2038, are exercisable beginning June 17, 1998 and expire on December 17,
1999. The original purchasers of the Company's Class B Series A Preferred Shares
converted 600 of the shares into Common Stock, retained 120 shares, and sold the
remaining 2,280 shares in private sales. As of September 30, 1999, 1,280 shares
of the Class B Series A Preferred Shares had been submitted for conversion into
28,550,710 share of Common Stock. All Common Stock issuable upon the conversions
has been issued except for 3,492,426 shares which the Company lacks the
authority to issue since issuance would cause the Company to exceed its maximum
authorized capital. Subsequent to the conversions, the holders of the Class B
Series A Preferred Shares agree to amend the conversion terms so that the
Floating Conversion Price will not be less than $0.25 per share.

As of February 20, 1998, the Company sold 300 shares of Class B Series B
Convertible Preferred Stock at $1,000 per share.  The Class B Series B
Convertible Preferred Shares have the same dividend and conversion features as
the Class B Series A Preferred Shares.  The investor also received a warrant to
purchase 18,515 shares of Common Stock at a price of $3.2038 for 18 months.  As
of September 30, 1999, 38 shares of the Series B Class B shares had been
converted into Common Stock and 262 shares remained outstanding.

Unpaid dividends of $218,200 were in arrears as of September 30, 1999 and are
included on the Consolidated Balance Sheets in accounts payable and accrued
expenses.  The Class B Preference Shares do not have any voting rights.


NOTE 6 - AGREEMENT REGARDING REDEMPTION OF PERFORMANCE SHARES

When the Company acquired the rights to the inflight gaming software from Sky
Games International, Inc. ("SGII") on November 7, 1991, a portion of the
consideration was 3,000,000 shares of Common Stock which, according to then
applicable requirements, were placed in escrow, to be released on the basis of
one share for each U.S. $1.78 of net cash flow generated from the assets over a
ten-year period (the "Performance Shares").  2,000,000 of the Performance Shares
were issued to SGII (87% of the outstanding stock of which was owned by James P.
Grymyr, formerly a director of the Company, and his wife) and 1,000,000 shares
were issued to Anthony Clements, a director of the Company.  An additional
525,000 shares, which were issued to Dr. Rex E. Fortescue, formerly a director
of the Company, are held in the escrow on the same terms and are also included
as Performance Shares.  Each of Messrs. Clements and Fortescue, as of April 30,
1997, agreed to allow the Company to redeem and cancel the Performance Shares
when and if they are released from escrow for any reason whatsoever (the
"Redemption Agreement").  As consideration for such agreement to tender the
Performance Shares for cancellation by the Company in the event they are ever
released from the escrow, the Company has issued to Messrs. Clements and
Fortescue, 333,333 and 175,000 shares of Common Stock, respectively.  SGII, as
of April 30, 1997, also agreed that it will tender the 2,000,000 Performance
Shares which it holds for cancellation by the Company when and if such
Performance Shares are released from escrow for any reason whatsoever (the
"Redemption and Cancellation Agreement").  As consideration of such agreement,
in February 1997, the Company expensed the outstanding balance of a note made by
SGII to the Company in the approximate amount of $550,000 and issued to SGII
80,590 shares of Common Stock.  In the event the Performance Shares are not
released prior to six months after the end of the Company's financial year
ending in the year 2002, the Performance Shares will automatically be canceled
in accordance with the terms of the escrow agreement.

                                       9
<PAGE>

As part of the agreements to allow the redemption and cancellation of the
Performance Shares, the holders of the Performance Shares have issued an
irrevocable proxy to a bank which has agreed not to vote the Performance Shares
at any General Meeting of Shareholders or otherwise.  The irrevocable proxy and
the agreement not to vote the Performance Shares will terminate upon the
cancellation of the Performance Shares.  The escrow agent is prohibited from
canceling the Performance Shares under the escrow agreement.

The Performance Shares have no rights and, therefore are excluded from per share
calculations for all periods presented.  Effective April 30, 1997, the
Performance Shares were no longer considered outstanding for financial statement
purposes.

Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Recent Developments

On January 5, 1999, the Company's Common Stock was delisted from the Nasdaq
SmallCap Market for failing to maintain a bid price greater than or equal to
$1.00 per share for the prior thirty consecutive trading days.  Maintenance of a
$1.00 stock price is required for continued listing of the Company's Common
Stock on the Nasdaq SmallCap Market.  The Common Stock currently trades through
the OTC Bulletin Board(R) which is a regulated quotation service of the Nasdaq
Stock Market, Inc.

Delisting of the Company's Common Stock from the Nasdaq SmallCap Market placed
the Company in default of certain agreements related to the sale of the Class B
Preference Shares.  A default requires the Company to redeem the remaining
outstanding Class B Preference Shares at 130% of the stated value of the shares.
The Company does not currently have the resources to redeem such shares.  The
Company is currently in default under its Registration Rights Agreement with the
holders of the Class B Preference Shares.

Overview

Interactive Entertainment Limited ("IEL" or the "Company"), formerly known as
Sky Games International Ltd. ("SGI"), is a Bermuda exempted company which was
incorporated on January 28, 1981.  The Company's activities had been focused on
providing inflight gaming software and services by developing, implementing and
operating a computer-based interactive video entertainment system of gaming and
other entertainment activities on, but not limited to, the aircraft of
international commercial air carriers.

On November 12, 1998, the Company announced that it had been unable to attract
the additional capital necessary for continued development of its Sky Games
inflight gaming business and that it had discontinued all operations associated
with the Sky Games product line. The Company stated that it would refocus its
business efforts to concentrate exclusively on its Sky Play PC games, non-gaming
inflight customers and business.  All employees were terminated as of November
13, 1998.  Some former employees have been retained on a part-time contract
basis to assist with the management of Sky Play.  The discontinuation of the Sky
Games business may have an adverse impact on the Sky Play business.

On January 13, 1998, the Company completed the acquisition of all the
outstanding stock of Inflight Interactive Limited ("IIL") in exchange for
500,000 shares of the Company's Common Stock.  IIL is a U. K. developer and
provider of amusement games to the airline industry marketed under the name Sky
Play.  IIL's games are currently operating on approximately 100 aircraft of a

                                      10
<PAGE>

number of airlines, including Air China, American Airlines, Cathay Pacific,
Continental, Egyptair, Japan Air Lines, Lauda Air, Malaysia Airlines, and
Virgin Atlantic.


Results of Operations


Three Months Ended September 30, 1999 and 1998

Revenue from operations for the three months ended September 30, 1999 was
$120,100 compared to $58,000 during the three months ended September 30, 1998.
Revenue consisted of fees generated from the Sky Play amusement games acquired
with the purchase of IIL. The increase in revenue is attributable to an increase
in the average number of aircraft licensed to use the Company's software.

General and administrative expense decreased from $681,000 in the 1998 period to
$95,100 during the 1999 period.  The decrease is attributable to ceasing the
inflight gaming business.  This includes decreases in payroll and related costs
of $365,800, office operations of $29,600, investor relations of $36,700, travel
of $51,500, taxes of $28,500 and rent of $36,500.

Consulting and contract labor expenses decreased by $102,800, marketing expenses
by $24,700, and legal expense by $64,700 due to closure of the inflight gaming
business.

Depreciation and amortization expenses decreased by $2,262,200.  The 1998 period
included amortization of the goodwill created in the 1997 Amalgamation.  The
remaining goodwill was written off in December, 1998 when the Company closed the
inflight gaming business.

Nine Months Ended September 30, 1999 and 1998

Revenue from operations for the nine months ended September 30, 1999 was
$372,600 compared to $169,700 during the nine months ended September 30, 1998.
Revenue consisted of fees generated from the Sky Play amusement games acquired
with the purchase of IIL. The increase in revenue is attributable to an increase
in the average number of aircraft licensed to use the Company's software.

General and administrative expense decreased from $2,233,600 in the 1998 period
to $266,300 during the 1999 period. The decrease is attributable to ceasing the
inflight gaming business. This includes decreases in payroll and related costs
of $1,133,200, office operations of $126,800, investor relations of $90,300,
travel of $282,200, taxes of $75,900 and rent of $86,100.

Consulting and contract labor expenses decreased by $248,700, marketing expenses
by $139,900, and legal expense by $181,600 due to closure of the inflight gaming
business.

Depreciation and amortization expenses decreased by $6,469,500. The 1998 period
included amortization of the goodwill created in the 1997 Amalgamation. The
remaining goodwill was written off in December, 1998 when the Company closed the
inflight gaming business.

Interest expense decreased by $187,500. The 1998 period included amounts for
interest and amortization of deferred finance charges on the convertible
debentures. There were no convertible debentures outstanding during the nine
months ended September 30, 1999.

Liquidity and Capital Resources

At September 30, 1999, the Company had a working capital deficit of $590,100.
Although the Company had positive cash flow from operations during the nine
months ended September 30, 1999, cash flow is not sufficient to provide the
necessary funds for marketing, for continued development of the Company's
products or to fund payment of the Company's dividend obligations on outstanding
preference shares.  The Company's primary source of funding has been through
sales of its equity and securities convertible into equity.  The Company has
subsequently negotiated a restructuring and reduction of certain amounts owed to
two of its largest creditors and to a deferred payment plan on these
obligations.

Forward-Looking Information

This Form 10-Q contains forward-looking statements that include among others,
statements concerning the Company's plans to implement its software products,
commence generating revenue from certain of its products, expectations as to
funding its capital requirements, the impact of competition, future plans and
strategies, statements which include the words "believe," "expect," and
"anticipate" and other statements of expectations, beliefs, anticipated
developments and other matters that are not historical facts.  These statements
reflect the Company's views with respect to such matters.  Management cautions
the reader that these forward-looking statements are subject to risks and
uncertainties that could cause actual events or results to materially differ
from those expressed or implied by the statements.

                                      11
<PAGE>

                          PART II.  OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders

The Company held its Annual General Meeting for the fiscal period ended
December 31, 1998 on September 10, 1999. The following matters were voted upon
at the meeting:

         1. Amendment of the Company's Bye-Laws to increase the authorized share
capital of the Company to 100,000,000 million shares of Common Stock;

         2. Amendment of the Company's Bye-Laws:

         . to increase the quorum required for a general meeting of shareholders
           to at least one-third of shares entitled to vote;
         . to make the size of the Board of Directors variable; and
         . to permit the Board to fill vacancies on the Board.

         3. Election of five persons to the Board of Directors.

         4. Ratification of the appointment of Buckley Dodds as the Company's
independent public accountants.

There were 38,095,287 shares of Common Stock voted at the Annual General Meeting
as follows. Percentages are percentages of shares voted.

         1. Increase in authorized share capital.

               Number        %
               ------        -
For              9,511,611   29.0
Against         23,290,088   70.9
Abstain             24,663    0.1
Not Voted        5,268,925

         2. Change in general meeting quorum, Board size and Board replacement

               Number        %
               ------        -
For             32,517,289   99.0
Against            283,073    0.9
Abstain             26,000    0.1
Not Voted        5,268,925

         3. Election of Directors:

<TABLE>
<CAPTION>
                                  For          Withhold         Abstain
                                  ---          --------         -------
Nominee                     Number      %     Number    %     Number   %
                            ------      -     ------    -     ------   -
<S>                        <C>          <C>   <C>       <C>   <C>      <C>
Anthony P. Clements        37,940,300   99.9      300   0.0    35,827  0.1
Stephen Rosenberg          37,940,300   99.9      300   0.0    35,827  0.1
Eppie Canning              37,826,800   99.6  113,800   0.3    35,827  0.1
Deborah Fortescue-Merrin   37,940,300   99.9      300   0.0    35,827  0.1
Anastasia Kostoff-Mann     37,906,850   99.8   33,750   0.1    35,827  0.1
</TABLE>
         4. Ratification of Buckley Dodds as independent public accountants.

               Number        %
               ------        -
For             37,813,450   99.3
Against            246,560    0.6
Abstain             23,277    0.1
Not Voted           12,000

                                      12

<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

<TABLE>
<CAPTION>
EXHIBIT     DESCRIPTION
--------    -----------
<C>         <S>
2.          Plan and Agreement of Merger and Amalgamation, dated as of May 13, 1997, among the Company,
            SGI Holding Corporation Limited, IEL and Harrah's Interactive Investment Company.
            (Incorporated by reference to the same numbered exhibit to the Registrant's Form 8-K as filed
            with the SEC on June 27, 1997.)
3.i(a)      Articles of Incorporation (Yukon Territory). (Incorporated by reference to Exhibit 1.1 to the
            Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the SEC on October
            12, 1993.)
3.i(b)      Certificate of Continuance (Bermuda). (Incorporated by reference to Exhibit 1.2 to the
            Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the SEC on September
            16, 1996.)
3.ii        Bye-Laws as amended. (Incorporated by reference to the same numbered exhibit to the
            Registrant's Annual Report on Form 10-K/A No. 2 as filed with the SEC on July 8, 1998.)
4.1         Escrow Agreement dated May 27, 1992, as amended, among Montreal Trust Company of Canada, the
            Company and certain shareholders. (Incorporated by reference to Exhibit 3.2 to the
            Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the SEC on October
            12, 1993.)
4.2         Redemption Agreement, dated as of February 25, 1997, between the Company and Anthony Clements
            and Rex Fortescue. (Incorporated by reference to Exhibit 3.12 to the Registrant's Annual
            Report on Form 20-F (File No. 0-22622) as filed with the SEC on September 12, 1997.)
4.3         Redemption and Cancellation Agreement, dated as of April 30, 1997, between the Company and
            Sky Games International, Inc. (Incorporated by reference to Exhibit 3.13 to the Registrant's
            Annual Report on Form 20-F (File No. 0-22622) as filed with the SEC on September 12, 1997.)
4.4         Shareholder Rights Agreement, dated June 17, 1997, between the Company and Harrah's
            Interactive Investment Company. (Incorporated by reference to Exhibit 3.15 to the
            Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the SEC on September
            12, 1997.)
4.5         Registration and Preemptive Rights Agreement, dated June 17, 1997, between the Company and
            Harrah's Interactive Investment Company. (Incorporated by reference to Exhibit 4(a) to the
            Registrant's Form 8-K as filed with the SEC on June 27, 1997.)
4.6         Registration Rights Agreement, dated June 17, 1997, between the Company and B/E Aerospace,
            Inc. (Incorporated by reference to Exhibit 4(b) to the Registrant's Form 8-K as filed  with
            the SEC on June 27, 1997.)
4.7         Subscription Agreement, dated as of October 22, 1997, between the Company and Henderson
            International Investments Limited. (Incorporated by reference to Exhibit 3.22 to the
            Registrant's Quarterly Report on Form 10-Q/A No. 1 as filed with the SEC on July 8, 1998.)
4.8         Subscription Agreement, dated as of October 22, 1997, between the Company and Michael A.
            Irwin. (Incorporated by reference to Exhibit 3.23 to the Registrant's Quarterly Report on
            Form 10-Q/A as filed with the SEC on July 8, 1998.)
4.9         First Amendment to Registration and Preemptive Rights Agreement dated March 18, 1998 between
            the Company and Harrah's Interactive Investment Company. (Incorporated by reference to
            Exhibit 99.22 to the Registrant's Amended Registration
</TABLE>

                                      13

<PAGE>

<TABLE>
<S>         <C>
            Statement on Form S-3 as filed with the SEC on July 15, 1998.)
4.10        First Amendment to Subscription Agreement between the Company and Henderson International
            Investments Limited dated as of April 2, 1998. (Incorporated by reference to Exhibit 99.23 to
            the Registrant's Amended Registration Statement on Form S-3 as filed with the SEC on July 15,
            1998.)
4.11        Securities Purchase Agreement between the Company and each of Marshall Capital Management,
            Inc. (formerly Proprietary Convertible Investment Group, Inc.) and CC Investments, LDC dated
            as of December 17, 1997. (Incorporated by reference to Exhibit 99 to the Registrant's Form
            8-K as filed with the SEC on December 24, 1997.)
4.12        Registration Rights Agreement between the Company and each of Marshall Capital Management,
            Inc. (formerly Proprietary Convertible Investment Group, Inc.) and CC Investments, LDC dated
            as of December 17, 1997 (Incorporated by reference to Exhibit 4(c) to the Registrant's Form
            8-K as filed with the SEC on December 24, 1997.)
4.13        Securities Purchase Agreement between the Company and Palisades Holding, Inc. dated February
            20, 1998. (Incorporated by reference to Exhibit 99.6 to the Registrant's Amended Registration
            Statement on Form S-3 as filed with the SEC on July 15, 1998.)
4.14        Registration Rights Agreement between the Company and Palisades Holding, Inc. dated February
            20, 1998. (Incorporated by reference to Exhibit 99.5 to the Registrant's Amended Registration
            Statement on Form S-3 as filed with the SEC on July 15, 1998.)
4.15        Securities Agreement between the Company and B/E Aerospace, Inc. dated June 25, 1998.
            (Incorporated by reference to Exhibit 99.1 to the Registrant's Form 8-K filed with the SEC on
            July 2, 1998.)
10.5*       Services Agreement, dated as of November 7, 1995, between IEL and Singapore Airlines Limited.
            (Incorporated by reference to Exhibit 3.9 to the Registrant's Annual Report on Form 20-F
            (File No. 0-22622) as filed with the SEC on September 16, 1996.)
10.6*       Software License and Software Services Agreement, dated as of November 7, 1995, between IEL
            and Singapore Airlines Limited. (Incorporated by reference to Exhibit 3.10 to the
            Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the SEC on September
            16, 1996.)
10.7        Sublease Agreement dated as of June 5, 1997, between IEL and Harrah's Operating Company, Inc.
            (Incorporated by reference to Exhibit 3.11 to the Registrant's Annual Report on Form 20-F
            (File No. 0-22622) as filed with the SEC on September 12, 1997.)
10.8        Consulting Agreement, dated as of April 30, 1997, between the Company and James P. Grymyr.
            (Incorporated by reference to Exhibit 3.14 to the Registrant's Annual Report on Form 20-F
            (file No. 0-22622) as filed with the SEC on September 12, 1997.)
10.9*       Software License Agreement, dated June 17, 1997, between the Company and Harrah's Interactive
            Investment Company. (Incorporated by reference to Exhibit 3.16 to the Registrant's Annual
            Report on Form 20-F (File No. 0-22622) as filed with the SEC on September 12, 1997.)
10.10       Continuing Services Agreement, dated June 17, 1997, between the Company and Harrah's
            Interactive Entertainment Company. (Incorporated by reference to Exhibit 3.17 to the
            Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the SEC on September
            12, 1997.)
10.11       Termination Agreement and Release, dated as of June 17, 1997, among the Company, SGI Holding
            Corporation Limited, IEL, Harrah's Interactive Investment Company, and Harrah's Interactive
            Entertainment Company. (Incorporated by reference to Exhibit 3.21 to the Registrant's Annual
            Report on Form 20-F (File No. 0-22622 as filed with he SEC on September 12, 1997.)
27**        Financial Data Schedule.
</TABLE>
*   Confidential treatment has been granted.
**  Submitted herewith.

                                      14
<PAGE>

                                   Signature

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                       INTERACTIVE ENTERTAINMENT LIMITED


November 10, 1999                           BY:  /s/ Michael A. Irwin
                                              -----------------------
                                              Controller
                                              (Chief Accounting Officer)

                                      15