<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, 1998

                                      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)

                        845 CROSSOVER LANE, SUITE D-215
                               MEMPHIS, TN 38117
                    (Address of principal executive offices)

                                 (901) 537-3800
              (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 23,087,413 shares of common stock outstanding as of November
13, 1998.

Exhibit index is located on page 17.
<PAGE>
 
                       INTERACTIVE ENTERTAINMENT LIMITED

                                     INDEX

<TABLE>
<CAPTION>

PART I. FINANCIAL INFORMATION                                                         PAGE
<S>                                                                                   <C>

Item 1. Consolidated Financial Statements
 
        Consolidated Balance Sheets - September 30, 1998 and December 31, 1997          3
 
        Consolidated Statements of Operations - Three Months ended September 30,
        1998 and September 30, 1997                                                     4
 
        Consolidated Statements of Operations - Nine Months ended September 30, 1998
        and Seven Months ended September 30, 1997                                       4
 
        Consolidated Statements of Cash Flows - Nine Months ended September 30, 1998
        and Seven Months ended September 30, 1997                                       5
 
        Notes to Consolidated Financial Statements                                      6
 

Item 2. Management's Discussion and Analysis of Financial Condition and                11
        Results of Operations


PART II. OTHER INFORMATION

Item 6.(a) Exhibits                                                                    17
</TABLE> 

                                       2
<PAGE>
 
                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                       INTERACTIVE ENTERTAINMENT LIMITED
                       ---------------------------------
                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------
                                  (UNAUDITED)
                                  -----------
 
<TABLE> 
<CAPTION> 
                                            ASSETS
                                            ------
                                                                                            September 30,            December 31,
                                                                                                1998                    1997
                                                                                       ---------------------    --------------------
<S>                                                                                    <C>                      <C>
Current Assets
   Cash and cash equivalents                                                                $    905,454            $  1,239,864
   Accounts and notes receivable, less allowance for 
     doubtful accounts of $46,828                                                                123,565                   3,859
   Prepaid expenses                                                                              155,549                  97,205
                                                                                            ------------            ------------
       Total current assets                                                                    1,184,568               1,340,928
                                                                                            ------------            ------------
 
Furniture, fixtures and equipment, at cost                                                       982,240                 974,568
   Less: accumulated depreciation                                                               (328,652)               (154,610)
                                                                                            ------------            ------------
     Furniture fixtures and equipment, net                                                       653,588                 819,958
                      
Software development costs, net                                                                2,202,721               2,376,782
 
Singapore Airlines agreement                                                                   1,855,800               1,855,800
 
Other assets                                                                                           -                 165,599
 
Goodwill                                                                                      15,746,036              20,952,284
                                                                                            ------------            ------------
       Total assets                                                                         $ 21,642,713            $ 27,511,351
                                                                                            ============            ============
 
                LIABILITIES AND SHAREHOLDERS' EQUITY
                ------------------------------------
 
Current liabilities
   Accounts payable and accrued expenses                                                    $    650,192            $    644,051
                                                                                            ------------            ------------
       Total current liabilities                                                                 650,192                 644,051
                                   
Convertible debentures                                                                                 -                 530,000
 
Shareholders' equity
   Class A preferred shares, $0.01 par value, authorized - 3,000
     shares, outstanding - 2,237 shares and 2,737 shares                                              22                      27
   Class B preferred shares, $0.01 par value, authorized - 5,000,000
     shares, outstanding - 3,090 shares and 1,000 shares                                              31                      10
   Common shares, $0.01 par value, authorized - 50,000,000
     shares, outstanding - 20,934,789 and 19,428,334 shares                                      209,348                 194,283
   Additional paid-in-capital                                                                 65,938,017              60,951,919
   Accumulated deficit                                                                       (45,154,897)            (34,808,939)
                                                                                            ------------            ------------ 
                                                                                              20,992,521              26,337,300
                                                                                            ------------            ------------
       Total liabilities and shareholders' equity                                           $ 21,642,713            $ 27,511,351
                                                                                            ============            ============
</TABLE>

                                       3
<PAGE>
 
                       INTERACTIVE ENTERTAINMENT LIMITED
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE> 
<CAPTION> 
                                                                                          
                                                 Three Months Ended                        Nine Months             Seven Months 
                                                    September 30,                             Ended                    Ended     
                                      -----------------------------------------           September 30,             September 30, 
                                            1998                   1997                       1998                     1997
                                      ----------------     --------------------       -------------------       -------------------
 
<S>                                    <C>                  <C>                        <C>                      <C>
Revenue                                 $   58,045               $        -               $   169,650                $         -
 
Operating Expenses
  General and administrative               681,005                  506,475                 2,233,575                  1,601,539
  Consulting and contract                 
   labor                                   102,762                  158,632                   275,992                  2,912,800
  Marketing                                 30,315                  112,849                   146,126                    217,841
  Management fees                                -                   41,184                         -                    114,351
  Legal                                     72,507                  185,581                   224,586                    530,699
  Depreciation and
   amortization                          2,518,523                2,152,692                 7,194,909                  2,489,306 
                                        ----------               ----------               -----------                -----------
                                         3,405,112                3,157,413                10,075,188                  7,866,536
 
Other (Income) and Expense
  Interest expense                               -                  410,828                   188,249                  4,099,843
  Interest income                          (13,901)                  (1,321)                  (29,143)                    (9,189)
  Amalgamation expense                           -                  100,000                         -                    100,000
  Asset valuation adjustment                     -                  449,267                         -                    449,267
                                        ----------               ----------               -----------                -----------
                                           (13,901)                 958,774                   159,106                  4,639,921
 
Loss Before Minority Interest
  and Extraordinary Item                 3,333,166                4,116,187                10,064,644                 12,506,457
  Minority Interest                              -                        -                         -                   (163,842)
                                        ----------               ----------               -----------                -----------
Loss Before Extraordinary Item           3,333,166                4,116,187                10,064,644                 12,342,615
  Early extinguishment of debt                   -                        -                         -                  1,824,222
                                        ----------               ----------               -----------                -----------   
Net Loss                                $3,333,166               $4,116,187               $10,064,644                $14,166,837
                                        ==========               ==========               ===========                ===========
 
Basic and Diluted Loss Per Share
Numerator for basic and diluted loss
  per share:
  Net loss                              $3,333,166               $4,116,187               $10,064,644                $14,166,837
  Preferred stock dividends                108,741                   62,302                   281,314                    144,424
                                        ----------               ----------               -----------                -----------
  Loss to common shareholders           $3,441,907               $4,178,489               $10,345,958                $14,311,261
                                        ==========               ==========               ===========                ===========
 
Denominator for basic and diluted
  loss per share
  Weighted average shares outstanding   20,841,778               18,403,497                20,438,746                 14,026,354
                                        ==========               ==========                ==========                 ==========
  
Loss Per Share
  Before extraordinary item             $     0.17               $    0.23                 $     0.51                 $     0.89
  Extraordinary item                             -                       -                          -                       0.13
                                        ----------               ---------                 ----------                 ----------
Net Loss Per Share                      $     0.17               $    0.23                 $     0.51                 $     1.02
                                        ==========               =========                 ==========                 ==========
</TABLE>

                                       4
<PAGE>
 
                       INTERACTIVE ENTERTAINMENT LIMITED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE> 
<CAPTION>  
                                                                                               Nine Months           Seven Months
                                                                                                  Ended                  Ended
                                                                                              September 30,          September 30,
                                                                                                   1998                   1997
                                                                                           -------------------    ------------------
<S>                                                                                        <C>                    <C>
OPERATING ACTIVITIES
Net Loss                                                                                      $(10,064,644)          $(14,166,637)
Reconciliation of net loss to net cash used in operating activities
  Depreciation and amortization                                                                  7,194,909              2,489,306
  Issuance of shares for financing fee                                                                   -                650,000
  Issuance of shares for consulting agreement                                                            -              2,417,568
  Issuance of options for consulting                                                                51,000                      -
  Extraordinary loss on debt conversion                                                                  -              1,824,222
  Non-cash interest expense                                                                        171,092              4,014,879
  Asset valuation adjustment                                                                             -                449,267
  Other                                                                                             12,819                (96,604)
  Changes in assets/liabilities (excluding effect of acquisition)
    Accounts receivable                                                                            (67,180)                69,381
    Prepaid expenses                                                                               (58,344)              (126,114)
    Accounts payable and accrued expenses                                                          (35,982)                74,326
                                                                                              ------------           ------------   
      Net cash used in operating activities                                                     (2,796,330)            (2,400,406)
                                                                                              ------------           ------------
 
INVESTING ACTIVITIES
  Purchases of furniture and fixtures and equipment                                                 (7,672)              (153,625)
  Software development                                                                            (101,280)              (808,379)
                                                                                              ------------           ------------ 
      Net cash used in investing activities                                                       (108,952)              (962,004)
                                                                                              ------------           ------------
 
FINANCING ACTIVITIES
  Advances from affiliated companies                                                                     -              1,007,875
  Issuance of preferred stock                                                                    2,041,623                      -
  Issuance of common stock                                                                       1,310,563                      -
  Issuance of convertible debentures                                                                     -              2,014,190
  Redemption of preferred stock                                                                   (500,000)                     -
  Payment of preferred stock dividends                                                            (281,314)              (144,424)
                                                                                              ------------           ------------
      Net cash provided by financing activities                                                  2,570,872              2,877,641
                                                                                              ------------           ------------ 
  
  Net decrease in cash                                                                            (334,410)              (484,769)
  Cash, beginning of period                                                                      1,239,864                626,074
                                                                                              ------------           ------------
  Cash, end of period                                                                         $    905,454           $    141,305
                                                                                              ============          ============= 
</TABLE>

                                       5
<PAGE>
 
               INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUBSEQUENT EVENTS

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 and plans to conduct an orderly disposition of 
all the assets related to the Sky Games product. 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 asset disposition and management of Sky Play.
Discontinuance of the Sky Games business will result in a write-off of
approximately $18-20 million during the fourth quarter of 1998 including $1.9
million for the Singapore Airlines agreement, $2.1 million for unamortized
software development costs, $13.9 million for unamortized goodwill, and an
amount yet to be determined for the write-down of furniture, fixtures and
equipment. It is possible that the Company will have negative shareholders'
equity following the write-offs. The discontinuation of the Sky Games business
may have an adverse impact on the Sky Play business.

On October 5, 1998, the Company was notified by Nasdaq that the Company's shares
had failed 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. Under Nasdaq's Marketplace Rules, the Company may regain 
compliance if the price of the Common Stock closes at or above $1.00 per share 
for ten consecutive trading days prior to January 5, 1999. If the Company is not
in compliance by January 5, 1999, its Common Stock will be subject to delisting.
The Company expects that its Common Stock will be delisted from the Nasdaq
SmallCap Market on or about January 5, 1999. At that time, the Company expects
that its Common Stock will begin trading 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 will 
place the Company in default of certain agreements related to the sale of the 
Series A Class B Preference Shares and Series B Class B Preference Shares. A 
default will require the Company to redeem the remaining outstanding shares of
the Series A and Series 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 Series A and Series B Class B Preference Shares. See Note 6--
"Shareholders Equity".

The Company intends to work with any interested parties to try to raise
additional financing and with respect to arranging acquisitions or strategic
alliances and, if necessary an orderly disposition of assets, including the
possible sale of its Sky Play business. There are no assurances that such
efforts will be successful and that, if they are successful, the Company will be
able to reenter the inflight gaming business.

NOTE 2 - 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/A No. 2 for the year ended December 31, 1997.

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 have 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.

The Company has entered into a contract to provide its gaming software to one
international airline, Singapore Airlines ("SIA").  SIA has selected the
Matsushita Avionics Systems Corporation ("MASC") hardware platform and operating
system for its interactive entertainment system.  Following an extensive series
of integration tests, laboratory tests and aircraft trials, SIA launched the
first flight with gaming on June 1, 1998 on one aircraft.  A second aircraft was
added in Mid-October.  As of September 30, 1998, the Company's Sky Games(TM)
software was still operational on one aircraft to evaluate: (i) acceptance of
the system by passengers; and (ii) the effectiveness of the already completed
crew training and to identify and, if necessary, correct any technical issues
that may be discovered during operations.  Upon an evaluation satisfactory to
SIA, it is expected that the system would then be rolled out to the remaining
SIA fleet of wide-body aircraft over a period of up to 24 months.  The roll-out
is to be made ultimately to all classes of service on SIA's fleet of 60 wide-
body aircraft.  The pace of the roll-out depends on various factors such as
acceptance of the system, time for crew training and the necessity of addressing
technical issues.  As a result, there is no timetable for the roll-out and one
cannot be predicted.  It is in SIA's discretion to determine whether the
performance of the Company's software is sufficient and when the roll-out is to
begin.  Management continues to believe the success of its software on SIA will
be critical to its ability to secure additional airline contracts.  The Company
has yet to receive any significant revenues under its agreement with SIA and may
never receive any such anticipated revenues.  (See Note 1, "Subsequent Events".)

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 are
currently operating on a number of airlines, including American Airlines, Cathay
Pacific, Continental, Egyptair, Lauda Air, Malaysia Airlines, Saudi Arabian
Airlines, and Virgin Atlantic.  Sky Play games are in development for Air China.
The purchase agreement provides for the Company to issue up to 250,000
additional shares of Common Stock to the previous owners of IIL

                                       6
<PAGE>
 
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 3 - 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).  For periods prior to the
acquisition of the minority interest in Old IEL discussed in Note 4, the
consolidated financial statements also include the accounts of SGI Holding
Corporation Ltd. and the Company's 80% ownership of Old IEL.  All material
intercompany transactions have been eliminated in consolidation.

Comprehensive Income

During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130").  The Company adopted this statement as of the beginning of 1998.
SFAS No 130 established new rules for the reporting and display of comprehensive
income and its components.  There is no difference between the net loss and the
total comprehensive net loss for the nine months and seven months ended
September 30, 1998 and 1997, respectively.

NOTE 4 - 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.

NOTE 5 - CONVERTIBLE DEBENTURES

During the ten months ended December 31, 1997, the Company issued $2,163,250 of
8% convertible debentures due in 1999.  The outstanding balance of convertible
debentures as of December 31, 1997 totaled $530,000.

All of the debentures outstanding as of December 31, 1997 were converted into
252,862 shares of Common Stock during the first quarter of 1998, and all
remaining deferred interest charges and placement fees totaling $148,000 were
expensed during the period and are included as interest expense during the nine
month period ended September 30, 1998.

                                       7
<PAGE>
 
NOTE 6 - 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, including accrued and unpaid interest, for Class A
Preference Shares at $1,000 per share.  The exchange for 2,737 Class A
Preference Shares was completed in June, 1997, at which time the Company
recorded an extraordinary expense of approximately $1,824,000 for early
retirement of the debt.

The Company has an agreement with BEA pursuant to which BEA and the Company have
agreed that the Company will redeem the Class A Preference Shares held by BEA at
their redemption price of $1,000 per share plus accrued and unpaid dividends in
installments equal to $100,000 on June 30, 1998, $200,000 on each of July 31,
August 31 and September 30, 1998, and $100,000 on the last business day of each
month thereafter beginning October 31, 1998 through May 31, 2000.  If the
Company is in compliance with its redemption obligations, BEA has agreed not to
convert any of its Class A Preference Shares.  The Class A Preference Shares do
not have any voting rights.  During the nine month period ended September 30,
1998, 500 shares of the Class A Preference Shares were redeemed by the Company.
The Company did not make the redemption of $200,000 scheduled for September 30,
1998.  The Company and BEA have agreed to a four month temporary suspension of
the redemption agreement.  As of November 13, 1998, 2,237.443 Class A Preference
Shares were outstanding and were convertible into 11,790,288 shares of Common
Stock on that date.  The actual number of shares of Common Stock issuable upon
conversion may be higher or lower and is based on a discount to the 20 day
average of the mean closing bid and ask price of the Company's Common Stock and
is inversely proportional to the market price of the Company's Common Stock i.e.
if the average share price decreases, the number of shares of Common Stock
issuable increases.

In October 1997, the Company completed an agreement with an investor for the
private placement of 925,747 shares of Common Stock for an aggregate purchase
price of $3.0 million.  $1.5 million (approximately $1,352,000 net of offering
expenses), ("Tranche A"), was received upon closing while the remaining $1.5
million ("Tranche B") was to be funded upon and was contingent upon completion
of the first flight with the Company's software available in all seats of a
Singapore Airlines aircraft prior to April 22, 1998.  For each five shares of
Common Stock purchased and held for a minimum of six months, the investor was to
have received one warrant for the purchase of additional shares.  Warrants were
to be exercisable at a price of $3.8125 per share for 18 months from their
issue.  As of April 2, 1998 the Company and the investor agreed to amended terms
under which 50% of the remaining portion ($750,000) was funded immediately while
the other 50% was to be funded under the terms of the original agreement.  The
subscription price for the Common Stock purchased in Tranche B was revised to
$2.62125.  Warrants issuable under Tranche A will not be issued.  However, for
each of the 286,123 Common Shares purchased in Tranche B, 0.85 of a warrant to
purchase Common Stock will be issued after a six month holding period for the
Common Stock purchased in Tranche B.  The warrants, if issued, will have an
exercise price of $2.62125 and a term of 18 months.  The first $750,000 was
funded under the amended terms; however, the flight required for funding of the
second $750,000 did not take place prior to April 22, 1998.  Subsequently, IEL
and the investor agreed to a $750,000 purchase on the same terms.  This
additional investment was consummated on June 5, 1998.

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 Series A Class B Preference 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

                                       8
<PAGE>
 
(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 a
defined conversion percentage (the "Conversion Percentage").  The Conversion
Percentage decreases from 100% to 85% as the holding period increases.
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 of 61,718 shares of Common Stock were issued in
connection with the issuance of the Series A Class B Convertible Preference
Shares.  The warrants, which have an exercise price of $3.2038, are exercisable
beginning June 17, 1998 and expire on December 17, 1999.  Under the agreement,
the Company had the option of selling a second tranche with 123,434 warrants for
an aggregate purchase price of $2,000,000 following the installation of the
Company's gaming software on an SIA aircraft and the availability of the
software to paying passengers in the entire cabin.  The Company's option with
respect to the second tranche, was set to expire on June 17, 1998.  Upon
agreement of the parties, funding of the second tranche was deferred until a
registration statement for resale of Common Stock issued upon conversion of the
Series A Class B Preference Shares had been declared effective by the SEC.  The
registration statement was declared effective on July 15, and the additional
funding of $2,000,000 was completed on July 24, 1998.  As of November 13, 1998,
580 shares of the Series A Class B Preference Shares had been converted into
2,219,269 shares of Common Stock, and 2,420 shares remained outstanding.  As of
November 13, 1998, the 2,420 outstanding Series A Class B Preference Shares were
convertible into 20,423,736 shares of Common Stock.  The actual number of shares
of Common Stock issued upon conversion may be higher or lower and is based on a
discount to the average of the lowest three closing bid prices of the Company's
Common Stock during the last 30 trading days and is inversely proportional to
the market price of the Company's Common Stock i.e. if the average share price
decreases, the number of shares of Common Stock issued upon conversion will
increase.

As of February 20, 1998, the Company sold 300 shares of Series B Class B
Convertible Preferred Stock at $1,000 per share.  The Series B Class B
Convertible Preferred Shares have the same dividend and conversion features as
the Series A Class B Convertible 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 November 13, 1998, 23 shares of the Series B Class B shares had
been converted into 114,702 shares of Common Stock and 277 shares remained
outstanding.  As of November 13, 1998, the 277 outstanding Series B Class B
Preference Shares were convertible into 2,337,758 shares of Common Stock.  The
actual number of shares of Common stock issued upon conversion may be higher or
lower and is based on a discount to the average of the lowest three closing bid
prices of the Company's Common Stock during the last 30 trading days and is
inversely proportional to the market price of the Company Common Stock i.e. if
the average share price decreases, the number of shares of Common Stock issued
upon conversion will increase.

NOTE 7 - 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

                                       9
<PAGE>
 
"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.

Each of Messrs. Clements and Fortescue have the right to include the 508,333
shares of Common Stock issued in connection with the Redemption Agreement in
certain registered offerings conducted by the Company prior to February 25,
1999.  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.

                                       10

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

Recent Developments

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 and plans to conduct an orderly disposition of 
all the assets related to the Sky Games product. 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 asset disposition and management of Sky Play.
Discontinuance of the Sky Games business will result in a write-off of
approximately $18-20 million during the fourth quarter of 1998 including $1.9
million for the Singapore Airlines agreement, $2.1 million for unamortized
software development costs, $13.9 million for unamortized goodwill, and an
amount yet to be determined for the write-down of furniture, fixtures and
equipment. It is possible that the Company will have negative shareholders'
equity following the write-offs. The discontinuation of the Sky Games business
may have an adverse impact on the Sky Play business.

On October 5, 1998, the Company was notified by Nasdaq that the Company's shares
had failed 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. Under Nasdaq's Marketplace Rules, the Company may regain 
compliance if the price of the Common Stock closes at or above $1.00 per share 
for ten consecutive trading days prior to January 5, 1999. If the Company is not
in compliance by January 5, 1999, its Common Stock will be subject to delisting.
The Company expects that its Common Stock will be delisted from the Nasdaq
SmallCap Market on or about January 5, 1999. At that time, the Company expects
that its Common Stock will begin trading 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 will 
place the Company in default of certain agreements related to the sale of the 
Series A Class B Preference Shares and Series B Class B Preference Shares. A 
default will require the Company to redeem the remaining outstanding shares of
the Series A and Series 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 Series A and Series B Class B Preference Shares. See Note 6--
"Shareholders Equity".

The Company intends to work with any interested parties to try to raise
additional financing and with respect to arranging acquisitions or strategic
alliances and, if necessary an orderly disposition of assets, including the
possible sale of its Sky Play business. There are no assurances that such
efforts will be successful and that, if they are successful, the Company will be
able to reenter the inflight gaming business.

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 have 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 December 30, 1994, the Company entered into a Shareholders Agreement with SGI
Holding Corporation Limited ("SGIH"), a wholly-owned subsidiary of SGI, and an
affiliate of Harrah's Entertainment, Inc. ("Harrah's"), to form a company then
known as Interactive Entertainment Limited ("Old IEL"), the result of which was
that Old IEL became owned 80% by SGIH and 20% by an affiliate of Harrah's.
Pursuant to the Management Agreement (the "Management Agreement"), Old IEL was
managed by an affiliate of Harrah's.

At a Special General Meeting of shareholders held on June 16, 1997, pursuant to
a Plan and Agreement of Merger and Amalgamation dated May 13, 1997, (the
"Amalgamation Agreement"), Old IEL was merged into SGIH and then into SGI (the
"Amalgamations").  Prior to the Amalgamations, Harrah's owned 20% of the capital
stock of Old IEL and did not own any capital stock or other securities of SGI
and had no representatives on the Board of Directors.  As a result of the
Amalgamations and the termination of the Management Agreement, the outstanding
shares of Old IEL common stock held by Harrah's were converted into 5,879,040
shares of $.01 par value common stock of the Company (the "Common Stock").
Harrah's also received 1,007,875 shares of Common Stock upon conversion of a
loan, (the "Harrah's Loan"), made to Old IEL.  Harrah's therefore became the
largest shareholder of the Company holding approximately 38.6% of the
outstanding shares at the time of the Amalgamations.

Pursuant to the Amalgamation Agreement, Harrah's was provided with the right to
appoint persons to the Board and to specified committees in a number generally
proportionate to their share holdings calculated on a "fully diluted" basis as
defined in the Company's bye-laws.  Additionally, Harrah's was provided with the
right to approve specified significant corporate actions by the Company for as
long as the ownership of Common Stock by Harrah's is in excess of 20% (10% in
some cases) of the outstanding voting shares computed on a fully diluted basis.

Upon consummation of the Amalgamations, SGI changed its name to Interactive
Entertainment Limited and consolidated operations formerly performed at its
Vancouver, British Columbia office into its Memphis, Tennessee headquarters.

The following statements regarding operations of inflight gaming with Singapore
Airlines ("SIA") refer to operations through September 30, 1998.  The Company
ceased operations of its inflight

                                       11
<PAGE>
 
gaming system on November 12, 1998 and the Company's gaming software has
subsequently either been removed from or deactivated on the two operating
aircraft.  See Note 1 - "Subsequent Events".

The Company has yet to generate any significant operating revenues and has no
assurance of future revenues.  Its principal activities through September 30,
1998, consisted of developing, testing and marketing the inflight gaming
software.  As of September 30, 1998, IEL had a contract to provide its gaming
software to Singapore Airlines ("SIA"), which has various termination
provisions.  The contract provides for a trial period which ends on the earlier
of (a) March 1, 1999, or (b) upon installation of the software in eight
aircraft.  As of September 30, 1998, the software was installed and operational
on one aircraft.  During this trial period, the airline has no affirmative
obligation to install the system on any or all of its aircraft; although, if 12
aircraft are not installed with the system within 18 months from the date
inflight gaming begins, IEL may terminate the contract.  The contract with
Singapore Airlines is the Company's only contract to provide its gaming software
to an airline.

The Company's software has been installed and operational on one SIA B747-400
since June 1, 1998.  The Company initially experienced technical problems with
the hardware which caused system components to drop from the aircraft's local
area network thus disabling gaming.  IEL implemented changes in its software in
mid-September to make the software more tolerant to hardware and network faults.
As a result, the availability of gaming improved dramatically and the Company
was allowed by SIA to install its software on a second aircraft in October,
1998.

Passenger penetration has remained below expectations.  SIA is restricted by the
Singapore government from advertisement of the gaming features.  Passengers were
made aware of the availability of gaming only through a cabin announcement on
the aircraft's public address system shortly after takeoff and by a brochure in
the seat pocket.  With a few exceptions, all flights have been on short-haul
routes of approximately 3-4 hours where passenger play time is limited or on
routes that include an overnight flight segment during which passengers have a
greater tendency to sleep rather than to seek entertainment options.

The average length of play was also below expectations.  Management believes
that this is due to the fact that a significant number of the gaming flights
were on the Singapore-Hong Kong routes.  This is a flight of approximately 3.5
hours with limited leisure time available to passengers after delivery of cabin
services.

Technical issues and participation notwithstanding, there are two areas in which
results exceeded expectations.  The average bet by participants and the average
number of plays per hour have consistently been higher than initial
expectations.

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 60 aircraft of a
number of airlines, including American Airlines, Cathay Pacific, Continental,
Egyptair, Lauda Air, Malaysia Airlines, Saudi Arabian Airlines and Virgin
Atlantic.  Development efforts are underway with Air China.  American and
Continental are currently in a trial period and have not yet contributed to
revenue; revenue contributions are expected to begin in October and December,
respectively.

The Company does not believe that it has exposure to the "Year 2000 Problem."
Software developed by the Company is compliant with dates in the year 2000.  The
Company uses commercial software produced by a variety of vendors and believes
that all of its major systems are compliant.

                                       12
<PAGE>
 
Results of Operations

During 1997, the Board of Directors changed the Company's fiscal year from the
last day of February to the last day of December.  As a result of the change,
the comparable year-to-date period in 1997 consists of the seven months ended
September 30.  Therefore the following discussion relating to year-to-date
operations compares a seven month period in 1997 with a nine month period in
1998.  Amounts are rounded to the nearest $1,000.

Three Months Ended September 30, 1998 and 1997

Revenue from operations for the three months ended September 30, 1998 was
$58,000 compared to zero during the three months ended September 30, 1997.
Revenue consisted primarily of fees generated from the Sky Play amusement games
acquired with the purchase of IIL.  Since the IIL acquisition was completed in
January 1998, there was no comparable revenue in the 1997 period.  Revenue from
the Company's gaming operations which were launched on June 1, 1998 were
minimal.

General and administrative expense increased $175,000.  This includes an
increase in payroll and related costs of $98,000 due to increased staffing in
1998 compared to 1997 as the Company built a permanent staff.  Expenses for
contract services increased by $40,000 due to initiation of charges under a
license agreement with Harrah's to provide batch processing of transaction data.
The Company subsequently developed its own software for this purpose and
notified Harrah's that it will exercise its termination rights effective
December 1998.  Expenses for state and local taxes increased by $30,000 due to
relocation of the Company's headquarters from Vancouver, British Columbia to
Memphis, Tennessee in June 1997 upon which the Company became subject to state
taxation.

Consulting and contract labor expenses decreased by $56,000 as the company
reduced its reliance on outside contractors who were replaced by permanent
employees.

Marketing expenses decreased by $83,000 due a change in the date of the
industry's largest trade show from September in 1997 to October in 1998.

Legal expenses decreased by $113,000.  The 1997 period included legal costs in
conjunction with the Amalgamations.

In the 1997 period, the Company paid $41,000 in management fees related to the
Company's former headquarters office in Vancouver, British Columbia.  These fees
ceased in October 1997.

Depreciation and amortization expenses increased by $366,000.  $128,000 of the
increase was due to amortization of goodwill associated with the purchase of ILL
in January 1998.  $207,000 was due to amortization of development costs on the
Company's primary software products which began in June 1998.  Depreciation
expense increased by $31,000 due to increases in furniture, fixtures and
equipment that occurred in late 1997.

Interest expense decreased by $411,000.  The 1997 period included amounts for
interest and amortization of deferred finance charges on the convertible
debentures.  There were no convertible debentures outstanding during the three
months ended September 30, 1998.

In the 1997 period, the company incurred a cost of $100,000 related to closure
of the Company's former headquarters in Vancouver, British Columbia.  This
expense was recorded as amalgamation expense.

                                       13
<PAGE>
 
In September 1997, the Company wrote down the value of land and certain other
assets held by its subsidiary, Creator Island Equities, Inc., to an estimated
net realizable value.  The amount of the write down was recorded in the 1997
period as an asset valuation adjustment of $449,000.  There were no comparable
charges in the 1998 period.

Nine Months Ended September 30, 1998 and Seven Months Ended September 30, 1997

Revenue from operations for the nine months ended September 30, 1998 was
$170,000 compared to zero in the seven months ended September 30, 1997.  Revenue
consisted primarily of fees generated from the Sky Play amusement games acquired
with the purchase of IIL.  Since the IIL acquisition was completed in January
1998, there was no comparable revenue during the seven months ended September
30, 1997.

General and administrative expense increased by $632,000.  Included in this
amount are increases in payroll and related costs of $68,000; contract services,
$72,000; travel, $163,000, investor relations, $55,000; business insurance,
$64,000; and taxes, $86,000.

The increase in payroll is due to increases in staff levels to reduce reliance
on contract labor offset by the decrease of $650,000 in executive compensation
attributable to the expense of the shares issued to Geller & Co. upon completion
of the Amalgamations.

Contract services increased due to costs incurred under two separate agreements
with Harrah's.  Under a Continuing Services Agreement, certain
telecommunications, computer systems support and consulting services are
provided to the Company.  This agreement was in effect for three months of the
1997 period and nine months of the 1998 period.  Beginning in June 1998, costs
were incurred under a license agreement with Harrah's, which provides the
Company with rights to use software developed by Harrah's for the batch
processing of transaction data.  The Company has subsequently developed its own
software for this purpose and has notified Harrah's that it will exercise its
termination rights effective December, 1998.

Travel costs increased due to increased travel associated with testing and
implementation of the Company's software product and a nine month period
compared to a seven month period.

The Company had no business insurance until June 1997.

The increase in taxes is due to consolidation of the Company's headquarters in
Memphis, Tennessee in mid-1997 and the Company becoming subject to state and
local taxes.

Expenses for consulting and contract labor decreased by $2,688,000.  The expense
for the seven months ended September 30, 1997 included an expense of $2.4
million for the Grymyr Consulting Agreement.  The Company began building a
permanent staff in mid-1997 to reduce dependence upon contract labor.

Marketing expenses decreased by $72,000 primarily due to a change in timing of
the industry's largest trade show from the third quarter in 1997 to the fourth
quarter in 1998.

Legal expenses decreased by $306,000.  The seven months ended September 30, 1997
included legal costs in conjunction with the Amalgamations.

Depreciation and amortization expenses increased by $4,706,000.  $3,945,000 of
the increase was attributable to amortization of goodwill associated with the
Amalgamations which occurred in June 1997.  $368,000 was due to amortization of
goodwill associated with the purchase of ILL in January 1998.  $275,000 was due
to amortization of development costs on the Company's

                                       14
<PAGE>
 
primary software product which began in June 1998.  Depreciation expense
increased by $118,000 due to increases in furniture, fixtures and equipment that
occurred in late 1997.

Interest expense decreased by $3,912,000.  The seven months ended September 30,
1997 included an expense of $3,466,000 for the beneficial conversion feature of
the Harrah's Loan and $456,000 related to amortization of deferred finance
charges upon conversion of the convertible debentures.

During the seven months ended September 30, 1997, the Company recorded an
extraordinary expense in the amount of $1,824,000 related to the exchange of the
Class A Preference Shares for debt.  There was no comparable expense during the
nine months ended September 30, 1998.

Liquidity and Capital Resources

At September 30, 1998 the Company had working capital of $534,000.  The
Company's primary source of funding has been through sales of its equity and
securities convertible into equity.

See Note 1--"Subsequent Events".

                                       15

<PAGE>
 
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.

                                       16
<PAGE>
 
                          PART II.  OTHER INFORMATION


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 No. 1 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>

                                       17
<PAGE>
 
<TABLE>
<C>         <S>
            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 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 the SEC on September 12, 1997.)
27**        Financial Data Schedule
</TABLE>

                                       18
<PAGE>
 
*Confidential treatment has been granted.
**Submitted herewith.

                                       19
<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 20, 1998                              BY:   /s/ David Lamm
                                                     --------------------------
                                                     Chief Financial Officer


November 20, 1998                              BY:   /s/ Michael A. Irwin
                                                     --------------------------
                                                     Controller
                                                     (Chief Accounting Officer)

                                       20