<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549

                               FORM 10-Q/A No. 1

(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, 1997

                                      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 1932 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and

                         Yes    X       No    
                             --------      -------

     (2) has been subject to such filing requirements for the past 90 days.

                         Yes    X       No   
                             -------       -------

The registrant had 19,250,602 shares of common stock outstanding as of November
14, 1997.

Exhibit index is located on page 19


<PAGE>
 
                       INTERACTIVE ENTERTAINMENT LIMITED

                                     INDEX

<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                          PAGE
<S>      <C>                                                                            <C>
Item 1.  Consolidated Financial Statements

         Consolidated Balance Sheets - September 30, 1997 and February 28, 1997           3
 
         Consolidated Statements of Operations - Three Months and Seven Months            4
         ended September 30, 1997 and 1996                                                 
                                                                                           
         Consolidated Statements of Cash Flows - Seven Months ended                       5
         September 30, 1997 and 1996                                                       
                                                                                           
         Notes to Consolidated Financial Statements                                       6
                                                                                           
Item 2.  Management's Discussion and Analysis of Financial Condition                     15
         and Results of Operations                                                         
                                                                                           
                                                                                           
PART II. OTHER INFORMATION                                                                 
                                                                                           
Item 6.(a)  Exhibits                                                                     19
                                                                                           
Item 6.(b)  Reports on Form 8-K                                                          20 
</TABLE> 

                                     Page 2

<PAGE>
 
Item 1. Consolidated Financial Statements

              INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                ASSETS
                ------
                                          September 30, 1997   February 28, 1997
                                          ------------------   -----------------
<S>                                       <C>                  <C>
CURRENT ASSETS
  Cash and cash equivalents                  $    141,305        $    626,074
  Accounts receivable                              50,387             119,768
  Prepaid expenses                                188,089              61,975
                                             ------------        ------------
      Total current assets                        379,781             807,817
                                             ------------        ------------
PROPERTY AND EQUIPMENT, at cost
  Land                                            434,000             800,000
  Furniture, fixtures and equipment               495,826             643,492
                                             ------------        ------------
                                                  929,826           1,443,492
  Less: accumulated depreciation                 (132,454)           (294,189)
                                             ------------        ------------
    Property and equipment, net                   797,372           1,149,303

SOFTWARE UNDER DEVELOPMENT                      2,612,812           1,357,869

SINGAPORE AIRLINES AGREEMENT                    1,855,800                  --

OTHER ASSETS                                      530,723             209,587

EXCESS OF PURCHASE PRICE OVER NET
 ASSETS ACQUIRED                               23,078,220                  --
                                             ------------        ------------
      Total assets                           $ 29,254,708        $  3,524,576
                                             ============        ============

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

CURRENT LIABILITIES
  Accounts payable and accrued expenses      $  1,054,274        $    979,948
                                             ------------        ------------
      Total current liabilities                 1,054,274             979,948

CONVERTIBLE DEBENTURES                          1,000,000           2,600,000

MINORITY INTEREST                                      --             277,249

SHAREHOLDERS' EQUITY
  Common shares, authorized- 50,000,000
   shares; outstanding - 18,443,050 par
   value US$.01 and 13,314,020 par
   value C$.01                                    184,431             106,752
  Class A preferred shares, $0.01 par
   value, authorized - 3,000 shares,
   outstanding - 2,737 shares                          27                  --
  Additional paid-in-capital                   57,793,790          16,027,379
  Accumulated deficit                         (30,777,814)        (16,466,752)
                                             ------------        ------------
                                               27,200,434            (332,621)
                                             ------------        ------------
      Total liabilities and
       shareholders' equity                  $ 29,254,708        $  3,524,576
                                             ============        ============ 
</TABLE>

             The accompanying notes are an integral part of these 
                         consolidated balance sheets.

                                     Page 3
<PAGE>
 
                       Interactive Entertainment Limited
                     Consolidated Statements of Operations
                                  (Unaudited)
 
<TABLE>
<CAPTION>
                                          Three Months  Ended                              Seven Months Ended
                                             September 30                                     September 30
                              -------------------------------------------      ------------------------------------------
                                     1997                    1996                     1997                    1996
                              -------------------    --------------------      -------------------    -------------------
<S>                           <C>                    <C>                       <C>                    <C>
OPERATING EXPENSES
    General & Administrative          $   955,742              $  236,865              $ 2,050,606             $  516,644
    Consulting & Contract
      Labor                               158,632                 173,157                2,912,800                390,191   
    Marketing                             112,849                 119,755                  217,841                245,873
    Management Fees                        41,184                  52,500                  114,351                115,750
    Legal                                 185,581                  13,932                  530,699                 74,359
    Interest Expense                      410,828                  76,169                4,099,843                175,933
    Depreciation and
      Amortization                      2,152,692                  16,719                2,489,306                 41,805
    Amalgamation Expenses                 100,000                       -                  100,000                      -
    Interest Income                        (1,321)                (19,192)                  (9,189)               (41,481)
                                      -----------              ----------              -----------             ----------
 LOSS BEFORE MINORITY
    INTEREST AND
    EXTRAORDINARY ITEMS                 4,116,187                 669,905               12,506,257              1,519,074
    Minority Interest                           -                 (76,869)                (163,842)              (182,925)
                                      -----------              ----------              -----------             ----------
LOSS BEFORE EXTRAORDINARY
    ITEM                                4,116,187                 593,036               12,342,415              1,336,149

EXTRAORDINARY ITEM                              -                       -                1,824,222                      -
                                      -----------              ----------              -----------             ----------
NET LOSS                              $ 4,116,187              $  593,036              $14,166,637             $1,336,149


LOSS PER SHARE:
    Before extraordinary item         $      0.23              $     0.06              $      0.89             $     0.15
    Extraordinary item                          -                       -                     0.13                      -
                                      -----------              ----------              -----------             ----------
    Net loss                          $      0.23              $     0.06              $      1.02             $     0.15


AVERAGE COMMON SHARES
    OUTSTANDING                        18,403,497               9,181,385               14,026,354              8,878,615
</TABLE>
 
 
 
                  The accompanying notes are an integral part
                       of these consolidated statements.


                                    Page 4
<PAGE>
 
              INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                           Seven Months Ended
                                                                              September 30
                                                                    --------------------------------- 
                                                                        1997                 1996
                                                                    ------------          ----------- 
CASH FLOWS USED IN OPERATING ACTIVITIES 
<S>                                                                 <C>                   <C>
       Net cash used in operating activities                        $(1,685,306)          $(1,963,924)
                                                                    -----------           -----------

CASH FLOW USED IN INVESTING ACTIVITIES
   Additions to property and equipment                                 (154,334)              (42,383)
   Software development costs                                          (808,379)             (608,255)
                                                                    -----------           -----------
       Net cash used in investing activities                           (962,713)             (650,638)
                                                                    -----------           -----------

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
   Proceeds from convertible debenture issuance                       2,163,250                     -
   Proceeds from stock issuance                                               -             2,405,530
                                                                    -----------           -----------
       Net cash provided by financing activities                      2,163,250             2,405,530
                                                                    -----------           -----------

NET DECREASE IN CASH AND
   CASH EQUIVALENTS                                                    (484,769)             (209,032)


CASH AND CASH EQUIVALENTS,
   beginning of period                                                  626,074               725,564
                                                                    -----------           ----------- 

CASH AND CASH EQUIVALENTS,
   end of period                                                    $   141,305           $   516,532
                                                                    ===========           =========== 
</TABLE>
                  The accompanying notes are an integral part
                       of these consolidated statements.

                                     Page 5
<PAGE>
 
              INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements of Interactive Entertainment Limited and
Subsidiaries (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 Form 20-F for the year ended
February 28, 1997, as amended.

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 principal business objective is to develop, implement and manage
computerized, remote gaming software for use by passengers on international
airline flights.

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.  The Company has been in the
process of integrating its software with the MASC network and operating system,
and other third party provided software with which the Company's software is
also required to be integrated pursuant to its agreements with SIA.  Following a
series of laboratory tests, the Company's software was certified by MASC on
August 25, 1997.  The Company conducted a series of Application Test Programs
("ATP") with SIA and received certification from SIA on October 9, 1997.
Following additional testing on November 7, 1997, SIA has authorized the Company
to proceed with technical trials onboard an aircraft.  Although the Company
believes the technical trials will be successful, there is no assurance of such
success, or if it does occur, when it will occur.  Management continues to
believe the success of its software on Singapore Airlines will be critical to
its ability to secure additional airline contracts.  The Company has yet to
receive any revenues under its agreement with Singapore Airlines and may never
receive any such anticipated revenues if its software is not successfully
implemented with Singapore Airlines.

On August 19, 1997, the Company entered into a non-binding letter of intent to
acquire all of the outstanding capital stock of Inflight Interactive Ltd. in
exchange for 500,000 shares of the Company's Common Stock.  Inflight Interactive
is a U. K. developer and provider of amusement games to the airline industry.
Inflight's games are currently operating on a number of airlines including
Cathay Pacific, Egypt Air, Lauda Air, Malaysia Airlines, and Virgin Atlantic.
The agreement also provides for the Company to issue up to 250,000 additional
shares of Common Stock to the current owners of Inflight Interactive upon
achievement of certain milestones regarding implementation of the Company's
software with an international airline to be designated by the parties.  The
Company believes that this acquisition will be completed by the end of 1997.

Until the Company receives sufficient cash flow from operations, additional
funding will be required to allow the Company to continue operations.  Based on
discussions with potential investors, management believes the Company will be
successful in obtaining sufficient financing to enable the 

                                    Page 6
<PAGE>
 
Company to continue its operations for the foreseeable future; however, such
funding may not be on terms that are as favorable to those available to more
stable companies and may be dilutive to current stockholders.

Subsequent to the end of the period, the Company completed agreements with two
investors for the private placement of 987,463 shares of Common Stock for an
aggregate purchase price of $3.2 million.  $1.7 million was received upon
closing while the remaining $1.5 million is to be funded upon and is contingent
upon completion of the first flight with the Company's software available in all
seats of a Singapore Airlines aircraft.  For each five shares of Common Stock
purchased and held for a minimum of six months, the investors will receive one
warrant for the purchase of additional shares.  Warrants are to be exercisable
at a price of $3.80 per share for 18 months from their issue.  The Company is
attempting to raise an additional amount of approximately $4.3 million on
similar terms and believes that its efforts will be successful.

Prior to June 17, 1997, the Company operated its principal business activities
through its indirectly 80%-owned subsidiary, 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
"Merger").  As part of the Merger, the Management Agreement with Harrah's was
terminated.  Harrah's received a total of 5,879,040 shares of the Company's $.01
par value common stock (the "Common Stock") in exchange for its 20% ownership
interest in Old IEL and as consideration for the termination of the Management
Agreement.  

The Merger 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 Merger was announced, or $4.466 per
share. The total value of the shares issued was allocated among the assets
acquired, including the Company's agreement with Singapore Airlines and the
Company's software under development. This transaction represents a non-cash
transaction for purposes of the Consolidated Statements of Cash Flows.

Prior to the Merger, Harrah's had agreed, pursuant to a funding agreement, to
loan up to $1,000,000 (the "Harrah's Loan") to Old IEL.  Upon closing of the
Merger, the outstanding principal and accrued interest of the Harrah's Loan
converted automatically into 1,007,875 shares of Common Stock at $1.00 per
share.  Since the Harrah's Loan was convertible into Common Stock at less than
the current market, a beneficial conversion feature was included in the Harrah's
Loan.  This beneficial conversion feature was valued at $3,466,000 and has been
included in interest expense for the seven months ended September 30, 1997.
In addition, pursuant to the funding agreement, for 90 days following June 17,
1997, the Company had the right, under certain circumstances, to require
Harrah's to purchase up to 650,000 shares of Common Stock at a price of $1.00
per share to provide working 

                                    Page 7
<PAGE>
 
capital for the Company. However, the Company did not exercise its rights with
respect to the 650,000 shares.

On April 23, 1997, the Board of Directors of the Company approved and adopted a
resolution changing the fiscal year end of the Company to December 31 of each
year from the last day of February of each year.  Therefore, the Consolidated
Financial Statements include the three month and seven month periods ending
September 30, 1997.  Pro forma information is presented for the seven month
periods ending September 30, 1997 and 1996.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers cash on hand, deposits in banks and short-term investments
with maturities of three months or less as cash and cash equivalents.

Software Development

All software production costs (i.e., external and internal programmers, graphic
design and testing) are being capitalized until the software is available for
general release to customers, in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed."  Once
capitalization ceases, the software costs will be amortized using the straight-
line method over the remaining estimated economic life of the product, currently
estimated at three to five years.

Equipment

The Company's equipment is recorded at cost and depreciated over its estimated
economic life which is generally three to five years.  Additions and
improvements that materially extend the useful lives are capitalized, while
repairs and maintenance costs are expensed as incurred.

Excess of Purchase Price over Net Assets Acquired

The excess of purchase price over net assets acquired, which arose from the
acquisition of the minority interest of Old IEL discussed in Note 1, is being
amortized on a straight-line basis over three years, which management estimates
is the related benefit period.  Management regularly evaluates whether or not
the future undiscounted cash flows of the Company are sufficient to recover the
carrying amount of this asset.  Additionally, management continually monitors
such factors as the status of new or proposed legislation, 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.  The amount of amortization expense recorded for
the period from the date of the acquisition (June 17, 1997) through September
30, 1997, totaled approximately $2,433,000.

Singapore Airlines Agreement

In conjunction with the acquisition of the minority interest of Old IEL, the 
Company allocated approximately $1,856,000 of the purchase price to the value of
the agreement with Singapore Airlines.  This amount will be amortized on a 
straight-line basis over the term of the agreement.  The agreement is for an 
initial three year term which begins upon the earlier of (a) nine months from 
the date of the first successful commercial installation of the software or (b) 
upon installation of the software in eight aircraft.  Therefore, the financial 
statements do not include an expense for amortization of the amount allocated to
the value of the agreement.

Impairment of Long-Lived Assets

In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of,"  management continually
evaluates whether events or changes in circumstances indicate that the carrying
amount of long-lived assets may not be recoverable.  Based on management's
evaluations, and except as discussed below, no significant impairments of long-
lived assets occurred through September 30, 1997.

                                    Page 8
<PAGE>
 
Through its wholly-owned subsidiary, Creator Island Equities, Inc., the Company
owns approximately 70 acres of land with a net book value of $800,000 as of
February 28, 1997. The subsidiary also owns other assets including irrigation
equipment, greenhouses, office equipment, nursery equipment, construction
equipment, vehicles, and shop equipment associated with this real estate. These
other assets have a net book value of approximately $83,000. The Company
received an offer of approximately $444,000 to purchase the real estate and the
other assets which were held for sale. Based on the opinion of real estate
consultants that the offering price was fair and indicative of similar property,
and assuming selling costs of $10,000, the Company recorded an asset valuation
adjustment of approximately $449,000 in September. The current fair market value
of the property and equipment was determined based on then current negotiations
with a willing outside party for the sale of the property and equipment. The
land and other assets were sold in November for approximately $444,000. Any
difference between the adjusted carrying value and the final selling price will
be reflected as a gain/loss on disposition of assets during the period of the
sale. A prior asset adjustment in the amount of approximately $442,000 was
recorded on the same property during the year ended February 28, 1997 based on 
an opinion of real estate professionals of the expected sales price of the
property in a then current transaction between willing parties.

Loss Per Share

Loss per share was computed by dividing net loss (increased by dividends on
preferred shares) by the average common shares outstanding plus the dilutive
effect of common stock equivalents outstanding and convertible securities, using
the treasury stock method based on the average market price of the Company's
Common Stock.  Fully diluted loss per share is not materially different from
primary loss per share.

Reclassifications

Certain reclassifications have been made to the historical financial statements
as of February 28, 1997 and for the three and seven months ended September 30,
1996, to conform to the presentation of the financial statements as of September
30, 1997 and for the three and seven months ended September 30, 1997.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Consolidated Subsidiaries

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 British Columbia corporation) and
IEL (Singapore) Pte. Ltd. (a Singapore corporation).  For comparable periods
ending in 1996, the consolidated financial statements also include the accounts
of Sky Games International Holdings Ltd. and the Company's 80% ownership of Old
IEL.  All material intercompany transactions have been eliminated in
consolidation.

Pro Forma Information

The table below shows pro forma information as if the purchase of the minority
interest had occurred at the beginning of each period:

                                    Page 9
<PAGE>
 
<TABLE>
<CAPTION>
                                 Seven Months Ended  Seven Months Ended
                                 September 30, 1997  September 30, 1996
                                 ------------------  ------------------
<S>                              <C>                 <C>
 
     Pro Forma Loss Before
            Extraordinary Item          $15,034,000          $6,480,000
 
     Pro Forma Net Loss                 $16,858,000          $6,480,000
 
     Pro Forma Loss Per Share           $      0.98          $     0.42
</TABLE>
3.   CONVERTIBLE DEBENTURES

As of September 30, 1997, the Company had issued $2,163,250 of 8% convertible
debentures due in 1999, $1,163,250 of which had been converted to 581,632 shares
of Common Stock.  The outstanding balance of convertible debentures as of
September 30, 1997, totaled $1,000,000.

Subscription dates range from July 7 through September 29, 1997.  Half of the
debentures are convertible at any time 45 to 60 days after the subscription
date, and half are convertible 60 to 90 days after the subscription date at the
lower of 85% of the average of the closing bid prices of the Common Stock for
the five trading days immediately preceding the execution by the subscriber of
its individual subscription for debentures or 77.5% of the average of the
closing bid prices of the Common Stock for the five trading days immediately
preceding the date of conversion.

The debentures contain a feature that provides for conversion into Common Stock
at a price below the current market at the time of issue.  The value of this
beneficial conversion feature, totaling $628,000, has been capitalized in other
assets with a corresponding increase to additional paid-in capital.  Placement
fees of $149,000 incurred upon sale of the debentures are also capitalized.  The
value of the conversion feature and the placement fees are amortized to interest
expense over the original life of the debenture.  Any unamortized amount is
expensed upon conversion of the debenture.  At September 30, 1997 the
unamortized deferred interest charge of $321,000 is included in other assets.  A
total of $391,000 and $456,000 was expensed during the three month and seven
month periods ending September 30, 1997, respectively.

4.   STOCK OPTION PLANS

On August 27, 1996, the Company established and the Company's shareholders
approved the 1996 Stock Program for the then upper management, directors and
major shareholders of the Company.  The options issued under the 1996 Stock
Program were exercisable upon the grant date and expire during 2001 through
2006.  As of September 30, 1997, options outstanding under the 1996 Stock
Program totaled options for 1,130,000 shares of Common Stock.

The Company adopted on December 6, 1996, a Directors Stock Ownership Plan
covering 500,000 shares of Common Stock pursuant to which all directors holding
office at December 10th of each year will automatically be granted options for
10,000 shares of Common Stock at the trading price on such day.  On October 17,
1997, the Board of Directors of the Company approved an amendment changing the
grant date from December 10 to the date of the first meeting of the Board of
Directors following the Company's Annual General Meeting of shareholders.  As of
September 30, 1997, options outstanding under the Directors Option Plan totaled
60,000 shares, which were exercisable immediately.  Additional grants covering
90,000 shares were made on October 17, 1997.

Effective June 16, 1997, the Company established a Management Incentive Plan
(the "MIP") by authorizing the issuance of options for 4,070,105 shares of
Common Stock.  The MIP was approved at the Company's Annual General Meeting on
October 17, 1997.  The Compensation Committee of the Board of Directors (the
"Committee") has the authority to determine the allocation and vesting

                                    Page 10
<PAGE>
 
requirements for such options under the MIP.  As of September 30, 1997, options
outstanding under the MIP totaled 2,159,550.  A total of 1,200,000 options will
vest specifically on the earlier of sustaining certain stock price levels or ten
years from the date of the grant.  The remaining 959,550 options vest partially
upon employees remaining with the Company for a specified period of time but
primarily upon the Company attaining revenue targets established by the
Compensation Committee of the Board of Directors.  In any event, the options
vest ten years from the grant.

5.   STOCK WARRANTS

As of September 30, 1997, the Company had outstanding stock warrants for 180,000
shares of its Common Stock as follows:
<TABLE>
<CAPTION>
     Number of Warrants      Exercise Price     Expiration Date
     ------------------      --------------     ---------------
<S>                          <C>                <C>
         100,000                   3.00             12-31-97
           4,900                   4.00              6-30-02
          17,500                   4.80              6-30-02
          57,600                   4.80              8-31-02
</TABLE>

6.   PREFERENCE SHARES OF STOCK

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.

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:  (i) prior
to February 28, 1999, a conversion price equal to 70% of the average mean of the
closing bid and ask prices of the Common Stock for the 20 trading days prior to
the conversion (the "Market Price"); (ii) after February 28, 1999 and prior to
August 31, 1999, a conversion price equal to 65% of the Market Price; and (iii)
after August 31, 1999, a conversion price equal to 60% of the Market Price.
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.  The
Class A Preference Shares do not have any voting rights.

Since the Preference Shares were convertible into Common Stock at less than the
market value at the time of issue, a beneficial conversion feature existed
requiring that the Preference Shares be valued at the market value of the
underlying Common Stock.  Since the resulting valuation of the Preference Shares
exceeded the balance of the note, an extraordinary expense of $1,824,000 was
incurred for early extinguishment of the note.

As part of the Merger, 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 Company 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.  

                                    Page 11
<PAGE>
 
Had BEA elected to convert the Preference Shares into Common Stock as of the
June 17, 1997 Merger date, Harrah's would have received an additional 573,483
shares. The actual number of shares that would be issued to Harrah's in the
event of conversion by BEA depends on a number of factors including, among
others, the number of shares issued to BEA upon conversion, the number of "fully
diluted" shares of Common Stock outstanding at the time of any such conversion
and Harrah's ownership of Common Stock at the time of any such conversion. 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 Merger when and if
such shares are issued.

7.   INCOME TAXES

As a Bermuda exempted company, IEL is not currently subject to income tax filing
requirements in Bermuda.  Accordingly, with the exception of U.S. earned
interest income, which is subject to U.S. taxation, there are no income tax
provisions, benefits, liabilities or assets reflected in the accompanying
financial statements.  U.S. tax expense related to interest income was
approximately $400 and $1,900 for the three and seven month periods ended
September 30, 1997, respectively, and $2,400 and $4,300 for the three and seven
month periods ended September, 1996.

8.   RELATED PARTY TRANSACTIONS

Pursuant to the Management Agreement, Harrah's managed Old IEL.  The Management
Agreement provided for Harrah's to receive a management fee equal to the greater
of $10,000 per whole fiscal month, as defined, or a percentage of gross
revenues, as defined.  The Management Agreement was terminated June 17, 1997, in
conjunction with the Merger.  Management fees totaled $30,000 for the three
month period ending September 30, 1996 and zero for the same period in the
current year.  Management fees totaled approximately $36,000 and $70,000 and for
the seven month periods ending September 30, 1997 and 1996, respectively.

Under the terms of the Management Agreement, the Company transferred cash to
Harrah's for payments made on the Company's behalf to support its operations,
including accounts payable, payroll and capital expenditures.  The net transfers
for the three month periods ending September 30, 1997 and September 30, 1996
totaled zero and approximately $89,000, respectively.  The net transfers for the
seven month periods ending September 30, 1997 and 1996 totaled approximately
$143,000 and $863,000, respectively.

The Company was charged a fee by Harrah's for administrative services (including
legal, accounting, information technology and office occupancy).  The Company
was charged approximately $115,000 for the three month period ending September
30, 1996.  This arrangement ended with termination of the Management Agreement,
and there were no similar charges during the 1997 period.  The Company was
charged approximately $160,000 and $279,000 for the seven month periods ending
September 30, 1997 and 1996, respectively.

On June 17, 1997, the Company entered into a Continuing Services Agreement with
Harrah's under which Harrah's provides certain telecommunications, computer
systems support and consulting services to the Company.  The Company incurred a
cost of approximately $56,000 during the three month period ending September 30,
1997 and $66,000 during the seven month period ending September 30, 1997.

Effective June 5, 1997, the Company entered into a lease (the "Sublease
Agreement") with Harrah's for the office space occupied by the Company.  The
Sublease Agreement is for a period of 23 months at a monthly cost of
approximately $11,000.  In conjunction with the Sublease Agreement and with the
Merger, the Company purchased certain leasehold improvements, computer hardware,
computer software and office equipment from Harrah's.  The total purchase price
was approximately $42,000.

During 1996, the Company entered into a sublicense agreement with Harrah's,
which provides the Company with rights to use an immediate authorization
credit/debit system that Harrah's is developing.  The Company reimburses
Harrah's for a portion of the development costs which totaled $30,000 and
$70,000 for the three month and seven month periods ending September 30, 1997,
respectively.

                                    Page 12
<PAGE>
 
On June 17, 1997, in conjunction with the Merger, the Company entered into a
Software License Agreement with Harrah's (the "License Agreement"). The License
Agreement is a non-exclusive, fully-paid, perpetual, world-wide license to
Harrah's and its affiliates to use the Company's gaming technology in non-
competitive uses in traditional casino venues owned, operated or managed by
Harrah's affiliates. The License Agreement includes source codes for all
software, but neither party to the License Agreement has any obligations to
share or provide any improvements or modifications with the other party. There
was no additional consideration paid by Harrah's for the License Agreement.

The Company paid approximately $75,000 and $117,000 during the three month
periods ending September 30, 1997 and 1996, respectively, to directors and
companies with common directors for management and consulting services and for
reimbursement of expenses.  The company paid approximately $157,000 and $203,000
during the seven month periods ending September 30, 1997 and 1996, respectively.

On April 30, 1997, the Company entered into a Consulting Agreement with James P.
Grymyr, then a director of the Company, whereby Mr. Grymyr would provide
consulting services to the Company as requested by the Company from time to
time.  Under the terms of the Consulting Agreement, the Company has issued to
Mr. Grymyr 586,077 shares of Common Stock as consideration for all such
consulting services both past and future.  The Company expects any future
consulting services to be minimal.  The value of the stock (approximately $2.4
million) is included in the Statements of Operations for the seven month period
ending September 30, 1997, as consulting and contract labor.

Geller & Co., of which Laurence Geller is Chairman and CEO, performed consulting
services for the Company pursuant to a retainer agreement that commenced in
February, 1996 and terminated August 14, 1997.  Geller & Co. was paid a monthly
retainer of $5,000.  Pursuant to Geller & Co.'s retainer, a grant of options for
200,000 shares of Common Stock with an exercise price of $3.00 and a term of ten
years was also made to Geller & Co.  In addition, Geller & Co. received 200,000
shares of Common Stock that vest upon the closing of a major financing.  The
Board has determined that the Merger which occurred June 17, 1997 constituted a
major financing, and, consequently, the 200,000 share success fee has vested and
an expense of $650,000 was recognized.  Mr. Geller has been Chairman of the
Board of Directors of the Company since September 30, 1996.

9.   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").  The Performance Shares were issued
at a deemed price of $.1155 per share with 2,000,000 shares issued to SGII (87 %
of the outstanding stock of which is 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, have
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,
has 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.  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 has
issued to SGII 80,590 shares of Common Stock (the 

                                    Page 13
<PAGE>
 
"Redemption and Cancellation Agreement"). 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. The value of the
588,923 shares of Common Stock issued as consideration for the agreement was
determined to be $1,840,000. This amount was included as additional purchase 
price for the acquistion of Harrah's 20% ownership interest in Old IEL.

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 First Tennessee 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; however, it is management's opinion that the Performance
Shares should be treated as canceled and have no rights and should be excluded
from all per share calculations.

                                    Page 14
<PAGE>
 
Item 2:  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

                                        
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 February 28, 1981.  The Company's activities are 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
Harrah's Interactive Investment Company ("HIIC"), an indirect wholly-owned
subsidiary of Harrah's Entertainment, Inc., the result of which was that Old IEL
became owned 80% by SGIH and 20% by HIIC.  Pursuant to the Management Agreement,
Old IEL was managed by Harrah's Interactive Entertainment Company ("HIEC"), 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, Old IEL was
merged into SGIH (the "Subsidiary Merger") and then into SGI (the "Parent
Merger").  Prior to the Merger, 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.  As a result of the amalgamation of Old IEL and
SGIH 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
Common Stock of the Company, therefore making Harrah's the largest shareholder
of the Company holding approximately 38.6% of the outstanding shares at the time
of the amalgamation.

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.  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 Parent Merger, SGI changed its name to Interactive
Entertainment Limited and installed Gordon Stevenson as President and Chief
Executive Officer.  The Company has consolidated certain operations formerly
performed at its Vancouver, British Columbia office into its Memphis, Tennessee
headquarters.  A charge of $100,000 was recorded in September, 1997 in
connection with the closure of the Vancouver office.

The Company has yet to generate any operating revenues and has no assurance of
future revenues.  Its principal activities through September 30, 1997, consisted
of developing, testing and marketing the inflight gaming software.  As of
September 30, 1997, IEL had a contract to provide its gaming software to
Singapore Airlines, which has various termination provisions.  The contract
provides for a six-month minimum trial period for the parties to assess the
operation of the inflight gaming system and public acceptance of the inflight
gaming business.  The Company and Singapore Airlines are not yet in the six-
month trial period.  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 is pursuing additional contracts.  However, gaming
is prohibited on the aircraft of U.S. commercial air carriers and on all flights
to and from the United States.  Other countries may introduce 

                                    Page 15
<PAGE>
 
similar prohibitions, which could limit the prospects for additional contracts
and result in termination of the contract with Singapore Airlines or any future
contracts with other airlines.

Prior to the end of 1997, the Company expects to begin a trial of its
interactive gaming application in a limited number of cabins on one cruise ship
operated by an international cruise line. This trial will be performed in
conjunction with Transdigital Communications Corporation. There is no assurance
that the trial will be successful, and if it is successful, that it will be
extended to other cabins or to other cruise ships operated by the owner or
result in any agreement with the owner.

On August 19, 1997, the Company entered into a letter of intent to acquire all
of the outstanding stock of Inflight Interactive Ltd. in exchange for 500,000
shares of the Company's Common Stock.  Inflight Interactive is a U. K. developer
and provider of amusement games to the airline industry.  Inflight's games are
currently operating on a number of airlines including Cathay Pacific, Egypt Air,
Lauda Air, Malaysia Airlines, and Virgin Atlantic.  The agreement also provides
for the Company to issue up to 250,000 additional shares of Common Stock to the
current owners of Inflight Interactive upon achievement of certain milestones
regarding implementation of the Company's software with an international airline
to be designated by the parties.  The Company believes that this acquisition
will be completed by the end of 1997.

Results of Operations

Three Months Ended September 30, 1997 and September 30, 1996

Total expenses for the quarter ended September 30, 1997 were approximately $4.1
million compared to approximately $.6 million during the same period of 1996.
The increase in expenses relates to increased staffing levels, the Merger,
financing activities and increased regulatory requirements as a public company
reporting in the U.S.

General and administrative expense increased by approximately $719,000. This
includes an increase in payroll and related costs of $153,000 due to increased
staffing during 1997. Also included in general and administrative expense is a
$449,000 write-down in the value of real estate and other assets owned by the
Company's wholly-owned subsidiary, Creator Island Equities, Inc.

Legal expenses for the current quarter were $186,000 as compared to $14,000 in
the prior year.  The increase is due to Merger, financing and reporting
activities of the Company.

Interest expense, including amortization of finance fees on Company debt,
totaled $411,000 for the 1997 quarter and $76,000 for the 1996 quarter. The 1997
expense is composed of interest on convertible debentures and amortization of
finance fees related to the debentures, while the 1996 expense is related to
interest on the convertible note due to B/E Aerospace.

Depreciation and amortization expenses increased by $2.1 million due to
amortization of the excess of the purchase price over assets acquired when the
Company purchased the minority interest in Old IEL previously owned by Harrah's.
There were no comparable expenses in the 1996 quarter.

Amalgamation expenses for the 1997 quarter were $100,000 for closure of the
Vancouver office.

Seven Months Ended September 30, 1997 and September 30, 1996

Total expenses for the seven months ended September 30, 1997 were approximately
$14.2 million vs. $1.3 million during the same period in 1996.

                                    Page 16
<PAGE>
 
General and administrative expenses increased by approximately $1.5 million.
Payroll and related costs increased by $166,000 due to increased staffing
levels.  The vesting of the of 200,000 shares of restricted stock issued to
Geller & Co. upon closing of the Merger resulting in an expense of $650,000.
Recruiting and relocation expenses increased to $70,000 in 1997 from $6,000 in
1996 as a result of the Company building a permanent staff and reducing reliance
on contractors.  Rent expense increased to $75,000 in 1997 from $15,000 in 1996
as a result of relocating operations from Harrah's corporate headquarters to
dedicated leased space for the Company.  Also included in general and
administrative expense is a $449,000 write-down in the value of real estate
and other assets owned by the Company's wholly-owned subsidiary, Creator Island
Equities, Inc.

Consulting expenses for the 1997 period were $2.9 million compared to $390,000
in 1996.  The increase is primarily due to the $2.4 million expensed for the
Grymyr consulting agreement.

Legal expenses were $531,000 and $74,000 for the 1997 and 1996 periods
respectively.  The increase in legal expenses is due to costs of the Merger,
financing activities and U.S. reporting requirements.

Interest expense, including amortization of finance fees on Company debt,
totaled $4.1 million for the 1997 period and $176,000 for the 1996 period. The
1997 expense is composed of $3.5 million for the beneficial conversion feature 
of the Harrah's Loan, interest on convertible debentures and amortization
of finance fees related to the debentures. The 1996 expense is related to
interest on the convertible note due to B/E Aerospace.

Depreciation and amortization for the 1997 period includes approximately
$2.4 million for amortization of the excess purchase price over assets acquired
when the Company purchased the minority interest in Old IEL from Harrah's.

An extraordinary expense of $1,824,000 was recorded in the period for early
extinguishment of the note due to BEA when it was exchanged for the Class A
Preference Shares.  There were no comparable expenses in the 1996 period.

Liquidity and Capital Resources

At September 30, 1997 the Company had a working capital deficit of $674,493.
The Company's primary source of funding has been through sales of its equity and
securities convertible into equity.

Subsequent to the end of the period, the Company completed agreements with two
investors for the private placement of 987,463 shares of Common Stock for an
aggregate purchase price of $3.2 million.  $1.7 million was received upon
closing with the remaining $1.5 million to be funded upon and is contingent upon
completion of the first flight with the Company's software available in all
seats of a Singapore Airlines aircraft.  For each five shares of Common Stock
purchased and held for a minimum of six months, the investors will receive one
warrant for the purchase of additional shares.  Warrants are to be exercisable
at a price of $3.80 per share for 18 months from their issue.  The Company is

                                    Page 17
<PAGE>
 
attempting to raise an additional amount of approximately $4.3 million on
similar terms and believes that its efforts will be successful.

The Company has not yet generated any operating revenue under its agreements
with Singapore Airlines.  Until the Company receives sufficient cash flow from
operations, additional funding will be required to allow the Company to continue
operations during 1998.  Absent sufficient cash flow from operations, the short-
term viability of the Company and the Company's ability to continue its
operations is directly dependent upon the completion of significant additional
financing.

New Financial Accounting Standards
----------------------------------

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share".  This statement, effective
for fiscal years ending after December 15, 1997, simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, "Earnings
per Share," and makes them comparable to international EPS standards.  Early
adoption of this standard is not permitted, and the Company has not determined
the future financial statement impact of adopting this statement.

Forward-Looking Information
---------------------------

Except for historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements (within the
meaning of Section 27A of the Securities Act of 1993, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended) that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in such forward-looking statement.  Such risks and
uncertainties include the inability to complete integration and testing of the
Company's software with the Matsushita system and the implementation of the
software by Singapore Airlines.


                                    Page 18
<PAGE>
 
PART II.  OTHER INFORMATION

Item 6.  Exhibits and reports on Form 8-K

(a)  Exhibits

Exhibit
Number      Description of Exhibits
-------     ----------------------------------------------

1.1+        Articles of Incorporation and Bylaws of the Company (Yukon
            Territory).

1.2++       Articles of Continuance and Bye Laws (Bermuda)

3.1+        Asset Purchase Agreement, as amended, dated November 7, 1991, among
            Sky Games International, Inc. ("SGII"), the Company and Sky Games
            International, Corp. (formerly Forty-Four Inc.) ("SGIC") and
            amendments thereto.

3.2+        Escrow Agreement dated May 27, 1992, as amended, among Montreal
            Trust Company of Canada, the Company and certain shareholders.

3.4+        Indemnification Agreement dated February 19, 1993, between SGII and
            SGIC.

3.5+        Cooperation Agreement dated May 20, 1993, by and among BE Aerospace,
            Inc. ("BEA"), the Company and SGII.

3.6+        Lease dated November 3, 1992, between Leifer Trust and the Company.

3.7+        Lease dated March 17, 1992, between Murray & Company Limited and the
            Company.

3.8#        Termination Agreement and Mutual Release, dated as of December 30,
            1994, among the Company, BEA and SGIC.

3.9++*      Services Agreement, Dated as of November 7, 1995, between IEL and
            Singapore Airlines Limited.

3.10++*     Software License and Software Services Agreement, dated as of
            November 7, 1995, between IEL and Singapore Airlines Limited.

3.11+++     Sublease Agreement dated as of June 5, 1997, between IEL and
            Harrah's Operating Company, Inc.

3.12+++     Redemption Agreement, dated as of February 25, 1997, between the
            Company and Anthony Clements and Rex Fortescue.

3.13+++     Redemption and Cancellation Agreement, dated as of April 30, 1997,
            between the Company and Sky Games International, Inc.

3.14+++     Consulting Agreement, dated as of April 30, 1997, between the
            Company and James P. Grymyr.

                                    Page 19
<PAGE>
 
3.15+++     Shareholder Rights Agreement, dated June 17, 1997, between the
            Company and Harrah's Interactive Investment Company.

3.16+++*    Software License Agreement, dated June 17, 1997, between the Company
            and Harrah's Interactive Investment Company. (20 pages omitted.)

3.17+++     Continuing Services Agreement, dated June 17, 1997, between the
            Company and Harrah's Interactive Entertainment Company.

3.18@       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.

3.19@       Registration and Preemptive Rights Agreement, Dated June 17, 1997,
            between the Company and Harrah's Interactive Investment Company.

3.20@       Registration Rights Agreement, dated June 17, 1997, between the
            Company and B/E Aerospace, Inc.

3.21+++     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.

3.22        Subscription Agreement, dated as of October 22, 1997, between the
            Company and Henderson International Investments Limited.

3.23        Subscription Agreement, dated as of October 22, 1997, between the
            Company and Michael A. Irwin.

27          Financial Data Schedule

+Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form 20-F (File No. 0-22622) as filed with the
Securities and Exchange Commission on October 12, 1993.

++Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on October 30, 1995.

+++Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on September 12, 1997

#Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on September 16, 1996.

@Incorporated by reference to the exhibits to the Company's Form 8-K as filed
with the Securities and Exchange Commission on June 26, 1997.

*Confidential treatment has been requested.

(b)  Reports on Form 8-K

        8-K filed September 15, 1997 for capital raising events occurring on
September 15, 1997

                                    Page 20
<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


July 8, 1998                       BY:  /s/ David B. Lamm
                                        --------------------------------------
                                        Chief Financial Officer

July 8, 1998                       BY:  /s/ Michael A. Irwin
                                        --------------------------------------
                                        Director of Finance and Administration
                                        (Chief Accounting Officer)

                                    Page 21