INTERACTIVE ENTERTAINMENT LTD, 10-K, 1998-03-31

INTERACTIVE ENTERTAINMENT LTD
10-K, 1998-03-31
MISCELLANEOUS MANUFACTURING INDUSTRIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

FORM 10-K

(MARK ONE)
[_]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended

[X]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from March 1, 1997 to December 31, 1997

COMMISSION FILE NO. 0-22622

INTERACTIVE ENTERTAINMENT LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
I.R.S. NO. 98-0170199

(I.R.S. EMPLOYER IDENTIFICATION NO.)
BERMUDA
(JURISDICTION OF INCORPORATION)

845 CROSSOVER LANE, SUITE D-215
MEMPHIS, TN 38117
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 901 537-3800

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
<S> <C>
Common Stock, Par Value $0.01 per share Nasdaq SmallCap Market
(the "Common Stock")
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
be best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price of $3.25 for the Common Stock as
reported by the Nasdaq SmallCap Market on March 12, 1998 is $43,206,413.

The number of shares outstanding of the issuer's Common Stock, as of March
12, 1998: 20,181,196 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders, which will be filed within 120 days after the end of the fiscal
year, are incorporated by reference into Part III hereof.

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<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
Part 1
Item 1 Corporate History and Development...................... 1
Business Overview...................................... 1
The Product............................................ 2
The Industry........................................... 3
Competition............................................ 3
Market and Marketing................................... 3
Manufacturing.......................................... 4
Sky Games System Acquisition........................... 4
The Amalgamations...................................... 4
Major Customers........................................ 5
Employees.............................................. 6
Item 2 Properties............................................. 6
Item 3 Legal Proceedings...................................... 6
Item 4 Submission of Matters to a Vote of Security Holders.... 6
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters................................... 7
Item 6 Selected Financial Data................................ 8
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
Overview............................................... 9
Results of Operations.................................. 10
Liquidity and Capital Resources........................ 12
Forward-Looking Information............................ 13
Item 8 Financial Statements and Supplementary Data............ 13
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 13
Part III
Item 10 Directors and Executive Officers of the Registrant..... 14
Item 11 Executive Compensation................................. 14
Item 12 Security Ownership of Certain Beneficial Owners and
Management............................................ 14
Item 13 Certain Relationships and Related Transactions......... 14
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K.............................................. 15
Signatures............................................. 18
Financial Statements................................... F-1
</TABLE>
<PAGE>

PART I

ITEM 1. BUSINESS

Corporate History and Development

Interactive Entertainment Limited (formerly Sky Games International Ltd.,
the "Company" or "IEL") was incorporated pursuant to the laws of the Province
of British Columbia on January 28, 1981 under the name Tu-Tahl Petro Inc. On
May 10, 1990, the Company changed its name to Creator Capital Inc. The Company
was reincorporated through the continuance of its corporate existence from the
Province of British Columbia to the Yukon Territory on July 15, 1992. On
January 23, 1995, the Company changed its name to Sky Games International Ltd.
("SGI"). Effective February 22, 1995, the Company continued its corporate
existence from the Yukon Territory to Bermuda as an exempted company under the
Companies Act 1981 (Bermuda) (the "Bermuda Act"). In June, 1997, the Company
changed its name to Interactive Entertainment Limited following consummation
of the amalgamation of the Company's wholly-owned subsidiary, SGI Holding
Corporation Limited ("SGIH"), and SGIH's formerly 80% owned subsidiary, then
known as Interactive Entertainment Limited ("Old IEL"), which was followed
immediately by an amalgamation of SGI with the survivor of the first
amalgamation, (the "Amalgamations"). Unless the context otherwise requires,
the term "Company" refers to Interactive Entertainment Limited, its wholly-
owned subsidiaries, Sky Games International Corporation ("SGIC"), and Creator
Island Equities Inc., and for periods prior to June 17, 1997, also SGIH and
Old IEL, which was the Company's principal operating subsidiary from December
30, 1994, through such Amalgamations. Also included is IEL (Singapore) Pte.
Ltd., a wholly-owned subsidiary of the Company.

The initial purpose of the Company was natural resource exploration and
development; however, since January 1991 the Company has concentrated its
efforts on acquiring, developing and commercializing a gaming technology
marketed as Sky Games(TM) for inflight use by international airline passengers
and patrons in other non-traditional gaming venues. In pursuit of this
purpose, the Company in 1991 acquired the principal assets of Nevada-based Sky
Games International, Inc. ("SGII"). In late 1994, the Company formed Old IEL
as a joint venture with subsidiaries of Harrah's Entertainment, Inc.,
("Harrah's"), which resulted in the transfer to Old IEL of the Company's
inflight gaming business and the execution of a management agreement with
Harrah's with respect to Old IEL and other related relationships. Pursuant to
such management agreement, Old IEL's operations were managed by a Harrah's
subsidiary. The description herein of the Company's operations from December
30, 1994 through June 17, 1997 with respect to inflight gaming activities
refers to the operations of Old IEL under the management of this subsidiary of
Harrah's. Until the Amalgamations, because the management of the business of
Old IEL had been substantially delegated to a third party manager the
management and affairs of the Company were subject to numerous contractual
requirements and limitations.

Business Overview

The Sky Games(TM) system was developed to introduce gaming to international
airline passengers. The system is designed to enable users to play a number of
casino-type games from their seats by way of a built-in, color, interactive,
in-seat monitor. The product design in its current form has only recently been
possible since audio-video interactive inflight entertainment hardware ("IFE")
systems have only recently been commercially introduced. The IEL system has
been integrated with the IFE systems offered by Matsushita Avionics Systems
Corporation ("MASC") and is also intended to be interfaced with systems
manufactured by other leading manufacturers including, among others, B/E
Aerospace, Inc. ("BEA"), Rockwell International Corp., Sony Trans Com Inc. and
The Network Connection, Inc.

The Company believes that an opportunity exists to introduce casino games on
international air flights, based on the following factors: (i) many commercial
international air routes involve long flights which create the opportunity for
the entertainment of passengers; (ii) many airlines have indicated that they
view IFE systems as a source of additional revenue; (iii) in certain parts of
the world and in certain markets, gaming is increasing in popularity and
public acceptance; and (iv) as with all casino style gaming, the odds are in
favor of the "house" when played over a period of time. The Company has
conducted limited field surveys in conjunction with

1
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affiliates of Harrah's to measure passenger reaction to inflight gaming in
general and to gather statistical information related to game preferences,
projected passenger participation, betting limits and acceptance of the
Company's software design. These surveys support the Company's belief
regarding inflight gaming.

The Company has made proposals to and held discussions with major airlines
in Europe and Asia, and in April of 1996, the Company announced the signing of
a three-year contract, subject to a two-year extension term, for the provision
of gaming services to Singapore Airlines ("SIA"). The term would commence with
SIA's acceptance, for use on its aircraft, of the Company's gaming software.
However, the agreement with SIA is subject to a trial period and to
termination by either party upon the occurrence of specified events.
Consequently, the agreement may not be in effect through the entirety of its
initial term or any extension term. The agreements with Singapore Airlines
consist of a license of the Sky Games(TM) system to the airline and a services
agreement under which the Company will manage certain aspects of the airline's
inflight gaming operations. While the Company intends that future contracts
will have a similar structure, the Company recognizes that different
arrangements may be required to work with different airlines. Fees payable by
the airline are a percentage of the net revenues generated from inflight
gaming activities. If results from the SIA operation are successful, the
Company believes additional contracts can be reached with additional carriers.

The commencement of gaming operations on an airline will require the
successful installation on the airline's aircraft of an IFE system. The
Company currently does not manufacture, provide, install or service IFE
systems. The Company understands that in the past, several airlines have
experienced difficulties with the installation and testing of IFE systems, but
based on discussions among the Company, various airlines and the IFE system
providers, the Company believes that these difficulties will be overcome. SIA
has installed IFE systems on their total fleet of 53 wide-body aircraft.

On January 13, 1998, IEL completed the acquisition of London-based Inflight
Interactive Limited ("IIL"). The acquisition has resulted in increased product
offerings in the way of games of skill and amusement. As a result of the
acquisition, IEL anticipates that it will gain greater market access to the
world's leading air carriers.

The Product

The IEL system is a self-contained, computerized gaming system that enables
airline passengers to play popular casino-style games at their seats. Airlines
can add gaming to aircraft fitted with compatible IFE equipment with only
nominal retrofitting cost and little or no aircraft downtime.

The IEL software was designed and written in layers. This layered approach
effectively insulates the top-level applications (gaming software) from the
specifics of the underlying hardware. The first level of software is composed
of device and system drivers. Where the hardware is unique to the specific
system, the drivers are provided by the hardware supplier. As additional
layers of software are added, the interface becomes less hardware specific.
The goal is to reach a level of abstraction sufficiently removed from the
hardware details so that the application software needs to have little, or
perhaps no, direct knowledge of the hardware that is supporting the operating
environment. This top-level interface is the Application Programming Interface
("API"). The IEL software is written to the Microsoft Windows API. The service
integrator will provide an API or APIs that will extend the Windows API by
providing access to IFE specific functions. Any Intel based platform that can
support Microsoft Windows will provide the necessary operating environment for
the gaming software.

The Company has been granted federal registration of the Sky Games logo and
the slogan "We Make Time Fly" by the U.S. Patent and Trademark Office. In
addition, the Company has applied for registration of the Sky Casinos
International logo and the marks "Sea Games International" and "Sky Play." At
this time the Company has not applied for any patents. Upon completion of
successful testing results, an assessment will be made of the Company's gaming
systems and designs and patent applications may be filed where appropriate.
The Company's proprietary software is copyrighted and contains security
features designed to "lock" the software if it is tampered with.

2
<PAGE>

In order to operate the Sky Games(TM) system in commercial settings, the
Company must provide additional hardware and software systems necessary to
properly record and account for gaming activities by patrons. The Company has
designed accounting and financial control systems for the management of
inflight gaming operations. Inflight gaming transactions will be conducted
through major credit cards. The major credit card companies have developed
rules for the use of their cards in connection with inflight gaming wherein,
presently, the maximum purchase of gaming credits on a credit card is U.S.
$350 and winnings are capped at U.S. $3,500.

The Industry

The Boeing Company's 1997 Current Market Outlook forecast passenger traffic
growth of 4.9% annually over the next 20 years. The report noted that, to meet
that growth, airlines are expected to add over 16,000 airplanes worth more
than $1.1 trillion to their fleets. Other industry sources estimate that
approximately half of new aircraft deliveries are expected to be wide body,
long-haul aircraft that will represent a substantial market for IFE systems
and inflight gaming.

Industry statistics indicate that gaming, in general, is gaining increased
market acceptance in many regions of the world and that U.S. casino revenue
increased from U.S. $8.9 billion in 1991 to U.S. $22.8 billion in 1996. North
Americans account for only a portion of the worldwide gaming industry. Casino
gambling, for example, also exists in Australia, the Bahamas, Canada, Denmark,
Chile, Germany, Great Britain, Malaysia, Monaco, the Netherlands, Puerto Rico,
South Africa, Switzerland, Turkey and Uruguay. The U.S. Department of
Transportation estimated in March, 1996, that the potential inflight gaming
revenue for non-U.S. airlines is approximately $480 million per year.

The Company anticipates that the IFE industry will grow rapidly over the
next three to five years as airlines commit to interactive IFE hardware based
on improved product reliability and demonstrated revenue generation.
Accordingly, the Company is committed to building its core business by
focusing initially on the airline market but also investigating the potential
of other venues such as cruise ships, ferry boats, trains and hotel rooms.

Competition

The Company understands that several companies are working on inflight
gaming systems, including InterGame and Interactive Flight Technologies, Inc.
("IFT"). Both of these companies have announced agreements with airlines to
provide inflight gaming systems. Unlike the Company, IFT provides the IFE
hardware in addition to gaming software. IFT's business plan was based on
allowing airlines to finance the purchase of the system out of a share of
gaming revenues. IFT launched inflight gaming with Swissair in January 1997
and announced shortly thereafter that gaming revenues were not sufficient to
support the financing of their system. IFT is currently seeking areas for
alternative business development. InterGame announced in March 1998 that it
had launched its gaming software with Lauda Air. These companies may have
significantly greater financial and technical resources than the Company, and
there can be no assurance that the Company will be able to compete effectively
with such companies. The Company believes that in the event inflight gaming
and related activities become more established, additional competitors with
alternate approaches are likely to enter the business. Other inflight
offerings, such as shopping and movies, could also be considered as indirect
competition.

Competition in the development of products for the inflight entertainment
industry is strong; however, the Company believes that few products currently
are being developed that provide the airlines with a means to generate revenue
comparable to inflight gaming.

Market and Marketing

In the very competitive airline market, airlines are seeking a distinctive,
competitive edge to attract and retain paying customers. Entertainment and
service systems are forming a part of airlines' current business strategy.

3
<PAGE>

The Company's primary target market is Asian and Pacific Rim airlines whose
passengers, with certain exceptions, generally have a broad cultural
acceptance of gaming. The Company believes that the Latin American and
European markets may also hold strong potential. Gaming is prohibited on the
aircraft of U.S. commercial air carriers and on all flights to and from the
United States.

The Company believes that the principal benefits of its product to the
airlines will be the ability to enhance entertainment offerings to passengers
and airline participation in a potential revenue stream. IFE systems are
capital intensive; however, providing passenger service and comfort,
especially for first and business class travelers, is a major area of
competition for airlines. The Company believes that new methods of increasing
revenues while providing a high level of service will be seriously considered
by airlines; however, there can be no assurance that IFE systems or inflight
gaming will be among the alternatives selected by airlines. Although the
system is designed for gaming using money, the Company believes that the
system could be adapted to "pay-for-play" mode in those circumstances where
gambling for money is not legal and that a system utilizing frequent flyer
credits and other rewards can be integrated as part of the gaming program.

Recent economic developments in Asia may cause airlines to cancel or delay
purchases of new aircraft and/or IFE systems. Most airlines serving the Asian
market have recently reported a decrease in passenger load factors, and some
have announced reductions in flight frequencies and eliminations of service to
some markets. It is possible that these events will adversely affect the
Company's ability to execute its business plan.

The Company expects to derive its income from a share of gaming earnings and
does not anticipate selling its gaming products to generate revenue. Airlines
will receive a percentage of net revenue generated by Sky Games(TM) on their
respective flights. Passenger payouts and certain direct operating costs will
be deducted from revenue and the "win" split on a negotiated basis. Airlines
currently have similar revenue-sharing arrangements with other product/service
providers, such as inflight communication companies (e.g. GTE Airfone). The
Company expects to provide certain training, banking, accounting and
administrative functions. The airline will provide the aircraft, the
equipment, the passengers and inflight personnel.

Manufacturing

As a software producer and operator, the Company has no manufacturing
capability. The Company's software is being designed to interface with in-
cabin hardware, including onboard computers, file servers, distribution and
communication systems, manufactured by various suppliers for the airlines.

Sky Games System Acquisition

On November 7, 1991, the Company entered into an agreement, with subsequent
amendments, with Sky Games International, Inc. ("SGII") to purchase
technology, proprietary rights and prototypes of the casino games known as
"Sky Games." The purchase price of the assets was 300,000 shares of the
Company's $.01 par value common stock (the "Common Stock") issued to SGII at a
deemed price of $1.65 per share, plus an additional 3,000,000 shares of Common
Stock held 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"). Of the 3,000,000 shares, 2,000,000 were issued to SGII
and 1,000,000 shares to Anthony Clements, an advisor to and director of the
Company. The Performance Shares are held in escrow by Montreal Trust Company
of Canada. As of April 30, 1997, the holders of the Performance Shares have
agreed with the Company to tender such shares to the Company when and if they
are released from the escrow, and the Company has agreed to cancel such
shares. The holders of the Performance Shares have also granted an irrevocable
proxy to a bank which has irrevocably agreed not to vote such shares. Since
the Performance Shares are subject to cancellation and may not be voted,
management of the Company does not consider the Performance Shares to be
outstanding.

The Amalgamations

Effective as of December 30, 1994, the Company, through SGIH, and Harrah's
Interactive Investment Company ("HIIC") completed the formation of Old IEL as
a joint venture corporation incorporated as an

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exempted company under the Bermuda Act. At the same time, (i) Old IEL entered
into a management agreement (the "Management Agreement") with Harrah's
Interactive Entertainment Company (the "Manager"), (ii) the prior consulting
agreement between Harrah's and SGIC was terminated, (iii) SGIC assigned all
right, title and interest in the Sky Games(TM) system and related trademarks
and trade names to the Company, and (iv) the Company licensed the Sky
Games(TM) system and certain related trademarks and trade names to Old IEL. In
connection with the Amalgamations, the contractual agreements with the
affiliates of Harrah's were terminated.

The ownership interests of the Company and HIIC in Old IEL were 80% and 20%,
respectively, prior to the Amalgamations. The Company and HIIC had funded a
total of $5 million to Old IEL. Additional capital, if not available from
third parties, was to have been provided by the Company and HIIC in proportion
to their shareholdings. The Executive Committee of Old IEL was to determine
whether additional capital was to be provided as equity or debt. Under the
shareholders agreement, each party had certain options with respect to the
other party's stock. The shareholders agreement was terminated effective June
17, 1997.

The Manager had been granted and had assumed broad responsibility for
managing the business of Old IEL, including completing the development of and
improving the Sky Games(TM) software and all other systems, marketing to
airlines and customers and day-to-day gaming operations. The Management
Agreement had a two-year term, but could have been renewed at the Manager's
option for successive two-year terms up to a maximum term of 10 years. The
Manager had a right of first negotiation on a renewal agreement. Management
fees were dependent on the amount of gross revenues with a maximum fee of 7.5%
of gross revenues and a minimum monthly fee of $10,000. Old IEL was required
to pay all operating costs (including capital expenditures) of the business,
which included the cost of services and goods provided by the Manager and its
affiliates under the Management Agreement.

The Manager could have declared a default under the Management Agreement if
IEL, SGIH, any of SGIH's affiliates or any of their officers, directors or
employees committed any act that the Manager determined could have affected
any gaming license or approval (whether or not any regulatory action was
commenced or threatened) held by the Manager, any of its affiliates, Old IEL,
SGIH or any of SGIH's affiliates.

The Amalgamations were consummated on June 17, 1997, and, in conjunction
with the Amalgamations, the Management Agreement was terminated, and
management of the Company assumed direct responsibility for day to day
operations. The Company also entered into a Continuing Services Agreement with
Harrah's for certain services.

The Company had exclusively licensed Old IEL to use certain of the Sky Games
trademarks, trade names and other trade rights. This license was replaced in
the Amalgamations by a similar license to Harrah's for use of the Company's
software, as it existed on June 17, 1997, in traditional casino venues owned,
operated or managed by Harrah's. The license is royalty-free, worldwide and
non-terminable.

In 1994, the Company terminated certain contractual rights previously
granted to BEA in connection with the development of an earlier generation
product for inflight gaming use. In connection with this termination, the
Company issued a U.S. $2,500,000 convertible promissory note due March 30,
1997. The unpaid balance of the note, including accrued interest, was
exchanged for Redeemable Convertible Class A Preference Shares in the Company
on June 16, 1997.

Major Customers

The Company's only contract for its gaming application is with Singapore
Airlines. On January 13, 1998, the Company completed the acquisition of IIL.
IIL is a U.K. company that provides games of amusement to Cathay Pacific
Airways, Egypt Air, Lauda Air, Malaysia Airlines and Virgin Atlantic Airways.

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Employees

During the current fiscal year, the Company consolidated the operations of
its former Vancouver corporate office into the Memphis, Tennessee headquarters
office of its former operating subsidiary. The Company had 18 employees as of
March 1, 1998. Fifteen employees work out of its Memphis headquarters, one
employee is based in Seattle, Washington, and one is based in Singapore. The
acquisition of IIL in January, 1998 added one employee based in London. Labor
relations with employees are good, and none of the Company's employees are
covered by collective bargaining agreements.

ITEM 2. PROPERTIES

The Company maintains its principal office in Memphis, Tennessee in
approximately 9,400 square feet pursuant to a sublease from Harrah's. The
lease provides for a monthly payment of approximately $11,000 and expires
April 30, 1999.

The Company rents approximately 400 square feet of office space from SIA on
a month-to-month basis for its Singapore subsidiary at a cost of approximately
$800 per month.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently a party to any material pending legal
proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual General Meeting for the fiscal year ended
February 28, 1997 on October 17, 1997. The following matters were voted upon
at the meeting:

1. Election of seven persons to the Board of Directors;

2. Approval and ratification of the Company's Management Incentive Plan;
and

3. Appointment of Ernst & Young LLP as the Company's independent public
accountants.

There were 13,398,086 shares of Common Stock voted at the 1997 Annual
General Meeting as follows:

1. Election of Directors:

<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD ABSTAIN
--------------- -------------- -----------
NOMINEE NUMBER % NUMBER % NUMBER %
------- ---------- ---- --------- ---- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Malcolm Burke................... 12,936,846 96.6 350,440 2.6 110,800 0.8
Anthony P. Clements............. 12,889,206 96.2 398,080 3.0 110,800 0.8
Brian Deeson.................... 13,129,857 98.0 157,429 1.2 110,800 0.8
Laurence Geller................. 11,130,036 83.1 2,157,250 16.1 110,800 0.8
Phillip Gordon.................. 11,161,256 83.3 2,126,030 15.9 110,800 0.8
Amnon Shiboleth................. 11,008,039 82.2 2,279,247 17.0 110,800 0.8
Gordon Stevenson................ 13,114,357 97.9 172,929 1.3 110,800 0.8
</TABLE>

2. Approval of Management Incentive Plan

<TABLE>
<S> <C> <C>
For...................................................... 8,205,815 61.3%
Against.................................................. 2,966,713 22.1%
Abstain.................................................. 115,183 0.9%
Not Voted................................................ 2,110,375 15.7%
</TABLE>

3. Approval of Ernst & Young LLP

<TABLE>
<S> <C> <C>
For..................................................... 13,289,226 99.2%
Against................................................. 91,081 0.7%
Abstain................................................. 17,779 0.1%
</TABLE>

6
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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since July 8, 1997, the Company's Common Stock has been traded on the Nasdaq
SmallCap Market under the symbol "IELSF." From March 1, 1994 until July 8,
1997, the Company's shares traded on the Nasdaq SmallCap Market under the
symbol "SKYGF."

The table below sets forth, for each fiscal quarter within the last two
years, the reported high and low closing prices of the Common Stock as
reported by the Nasdaq SmallCap Market.

<TABLE>
<CAPTION>
TWELVE MONTHS TEN MONTHS
ENDED ENDED
FEBRUARY 28, DECEMBER 31,
1997 1997
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter................................. $6.250 $2.625 $5.000 $4.125
Second Quarter................................ $5.875 $2.875 $4.625 $2.625
Third Quarter................................. $4.625 $3.375 $4.938 $2.375
Fourth Quarter................................ $5.000 $3.125 $4.500 $2.375
</TABLE>

As of February 12, 1998, there were 250 shareholders of record. Since
certain of the shares of Common Stock are held by brokers or other nominees,
the number of record holders may not be representative of the number of
beneficial holders. The Company believes there are approximately 2,600
beneficial holders of the Company's Common Stock.

The Company has not paid any cash dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.

The Nasdaq SmallCap Market adopted revised Marketplace Rules for continued
listing which became effective February 23, 1998. Except as discussed below,
the Company believes that it is in compliance with the new listing
requirements. The listing requirements state that a company's by-laws must
provide that a quorum for any meeting of the shareholders is at least 33 1/3%
of the outstanding shares of a company's common voting shares. The Company's
bye-laws are consistent with the Bermuda Companies Act 1981 which provide that
at least two shareholders may constitute a quorum. The Company has requested
an exemption from the revised rules.

On October 22, 1997, 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 the
entire cabin 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 warrants for the purchase of one additional share. Warrants will be
exercisable at a price of $3.8125 per share for 18 months from their issue.

On March 19, 1998, the Company began negotiating the modification of the
terms of the remaining $1.5 million of the private placement. Under the
proposed terms, 50% of the remaining portion ($750,000) would be funded
immediately, while the other 50% would be funded under the terms of the
original agreement. The subscription price for the Common Stock would be
revised to $2.62. Warrants scheduled to be issued in connection with the
initial funding of $1.5 million would not be issued. For each Common Share
purchased under the proposed revised agreement and held for a six-month
period, the investor would receive 0.85 of a warrant to purchase Common Stock.
The warrants, if issued, would have an exercise price of $2.62 and a term of
18 months.

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<PAGE>

On December 17, 1997, the Company issued 1,000 shares of Series A
Convertible Preference Shares of the Company's Class B Preferred Stock for a
total consideration of $1,000.000. The Series A Class B Preference Shares are
convertible after three months into a number of shares of Common Stock,
determined by dividing the stated value of $1,000 per share by the lesser of:
$3.2038 (the "Fixed Conversion Price") and a price (the "Floating Conversion
Price") calculated by (i) determining the average of the three lowest closing
bid prices for the Common Stock during the thirty trading days occurring
immediately prior to, but not including, the conversion date, and (ii)
multiplying such average by 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 has the option of
selling a second tranche with 123,432 warrants for an aggregate purchase price
of $2,000,000. The Company's option with respect to the second tranche, which
expires on June 17, 1998, is not exercisable until the Company's gaming
software has been installed and is available to paying passengers in the
entire cabin of a Singapore Airlines aircraft. The Series A Class B Preference
Shares do not have any voting rights.

ITEM 6. SELECTED FINANCIAL DATA

(in thousands, except share and per share data)

<TABLE>
<CAPTION>
TEN MONTHS
ENDED FISCAL YEAR ENDED FEBRUARY 28 OR 29
DECEMBER 31 ---------------------------------------
1997 1997 1996 1995 1994
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Loss before extraordinary
item.................... $ 28,988 $ 4,180 $ 4,167 $ 5,684 $ 1,709
Extraordinary loss....... 1,824 -- -- -- --
---------- --------- --------- --------- ---------
Net loss................... $ 30,812 $ 4,180 $ 4,167 $ 5,684 $ 1,709
========== ========= ========= ========= =========
Loss per share before
extraordinary item........ $ 1.87 $ 0.46 $ 0.52 $ 0.79 $ 0.26
Extraordinary loss......... .12 -- -- -- --
---------- --------- --------- --------- ---------
Loss per share............. $ 1.99 $ 0.46 $ 0.52 $ 0.79 $ 0.26
========== ========= ========= ========= =========
Weighted number of common
shares outstanding (1).... 15,562,834 9,043,687 7,942,332 7,160,279 6,465,854
Number of common shares
outstanding at period end
(1)....................... 19,428,334 9,789,020 8,521,434 7,290,624 7,076,124
</TABLE>

<TABLE>
<CAPTION>
AS OF AS OF FEBRUARY 28 OR 29
DECEMBER 31 ------------------------------
1997 1997 1996 1995 1994
----------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)......... $ 697 $ (172) $ (280) $ (522) $2,275
Total assets...................... 17,395 3,525 3,861 3,602 4,200
Long term debt.................... 530 2,600 2,346 2,550 --
Redeemable preferred stock........ 2,737 -- -- -- --
Shareholders' equity (deficit).... 16,221 (333) (54) (695) 4,117
Equity (deficit) per common share. $ 0.83 $(0.03) $(0.01) $(0.10) $ 0.58
</TABLE>
- --------
(1) Excludes Performance Shares

8
<PAGE>

ITEM 7. MANAGEMENT'S 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 January 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 an affiliate of Harrah's Entertainment, Inc. ("Harrah's"), to form a joint
venture then known as Interactive Entertainment Limited ("Old IEL"), the
result of which was that Old IEL became owned 80% by SGIH and 20% by Harrah's.
Pursuant to a 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 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 $.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 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 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 of Common
Stock computed on a fully-diluted basis.

Upon consummation of the Amalgamations, SGI changed its name to Interactive
Entertainment Limited, and the Board appointed Gordon Stevenson as President
and Chief Executive Officer. The Company has consolidated operations formerly
performed at its Vancouver, British Columbia office into its Memphis,
Tennessee headquarters.

The Company has yet to generate any operating revenues and has no assurance
of future revenues. Its principal activities through December 31, 1997,
consisted of developing, testing and marketing the inflight gaming software.
As of December 31, 1997, IEL had a contract to provide its gaming software to
Singapore Airlines, ("SIA"), 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 which begins following acceptance by SIA of the
Company's software for operation on one of SIA's 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 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 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.

9
<PAGE>

Although SIA has been progressively installing the Matsushita Avionics
Systems Corporation ("MASC") 2000E interactive inflight entertainment ("IFE")
system on its wide-body aircraft since 1995, only now are the true interactive
features of the system being implemented. Inflight gaming is expected to
provide the first truly comprehensive interactive use of the IFE system.
Inflight gaming is also expected to be the first use of the IFE system which
generates a significant volume of financial transactions. Therefore, both SIA
and IEL have insisted on rigorous testing prior to offering IEL's product to
SIA's passengers. In October 1997, the Company completed an initial phase of
laboratory testing of its inflight gaming system in conjunction with SIA and
MASC and received laboratory certification from Singapore Airlines. Testing of
the system then progressed to a series of test procedures on various aircraft
on the ground. Among other items, this series of tests revealed
inconsistencies in third party provided software (with which the Company's
software must be integrated) from aircraft to aircraft and, in some cases,
from one server to another server on the same aircraft. Once these issues were
resolved, testing moved to an airborne environment. One airborne test was
completed in March, 1998. The Company is currently addressing issues that
surfaced during this test. The Company's inflight gaming system is comprised
of three primary sets of software programs. One set of programs operates the
games, one set controls the operation and communications between servers on
the aircraft, and one set performs cabin management functions. Current issues
are with the programs controlling cabin management functions which are highly
customized to SIA specifications. Management expects that testing will be
completed and the inflight gaming product will be launched during the second
quarter of 1998.

The Company has developed a version of its gaming product for use on cruise
lines. It is expected that a trial will be initiated during 1998 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 can be no assurances 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.

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.

On January 13, 1998, the Company completed the acquisition of all of 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. IIL's games are currently
operating on over 50 aircraft operated by Cathay Pacific, Egypt Air, Lauda
Air, Malaysia Airlines, Saudi Arabian Airlines and Virgin Atlantic. The
agreement also provides for the Company to issue up to 250,000 additional
shares of Common Stock to the former owners of IIL upon achievement of certain
milestones regarding implementation of the Company's software with an
international airline to be designated by the parties. In February, 1998 IIL
was advised by another major airline that it has been chosen to provide
amusement games for selected aircraft of the airline's fleet. Due to existing
contractual obligations, the airline has asked that IEL not reveal its
identity until late in the second quarter of 1998.

Results of Operations

In April, 1997, the Board of Directors of the Company approved a change in
the Company's fiscal year from the end of February to the end of December.

Ten Months Ended December 31, 1997 and Twelve Months Ended February 28, 1997

General and administrative expense increased by approximately $1.5 million.
This includes an increase in payroll and related costs of approximately
$307,000 due to increased staffing and an expense in the amount of $650,000
for the value of Company stock granted to Geller & Co. whose stock became
vested following the Amalgamations. Accounting and audit fees increased by
$93,000 as a result of increased reporting requirements following a change in
the Company's status from a foreign private issuer. Travel expenses increased
by $75,000

10
<PAGE>

due to increased travel for marketing and product development. Recruiting and
relocation expenses increased by $82,000 as a result of the Company building a
permanent staff and reducing reliance on contractors. In conjunction with the
Amalgamations, the Company purchased business insurance resulting in a cost of
$79,000; the Company previously had no business insurance. Rent increased by
$92,000 primarily as a result of relocation of operations from Harrah's
corporate headquarters to dedicated leased space for the Company.

Expenses for consulting and contract labor increased by approximately $1.9
million. These expenses would have decreased by $500,000 except for the $2.4
million expense for the value of 586,077 shares of Common Stock issued to
James P. Grymyr, a former director of the Company, in payment of a consulting
agreement in the second quarter.

Legal expenses increased by approximately $411,000 due to the Amalgamations
and increased financing and reporting activities of the Company.

Interest expense, including amortization of finance fees on Company debt,
totaled $1,012,000 for the ten month period ending December, 1997 and $300,000
for the twelve month period ending February, 1997. The expense for the current
period is composed of interest on convertible debentures and amortization of
finance fees related to the debentures, while the prior period expense is
related to interest on the convertible note due to B/E Aerospace ("BEA"). The
remainder of the convertible debentures were converted into Common Stock
during the first quarter of 1998, and any unamortized finance fees as of
December 31, 1997 have been expensed.

Depreciation and amortization expenses increased by $2.8 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 prior period.

Amalgamation expenses for the ten months ended December 31, 1997 were $18.1
million including: $10,098,000 for the expense of the Common Stock issued to
Harrah's upon termination of the Management Agreement; $3,466,000 upon
expensing the value of Common Stock issued to Harrah's relating to conversion
of the Harrah's Loan; $2,561,000 upon expensing the value of the Common Stock
that may be issuable to Harrah's under a registration and preemptive rights
agreement in the event that BEA converts its Class A Preference Shares to
Common Stock; an expense of $1,840,000 for the value of the Common Stock
issued to SGII, Anthony Clements and Dr. Rex Fortescue upon their agreement to
surrender the Performance Shares for cancellation upon their release from
escrow; and $100,000 relating to closure of the Vancouver office. Except for
the last item, all Amalgamation expenses were non-cash expenses. There were no
Amalgamation expenses in the prior period.

Write-down of assets for the ten months ended December 31, 1997 includes an
adjustment of $449,000 in the value of real estate and other assets owned by
the Company's wholly-owned subsidiary, Creator Island Equities, Inc. These
assets were sold in November, 1997 at the approximate book value following the
adjustment. In December, 1997 the Company wrote off the remaining $210,000
book value of inventory owned by SGIC. The inventory consisted of parts for a
computer gaming system that had previously been in development with BEA. The
$1.3 million write-down of assets for the twelve months ended February 28,
1997 includes the write-off of $138,000 in notes receivable owed to SGIC, the
forgiveness of $550,000 in debt to SGIC in connection with an agreement to
cancel the Performance Shares, and interim write-downs of $442,000 on the
Creator Island Equities real estate and $210,000 on the SGIC inventory.
Following the write-down and disposition of assets, the Company has no
significant remaining assets that are not strategic to its current business
objectives.

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

Twelve Months Ended February 28, 1997 and February 29, 1996

The net loss for both the 1997 and 1996 periods was approximately $4.2
million. Revenue for 1997 consisted solely of interest income of approximately
$64,000 compared to $118,000 for 1996.

11
<PAGE>

General and administrative expenses decreased by approximately $987,000. The
decrease was attributable primarily to an expense of $703,000 for the value of
stock options granted to non-employees and non-directors in the 1996 period
with no comparative expense in the 1997 period. Office and administration
costs decreased by approximately $99,000 due to the closure of corporate
offices in Las Vegas, Nevada and Los Angeles, California in late 1995.

Consulting and contract labor costs for 1997 were approximately $1,195,000
compared to approximately $707,000 in 1996. Included were Old IEL costs of
approximately $870,000 for 1997 and $434,000 for 1996. The increase is due to
an increase in staffing needs that was fulfilled through the use of contract
labor.

Interest expense declined by approximately $306,000 due to the Company's
efforts at securing equity capital and reducing reliance on debt instruments
to fund operations.

Asset write-down costs increased by $567,000. In the 1996 period, the
Company wrote down $457,000 of previously deferred technology costs and wrote
off approximately $316,000 in notes receivable.

Liquidity and Capital Resources

At December 31, 1997 the Company had working capital of approximately
$697,000. The Company's primary source of funding has been through sales of
its equity and securities convertible into Common Stock.

During the ten months ended December 31, 1997, the Company sold a total of
$2,163,250 in convertible debentures in four different private sales. The
debentures were generally convertible into shares of Common Stock at the lower
of a 15% discount to market at the time of purchase or a 22.5% discount to
market at the time of conversion. A total of $1,633,250 of debentures were
converted into 808,520 shares of Common Stock during the year and a principal
amount of $530,000 remained outstanding as of December 31, 1997. Subsequent to
the end of the year, the remaining debentures have been converted.

In October, 1997, 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. These warrants are exercisable at a
price of $3.8125 per share for 18 months from their issue.

In December, the Company completed agreements with two investors for the
private placement of 3,000 shares of, Series A Class B Convertible Preferred
Stock, (the "Preferred Stock"), at $1,000 per share. The Preferred Stock is
entitled to receive a quarterly dividend at the rate of 8.0%. The Company has
the option of paying the dividend in cash or in additional shares of Common
Stock subject to certain notice provisions. $1.0 million was received upon
closing with the remaining $2.0 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. The investors received a total of
61,718 warrants to purchase Common Stock. The Preferred Stock is convertible
into Common Stock at the lower of $3.2038 or a sliding discount to market at
the time of conversion. The

12
<PAGE>

warrants are exercisable for a period of 18 months at a price of $3.2038. The
investors will receive an additional 123,432 warrants upon funding of the
second tranche.

Subsequent to the end of the year, 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 Stock has the same dividend and conversion features as
the Series A Class B Convertible Preferred Stock. The investor also received a
warrant to purchase 18,515 shares of Common Stock at a price of $3.2038 for 18
months.

During the second quarter of 1997, the Company established a target of
raising a total of $8.0 million in equity to provide funding for the Company's
operating needs until such time as management believes that the Company will
be receiving a positive cash flow from operations. Through March, 1998 a total
of $6.5 million had been either raised or committed to the Company. The
Company is currently negotiating commitments for additional capital to
complete its equity target and believes that these efforts will be successful
during the second quarter of 1998.

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.

Forward-Looking Information

Except for historical information contained herein, the matters discussed in
this Annual Report on Form 10-K 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 statements. Such risks
and uncertainties include the inability to complete integration and testing of
the Company's software, the implementation of the software by Singapore
Airlines and the Company's ability to raise the necessary capital to fund its
operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and Supplementary Data are provided as an exhibit to
Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

As of September 15, 1997, the Company accepted the resignation of Buckley
Dodds, Chartered Accountants, as independent Canadian auditor to the Company.
Buckley Dodds, Chartered Accountants, reports on the financial statements for
the past two years have not contained any adverse opinions or disclaimer of
opinions and have not been qualified as to uncertainty, audit scope, or
accounting principles. There were no disagreements with Buckley Dodds,
Chartered Accountants, during the two most recent fiscal years and any
subsequent interim period. Buckley Dodds, Chartered Accountants, had, since
June 30, 1992, acted as independent auditor for the Company.

As of September 15, 1997, the Executive Committee of the Company approved
the appointment, which was approved by shareholders on October 17, 1997, of
Ernst & Young LLP as a new independent accountant to the Company for the
ensuing year at a remuneration to be negotiated by management and approved by
the board of directors of the Company. Ernst & Young LLP was selected by the
Company on account of the increasing importance of U.S. GAAP to the accounting
practices and disclosures of the Company, which resulted from the Company's
1997 change of its status from that of a foreign private issuer, and the fact
that Ernst & Young LLP is also experienced in auditing financial statements
prepared under Canadian GAAP, which the Company will continue to prepare for
certain continuing Canadian reporting purposes.

13
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

See the information set forth in the sections of the Proxy Statement
entitled "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," which sections are incorporated herein by reference.

EXECUTIVE OFFICERS

See the information set forth in the section of the Proxy Statement entitled
"Executive Officers and Significant Employees," which section is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

See the information set forth in sections of the Proxy Statement entitled
"Executive Compensation," "Summary Compensation Table," and "Option Grants in
the Last Fiscal Year" which sections are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

See the information set forth under "Security Ownership by Directors,
Officers and Five Percent (or More) Shareholders" as set forth in the Proxy
Statement and incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See the information set forth in the section of the Proxy Statement entitled
"Certain Relationships and Related Transactions," which section is
incorporated herein by reference.

14
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) EXHIBITS

1.Financial Statements

Consolidated Balance Sheets at December 31, 1997 and February 28, 1997.

Consolidated Statements of Operations for:
Ten Months Ended December 31, 1997
Twelve Months Ended February 28, 1997
Twelve Months Ended February 29, 1996

Consolidated Statements of Shareholder's Equity
February 28, 1995 through December 31, 1997

Statements of Cash Flow
Ten Months Ended December 31, 1997
Twelve Months Ended February 28, 1997
Twelve Months Ended February 29, 1996

Notes to Consolidated Financial Statements

2.Financial Statement Schedule

3.Other 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. (1)
3.i(a) Articles of Incorporation (Yukon Territory). (2)
3.i(b) Certificate of Continuance (Bermuda). (3)
3.ii** Bye-Laws as amended.
4.1 Escrow Agreement dated May 27, 1992, as amended, among Montreal Trust
Company of Canada, the Company and certain shareholders. (4)
4.2 Redemption Agreement, dated as of February 25, 1997, between the Company
and Anthony Clements and Rex Fortescue. (5)
4.3 Redemption and Cancellation Agreement, dated as of April 30, 1997, between
the Company and Sky Games International, Inc. (6)
4.4 Shareholder Rights Agreement, dated June 17, 1997, between the Company and
Harrah's Interactive Investment Company. (7)
4.5 Registration and Preemptive Rights Agreement, dated June 17, 1997, between
the Company and Harrah's Interactive Investment Company. (8)
4.6 Registration Rights Agreement, dated June 17, 1997, between the Company
and B/E Aerospace, Inc. (9)
4.7 Subscription Agreement, dated as of October 22, 1997, between the Company
and Henderson International Investments Limited. (10)
4.8 Subscription Agreement, dated as of October 22, 1997, between the Company
and Michael A. Irwin. (11)
</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.1 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. (12)
10.2 Indemnification Agreement dated February 19, 1993, between SGII and SGIC.
(13)
10.3 Cooperation Agreement dated May 20, 1993, by and among BE Aerospace, Inc.
("BEA"), the Company and SGII. (14)
10.4 Termination Agreement and Mutual Release, dated as of December 30, 1994,
among the Company, BEA and SGIC. (15)
10.5* Services Agreement, dated as of November 7, 1995, between IEL and
Singapore Airlines Limited. (16)
10.6* Software License and Software Services Agreement, dated as of November 7,
1995, between IEL and Singapore Airlines Limited. (17)
10.7 Sublease Agreement dated as of June 5, 1997, between IEL and Harrah's
Operating Company, Inc. (18)
10.8 Consulting Agreement, dated as of April 30, 1997, between the Company and
James P. Grymyr. (19)
10.9* Software License Agreement, dated June 17, 1997, between the Company and
Harrah's Interactive Investment Company. (20)
10.10 Continuing Services Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Entertainment Company. (21)
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. (22)
27** Financial Data Schedule
</TABLE>

Footnotes

(1) Incorporated by reference to the same numbered exhibit to the
Registrant's Form 8-K as filed with the Securities and Exchange
Commission on June 27, 1997.
(2) 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 Securities and
Exchange Commission on October 12, 1993.
(3) 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 Securities and
Exchange Commission on September 16, 1996.
(4) 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 Securities and
Exchange Commission on October 12, 1993.
(5) 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 Securities and
Exchange Commission on September 12, 1997.
(6) 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 Securities and
Exchange Commission on September 12, 1997.
(7) 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 Securities and
Exchange Commission on September 12, 1997.
(8) Incorporated by reference to the Exhibit 4(a) to the Registrant's Form 8-
K as filed with the Securities and Exchange Commission on June 27, 1997.
(9) Incorporated by reference to the Exhibit 4(b) to the Registrant's Form 8-
K as filed with the Securities and Exchange Commission on June 27, 1997.
(10) Incorporated by reference to Exhibit 3.22 to the Registrant's Quarterly
Report on Form 10-Q as filed with the Securities and Exchange Commission
on November 19, 1997.

16
<PAGE>

(11) Incorporated by reference to Exhibit 3.23 to the Registrant's Quarterly
Report on Form 10-Q as filed with the Securities and Exchange Commission
on November 19, 1997.
(12) Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on October 12, 1993.
(13) Incorporated by reference to Exhibit 3.4 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on October 12, 1993.
(14) Incorporated by reference to Exhibit 3.5 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on October 12, 1993.
(15) Incorporated by reference to Exhibit 3.8 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.
(16) 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 Securities and Exchange
Commission on September 16, 1996.
(17) 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 Securities and
Exchange Commission on September 16, 1996.
(18) 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 Securities and
Exchange Commission on September 12, 1997.
(19) 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 Securities and
Exchange Commission on September 12, 1997.
(20) 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 Securities and
Exchange Commission on September 12, 1997.
(21) 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 Securities and
Exchange Commission on September 12, 1997.
(22) 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 Securities and
Exchange Commission on September 12, 1997.
*Confidential treatment has been requested.
**Submitted herewith.

(b) REPORTS FILED ON FORM 8-K

8-K filed October 15, 1997 for capital raising events occurring on September
30, 1997.

8-K filed December 24, 1997 for capital raising events occurring on December
17, 1997.

17
<PAGE>

SIGNATURES

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

/s/ Gordon Stevenson
By: _________________________________
Dated: March 30, 1998 President and Chief Executive
Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles L. Atwood Director March 30, 1998
____________________________________
Charles L. Atwood

/s/ John M. Boushy Director March 30, 1998
____________________________________
John M. Boushy

Director March 30, 1998
____________________________________
Malcolm P. Burke

/s/ Anthony P. Clements Director March 30, 1998
____________________________________
Anthony P. Clements

Director March 30, 1998
____________________________________
Brian Deeson

/s/ Laurence S. Geller Director and Chairman March 30, 1998
____________________________________
Laurence S. Geller

/s/ Phillip Gordon Director March 30, 1998
____________________________________
Phillip Gordon

Director March 30, 1998
____________________________________
Amnon Shiboleth

/s/ Gordon Stevenson Director, President and March 30, 1998
____________________________________ Chief Executive Officer
Gordon Stevenson

Director March 30, 1998
____________________________________
Judy Wormser

/s/ David Lamm Chief Financial Officer March 30, 1998
____________________________________
David Lamm

/s/ Michael A. Irwin Controller and Principal March 30, 1998
____________________________________ Accounting Officer
Michael A. Irwin
</TABLE>

18
<PAGE>

REPORT OF INDEPENDENT AUDITORS

THE SHAREHOLDERS OF INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheet of Interactive
Entertainment Limited and Subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the ten months then ended. Our audit also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audit. The consolidated financial statements of
Interactive Entertainment Limited and Subsidiaries for the years ended
February 28, 1997 and February 29, 1996, were audited by other auditors whose
report dated April 28, 1997 (except for Note 11(b), as to which the date is
May 14, 1997), expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the December 31, 1997 financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Interactive Entertainment Limited and Subsidiaries at December 31, 1997,
and the consolidated results of its operations and its cash flows for the ten
months ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

Memphis, Tennessee
February 11, 1998, except for the second paragraph of Note 14,
as to which the date is March 19, 1998

F-1
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets
Cash and cash equivalents.......................... $ 1,239,864 $ 626,074
Accounts and notes receivable, less allowance for
doubtful accounts of $46,828 at December 31, 1997
.................................................. 3,859 119,768
Prepaid expenses................................... 97,205 61,975
----------- -----------
Total current assets............................. 1,340,928 807,817
Property and Equipment
Land............................................... -- 800,000
Furniture, fixtures and equipment.................. 974,568 643,492
----------- -----------
974,568 1,443,492
Less accumulated depreciation...................... (154,610) (294,189)
----------- -----------
Property and equipment, net.......................... 819,958 1,149,303
Software under development........................... 1,930,218 1,357,869
Other assets......................................... 165,599 209,587
Goodwill............................................. 13,138,704 --
----------- -----------
Total assets..................................... $17,395,407 $ 3,524,576
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities..................................
Accounts payable and accrued expenses.............. $ 644,051 $ 979,948
----------- -----------
Total current liabilities........................ 644,051 979,948
Convertible debentures............................... 530,000 --
Notes payable........................................ -- 2,600,000
Minority interest.................................... -- 277,249
Shareholders' equity (deficit)
Class A preferred shares, $.01 par value,
authorized--3,000 shares; outstanding--2,737
shares at December 31, 1997....................... 27 --
Class B preferred shares, $.01 par value,
authorized--5,000,000 shares; outstanding--1,000
shares at December 31, 1997....................... 10 --
Common shares, authorized--50,000,000 shares;
outstanding--19,428,334 par value US$.01 at
December 31, 1997 and 13,314,020 par value C$.01
at February 28, 1997.............................. 194,283 106,752
Additional paid-in-capital......................... 63,512,559 16,027,379
Accumulated deficit................................ (47,485,523) (16,466,752)
----------- -----------
Total shareholders' equity (deficit)............. 16,221,356 (332,621)
----------- -----------
Total liabilities and shareholders' equity....... $17,395,407 $ 3,524,576
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
TEN MONTHS ENDED ----------------------
DECEMBER 31, FEBRUARY FEBRUARY
1997 28, 1997 29, 1996
---------------- ---------- ----------
<S> <C> <C> <C>
Operating Expenses
General and administrative.......... $ 2,376,127 $ 875,779 $1,862,742
Consulting and contract labor....... 3,092,289 1,195,068 707,090
Marketing........................... 351,582 378,037 209,196
Management fees..................... 107,584 211,000 171,307
Legal............................... 640,456 229,353 220,989
Interest expense.................... 1,012,243 300,388 605,929
Depreciation and amortization....... 2,846,580 87,976 48,903
Amalgamation expense................ 18,065,734 -- --
Interest income..................... (17,616) (63,738) (118,163)
Write-down of assets................ 676,899 1,339,279 772,731
----------- ---------- ----------
Loss before minority interest and
extraordinary item................... 29,151,878 4,553,142 4,480,724
Minority interest..................... (163,841) (372,829) (313,590)
----------- ---------- ----------
Loss before extraordinary item........ 28,988,037 4,180,313 4,167,134
Extraordinary loss.................... 1,824,222 -- --
----------- ---------- ----------
Net loss.............................. $30,812,259 $4,180,313 $4,167,134
=========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE
Numerator for basic and diluted
earnings per share:
Loss before extraordinary item...... $28,988,037 $4,180,313 $4,167,134
Preferred stock dividends........... 206,512 -- --
----------- ---------- ----------
Loss to common shareholders before
extraordinary item................. 29,194,549 4,180,313 4,167,134
Extraordinary loss.................. 1,824,222 -- --
----------- ---------- ----------
Loss to common shareholders......... $31,018,771 $4,180,313 $4,167,134
=========== ========== ==========
Denominator for basic and diluted
earnings per share--weighted average
shares outstanding................... 15,562,834 9,043,687 7,942,332
=========== ========== ==========
Loss before extraordinary item........ $1.87 $0.46 $0.52
Extraordinary loss ................... 0.12 -- --
----------- ---------- ----------
Net loss per share.................... $1.99 $0.46 $0.52
=========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------- ---------------- -------------------- ADDITIONAL
NUMBER NUMBER NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------ ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28,
1995................... -- $ -- -- $ -- 10,815,624 $ 88,193 $ 7,792,932 $ (8,119,305) $ (238,180)
Net loss............... -- -- -- -- -- -- -- (4,167,134) (4,167,134)
Exercise of stock
options............... -- -- -- -- 103,500 792 193,459 -- 194,251
Issuance of stock
options to non-
employees............. -- -- -- -- -- -- 703,000 -- 703,000
Issuance of shares on
debt conversion....... -- -- -- -- 125,000 945 499,160 -- 500,105
Issuance of shares..... -- -- -- -- 1,002,310 7,521 2,946,262 -- 2,953,783
----- ----- ----- ----- ---------- -------- ----------- ------------ ------------
Balance, February 29,
1996................... -- -- -- -- 12,046,434 97,451 12,134,813 (12,286,439) (54,175)
Net loss............... -- -- -- -- -- -- -- (4,180,313) (4,180,313)
Exercise of warrants... -- -- -- -- 893,086 6,547 2,784,961 -- 2,791,508
Exercise of stock
options............... -- -- -- -- 37,500 276 63,833 -- 64,109
Issuance of shares on
debt conversion....... -- -- -- -- 162,000 1,191 563,809 -- 565,000
Issuance of shares..... -- -- -- -- 175,000 1,287 479,963 -- 481,250
----- ----- ----- ----- ---------- -------- ----------- ------------ ------------
Balance, February 28,
1997................... -- -- -- -- 13,314,020 106,752 16,027,379 (16,466,752) (332,621)
Net loss............... -- -- -- -- -- -- -- (30,812,259) (30,812,259)
Preferred stock
dividends............. -- -- -- -- -- -- -- (206,512) (206,512)
Change in par value.... -- -- -- -- -- 26,387 (26,387) -- --
Issuance of shares on
debenture conversion.. -- -- -- -- 808,520 8,085 1,625,165 -- 1,633,250
Issuance of shares as
interest on
debentures............ -- -- -- -- 44,289 443 140,120 -- 140,563
Beneficial conversion
feature on convertible
debentures............ -- -- -- -- -- -- 628,041 -- 628,041
Cancellation of
performance shares.... -- -- -- -- (3,525,000) (35,250) 35,250 -- --
Issuance of shares in
connection with
cancellation of
performance shares.... -- -- -- -- 588,923 5,889 1,834,495 -- 1,840,384
Issuance of shares for
consulting agreement.. -- -- -- -- 586,077 5,861 2,411,707 -- 2,417,568
Issuance of shares in
connection with the
amalgamation.......... -- -- -- -- 7,086,915 70,870 33,702,268 -- 33,773,138
Issuance of Class A
preferred stock....... 2,737 27 -- -- -- -- 2,737,416 -- 2,737,443
Beneficial conversion
feature on Class A
preferred stock....... -- -- -- -- -- -- 1,824,222 -- 1,824,222
Issuance of Class B
preferred stock....... -- -- 1,000 10 -- -- 934,000 -- 934,010
Issuance of warrants... -- -- -- -- -- -- 92,223 -- 92,223
Issuance of shares..... -- -- -- -- 524,590 5,246 1,546,660 -- 1,551,906
----- ----- ----- ----- ---------- -------- ----------- ------------ ------------
Balance, December 31,
1997................... 2,737 $ 27 1,000 $ 10 19,428,334 $194,283 $63,512,559 $(47,485,523) $ 16,221,356
===== ===== ===== ===== ========== ======== =========== ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
TEN MONTHS TWELVE MONTHS ENDED
ENDED --------------------------
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................. $(30,812,259) $(4,180,313) $(4,167,134)
Reconciliation of net loss to net
cash used in operating activities:
Depreciation and amortization...... 2,846,580 87,976 48,903
Write-down of assets............... 676,899 1,339,279 772,731
Other.............................. 1,939 -- --
Minority interest.................. (163,841) (372,829) (313,590)
Issuance of stock options to non-
employees......................... -- -- 703,000
Issuance of warrants............... 92,223 -- --
Issuance of shares for financing
fee............................... 650,000 -- --
Issuance of shares for consulting
agreement......................... 2,417,568 -- --
Extraordinary loss on debt
conversion........................ 1,824,222 -- --
Non-cash interest expense.......... 906,114 -- --
Non-cash amalgamation expenses..... 17,965,734 -- --
Changes in assets/liabilities:
Accounts receivable.............. 115,909 16,915 (78,882)
Prepaid expenses................. (35,230) (58,246) 32,292
Other assets..................... (165,599) -- --
Accounts payable and accrued
expenses........................ (335,897) 157,096 124,119
------------ ----------- -----------
Net cash used in operating
activities.................... (4,015,638) (3,010,122) (2,878,561)
------------ ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (683,786) (231,812) (9,278)
Proceeds from sales of property and
equipment......................... 435,034 -- --
Notes receivable................... -- 35,971 14,967
Software development............... (572,349) (963,974) (393,895)
------------ ----------- -----------
Net cash used in investing
activities.................... (821,101) (1,159,815) (388,206)
------------ ----------- -----------
FINANCING ACTIVITIES:
Issuance of common stock........... 1,551,906 3,336,867 3,148,034
Issuance of preferred stock........ 934,010 -- --
Advances from (to) affiliated
companies......................... 1,007,875 11,103 (40,107)
Payments on loans/notes payable.... -- -- (179,727)
Borrowings on note payable......... -- 322,819 --
Proceeds from issuance of
debentures........................ 2,163,250 -- --
Payment of preferred stock
dividends......................... (206,512) -- --
Non-controlling interest........... -- 400,000 500,000
------------ ----------- -----------
Net cash provided by financing
activities........................ 5,450,529 4,070,789 3,428,200
------------ ----------- -----------
Net increase (decrease) in cash.... 613,790 (99,148) 161,433
Cash, beginning of period.......... 626,074 725,222 563,789
------------ ----------- -----------
Cash, end of period................ $ 1,239,864 $ 626,074 $ 725,222
============ =========== ===========
Supplemental Cash Flow Information:
Cash paid for income taxes......... $ 7,469 $ 13,000 $ --
============ =========== ===========
Cash paid for interest............. $ 10,893 $ -- $ --
============ =========== ===========
</TABLE>

For supplemental disclosures of cash flow information, see Notes 2, 3, 4, 7, 8,
11, 12 and 13.

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--NATURE OF OPERATIONS

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.

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 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.

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.

NOTE 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 are being capitalized until the software is
available for general release to customers, in accordance with the provisions
of Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. 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.

Property and Equipment

The Company's property and equipment is recorded at cost and, beginning
March 1, 1997, depreciated using the straight-line method over its estimated
economic life which is generally three to five years. Prior to March 1, 1997,
depreciation of property and equipment was computed using a declining balance
method which

F-6
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

approximated the straight-line method. Additions and improvements that
materially extend the useful lives are capitalized, while repairs and
maintenance costs are expensed as incurred. Depreciation expense was
approximately $111,000, $88,000 and $49,000 for the ten month period ended
December 31, 1997 and the twelve month periods ended February 28, 1997 and
February 29, 1996, respectively.

Goodwill

The goodwill, which arose from the acquisition of the minority interest of
Old IEL discussed in Note 3, is being amortized on a straight-line basis over
three years. 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 December 31, 1997, totaled approximately $2,736,000.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standard 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
December 31, 1997.

Through its wholly-owned subsidiary, Creator Island Equities, Inc. the
Company owned approximately 70 acres of land with a net book value of
$800,000. The subsidiary also owned other assets including irrigation
equipment, greenhouses, office equipment, nursery equipment, construction
equipment, vehicles, and shop equipment associated with this real estate.
These other assets had a net book value of approximately $83,000 at September
30, 1997. Based upon the current fair market value of the property, the
Company recorded an asset valuation adjustment of approximately $449,000 in
September 1997. As discussed in Note 11, the asset valuation adjustment is
included in the Consolidated Statement of Operations for the ten months ended
December 31, 1997 as write-down of assets. The land and other assets were sold
in November 1997 for approximately the reduced carrying value.

Through another wholly-owned subsidiary, Sky Games International Corp., the
Company owned certain equipment and other assets, specifically gaming
technology parts, which were written off in the ten months ended December 31,
1997 due to technological obsolescence. The write-downs during the ten months
ended December 31, 1997, were approximately $18,000 and $210,000 for equipment
and other assets, respectively.

Stock-Based Compensation

The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB No. 25) and related
interpretations.

Loss Per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (SFAS No. 128). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and

F-7
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. For the periods ended December 31,
1997, February 28, 1997, and February 29, 1996, there is no difference between
basic and diluted loss per share as all stock options, warrants, convertible
debentures and convertible preferred stock are antidilutive for the periods
presented. All loss per share amounts for all periods have been presented, and
where appropriate, restated to conform to the SFAS No. 128 requirements.

Use of Estimates

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

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 British Columbia corporation)
and IEL (Singapore) Pte. Ltd. (a Singapore corporation). For periods prior to
the acquisition of the minority interest in Old IEL discussed in Note 3, 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.

Recently Issued Accounting Standards

During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130) and Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131). Both
statements are effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components in financial statements. The Company
is currently evaluating the reporting formats recommended under this
statement. SFAS No. 131 establishes a new method by which companies report
operating segment information. This method is based on the manner in which
management organizes the segments within a company for making operating
decisions and assessing performance. The Company is currently evaluating the
provisions of this statement.

Foreign Currency Translation

Canadian currency assets and liabilities are translated into United States
dollars at the exchange rate prevailing at the balance sheet date. Revenue and
expenses are translated at the average exchange rate during the year.
Translation gains and losses are not material.

NOTE 3--ACQUISITION OF MINORITY INTEREST

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").

F-8
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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
"Amalgamation"). As part of the Amalgamation, 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. Of the total shares issued to Harrah's, 3,617,871
shares were allocated to the acquisition of Harrah's 20% ownership interest in
Old IEL and 2,261,169 shares were allocated to the termination of the
Management Agreement. This allocation was based on the Amalgamation
negotiation discussions held between the Company and Harrah's.

The acquisition of the minority interest, previously held by Harrah's, has
been accounted for under the purchase method. The value of the purchase price
was based on the average quoted market price of the Company's Common Stock
when the Amalgamation was announced, or $4.466 per share. This transaction
represents a non-cash transaction for purposes of the Consolidated Statements
of Cash Flows.

The shares issued to terminate the Management Agreement were also valued at
$4.466 per share, and the $10,098,000 value of the shares is reflected as part
of the amalgamation expense for the ten months ended December 31, 1997. Prior
to termination, the Company paid Harrah's a monthly fee of $10,000 and was
obligated to pay Harrah's a percentage of future gross revenues.

Prior to the Amalgamation, 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 Amalgamation, 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 amalgamation expense for the ten months
ended December 31, 1997.

Amalgamation expense in the Consolidated Statements of Operations is
comprised of the following:

<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Termination of Management Agreement..................... $10,098,175
Harrah's Loan........................................... 3,466,000
Harrah's preemptive rights (Note 7)..................... 2,561,175
Cancellation of Performance Shares (Note 13)............ 1,840,384
Closure of Vancouver office............................. 100,000
-----------
Amalgamation expense.................................... $18,065,734
===========
</TABLE>

The following unaudited pro forma consolidated results of operations for the
ten months ended December 31, 1997 and the year ended February 28, 1997 assume
the acquisition of the minority interest occurred as of March 1, 1996:

<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31, TWELVE MONTHS ENDED
1997 FEBRUARY 28, 1997
---------------- -------------------
<S> <C> <C>
Pro forma loss before extraordinary
item............................... $30,825,666 $9,844,650
Pro forma net loss.................. $32,649,888 $9,844,650
Pro forma basic and diluted loss per
share.............................. $ 1.94 $ 0.78
</TABLE>

NOTE 4--CONVERTIBLE DEBENTURES

During the ten months ended December 31, 1997, the Company issued $2,163,250
of 8% convertible debentures due in 1999. At December 31, 1997, $1,633,250 of
the debentures had been converted into 808,520 shares of Common Stock. The
outstanding balance of convertible debentures as of December 31, 1997 totaled
$530,000.

F-9
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Subscription dates ranged from July 7 through September 29, 1997. The
debentures are convertible 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 approximately $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 December 31, 1997, the unamortized deferred interest charge and
unamortized placement fees of $148,000 are included in other assets.

The book value of the convertible debentures is a reasonable estimate of the
fair value based on the estimated current incremental borrowing rates for
similar types of borrowing arrangements.

NOTE 5--LEASES

The Company leases certain facilities under an operating lease expiring
April 30, 1999. Total lease and rent expense amounted to $139,000, $38,000,
and $32,000 for the ten month period ending December 31, 1997 and the twelve
month periods ending February 28, 1997 and February 29, 1996, respectively.

NOTE 6--EMPLOYEE BENEFITS

On July 1, 1997, the Company established an employee savings plan that
qualifies under Section 401(k). All employees of the Company may participate
after completion of one year of service by deferring from 1 percent to 16
percent of their eligible compensation. There is no provision for Company
contributions to the Plan.

NOTE 7--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.

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

F-10
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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. Dividends of $206,512, or $75.45 per
share, were paid during the ten months ended December 31, 1997. 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
approximately $1,824,000 was incurred for early extinguishment of the note.

As part of the Amalgamation, Harrah's entered into the "Registration and
Preemptive Rights Agreement" under which, among other things, Harrah's has the
right to receive additional shares of 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. The
market value of the Common Stock issuable to Harrah's in the event that BEA
elects to convert the Class A Preference Shares, was determined to be
$2,561,000, and this amount has been included in amalgamation expense for the
ten months ended December 31, 1997.

On December 17, 1997, the Company issued 1,000 shares of Series A
Convertible Preference Shares of the Company's Class B Preferred Stock.
Proceeds from the issuance were $1 million (approximately $934,000 net of
offering expenses). The Series A Preference Shares are convertible after three
months into a number of shares of Common Stock, determined by dividing the
stated value of $1,000 per share of Series A Preference Shares by the lesser
of: (A) 110% of the average of the closing bid price for the Common Stock on
the five trading days occurring immediately prior to December 17, 1997 (the
"Fixed Conversion Price") and (B) a price (the "Floating Conversion Price")
calculated by (i) determining the average of the three lowest closing bid
prices for the Common Stock during the thirty trading days occurring
immediately prior to, but not including, the conversion date, and (ii)
multiplying such average by a defined conversion percentage (the "Conversion
Percentage"). The Fixed Conversion Price is $3.2038. The Conversion Percentage
decreases from 100% to 85% as the holding period increases. Dividends on the
Class B Preferred Stock are cumulative and payable upon conversion or maturity
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
Preference Shares. The Warrants, which have an exercise price of $3.2038, are
exercisable beginning June 17, 1998 and expire on December 17, 1999 (the
"Maturity Date"). On the Maturity Date, any outstanding Series A Preference
Shares shall be automatically converted into the number of shares of Common
Stock equal to the stated value of the shares divided by the conversion price
then in effect.

Under the agreement, the Company has the option of selling a second tranche
of Class B Preferred Stock with 123,432 warrants for an aggregate purchase
price of $2,000,000. The Company's option with respect to the second tranche,
which expires on June 17, 1998, is not exercisable until the Company's gaming
software has been installed and is available to paying passengers in the
entire cabin of one B-747-400, B-777 or A-340 on Singapore Airlines. Upon
liquidation, holders of the Class B Preferred 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 B
Preferred Shares do not have any voting rights.

In October 1997, 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 (approximately $1,552,000 net of offering
expenses) was received upon closing while the remaining $1.5 million (see Note
14) is to be funded upon and is contingent upon completion of the first flight
with the Company's software available

F-11
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 will be
exercisable at a price of $3.8125 per share for 18 months from their issue.

During the ten months ended December 31, 1997, the Company changed the par
value of the Common Stock from C$.01 (Canadian dollars) to $.01 (United States
dollars). The change in par value did not affect any of the existing rights of
shareholders and has been recorded as an adjustment to additional paid-in
capital and Common Stock.

As of December 31, 1997, the Company had reserved 7,773,247 shares of its
Common Stock for issuance pursuant to stock option plans, warrants,
convertible debentures, convertible preferred stock, unexercised stock
subscriptions, and preemptive rights agreements.

NOTE 8--STOCK OPTIONS

The Company follows APB No. 25 in accounting for its employee stock options.
Under APB No. 25, no compensation expense is recognized because the exercise
price of the Company's incentive employee stock options is equal to or greater
than the market price of the underlying stock on the date of grant.

Prior to February 28, 1995, the Directors of the Company issued stock
options to employees and directors under individual agreements between the
Company and the individuals. Exercise prices and terms were determined by the
Board of Directors. At December 31, 1997, no stock options issued prior to
February 28, 1995 are outstanding.

During the year ended February 29, 1996, the Company established and the
Company's shareholders subsequently approved the 1996 Stock Program for the
then upper management, directors and major shareholders of the Company. Under
this plan, the Company may grant options to purchase up to 1,500,000 shares of
Common Stock at prices not less than the fair market value of the stock on the
day of grant. The 1,130,000 options issued under the 1996 Stock Program are
exercisable upon the grant date and expire during 2001 through 2002. No
further grants under the 1996 Stock Program will be made by the Company.

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. The 150,000 options granted under this plan are exercisable upon
the grant date and expire ten years after the grant date.

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 Compensation Committee of the Board of Directors has the
authority to determine the allocation and vesting requirements for such
options issued under the MIP. The exercise price of stock options granted
under the MIP is the market price of the Common Stock on the date of the
grant. 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 1,337,950 options outstanding under this plan 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.

F-12
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
TEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 FEBRUARY 28, 1997 FEBRUARY 29, 1996
------------------------ ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 1,190,000 $3.06 1,167,500 $2.98 1,014,300 $5.56
Granted............... 2,627,950 3.14 60,000 4.13 1,130,000 3.00
Exercised............. -- -- (37,500) 2.32 (103,500) 2.57
Expired............... -- -- -- -- (873,300) 6.06
--------- ----- --------- ----- --------- -----
Outstanding at end of
period................. 3,817,950 $3.11 1,190,000 $3.06 1,167,500 $2.98
========= ===== ========= ===== ========= =====
Options exercisable at
period end............. 1,190,000 $3.06 1,190,000 $3.06 1,167,500 $2.98
========= ===== ========= ===== ========= =====
Weighted average fair
value of options
granted during the $1.99 $2.61 $1.90
period................. ===== ===== =====
</TABLE>

Exercise prices for stock options outstanding at December 31, 1997, ranged
from $3.00 to $4.13. The weighted average remaining life of the outstanding
stock options is approximately 8 years.

Pro forma information regarding net loss and loss per share is required by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS No. 123) and has been determined as if the Company
had accounted for its employee stock options under the fair value method. The
fair value for these options at the date of grant was estimated using a Black-
Scholes option pricing model with the following weighted average assumptions
for the ten months ended December 31, 1997 and the years ended February 28,
1997 and February 29, 1996: volatility factor of the expected market value of
the Company's Common Stock of 0.715; weighted average expected life of the
options of 5 years; risk-free interest rate of 5.75%; and no dividend
payments.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:

<TABLE>
<CAPTION>
TEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, -----------------------------------
1997 FEBRUARY 28, 1997 FEBRUARY 29, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss.................. $30,812,259 $4,180,313 $4,167,134
SFAS No. 123 compensation
expense.................. 438,574 156,600 1,444,000
----------- ---------- ----------
SFAS No. 123 pro forma net
loss..................... $31,250,833 $4,336,913 $5,611,134
=========== ========== ==========
Basic and diluted pro
forma loss per share..... $ 2.02 $ 0.48 $ 0.71
=========== ========== ==========
</TABLE>

F-13
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Because SFAS No. 123 applies only to stock-based compensation awards for the
fiscal year ended February 29, 1996 and future years, the pro forma
disclosures under SFAS No. 123 are not likely to be indicative of future
disclosures until the disclosures reflect all outstanding, nonvested awards.

During the year ended February 29, 1996, the Company issued 370,000 stock
options under the 1996 Stock Program to non-employees for services provided to
the Company. The fair value of the stock options of $703,000 was determined
using the same method and assumptions described in the fourth preceding
paragraph and was recorded as expense during the year ended February 29, 1996.
The options, which remain outstanding at December 31, 1997, have an exercise
price of $3.00.

NOTE 9--STOCK WARRANTS

As of December 31, 1997, the Company had outstanding stock warrants for
161,718 shares of its Common Stock as follows:

<TABLE>
<CAPTION>
EXERCISE
NUMBER OF WARRANTS PRICE EXPIRATION DATE
------------------ -------- ---------------
<S> <C> <C>
20,000 $3.50 March 17, 1999
61,718 $3.20 December 17, 1999
4,900 $4.00 June 30, 2002
17,500 $4.80 June 30, 2002
57,600 $4.80 August 31, 2002
</TABLE>

NOTE 10--INCOME TAXES

As a Bermuda exempted company, the Company is not currently subject to
income tax filing requirements in Bermuda. The Company operates in the U.S. as
a branch of a foreign corporation. As a foreign corporation with a U.S. trade
or business, the Company will be subject to tax in the U.S. on the income
earned that is effectively connected with that trade or business. Tax
carryforward in taxable jurisdictions have not been determined. Deferred tax
assets, if any, would be fully reserved. Other than the tax associated with
the U.S. earned interest income, there are no income tax provisions, benefits,
liabilities or assets reflected in the accompanying financial statements.

NOTE 11--WRITE-DOWN OF ASSETS

The following assets were written down to a nominal or current value in the
period due to impairment in the assets value:

<TABLE>
<CAPTION>
TEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, -----------------------------------
1997 FEBRUARY 28, 1997 FEBRUARY 29, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Land...................... $449,267 $ 442,238 $ --
Furniture, fixtures and
equipment................ 18,045 -- --
Other assets.............. 209,587 209,587 --
Software under
development.............. -- -- 457,275
Notes receivables......... -- 137,803 315,456
Due from affiliated
company.................. -- 549,651 --
-------- ---------- --------
$676,899 $1,339,279 $772,731
======== ========== ========
</TABLE>

F-14
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--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 Amalgamation. Management fees totaled
$36,000, $120,000, and $120,000 for the ten month period ending December 31,
1997, and the twelve month periods ending February 28, 1997 and February 29,
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 ten month period ending December 31, 1997 and the twelve
month periods ending February 28, 1997 and February 29, 1996 totaled $143,000,
$1,085,000 and $1,391,000, 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 $150,000 for the ten month period ending
December 31, 1997. This arrangement ended with termination of the Management
Agreement. The Company was charged approximately $523,000 and $184,000 during
the years ended February 28, 1997 and February 29, 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 $101,000 during the ten month period ending
December 31, 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. Future payments under this Sublease Agreement aggregate
to approximately $132,000 in 1998 and $44,000 in 1999. In conjunction with the
Sublease Agreement and with the Amalgamation, 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 reimbursed
Harrah's for a portion of the development costs which totaled $70,000 and
$180,000 for the ten months ended December 31, 1997 and the year ended
February 28, 1997, respectively.

On June 17, 1997, in conjunction with the Amalgamation, the Company entered
into a Software License Agreement with Harrah's (the "License Agreement"). The
License Agreement is a 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.

The Company paid approximately $291,000, $335,000 and $226,000 during the
ten months ended December 31, 1997, and the twelve months ended February 28,
1997 and February 29, 1996, respectively, to directors and companies with
common directors for management and consulting services and for reimbursement
of expenses.

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

F-15
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 ten months ended
December 31, 1997, as consulting and contract labor.

Geller & Co., of which Laurence Geller is Chairman, 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. On May 29, 1997, the Company
granted an additional 1,000,000 options with the same terms above to Geller &
Co. for Laurence Geller's services as Chairman of the Board. 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 Amalgamation
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. This amount is included on the Consolidated Statement of
Operations as general and administrative expense. Mr. Geller has been Chairman
of the Board of Directors of the Company since September 30, 1996. The annual
compensation of the Chairman of the Board is $100,000 and is unpaid until the
Company generates revenue under its agreement with Singapore Airlines.

NOTE 13--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 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, 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
"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 approximately $1,840,000. This amount is included on the
Consolidated Statement of Operations as amalgamation expense.

Each of Messrs. Clements and Fortescue and SGII have the right to include
the 588,923 shares of Common Stock issued in connection with the Redemption
Agreement and the Redemption and Cancellation 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

F-16
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

NOTE 14--SUBSEQUENT EVENTS

On January 13, 1998, the Company acquired all of the outstanding capital
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. IIL's games are currently operating
on a number of airlines including Cathay Pacific, Egypt Air, Lauda Air,
Malaysia Airlines, Saudi Arabian Airlines and Virgin Atlantic. The agreement
also provides for the Company to issue up to 250,000 additional shares of
Common Stock to the previous owners of IIL upon achievement of certain
milestones regarding implementation of the Company's software with an
international airline to be designated by the parties. The acquisition will be
accounted for using the purchase method.

On March 19, 1998, the Company began negotiating the modification of the
terms of the remaining portion ($1,500,000) of the private placement of Common
Stock discussed in Note 7. Under the proposed terms, 50% of the remaining
portion ($750,000) would be funded immediately while the other 50% would be
funded under the terms of the original agreement. The subscription price for
the Common Stock would be revised to $2.62. For each Common Share purchased
under this agreement, 0.85 of a warrant to purchase Common Stock would be
issued after a six month holding period of the Common Stock. The warrants, if
issued, would have an exercise price of $2.62 and a term of 18 months.

NOTE 15--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Financial results by quarter are as follows:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Ten Months ended December 31,
1997
Loss before extraordinary
item......................... $219,148(1) $22,435,687(2) $3,183,872 $3,149,330
Extraordinary loss............ -- 1,824,222(3) -- --
-------- ----------- ---------- ----------
Net loss...................... $219,148(1) $24,259,909(2) $3,183,872 $3,149,330
======== =========== ========== ==========
Basic and diluted loss per
share:
Loss per share before
extraordinary item......... $ 0.02(1) $ 2.03(2) $ 0.18 $ 0.17
Extraordinary loss per
share...................... -- 0.17(3) -- --
-------- ----------- ---------- ----------
Loss per share.............. $ 0.02(1) $ 2.20(2) $ 0.18 $ 0.17
======== =========== ========== ==========
Twelve Months ended February
28, 1997
Net loss...................... $563,479 $ 551,542 $ 593,036 $2,472,256
======== =========== ========== ==========
Basic and diluted loss per
share........................ $ 0.07 $ 0.06 $ 0.06 $ 0.26
======== =========== ========== ==========
</TABLE>
- --------
(1) Due to the change in the Company's fiscal year end from the last day in
February to December 31, the first quarter amounts represent the results
of operations from March 1, 1997 to March 31, 1997.
(2) Includes effect of the Amalgamation.
(3) Loss on early extinguishment of debt.

F-17
<PAGE>

INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TEN MONTHS ENDED DECEMBER 31, 1997 AND YEARS ENDED FEBRUARY 28, 1997 AND
FEBRUARY 29, 1996

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Ten months ended December
31, 1997:
Allowance for Doubtful
Accounts............... $ -- $46,828 $ -- $46,828
Year ended February 28,
1997:
None
Year ended February 29,
1996:
None
</TABLE>

<PAGE>

Exhibit 3.ii

AMENDED AND RESTATED

BYE-LAWS

INTERACTIVE ENTERTAINMENT LIMITED

I HEREBY CERTIFY THAT the written Bye-Laws are a true copy
of the Bye-Laws of INTERACTIVE ENTERTAINMENT LIMITED as
amended by the Shareholders at a Special General Meeting of
the above Company on June 16, 1997.

/s/ David Lamm
------------------------------------
Secretary

[SEAL]
<PAGE>

TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>

Bye-Law Page
- ------- ----
<C> <S> <C>
1 Interpretation................................................................................1

2 Registered Office.............................................................................4

3-4 Share Rights..................................................................................4

5-6 Modification of Rights........................................................................8

7-9 Shares........................................................................................8

10-12 Certificates..................................................................................9

13 Register of Shareholders......................................................................9

14 Register of Directors and Officers...........................................................10

15-17 Transfer of Shares...........................................................................10

18-21 Transmission of Shares.......................................................................11

22-24 Increase of Capital..........................................................................12

25-26 Alteration of Capital........................................................................12

27-28 Reduction of Capital.........................................................................13

29 General Meetings.............................................................................14

30-31 Notice of General Meetings...................................................................14

32-37 Proceedings at General Meetings..............................................................15

38-47 Voting.......................................................................................16

48-53 Proxies and Corporate Representatives........................................................17

54-57 Appointment and Removal of Directors.........................................................19

58 Resignation and Disqualification of Directors and Officers...................................20

59-61 Alternate Directors..........................................................................20
</TABLE>

<PAGE>

<TABLE>
<C> <S> <C>
62 Directors' Fees and Additional Remuneration
and Expenses.........................................................................21

63 Directors' Interests.................................................................21

64-68 Powers and Duties of the Board.......................................................22

69-70 Delegation of the Board's Powers.....................................................23

71-79 Proceedings of the Board.............................................................24

80 Officers.............................................................................26

81 Duty and Care of Officers and Directors..............................................27

82 Minutes..............................................................................27

83-84 Secretary............................................................................27

85 The Seal.............................................................................28

86-91 Dividends and Other Payments.........................................................28

92 Reserves.............................................................................29

93-94 Capitalization of Profits............................................................29

95 Record Dates.........................................................................30

96-98 Accounting Records...................................................................30

99 Audit................................................................................31

100-102 Service of Notices and Other Documents...............................................31

103 Winding Up...........................................................................31

104-106 Indemnity............................................................................32

107 Alteration of Bye-laws...............................................................32
</TABLE>

ii
<PAGE>

AMENDED AND RESTATED

B Y E - L A W S

INTERACTIVE ENTERTAINMENT LIMITED

INTERPRETATION
--------------

1. In these Bye-Laws unless the context otherwise requires:

"Affiliates" means, with respect to any person or entity, any person
or entity that directly or indirectly Controls such person or entity, or any
person or entity which is Controlled by or under common Control with such person
or entity;

"Bermuda" means the Islands of Bermuda;

"Board" means the Board of Directors of the Company of the Directors
present at a meeting of Directors at which there is a quorum;

"Common Shares" has the meaning set forth in Bye-law 3(B);

"Company" means the company registered in Bermuda under the name of
SKY GAMES INTERNATIONAL LTD. on the 22nd day of February, 1995;

"the Companies Acts" means every Bermuda statute from time to time in
force concerning companies insofar as the same applies to the Company;

"Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of a person or
entity, whether through the ownership of voting securities, by contract or
otherwise;

"Director" means a director of the Company;

"fully diluted basis" means at any time that number of (A) Common
Shares equal to the sum, without duplication, of (i) the total number of Common
Shares then outstanding (other than 3,525,000 shares of Common Shares held in
escrow pursuant to that Escrow Agreement dated May 27, 1992, as amended, among
Montreal Trust Company of Canada, the Company and certain shareholders), plus
(ii) the total number of Common Shares into which all then outstanding
Preference Shares or any other shares of the Company are then convertible
directly or indirectly, provided that Common Shares issuable upon conversion of
Class A Preference Shares shall not be included until such conversion occurs,
plus (iii) the total number of Common Shares then issuable directly or
indirectly upon exercise of all then outstanding options, warrants (including
the warrant
<PAGE>

for 650,000 Common Shares exercisable at $1 per Common Share issued to Harrah's
Interactive Investment Company, a Nevada corporation, and exercisable at the
option of the Company), unexercised stock subscriptions, convertible debentures
and other convertible securities, plus (B) Other Voting Shares equal to the sum,
without duplication (including without duplication of any Common Shares) of (i)
the total number of Other Voting Shares then outstanding, plus (ii) the total
number of Other Voting Shares into which all then outstanding Preference Shares
or any other shares of the Company are then convertible directly or indirectly,
plus (iii) the total number of Other Voting Shares then issuable directly or
indirectly upon exercise of all then outstanding options, warrants, unexercised
stock subscriptions, convertible debentures and other convertible securities;

"HIIC Entities" means Harrah's Interactive Investment Company, a
Nevada corporation, and any of its Affiliates owning shares in the Company;

"HIIC Directors" means the Directors appointed pursuant to Bye-law
54(B) or the second sentence of Bye-law 55;

"Other Voting Shares" means shares of the Company having the right to
vote for election of directors other than Common Shares or securities
convertible into Common Shares;

"paid up" means paid up or credited as paid up;

"Preference Shares" has the meaning set forth in Bye-law 3(B);

"the Principal Register" shall mean the register of shareholders of
the Company maintained in Bermuda;

"the Register" means the Principal Register and any branch register to
be kept pursuant to the Companies Acts;

"Registered Office" means the registered office for the time being of
the Company;

"Resolution" means a resolution of the Shareholders or, where
required, of a separate class or separate classes of Shareholders, adopted in
general meeting in accordance with the provisions of these Bye-Laws;

A resolution shall be a special resolution when it has been passed by
a majority of not less than three-fourths of the votes cast by such members as,
being entitled so to do, vote in person or, in the case of such members as are
corporations, by their respective duly authorised representatives or, where
proxies and attorneys are allowed, by proxy or by attorney at a general meeting
of which not less than 14 days notice specifying (without prejudice to the power
contained in these present to amend the same) the intention to propose the
resolution as a special resolution, has been duly given. Provided that, if it
is so agreed by a majority in number of the members having a right to attend and
vote at any such meeting, being a majority together holding not less than 95
percent in

2
<PAGE>

nominal value of the shares giving that right, a resolution may be proposed and
passed as a special resolution at a meeting of which less than 14 days notice
has been given.

A resolution shall be an ordinary resolution when it has been passed
by a simple majority of the votes cast by such members as, being entitled so to
do, vote in person or, in the case of any member being a corporation, by its
duly authorised representative or, where proxies and attorneys are allowed, by
proxy or by attorney at a general meeting held in accordance with these
presents.

A special resolution shall be effective for any purpose for which an
ordinary resolution is expressed to be required under any provision of these
Bye-Laws or the Statutes.

"Seal" means the common seal of the Company and includes any duplicate
thereof;

"Securities Seal" means a seal for use for sealing certificates for
shares or other securities issued by the Company which is a facsimile of the
Seal of the Company with the addition on its face of the words "Securities
Seal";

"Secretary" includes a temporary or assistant Secretary and any person
appointed by the Board to perform any of the duties of the Secretary;

"Shareholder" means a shareholder or member of the Company;

"Special Board Majority" means (i) a majority of the Directors voting
at a meeting of the Board which also includes a majority of the HIIC Directors
then in office or (ii) a written resolution executed by all the members of the
Board;

"Special Shareholders Majority" means a majority of the votes cast at
a general meeting which also includes the votes attaching to a majority of the
Voting Shares of the Company on a fully diluted basis then heir by the HIIC
Entities;

"these Bye-Laws" means these Bye-Laws in their present form or as from
time to time amended;

"Voting Shares" means Common Shares having the right to vote for
election of or to appoint Directors and any shares convertible directly or
indirectly into such Common Shares and Other Voting Shares and any shares
convertible directly or indirectly into Other Voting Shares;

for the purposes of these Bye-Laws a corporation shall be deemed to be
present in person if its representative duly authorised pursuant to the
Companies Acts is present;

words importing the singular number only include the plural number and
vice versa;

3
<PAGE>

words importing the masculine gender only include the feminine and
neuter genders respectively;

word importing persons include companies or associations or bodies of
persons, whether corporate or un-incorporate;

reference to writing shall include typewriting, lithography,
photography and other modes of representing or reproducing words in a legible
and non-transitory form;

any words or expressions defined in the Companies Acts in force at the
date when these Bye-Laws or any part thereof are adopted shall bear the same
meaning in these Bye-Laws or such part (as the case may be).

REGISTERED OFFICE
-----------------

2. The Registered Office shall be at such place in Bermuda as the Board
shall from time to time appoint.

SHARE RIGHTS
------------

3. (A) Subject to any special rights conferred on the holders of any
share or class of shares, any share in the Company may be issued with or have
attached thereto such preferred, deferred, qualified or other special rights or
such restrictions, whether in regard to dividend, voting, return of capital or
otherwise, as the Company may by Resolution determine or, if there has not been
any such determination or so far as the same shall not make specific provision,
as the Board may determine.

(B) The authorised share capital of the Company at the date of the
adoption of these Bye-laws is US$550,030 divided into 50,000,000 common shares
of par value US$0.01 each (the "Common Shares"), 3,000 non-voting convertible
redeemable preference shares of par value US$0.01 each (the "Class A Preference
Shares") and 5,000,000 redeemable preference shares of par value US$0.01 each
(the "Class B Preference Shares" and together with the Class A Preference
Shares, the "Preference Shares").

4. Subject to the Companies Acts, any preference shares may, with the
sanction of a Resolution be issued on terms:

(a) that they are to be redeemed on the happening of a specified
event or on a given date and/or

(b) that they are liable to be redeemed at the option of the Company.

4
<PAGE>

4A. The Board shall be authorised to issue from time to time in one or
more series the Preference Shares on such terms as it deems appropriate,
including, without limitation, the following:

(a) the number of shares of the Preference Shares, less than or equal
to the total number of Preference Shares authorised in Bye-law 3(B)
for each class of Preference Shares, respectively;

(b) whether dividends, if any, shall be cumulative or noncumulative
and the dividend rate of the Preference Shares;

(d) the redemption rights of the Preference Shares;

(e) the terms and amount of any sinking fund provided for the purchase
or redemption of shares of the Preference Shares;

(f) the amounts payable on shares of the Preference Shares in the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company;

(g) whether the shares of the Preference Shares shall be convertible
into shares of any other class or preference shares, or any other
equity security, of the Company or any other company, and, if so, the
specification of such other class or preference shares or such other
equity security, the conversion price or prices or rate or rates, any
adjustments thereof, the date or dates as of which such shares shall
be convertible and all other terms and conditions upon which such
conversion may be made; and

(h) the voting rights, if any of the holders of shares of the
Preference Shares; provided that the Class A Preference Shares shall
be not-voting.

4B. (A) Any Common Shares, Preference Shares or shares of any other class
shall always (i) be redeemed whenever the HIIC Entities own 10% or more of the
Voting Shares on a fully diluted basis and (ii) be subject to redemption by the
Company in accordance with the Companies Act, by action of the Board whenever
the HIIC Entities own less than 10% of the Voting Shares on a fully diluted
basis, if any holder of such shares is a Disqualified Holder or if such action
otherwise should be taken pursuant to any applicable provision of law, to the
extent necessary to avoid any regulatory sanctions against, or to prevent the
loss of, inability to obtain or secure the reinstatement of any license,
franchise or entitlement from any governmental agency held by, the Company, any
Affiliate of the Company, any entity in which the Company or such Affiliate is
an owner or the HIIC Entities or their Affiliates which license, franchise or
entitlement is (i) conditioned upon some or all of the holders of the Company's
shares of any class or series possessing prescribed qualifications, or (ii)

5
<PAGE>

needed to allow the conduct of any portion of the business of the Company or any
such Affiliate or other entity or the HIIC Entities or their Affiliates.

The terms and conditions of such redemption shall be as follows:

(a) the redemption price of the Common Shares and the shares
convertible into Common Shares to be redeemed pursuant to this Bye-law
shall be equal to the Fair Market Value of such shares, and as to such
convertible shares, as if any such convertible shares were converted
into Common Shares, (or such other redemption price as required by any
applicable law, regulation or rule) and the redemption price of shares
of the Company of any class (or classes) or series other than Common
Shares or shares convertible into Common Shares shall be the Fair
Market Value of such shares; provided that in both of the previous
cases there shall be excluded any dividends thereon not entitled to be
received pursuant to paragraph (e) of this Bye-law;

(b) the redemption price of such shares may be paid only in cash;

(c) if less than all the shares held by Disqualified Holders are to be
redeemed, the shares to be redeemed shall be selected in such manner
as shall be determined by the Board, which may include selection first
of the most recently purchased shares thereof, selection by lot or
selection in any other manner determined by the Board;

(d) at least 30 days' written notice of the Redemption Date shall be
given to the record holders of the shares selected to be redeemed
pursuant to this Bye-law (unless waived in writing by any such
holder), provided that the Redemption Date may be the date on which
written notice shall be given to record holders if the cash necessary
to effect the redemption shall have been deposited in trust for the
benefit of such record holders and subject to immediate withdrawal by
them upon surrender of the share certificates for their shares to be
redeemed together with any other documentation required to effect such
redemption; and

(e) from and after the Redemption Date or such earlier date as
required by any applicable law, regulation or rule, any and all rights
of whatever nature, which may be held by the owners of shares selected
for redemption (including without limitation any rights to vote or
participate in dividends declared on stock of the same class or series
as such shares), shall cease and terminate and they shall thenceforth
be entitled only to receive the cash upon redemption.

As used in these Bye-laws:

(i) "Disqualified Holder" shall mean any holder of shares of the
Company of any class (or classes) or series: (1) who, either individually or
when taken together with any other holders of shares of the Company of any class
(or classes) or series is or would reasonably be expected to be determined by
any gaming regulatory agency to be unsuitable, or has or would reasonably be

6
<PAGE>

expected to have an application for a gaming license, permit or other necessary
regulatory approval rejected, or has or would reasonably be expected to have a
previously issued gaming license, permit or other necessary regulatory approval
rescinded, suspended, revoked, not renewed or not reinstated, as the case may
be, whether or not any of the foregoing is or would reasonably be expected to be
final and nonappealable; or (2) whose holding of such shares, either
individually or when taken together with the holding of shares of the Company of
any class (or classes) or series by any other holder could reasonably be
expected to cause the Company (or any other company engaged in the gaming
business in any jurisdiction if such holder of shares were a shareholder of that
company) to be denied a licence, permit or other necessary regulatory approval
to engage in any aspect of the gaming business or the serving or sale of
alcoholic beverages in connection with the operation of a gaming business.

(ii) "Fair Market Value" of a share of (1) the Common Shares shall
mean the average Closing Price for such share for each of the 45 most recent
days of which Common Shares shall have been traded preceding the day on which
notice of redemption shall be given pursuant to paragraph (d) of this Bye-law;
provided, however, that "Fair Market Value" as to any shareholder who purchased
any Common Shares subject to redemption within 120 days of a Redemption Date
need not (unless otherwise determined by the Board) exceed the purchase price
paid by him for any Common Shares purchased within such 120 days and (2) shares
of the Company of any class (or classes) or series other than Common Shares or
shares convertible into Common Shares (including, Other Voting Shares) shall be
determined by the Board in good faith; provided, however, that "Fair Market
Value" as to any shareholder who purchased any such shares subject to redemption
within 120 days of the Redemption Date need not (unless otherwise determined by
the Board) exceed the purchase price paid by him for any such shares of the
Company purchased within such 120 days.

(iii) "Closing Price" on any day means the reported closing sales
price or, in case no such sale takes place, the average of the reported closing
bid and asked prices on the Composite Tape for the New York Stock
Exchange-Listed Stocks, or, if such stock is not listed on such Exchange, on the
principal United States securities exchange registered under the Securities
Exchange Act of 1934 on which such shares are listed, or, if such shares are not
listed on any such exchange, the highest closing sales price or bid quotation
for such shares on the National Association of Securities Dealers, Inc.
Automated Quotations System or any system then in use, or if no such prices or
quotations are available, the fair market value on the day in question as
determined by the Board in good faith.

(iv) "Redemption Date" shall mean the date fixed by the Board for the
redemption of any shares of the Company pursuant to this Bye-law; provided,
however, with respect to any redemption pursuant to Bye-Law 4B(A)(i), the
Redemption Date shall not be more than 90 days after the date the Board first
learned of the existence of a Disqualified Holder.

(v) "Subsidiary" shall mean any company (wherever incorporated),
association, partnership or other business entity more than 50% of whose
outstanding stock or other ownership interests entitled to vote generally in the
election of directors (or their equivalent in such form of

7
<PAGE>

entity and under the laws of the jurisdiction of organisation of such entity) is
owned by the Company, by one or more Subsidiaries or by the Company and one or
more Subsidiaries.

(B) So long as a holder of Preference Shares is not a Disqualified
Holder, such Preference Shares shall be redeemed in accordance with the terms
set forth in the resolutions adopted by the Board.

MODIFICATION OF RIGHTS
----------------------

5. Subject to the Companies Acts, all or any of the special rights for
the time being attached to any class of shares for the time being issued may
from time to time (whether or not the Company is being wound up) be altered or
abrogated with the consent in writing of the holders of not less than seventy
five percent of the issued shares of that class or with the sanction of a
Resolution of the holders of such shares voting in person or by proxy. To any
such separate general meeting, all the provisions of these Bye-Laws as to
general meetings of the Company shall mutatis mutandis apply, but so that the
necessary quorum shall be two or more persons holding or representing by proxy
any of the shares of the shares of the relevant class, that every holder of
shares of the relevant class shall be entitled on a poll to one vote for every
such share held by him and that any holder of shares of the relevant class
present in person or by proxy may demand a poll; provided, however, that if the
Company or a class of Shareholders shall have only one Shareholder present in
person or by proxy, one Shareholder shall constitute the necessary quorum.

6. The special rights conferred upon the holders of any shares or class
of shares shall not, unless otherwise expressly provided in the rights attaching
to or the terms of issue of such shares, be deemed to be altered by the creation
or issue of further shares ranking pari passu therewith.

SHARES
------

7. Subject to the provisions of these Bye-Laws, the unissued shares of
the Company (whether forming part of the original capital or any increased
capital) shall be at the disposal of the Board, which may offer, allot, grant
options over or otherwise dispose of them to such persons, at such times and for
such consideration and upon such terms and conditions as the Board may determine
PROVIDED that no shares may be issued unless fully paid in cash, bona fide debt
or other assets. Payment in the form of promissory notes will not be permitted
unless pertaining to an employer incentive stock option plan.

8. The Board may in connection with the issue of any shares exercise all
powers of paying commission and brokerage conferred or permitted by law.

9. Except as ordered by a court of competent jurisdiction or as required
by law, no person shall be recognised by the Company as holding any share upon
trust and the Company shall not be bound by or required in any way to recognise
(even when having notice thereof) any equitable, contingent, future or partial
interest in any share or any interest in any fractional part of a share or
(except only

8
<PAGE>

as otherwise provided in these Bye-Laws or by law) any other right in respect of
any share except an absolute right to the entirety thereof in the registered
holder.

CERTIFICATES
------------

10. The preparation, issue and delivery of certificates shall be governed
by the Companies Acts. In the case of a share held jointly by several persons,
delivery of a certificate to one of several joint holders shall be sufficient
delivery to all.

11. If a share certificate is defaced, lost or destroyed it may be
replaced without fee but on such terms (if any) as to evidence and indemnity and
to payment of the costs and out of pocket expenses of the Company in
investigating such evidence and preparing such indemnity as the Board may think
fit and, in case of defacement, on delivery of the old certificate to the
Company.

12. All certificates for share or loan capital or other securities of the
Company (other than letters of allotment, scrip certificates and other like
documents) shall, except to the extent that the terms and conditions for the
time being relating thereto otherwise provide, be issued under the Seal. The
Board may by resolution determine, either generally or in any particular case,
that any signatures on any such certificates need not be autographic but may be
affixed to such certificates by some mechanical means or may be printed thereon
or that such certificates need not be signed by any persons.

13. The Secretary shall establish and maintain the Register of
Shareholders at the Registered Office in the manner prescribed by the Companies
Acts. Unless the Board otherwise determines, the Register of Shareholders shall
be open to inspection in the manner prescribed by the Companies Acts between
10:00 a.m. and 12:00 noon on every working day. The Board may at their
discretion establish Branch Registers of Shareholders. The Directors, on behalf
of the Company, may appoint a trust company to keep registers of Shareholders,
registers of transfers and registers of allotments or, if there is more than one
class of shares, the Directors may appoint a trust company, which need not be
the same trust company, to keep such registers of Shareholders, the registers of
transfers and the registers of allotments for each class of shares. The
Directors, on behalf of the Company, may also appoint one or more trust
companies, including the trust company which keeps the said registers of its
shares or of a class thereof, as transfer agent for its shares or such class
thereof, as the case may be, and the same or another trust company or companies
as registrar for its shares or such class thereof, as the case may be. The
Directors may terminate the appointment of any such trust company at any time
and may appoint another trust company in its place.

9
<PAGE>

14. The Secretary shall establish and maintain a register of the Directors and
Officers of the Company as required by the Companies Acts. The register of
Directors and Officers shall be open to inspection in the manner prescribed by
the Companies Acts between 10:00 a.m. and 12:00 noon on every working day.

TRANSFER OF SHARES
------------------

15. (A) Subject to the provisions of the Bye-Laws that may be applicable, any
Shareholder may transfer any of his shares by instrument in writing executed by
or on behalf of such Shareholder and delivered to the Company or its transfer
agent. The instrument of transfer of any share of the Company shall be in the
form, if any, on the back of the Company share certificates or on such other
form as the Directors may from time to time approve. Except to the extent that
the Companies Act may otherwise provide, the transferor shall be deemed to
remain the holder of the shares until the name of the transferee is entered in
the register of Shareholders or a branch register of Shareholders in respect
thereof.

(B) The signature of the registered owner of any shares, or of his duly
authorised attorney, upon an authorised instrument of transfer shall constitute
a complete and sufficient authority to the Company, its Directors, officers and
agents to register, in the name of the transferee as named in the instrument of
transfer, the number of shares specified therein or, if no number is specified,
all the shares of the registered owner represented by share certificates
deposited with the instrument of transfer. If no transferee is named in the
instrument of transfer, the instrument of transfer shall constitute a complete
and sufficient authority to the Company, its Directors, officers and agents to
register, in the name of the person in whose behalf any certificate for the
shares to be transferred is deposited with the Company for the purpose of having
the transfer registered, the number of shares specified in the instrument of
transfer or, if no number is specified, all the shares represented by all share
certificates deposited with the instrument of transfer.

(C) Neither the Company nor any Director, officer or agent thereof shall be
bound to inquire into the title of the person named in the form of transfer as
transferee or, if the person is named therein as transferee, of the person on
whose behalf the certificate is deposited with the Company for the purpose of
having the transfer registered or be liable to any claim by such registered
owner or any intermediate owner or holder of the certificate or of any of the
shares represented thereby or any interest therein for registering the transfer,
and the transfer, when registered, shall confer upon the person in whose name
the shares have been registered a valid title to such shares.

(D) Every instrument of transfer shall be executed by the transferor and
left at the registered office of the Company or at the office of its transfer
agent or registrar for registration, together with the share certificate for the
shares to be transferred and such other evidence, if any, as the Directors or
the transfer agent or registrar may require to prove the title of the transferor
or his

10
<PAGE>

right to transfer the shares and the right to the transferee to have the
transfer registered. All instruments of transfer where the transfer is
registered shall be retained by the Company or its transfer agent or registrar
and any instrument of transfer where the transfer is not registered shall be
returned to the person depositing the same, together with the share certificate
which accompanied the same when tendered for registration.

(E) There shall be paid to the Company in respect of the registration of
any transfer such sum, if any, as the Directors may from time to time determine.

16. The Board may decline to register any transfer unless:

(a) the instrument of transfer is duly stamped and lodged with the Company,
accompanied by the certificate for the shares to which it relates, and such
other evidence as the Board may reasonably require to show the right of the
transferor to make the transfer;

(b) the instrument of transfer is in respect of only one class of share;

Subject to any directions of the Board from time to time in force, the Secretary
may exercise the powers and discretions of the Board under this Bye-Law and Bye-
Laws 15 and 17.

17. If the Board declines to register a transfer it shall, within three days
after the date on which the instrument of transfer was lodged, send to the
transferee notice of such refusal.

TRANSMISSION OF SHARES
----------------------

18. In the case of the death of a Shareholder, the survivor or survivors, where
the deceased was a joint holder, and the estate representative, where he was
sole holder, shall be the only person recognised by the Company as having any
title to his shares; but nothing herein contained shall release the estate of a
deceased holder (whether the sole or joint) from any liability in respect of any
share held by him solely or jointly with other persons. For the purpose of this
Bye-Law, estate representative means the person to whom probate or letters of
administration has or have been granted in Bermuda or, failing any such person,
such other person as the Board may in its absolute discretion determine to be
the person recognised by the Company for the purpose of this Bye-Law.

19. Any person becoming entitled to a share in consequence of the death of a
Shareholder or otherwise by operation of applicable law may, subject as
hereafter provided and upon such evidence being produced as may from time to
time be required by the Board as to his entitlement, either be registered
himself as the holder of the share or elect to have some person nominated by him
registered as the transferee thereof. If the person so becoming entitled elects
to be registered himself, he shall deliver or send to the Company a notice in
writing signed by him stating that he so elects.

11
<PAGE>

If he shall elect to have his nominee registered, he shall signify his election
by signing an instrument of transfer of such share in favour of his nominee.
All the limitations, restrictions and provisions of these Bye-Laws relating to
the right to transfer and the registration of transfer of shares shall be
applicable to any such notice or instrument of transfer as aforesaid as if the
death of the Shareholder or other event giving rise to the transmission had not
occurred and the notice or instrument of transfer was an instrument of transfer
signed by such Shareholder.

20. A person becoming entitled to a share in consequence of the death of a
Shareholder or otherwise by operation of applicable law shall (upon such
evidence being produced as may from time to time be required by the Board as to
his entitlement) be entitled to receive and may give a discharge for any
dividends or other moneys payable in respect of the share, but he shall not be
entitled in respect of the share to receive notices of or to attend or vote at
general meetings of the Company or, save as aforesaid, to exercise in respect of
the share any of the rights or privileges of a Shareholder until he shall have
become registered as the holder thereof. The Board may at any time give notice
requiring such person to elect either to be registered himself or to transfer
the share and if the notice is not complied with within sixty days the Board may
thereafter withhold payment of all dividends and other moneys payable in respect
of the shares until the requirements of the notice have been complied with.

21. Subject to any directions of the Board from time to time in force, the
Secretary may exercise the powers and discretions of the Board under Bye-Laws
18, 19 and 20.

INCREASE OF CAPITAL
-------------------

22. The Company may from time to time increase its capital by such sum to be
divided into shares of such par value as the Company by Special Resolution shall
prescribe.

23. The Company may, by Resolution direct that the new shares or any of them
(arising from an increase in the capital of the Company) shall be offered in the
first instance either at par or at a premium or (subject to the provisions of
the Companies Acts) at a discount to all the holders for the time being of
shares of any class or classes in proportion to the number of such shares held
by them respectively or make any other provision as to the issue of the new
shares.

24. New shares shall be subject to all the provisions of these Bye-Laws with
reference to payment, transfer, transmission and otherwise.

ALTERATION OF CAPITAL
---------------------

25. The Company may from time to time by Special Resolution:

(a) divide its shares into several classes and attach hereto respectively
any preferential, deferred, qualified or special rights, privileges or
conditions;

12
<PAGE>

(b) consolidate and divide all or any of its share capital into shares of
larger par value than its existing shares;

(c) sub-divide its shares or any of them into shares of smaller par value
than is fixed by its memorandum, so, however, that in the sub-division the
proportion between the amount paid and the amount, if any, unpaid on each
reduced share shall be the same as it was in the case of the share from
which the reduced share is derived;

(d) make provision for the issue and allotment of shares which do not carry
any voting rights;

(e) cancel shares which, at the date of the passing of the resolution in
that behalf, have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital by the amount of the shares so
cancelled; and

(f) change the currency denomination of its share capital.

Where any difficulty arises in regard to any division, consolidation, or sub-
division under this Bye-Law, the Board may settle the same as it thinks
expedient and, in particular, may arrange for the sale of the shares
representing fractions and the distribution of the net proceeds of sale in due
proportion amongst the Shareholders who would have been entitled to the
fractions, and for this purpose the Board may authorise some person to transfer
the shares representing fractions to the purchaser thereof, who shall not be
bound to see to the application of the purchase money nor shall his title to the
shares be affected by any irregularity or invalidity in the proceedings relating
to the sale.

26. Subject to the Companies Acts and to any confirmation or consent required
by law or these Bye-Laws, the Company may by Resolution from time to time
convert any preference shares into redeemable preference shares.

REDUCTION OF CAPITAL
--------------------

27. Subject to the Companies Acts, its memorandum and any confirmation or
consent required by law or these Bye-Laws, the Company may from time to time by
Special Resolution authorise the reduction of its issued share capital or any
capital redemption reserve fund or any share premium or contributed surplus
account in any manner.

28. In relation to any such reduction, the Company may by Special Resolution
determine the terms upon which such reduction is to be effected including in the
case of a reduction of part only of a class of shares, those shares to be
affected.

13
<PAGE>

GENERAL MEETINGS
----------------

29. The Board shall convene and the Company shall hold general meetings as
Annual General Meetings in accordance with the requirements of the Companies
Acts at such times and places as the Board shall appoint. The Board may,
whenever it thinks fit, ans shall, when required by the Companies Acts, convene
general meetings other than Annual General Meetings which shall be called
Special General Meetings.

The Board, notwithstanding anything in these Bye-Laws shall, on the
requisition of shareholders holding at the date of the deposit of the
requisition not less than one-twentieth of such of the paid-up capital of the
Company as at the date of the deposit carries the right of voting at general
meetings of the Company proceed duly to convene a special general meeting of the
Company.

NOTICE OF GENERAL MEETINGS
--------------------------

30. An Annual General Meeting of the Shareholders of the Company shall be held
once in each calendar year for the purpose of electing directors, receiving
audited financial statements, receiving the directors report and conducting
other Company business. An Annual General Meeting shall be called by giving not
less than 14 days notice in writing to the Shareholders and a Special General
Meeting shall be called by giving not less than 14 days notice in writing. The
notice shall be exclusive of the day on which it is served or deemed to be
served and of the day for which it is given, and shall specify the place, day
and time of the meeting, and, in the case of a Special General Meeting, the
general nature of the business to be considered. Notice of every general
meeting shall be given in any manner permitted by Bye-Laws 100 and 101 to all
Shareholders other than such as, under the provisions of these Bye-Laws or the
terms of issue of the shares they hold, are not entitled to receive such notice
from the Company.

Notwithstanding that a meeting of the Company is called by shorter notice than
that specified in this Bye-Law, it shall be deemed to have been duly called if
it is so agreed:

(a) in the case of a meeting called as an Annual General Meeting, by all
the Shareholders entitled to attend and vote thereat;

(b) in the case of any other meeting, by a majority in number of the
Shareholders having the right to attend and vote at the meeting, being a
majority together holding not less than 95 percent in nominal value of the
shares giving that right.

31. The accidental omission to give notice of a meeting or (in cases where
instruments of proxy are sent out with the notice) the accidental omission to
send such instrument of proxy to, or the non-receipt of notice of a meeting or
such instrument of proxy by, any person entitled to receive such notice shall
not invalidate the proceedings at the meeting.

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<PAGE>

PROCEEDINGS AT GENERAL MEETINGS
-------------------------------

32. No business shall be transacted at any general meeting unless a quorum is
present when the meeting proceeds to business, but the absence of a quorum shall
not preclude the appointment, choice or election of a chairman which shall not
be treated as part of the business of the meeting. Save as otherwise provided
by these Bye-Laws, at least two Shareholders present in person or by proxy and
entitled to vote shall be a quorum for all purposes; provided, however, if the
Company shall have only one Shareholder, one Shareholder present in person or by
proxy shall constitute the necessary quorum.

33. If within five minutes (or such longer time as the chairman of the meeting
may determine to wait) after the time appointed for the meeting, a quorum is not
present, the meeting, if convened on the requisition of Shareholder, shall be
dissolved. In any other case, it shall stand adjourned to such other day and
such other time and place as the chairman of the meeting may determine and at
such adjourned meeting two Shareholders present in person or by proxy (whatever
the number of shares held by them) shall be a quorum provided that if the
Company shall have only one Shareholder, one Shareholder present in person or by
proxy shall constitute the necessary quorum. The Company shall give not less
than seven days notice of any meeting adjourned through want of a quorum and
such notice shall state that the sole Shareholder or, if more than one, two
Shareholders present in person or by proxy (whatever the number of shares held)
shall be a quorum.

34. Each Director shall be entitled to attend and speak at any general meeting
of the Company.

35. The Chairman (if any) of the Board or, in his absence, or the President
shall preside as chairman at every general meeting. If there is no such
Chairman or President, or if any meeting neither of the Chairman or the
President is not present within five minutes after the time appointed for
holding the meeting, or if neither of them is willing to act as chairman, the
Directors present shall choose one of their number to act or if one Director
only is present he shall preside as chairman if willing to act. If no Director
is present or, if each of the Directors present declines to take the chair, the
persons present and entitled to vote on a poll shall elect one of their number
to be chairman.

36. The chairman of the meeting may, with the consent of any meeting at which a
quorum is present (and shall if so directed by the meeting), adjourn the meeting
from time to time and from place to place but no business shall be transacted at
any adjourned meeting except business which might lawfully have been transacted
at the meeting from which the adjournment took place. When a meeting is
adjourned for three months or more, notice of the adjourned meeting shall be
given as the case of an original meeting.

37. Save as expressly provided by these Bye-Laws, it shall not be necessary to
give any notice of an adjournment or of the business to be transacted at an
adjourned meeting.

15
<PAGE>

VOTING

38. (A) Save where a greater majority is required by the Companies Acts or
these Bye-Laws, any question proposed for consideration at any general meeting
shall be decided on by a simple majority of votes cast.

(B) Subject to any voting rights or resolutions attached to any class of
shares and the restrictions on joint registered holders of shares, on a show of
hands every member who is present in person and entitled to vote thereat shall
have one vote and on a poll every member shall have one vote for each share of
which he is the registered holder an may exercise such vote either in person or
by proxy.

39. At any general meeting, a resolution put to the vote of the meeting shall
be decided on a show of hands unless (before or on the declaration of the result
of the show of hands or on the withdrawal of any other demand for a poll) a poll
is demanded by:

(a) the chairman of the meeting; or

(b) a least three Shareholders present in person or represented by proxy;
or

(c) any Shareholder or Shareholders present in person or represented by
proxy and holding between them not less than one tenth of the total voting
rights of all the Shareholders having the right to vote at such meeting; or

(d) a Shareholder or Shareholders present in person or represented by
proxy holding shares conferring the right to vote at such meeting, being
shares on which an aggregate sum has been paid up equal to not less than
one tenth of the total sum paid up on all such shares conferring such
right.

Unless a poll is so demanded and the demand is not withdrawn, a declaration by
the chairman that a resolution has, on a show of hands, been carried or carried
unanimously or by a particular majority or not carried by a particular majority
or lost shall be final and conclusive, and an entry to that effect in the minute
book of the Company shall be conclusive evidence of the fact without proof of
the number of votes recorded for or against such resolution.

40. If a poll is duly demanded, the result of the poll shall be deemed to be
the resolution of the meeting at which the poll is demanded.

41. A poll demanded on the election of a chairman, or on a question of
adjournment, shall be taken forthwith. A poll demanded on any other question
shall be taken in such manner and either forthwith or at such time (being not
later than three months after the date of the demand) and place as the chairman
shall direct. It shall not be necessary (unless the chairman otherwise directs)
for notice to be given of a poll.

<PAGE>

42. The demand for a poll shall not prevent the continuance of a meeting for
the transaction of any business other than the question on which the poll has
been demanded and it may be withdrawn at any time before the close of the
meeting or the taking of the poll, whichever is the earlier.

43. A person entitled to more than one vote on a poll need not use all his
votes or cast all the votes he uses in the same way.

44. In the case of an equality of votes at a general meeting, whether on a show
of hands or on a poll, the chairman of such meeting shall not be entitled to a
second or casting vote.

45. In the case of joint holders of a share, the vote of the senior who tenders
a vote, whether in person or by proxy, shall be accepted to the exclusion of the
votes of the other joint holders, and for this purpose seniority shall be
determined by the order in which the names stand in the Register in respect of
the joint holding.

46. A Shareholder who is a patient for any purpose of any statute or applicable
law relating to mental health or in respect of whom an order has been made by
any Court having jurisdiction for the protection or management of the affairs of
persons incapable of managing their own affairs may vote, whether on a show of
hands or on a poll, by his receiver, committee, curator bonis or other person in
the nature of a receiver, committee or curator bonis appointed by such Court and
such receiver, committee, curator bonis or other person may vote on a poll by
proxy, and may otherwise act and be treated as such Shareholder for the purpose
of general meetings.

47. If (i) any objection shall be raised to the qualification of any voter or
(ii) any votes have been counted which ought not to have been counted or which
might have been rejected or (iii) any votes are not counted which ought to have
been counted, the objection or error shall not vitiate the decision of the
meeting or adjourned meeting on any resolution unless the same is raised or
pointed out at the meeting or, as the case may be, the adjourned meeting at
which the vote objected to is given or tendered or at which the error occurs.
Any objection or error shall be referred to the chairman of the meeting and
shall only vitiate the decision of the meeting on any resolution if the chairman
decides that the same may have affected the decision of the meeting. The
decision of the chairman on such matters shall be final and conclusive.

PROXIES AND CORPORATE REPRESENTATIVES

48. The instrument appointing a proxy shall be in writing under the hand of the
appointor or of his attorney authorised by him in writing or, if the appointor
is a corporation, either under its seal or under the hand of an officer,
attorney or other person authorised to sign the same.

49. (A) Any Shareholder may appoint a standing proxy or (if a corporation)
representative by depositing at the Registered Office a proxy or (if a
corporation) an authorisation and such proxy or authorisation shall be valid for
all general meetings and adjournments thereof as the case may be, until notice
of revocation is received at the Registered Office. Subject to Bye-law 49(B),
where a

<PAGE>

standing proxy or authorisation exists, its operation shall be deemed to have
been suspended at any general meeting or adjournment thereof at which the
Shareholder is present or in respect to which the Shareholder has specially
appointed a proxy or representative. The Board may from time to time require
such evidence as it shall deem necessary as to the due execution and continuing
validity of any such standing proxy or authorisation and the operation of any
such standing proxy or authorisation shall be deemed to be suspended until such
time as the Board determines that it has received the requested evidence or
other evidence satisfactory to it.

(B) Any Shareholder may irrevocably appoint a proxy, and in such case,
such proxy shall be irrevocable in accordance with the instrument of appointment
and the Shareholder may not vote at any meeting in which the proxy holder is
present either in person or pursuant to s. 75A of the Companies Acts.

50. Subject to Bye-Law 49, the instrument appointing a proxy together with such
other evidence as to its due execution as the Board may from time to time
require, shall be delivered at the Registered Office (or at such place as may be
specified in the notice convening the meeting or in any notice of any
adjournment or, in either case, in any document sent therewith) prior to the
holding of the relevant meeting or adjourned meeting at which the person named
in the instrument proposes to vote or, in the case of a poll taken subsequently
to the date of a meeting or adjourned meeting, before the time appointed for the
taking of the poll, and in default the instrument of proxy shall not be treated
as valid.

51. Instruments of proxy shall be in any common form or in such other form as
the Board may approve and the Board shall send out with the notice of any Annual
General Meeting or special general meeting forms of instruments of proxy for use
at the meeting. The instrument of proxy shall be deemed to confer authority to
demand or join in demanding a poll and to vote on any amendment of a resolution
put to the meeting for which it is given as the proxy thinks fit. The instrument
of proxy shall unless the contrary is stated therein be valid as well for any
adjournment of the meeting as for the meeting to which it relates.

52. A vote given in accordance with the terms of an instrument of proxy shall
be valid notwithstanding the previous death or insanity of the principal, or
revocation of the instrument of proxy or of the authority under which it was
executed, provided that, subject to Bye-law 49(B), no intimation in writing of
such death, insanity or revocation shall have been received by the Company at
the Registered Office (or such other place as may be specified for the delivery
of instruments of proxy in the notice convening the meeting or other documents
sent therewith) one hour at least before the commencement of the meeting or
adjourned meeting, or the taking of the poll, or the day before the effective
date of any written resolution at which the instrument of proxy is used.

53. Subject to Bye-law 49(B) and the Companies Acts, the Board may at its
discretion waive any of the provisions of these Bye-Laws related to proxies or
authorisations and, in particular, may accept such verbal or other assurances as
it thinks fit as to the right of any person to attend and vote on behalf of any
Shareholder at general meetings or to sign written resolutions.

<PAGE>

APPOINTMENT AND REMOVAL OF DIRECTORS

54. (A) Until the HIIC Entities own less than 5% of the Voting Shares on a
fully diluted basis, the Board shall consist of 10 Directors who shall, subject
to Bye-law 54(B), be elected or appointed, except in the case of a casual
vacancy filled pursuant to Bye-law 55, at the annual general meeting or at any
special general meeting called for the purpose of electing or appointing
Directors and who shall hold office for such term as the Shareholders may
determine or, in the absence of such determination, until the next annual
general meeting or until their successors are elected or appointed or their
office is otherwise vacated. At such time as the HIIC Entities own less than 5%
of the Voting Shares on a fully diluted basis, the Board shall consist of such
number not less than three as the Company by Resolution may from time to time
determine. At least two of the Directors, other than the Directors appointed
pursuant to Bye-law 54(B), shall be individuals who are not otherwise officers
or employees of the Company.

54. (B) At any time at which the HIIC Entities own 10% or more of the Voting
Shares on a fully diluted basis, the HIIC Entities shall be entitled to appoint
a percentage of Directors which is the same percentage of the size of the entire
Board as the number of Voting Shares held by the HIIC Entities is of the total
number of Voting Shares on a fully diluted basis (such percentage of Voting
Shares owned by and such number of Directors appointed by the HIIC Entities
shall be determined as follows: the fractional portion of any percentage of
ownership shall be disregarded and whole numbers ending in 5 through 9 shall be
rounded up to the next highest multiple of 10 and whole numbers ending 1 through
4 shall be rounded down to the net lowest multiple of 10 (e.g., 24.9% shall be
rounded down to 20% and 25.1% shall be rounded up to 30%) (and the resulting
percentage shall be multiplied by 10). At any time at which the HIIC Entities
own 5% or more, but less than 10%, of the Voting Shares on a fully diluted
basis, the HIIC Entities shall be entitled to appoint one Director.

55. The Company in general meeting may authorise the Board to fill any vacancy
on the Board other than a vacancy in the office of a Director who was appointed
pursuant to Bye-law 54(B). Any vacancy in the office of a Director appointed
pursuant to Bye-law 54(B) may be filled by a written resolution deposited at the
Registered Office, signed by each of the HIIC Entities holding Voting Shares.

56. The Company may in a Special General Meeting called for that purpose remove
a Director provided notice of any such meeting shall be served upon the Director
concerned not less than 14 days before the meeting and he shall be entitled to
be heard at the meeting and provided further that only the HIIC Entities shall
be entitled to vote on any resolution for the removal of an HIIC Director unless
the reason for removal is disqualification of such Director under Bye-law 58(f)
in which case such Director shall be subject to removal by the Company in
accordance with the foregoing provisions of this Bye-law 56. Any vacancy created
by the removal of a Director at a Special General Meeting may be filled at the
Meeting pursuant to Bye-law 54 by the election of another Director in his place
or, in the absence of such election, pursuant to Bye-law 55.

<PAGE>

57. Where the Company fails to hold an annual general meeting in accordance
with the Companies Act or the election of directors does not take place at the
proper time, the Company shall continue its business and the existing directors
shall continue in office until other directors are appointed or elected pursuant
to the terms of the Companies Acts or these Bye-Laws or until the day on which
the next Annual General Meeting is held.

RESIGNATION AND DISQUALIFICATION OF DIRECTORS AND OFFICERS

58A. The office of a Director shall be vacated upon the happening of any of the
following events:

(a) if he resigns his office by notice in writing delivered to the
Registered Office or tendered at a meeting of the Board;

(b) if he becomes of unsound mind or a patient for any purpose of any
statute or applicable law relating to mental health and the Board resolves
that his office is vacated;

(d) if he is prohibited by law from being a Director;

(e) if he is removed from office pursuant to Bye-law 56;

(f) if he would be a Disqualified Holder if he were to own any shares of
the Company.

58B. The office of any officer shall be vacated upon the happening as to such
officer of the events set out in Bye-law 58A (except the events described in
paragraph (d) and (e)).

ALTERNATE DIRECTORS

59. The Company may by Resolution elect any person or persons to act as
Directors in the alternative to any of the Directors, other than the HIIC
Directors, or may authorise the Board to appoint such Alternate Directors and an
HIIC Director may appoint and remove his own Alternate Director. Any appointment
or removal of an Alternate Director by a Director shall be effected by
depositing a notice of appointment or removal with the Secretary at the
Registered Office, signed by such Director, and such appointment or removal
shall become effective on the date of receipt by the Secretary. Any Alternate
Director may be removed in the same manner as the Director in respect of whom he
is appointed in the alternative and, if appointed by the Board, may be removed
by the Board. Subject as aforesaid, the office of Alternate Director shall
continue until the next annual election of Directors or, if earlier, the date on
which the relevant Director ceases to be a Director. An Alternate Director may
also be a Director in his own right and may act as alternate to more than one
Director.

<PAGE>

60. An Alternate Director shall be entitled to receive notices of all meetings
of Directors, to attend, be counted in the quorum and vote at any such meeting
at which any Director to whom he is alternate is not personally present, and
generally to perform all the functions of any Director to whom he is alternate
in his absence.

61. Every person acting as an Alternate Director shall (except as regards
powers to appoint an alternate and remuneration) be subject in all respects to
the provisions of these Bye-Laws relating to Directors and shall alone be
responsible to the Company for his acts and defaults and shall not be deemed to
be the agent of or for any Directors for whom he is alternate. An Alternate
Director may be paid expenses and shall be entitled to be indemnified by the
Company to the same extent mutatis mutandis as if he were a Director. Every
person acting as an Alternate Director shall have one vote for each Director for
whom he acts as alternate (in addition to his own vote if he is also a
Director). The signature of an Alternate Director to any resolution in writing
of the Board or a committee of the Board shall, unless the terms of his
appointment provides to the contrary, be as effective as the signature of the
Director or Directors to whom he is alternate.

DIRECTORS' FEES AND ADDITIONAL REMUNERATION AND EXPENSES

62. The amount, if any, of Directors' fees shall from time to time be
determined by the Company by Resolution in general meeting and in the absence of
a determination to the contrary in general meeting, such fees shall be deemed to
accrue from day to day. Each Director may be paid his reasonable travelling,
hotel and incidental expenses in attending and returning from meetings of the
Board or committees constituted pursuant to these Bye-Laws or general meetings
and shall be paid all expenses properly and reasonably incurred by him in the
conduct of the Company's business or in the discharge of his duties as a
Director. Any Director who, by request, goes or resides abroad for any purposes
of the Company or who performs services which in the opinion of the Board go
beyond the ordinary duties of a Director may be paid such extra remuneration
(whether by way of salary, commission, participation in profits or otherwise) as
the Board may determine, and such extra remuneration shall be in addition to any
remuneration provided for by or pursuant to any other Bye-Law.

DIRECTORS' INTERESTS

63. (A) A Director may hold any other office or place of profit with the
Company (except that of auditor) in conjunction with his office of Director for
such period and upon such terms as the Board may determine, and may be paid such
extra remuneration therefor (whether by way of salary, commission, participation
in profits or otherwise) as the Board may determine, and such extra remuneration
shall be in addition to any remuneration provided for by or pursuant to any
other Bye-Law.

(B) A Director may act by himself or his firm in a professional capacity
for the Company (otherwise than as auditor) and he or his firm shall be entitled
to remuneration for professional services as if he were not a Director.

<PAGE>

(C) Subject to the provisions of the Companies Acts, a Director may
notwithstanding his office be a party to, or otherwise interested in, any
transaction or arrangement with the Company or in which the Company is otherwise
interested; and be a Director or other officer of, or employed by, or a party to
any transaction or arrangement with, or otherwise interested in, any body
corporate promoted by Company or in which the Company is interested. The Board
may also cause the voting power conferred by the shares in any other company
held or owned by the Company to be exercised in such manner in all respects as
it thinks fit, including the exercise thereof in favour of any resolution
appointing the Directors or any of them to be directors or officers of such
other company, or voting or providing for the payment of remuneration to the
directors or officers of such other company.

(D) So long as, where it is necessary, he declares the nature of his
interest at the first opportunity at a meeting of the Board or by writing to the
Directors as required by the Companies Acts, a Director shall not by reason of
his office be accountable to the Company for any benefit which he derives from
any office or employment to which these Bye-Laws allow him to be appointed or
from any transaction or arrangement in which these Bye-Laws allow him to be
interested, and no such transaction or arrangement shall be liable to be avoided
on the ground of any interest or benefit.

(E) Subject to the Companies Acts and any further disclosure required
thereby, a general notice to the Directors by a Director or officer declaring
that he is a director or officer or has an interest in a person and is to be
regarded as interested in any transaction or arrangement made with that person,
shall be a sufficient declaration of interest in relation to any transaction or
arrangement so made.

POWERS AND DUTIES OF THE BOARD

64. Subject to the provisions of the Companies Acts and these Bye-Laws and to
any directions given by the Company by Resolution, the Board shall manage the
business of the Company and may pay all expenses incurred in promoting and
incorporating the Company and may exercise all the powers of the Company. No
alteration of these Bye-Laws and no such direction shall invalidate any prior
act of the Board which have been valid if that alteration had not been made or
that direction had not been given. Subject to Bye-law 71, the powers given by
this Bye-Law shall not be limited by any special power given to the Board by
these Bye-Laws and a meeting of the Board at which a quorum is present shall be
competent to exercise all the powers, authorities and discretions for the time
being vested in or exercisable by the Board. PROVIDED that, subject to Bye-Law
71, that a Resolution will be required in respect of the sale of all or
substantially all of the undertaking of the business of the Company.

65. The Board may exercise all the powers of the Company to borrow money and to
mortgage or charge all or any part of the undertaking, property and assets
(present and future) and uncalled capital of the Company and to issue debentures
and other securities, whether outright or as collateral security for any debt,
liability or obligation of the Company or of any other persons.

<PAGE>

66. All cheques, promissory notes, drafts, bills of exchange and other
instruments, whether negotiable or transferable or not, and all receipts for
money paid to the Company shall be signed, drawn, accepted, endorsed or
otherwise executed, as the case may be, in such manner as the Board shall from
time to time by resolution determine.

67. The Board on behalf of the Company may provide benefits, whether by the
payment of gratuities or pensions or otherwise, for any person including any
Director or former Director who has held any executive office or employment with
the Company or with any body corporate which is or has been a subsidiary or
affiliate of the Company or a predecessor in the business of the Company or of
any such subsidiary or affiliate, and to any member of his family or any person
who is or was dependent on him, any may contribute to any fund and pay premiums
for the purchase or provisions of any such gratuity, pension or other benefit,
or for the insurance of any such person.

68. The Board may from time to time appoint one or more of its body to be a
managing director, joint managing director or an assistant managing director or
to hold any other employment or executive office with the Company for such
period and upon such terms as the Board may determine and may revoke or
terminate any such appointments. Any such revocation or termination as aforesaid
shall be without prejudice to any claim for damages that such Director may have
against the Company or the Company may have against such Director for any breach
of any contract of service between him and the Company which may be involved in
such revocation or termination. Any person so appointed shall receive such
remuneration (if any) (whether by way of salary, commission, participation in
profits or otherwise) as the Board may determine, and either in addition to or
in lieu of his remuneration as a Director.

DELEGATION OF THE BOARD'S POWERS

69. The Board may by power of attorney appoint any company, firm or person or
any fluctuating body of persons, whether nominated directly or indirectly by the
Board, to be the attorney or attorneys of the Company for such purposes and with
such powers, authorities and discretions (not exceeding those vested in or
exercisable by the Board under these Bye-Laws) and for such period and subject
to such conditions as it may think fit, and any such power of attorney may
contain such provisions for the protection and convenience of persons dealing
with any such attorney and of such attorney as the Board may think fit, and may
also authorise any such attorney to sub-delegate all or any of the powers,
authorities and discretions vested in him.

70. (A) Subject to Bye-law 71(B), the Board may entrust to and confer upon any
Director or officer any of the powers exercisable by it upon such terms and
conditions with such restrictions as it thinks fit, and either collaterally
with, or to the exclusion of, its own powers, and may from time to time revoke
or vary all or any of such powers but no person dealing in good faith and
without notice of such revocation or variation shall be affected thereby.

(B) Subject to Bye-law 71(B), the Board may delegate any of its powers,
authorities and discretions to committees, consisting of such person or persons
(whether a member or members of

<PAGE>

its body or not) as it thinks fit. Any committee so formed shall, in the
exercise of the powers, authorities and discretions so delegated, conform to any
regulations which may be imposed upon it by the Board. Notwithstanding the first
sentence of this paragraph and Bye-law 70(C), for so long as the HIIC Entities
hold at least 5% but less than 10% of the Voting Shares on a fully diluted
basis, the HIIC Directors shall be entitled to elect one member to each of the
Board's executive committee, compensation committee and audit committee (or any
other committee with powers similar thereto); for such time as the HIIC Entities
hold 10% or more of the Voting Shares on a fully diluted basis, the HIIC
Directors shall be entitled to appoint a percentage of members to each of the
Board's executive committee, compensation committee and audit committee (or any
other committees with powers similar thereto) which is the same percentage of
the total number of members of such committee as the percentage of Voting Shares
so held by the HIIC Entities is of the total number of Voting Shares on a fully
diluted basis (such number to be determined as follows: the fractional portion
of any percentage of ownership shall be disregarded and whole numbers ending in
5 through 9 shall be rounded up to the next highest multiple of 10 and whole
numbers ending 1 through 4 shall be rounded down to the next lowest multiple of
10 (e.g., 24.9% shall be rounded down to 20% and 25.1% shall be rounded up to
30%) and the fractional portion of the number of members shall be rounded up to
the nearest whole number (e.g., 30% of a committee of 4 members would result in
the right to appoint 2 members of such committee)).

(C) The Board shall, from among their number elect at their first meeting
following each Annual General Meeting a committee, to be known as the "Audit
Committee", composed of not fewer than three Directors, of whom a majority shall
not be officers or employees of the Company or an Affiliate of the Company, to
hold office until the next Annual General Meeting. At every meeting of the Audit
Committee, a quorum consists of a majority of members of the Audit Committee who
are not officers or employees of the Company or of an Affiliate of the Company.
The members of the Audit Committee shall elect a chairman from among their
number and, subject to the provisions herein contained, may determine their own
procedures.

(D) Before a financial statement that is to be submitted to an Annual
General Meeting is considered by the Directors it shall be submitted to the
Audit Committee for review with the auditor, and, thereafter the report of the
Audit Committee on it shall be submitted to the Directors. The auditor shall be
given notice of, and has the right to appear before and to be heard at, every
meeting of the Audit Committee, and shall appear before the Audit Committee when
requested to do so by the Audit Committee. On the request of the auditor, the
Chairman of the Audit Committee shall convene a meeting of the Audit Committee
to consider any matters the auditor believes should be brought to the attention
of the Directors or Shareholders.

PROCEEDINGS OF THE BOARD

71. (A) The Board may meet for the despatch of business, adjourn and otherwise
regulate its meetings as it thinks fit. Save as otherwise provided in these Bye-
laws, questions arising at any meeting shall be determined by a majority of
votes. In the case of an equality of votes the motion

<PAGE>

shall be deemed to have been lost. A Director may, and the Secretary on the
requisition of a Director shall, at any time summon a board meeting.

(B) At any time that the HIIC Entities own 20% or more of the Voting
Shares on a fully diluted basis, any of the following actions by the Company
would require the approval by a Special Board Majority and a Resolution:

(i) the amalgamation, merger or consolidation of the Company; and

(ii) the amendment of these Bye-laws, including, without limitation,
Bye-laws 4B, 54, 55, 56, 58A, 58B, 71(B) or 71(C), in a manner
that would have a material adverse effect on the rights of the
HIIC Entities hereunder.

(C) At any time that the HIIC Entities own 20% or more of the Voting
Shares of the Company on a fully diluted basis, any of the following actions by
the Company would require the approval by a Special Shareholder Majority:

(i) the winding-up or dissolution of the Company; and

(ii) appointment of the Company's independent auditors.

72. Notice of a board meeting shall be deemed to be duly given to a Director if
it is given to him personally or by verbally or sent to him by post, cable,
telex, telecopier or other mode of representing or reproducing words in a
legible and non-transitory form at his last known address or any other address
given by him to the Company for this purpose. A Director may waive notice of any
meeting either prospectively or retrospectively.

73. (A) The quorum necessary for the transaction of the business of the Board,
shall be a majority of directors and in any event not less than two individuals.
Any Director who ceases to be a Director at a board meeting may continue to be
present and to act as a Director and be counted in the quorum until the
termination of the Board meeting if no other Director objects and if otherwise a
quorum of Directors would not be present.

(B) A Director who to his knowledge is in any way, whether directly or
indirectly, interested in a contract or proposed contract, transaction or
arrangement with the Company shall make full disclosure of his interest to the
Company and shall not be entitled to vote in respect of any contract,
transaction or arrangement in which he is so interested and if he shall do so
his vote shall not be counted, and he shall not be taken into account in
ascertaining whether a quorum is present. In the event that there are
insufficient disinterested directors to form a quorum a decision in respect of
any contract, transaction or arrangement with the Company will be made by a
simple majority for the Company's Shareholders voting at a general meeting.

<PAGE>

74. So long as a quorum of Directors remains in office, the continuing
Directors may act notwithstanding any vacancy in the Board but, if no such
quorum remains, the continuing Directors or a sole continuing Director may act
only for the purpose of calling a general meeting.

75. The Chairman (if any) of the Board or, in his absence, or the President
shall preside as chairman at every meeting of the Board. If there is no such
Chairman or President, or if at any meeting the Chairman or the President is not
present within five minutes after the time appointed for holding the meeting, or
is not willing to act as chairman, the Directors present may choose one of their
number to be chairman of the meeting.

76. The meetings and proceedings of any committee consisting of two or more
members shall be governed by the provisions contained in these Bye-Laws for
regulating the meetings and proceedings of the Board so far as the same are
applicable and are not superseded by any regulations imposed by the Board.

77. A resolution in writing signed by all the Directors for the time being
entitled to receive notice of a meeting of the Board or by all the members of a
committee for the time being shall be as valid and effectual as a resolution
passed at a meeting of the Board or, as the case may be, of such committee duly
called and constituted. Such resolution may be contained in one document or in
several documents in the like form each signed by one or more of the Directors
or members of the committee concerned.

78. A meeting of the Board or a committee appointed by the Board may be held by
means of such telephone, electronic or other communication facilities as permit
all persons participating in the meeting to communicate with each other
simultaneously and instantaneously and participation in such a meeting shall
constitute presence in person at such meeting.

79. All acts done by the Board or by any committee or by any person acting as a
Director or member of a committee or any person duly authorised by the Board or
any committee, shall, notwithstanding that it is afterwards discovered that
there was some defect in the appointment of any member of the Board or such
committee or person acting as aforesaid or that they or any of them were
disqualified or had vacated their office, be as valid as if every such person
had been duly appointed and was qualified and had continued to be a Director,
member of such committee or person so authorised.

OFFICERS
--------

80. The officers of the Company shall include a President and a Vice-President
or a Chairman and a Deputy Chairman who shall be Directors and shall be elected
by the Board as soon as possible after the statutory meeting and each annual
general meeting. In addition the Board may appoint any person whether or not he
is a Director to hold such office as the board may from time to time determine.
Any person elected or appointed pursuant to this Bye-Law shall hold office for
such period and upon such terms as the Board may determine and the Board may
revoke or terminate any

26
<PAGE>

such election or appointment. Any such revocation or termination shall be
without prejudice to any claim for damages that such officer may have against
the Company or the Company may have against such officer for any breach of any
contract of service between him and the Company which may be involved in such
revocation or termination. Save as provided in the Companies Acts or these Bye-
laws, the powers and duties of the officers of the Company shall be such (if
any) as are determined from time to time by the Board.

DUTY AND CARE OF OFFICERS AND DIRECTORS
---------------------------------------

81. Every Director and officer of the Company in exercising his power and
discharging his duties will act honestly and in good faith with a view to the
best interest of the Company and will comply with statutes, regulations and
these Bye-Laws governing the conduct of the Director and officers and the
Company.

MINUTES
-------

82. The Directors shall cause minutes to be made and books kept for the purpose
of recording:

(a) all appointments of officers made by the Directors;

(b) the names of the Directors and other persons (if any) present at each
meeting of Directors and of any committee;

(c) of all proceedings at meetings of the Company, of the holders of any
class of shares in the Company, and of committees;

(d) of all proceedings of managers (if any).

SECRETARY
---------

83. The Secretary who will not be the President or Chairman of the Company
shall be appointed by the Board at such remuneration (if any) and upon such
terms as it may think fit and any Secretary so appointed may be removed by the
Board.

The duties of the Secretary shall be those prescribed by the Companies Acts
together with such other duties as shall from time to time be prescribed by the
Board.

84. A provision of the Companies Acts or those Bye-Laws requiring or
authorising a thing to be done by or to a Director and the Secretary shall not
be satisfied by its being done by or to the same person acting both as Director
and as, or in the place of, the Secretary.

27
<PAGE>

THE SEAL
--------

85. (A) The Seal shall consist of a circular metal device with the name of the
Company around the outer margin thereof and the county and year of registration
across the centre thereof. Should the Seal not have been received at the
Registered Office in such form at the date of adoption of this Bye-Law then,
pending such receipt, any document requiring to be sealed with the Seal shall be
sealed by affixing a red wafer seal to the document with the name of the
Company, and the country and year of registration type written across the centre
thereof.

(B) The Board shall provide for the custody of every Seal. A Seal shall
only be used by authority of the Board or of a committee constituted by the
Board. Subject to these Bye-laws, any instrument to which a Seal is affixed
shall be signed by two Directors or the Secretary and one Director, or by any
two persons whether or not Directors or the Secretary, who have been authorised
either generally or specifically to attest to the use of a Seal; provided that
the Secretary or a Director may affix a Seal attested with his signature only to
authenticate copies of these Bye-Laws, the minutes of any meeting or any other
documents requiring authentication.

(C) The Company may have a Securities Seal for use for sealing certificates
for shares or other securities issued by the Company and no signature of any
Director, officer or other person and no mechanical reproduction thereof shall
be required on any such certificates or other document and any such certificates
or other document to which such Securities Seal is affixed shall be valid and
deemed to have been sealed and executed with the authority of the Board
notwithstanding the absence of such signature or mechanical reproduction as
aforesaid.

DIVIDENDS AND OTHER PAYMENTS
----------------------------

86. The Board may from time to time declare cash dividends or distributions out
of contributed surplus to be paid to the Shareholders according to their rights
and interests including such interim dividends as appear to the Board to be
justified by the position of the Company. The Board may also pay any fixed cash
dividend which is payable on any shares of the Company half yearly or on such
other dates, whenever the position of the Company, in the opinion of the Board,
justifies such payment.

87. The Board may deduct from any dividend, distribution or other moneys
payable to a Shareholder by the Company on or in respect of any shares all sums
of money (if any) presently payable by him to the Company.

88. No dividend, distribution or other moneys payable by the Company on or in
respect of any share shall bear interest against the Company.

89. Any dividend, distribution, interest or other sum payable in cash to the
holder of shares may be paid by cheque or warrant sent through the post
addressed to the holder at his address in the Register or, in the case of joint
holders, addressed to the holder whose name stands first in the

28
<PAGE>

Register in respect of the shares at his registered address as appearing in the
Register or addressed to such person at such address as the holder or joint
holders may in writing direct. Every such cheque or warrant shall, unless the
holder or joint holders otherwise direct, be made payable to the order of the
holder or, in the case of joint holders, to the order of the holder whose name
stands first in the Register in respect of such shares, and shall be sent at his
or their risk and payment of the cheque or warrant by the bank on which it is
drawn shall constitute a good discharge to the Company. Any one of two or more
joint holders may give effectual receipts for any dividends, distributions or
other moneys payable or property distributable in respect of the shares held by
such joint holders.

90. Any dividend or distribution out of contributed surplus unclaimed for a
period of six years from the date of declaration of such dividend or
distribution shall be forfeited and shall revert to the Company and the payment
by the Board of any unclaimed dividend, distribution, interest or other sum
payable on or in respect of the share into a separate account shall not
constitute the Company a trustee in respect thereof.

91. With the sanction of a Resolution the Board may direct payment or
satisfaction of any dividend or distribution out of contributed surplus wholly
or in part by the distribution of specific assets, and in particular of paid-up
shares or debentures of any other company, and where any difficulty arises in
regard to such distribution or dividend the Board may settle it as it thinks
expedient, and in particular, may authorise any person to sell and transfer any
fractions or may ignore fractions altogether, and may fix the value for
distribution or dividend purposes of any such specific assets and may determine
that cash payments shall be made to any Shareholders upon the footing of the
values so fixed in order to secure equality of distribution any may vest any
such specific assets in trustees as may seem expedient to the Board.

RESERVES
--------

92. The Board may, before recommending or declaring any dividend or
distribution out of contributed surplus, set aside such sums as it thinks proper
as reserves which shall, at the discretion of the Board, be applicable for any
purpose of the Company and pending such application may, also at such
discretion, either be employed in the business of the Company or be invested in
such investments as the Board may from time to time think fit. The Board may
also without placing the same to reserve carry forward any sums which it may
think it prudent not to distribute.

CAPITALIZATION OF PROFITS
-------------------------

93. The Company may, upon the recommendation of the Board, at any time and from
time to time pass a Resolution to the effect that it is desirable to capitalize
all or any part of any amount for the time being standing to the credit of any
reserve or fund which is available for distribution or to the credit of any
share premium account or any capital redemption reserve fund and accordingly
that such amount be set free for distribution amongst the Shareholders or any
class of Shareholders who would be entitled thereto if distributed by way of
dividend and in the same proportions, on the

29
<PAGE>

footing that the same be not paid in cash but be applied in payment up in full
of unissued shares, debentures or other obligations of the Company, to be
allotted and distributed credited as fully paid amongst such Shareholders and
the Board shall give effect to such Resolution, provided that for the purpose of
this Bye-Law, a share premium account and a capital redemption reserve fund may
be applied only in paying up of unissued shares to be issued to such
Shareholders credited as fully paid and provided further that any sum standing
to the credit of a share premium account may only be applied in crediting as
fully paid shares of the same class as that from which the relevant share
premium was derived.

94. Where any difficulty arises in regard to any distribution under the last
preceding Bye-Law, the Board may settle the same as it thinks expedient and, in
particular, may authorise any person to sell and transfer any fractions or may
resolve that the distribution should be as nearly as may be practicable in the
correct proportion but not exactly so or may ignore fractions altogether, and
may determine that cash payments should be made to any Shareholders in order to
adjust the rights of all parties, as may seem expedient to the Board. The Board
may appoint any person to sign on behalf of the persons entitled to participate
in the distribution any contract necessary or desirable for giving effect
thereto and such appointment shall be effective and binding upon the
Shareholders.

RECORD DATES
------------

95. Notwithstanding any other provisions of these Bye-Laws, the Company may by
Resolution or the Board may fix any date as the record date for any dividend,
distribution, allotment or issue and for the purpose of identifying the persons
entitled to receive notices of or to vote at general meetings. Any such record
date may be on or at any time before or after any date on which such dividend,
distribution, allotment or issue is declared, paid or made or such notice
dispatched.

ACCOUNTING RECORDS
------------------

96. The Board shall cause to be kept accounting records sufficient to give a
true and fair view of the state of the Company's affairs and to show and explain
its transactions, in accordance with the Companies Acts.

97. The records of account shall be kept at the Registered Office or at such
other place or places as the Board thinks fit, and shall at all times be open to
inspection by the Directors: PROVIDED that if the records of account are kept
at some place outside Bermuda, there shall be kept at an office of the Company
in Bermuda such records as will enable the directors to ascertain with
reasonable accuracy the financial position of the Company at the end of each
three month period. No Shareholder (other than an officer of the Company) shall
have any right to inspect any accounting record or book or document of the
Company except as conferred by law or authorised by the Board or by Resolution.

98. A copy of every balance sheet and statement of income and expenditure,
including every document required by law to be annexed thereto, which is to be
laid before the Company in general

30
<PAGE>

meeting, together with a copy of the auditor's report, shall be sent to each
person entitled thereto in accordance with the requirements of the Companies
Acts.

AUDIT
-----

99. Save and to the extent that an audit is waived in the manner permitted by
the Companies Acts, auditors shall be appointed and their duties regulated in
accordance with the Companies Acts, any other applicable law and such
requirements not inconsistent with the Companies Acts as the Board may from time
to time determine.

SERVICE OF NOTICES AND OTHER DOCUMENTS
--------------------------------------

100. Any notice or other document (including a share certificate) may be served
on or delivered to any Shareholder by the Company either personally or by
sending it through the post (by airmail where applicable) in a pre-paid letter
addressed to such Shareholder at his address as appearing in the Register or by
delivering it to or leaving it at such registered address. In the case of joint
holders of a share, service or delivery of any notice or other document on or to
one of the joint holders shall for all purposes be deemed as sufficient service
on or delivery to all the joint holders. Any notice or other document if sent
by post shall be deemed to have been served or delivered seven days after it was
put in the post, and in proving such service or delivery, it shall be sufficient
to prove that the notice or document was properly addressed, stamped and put in
the post.

101. Any notice of a general meeting of the Company shall be deemed to be duly
given to a Shareholder if it is sent to him by cable, telex, telecopier or other
mode of representing or reproducing words in a legible and non-transitory form
at his address as appearing in the Register or any other address given by him to
the Company for this purpose. Any such notice shall be deemed to have been
served twenty-four hours after its despatch.

102. Any notice or other document delivered, sent or given to a Shareholder in
any manner permitted by these Bye-Laws shall, notwithstanding that such
Shareholder is then dead or bankrupt or that any other event has occurred, and
whether or not the Company has notice of the death or bankruptcy or other event,
be deemed to have been duly served or delivered in respect of any share
registered in the name of such Shareholder as sole or joint holder unless his
name shall, at the time of the service or delivery of the notice or document,
have been removed from the Register as the holder of the share, and such service
or delivery shall for all purposes be deemed as sufficient service or delivery
of such notice or document on all persons interested (whether jointly with or as
claiming through or under him) in the share.

WINDING UP
----------

103. If the Company shall be wound up, the liquidator may, with the sanction of
a Resolution of the Company and any other sanction required by the Companies
Acts, divide amongst the Shareholders in specie or kind the whole or any part of
the assets of the Company (whether they

31
<PAGE>

shall consist of property of the same kind or not) and may for such purposes set
such values as he deems fair upon any property to be divided as aforesaid and
may determine how such division shall be carried out as between the Shareholders
or different classes of Shareholders. The liquidator may, with the like
sanction, vest the whole or any part of such assets in trustees upon such trust
for the benefit of the contributories as the liquidator, with the like sanction,
shall think fit, but so that no Shareholder shall be compelled to accept any
shares or other assets upon which there is any liability.

INDEMNITY
---------

104. Subject to the proviso below, every Director, officer of the Company and
member of a committee constituted under Bye-Law 70 shall be indemnified out of
the funds of the Company against all civil liabilities loss damage or expense
(including but not limited to liabilities under contract, tort and statue or any
applicable foreign law or regulation and all reasonable legal and other costs
and expenses properly payable) incurred or suffered by him as such Director,
officer or committee member and the indemnity contained in this Bye-Law shall
extend to any person acting as a Director, officer or committee member in the
reasonable belief that he has been so appointed or elected notwithstanding any
defect in such appointment or election PROVIDED ALWAYS that the indemnity
contained in this Bye-Law shall not extend to any matter which would render it
void pursuant to the Companies Acts.

105. Every Director, officer and member of a committee duly constituted under
Bye-Law 70 of the Company shall be indemnified out of the funds of the Company
against all liabilities incurred by him as such Director, officer or committee
member in defending any proceedings, whether civil or criminal, in which
judgment is given in his favour, or in which he is acquitted, or in connection
with any application under the Companies Acts in which relief from liability is
granted to him by the court.

106. To the extent that any Director, officer or member of a committee duly
constituted under Bye-Law 70 is entitled to claim an indemnity pursuant to these
Bye-Laws in respect of amounts paid or discharged by him, the relative indemnity
shall take effect as an obligation of the Company to reimburse the person making
such payment or effecting such discharge.

ALTERATION OF BYE-LAWS
----------------------

107. Subject to Bye-law 71(B), these Bye-Laws may be amended from time to time
by the Directors; however, any such amendment shall be submitted to the
Shareholders in general meeting for confirmation, and upon such confirmation
such amendments shall become operative.

<PAGE>

<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheets and the Consolidated Statements of Operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,239,864
<SECURITIES> 0
<RECEIVABLES> 50,686
<ALLOWANCES> 48,828
<INVENTORY> 0
<CURRENT-ASSETS> 1,340,928
<PP&E> 974,568
<DEPRECIATION> (154,610)
<TOTAL-ASSETS> 17,395,407
<CURRENT-LIABILITIES> 644,051
<BONDS> 530,000
0
37
<COMMON> 194,283
<OTHER-SE> 16,027,036
<TOTAL-LIABILITY-AND-EQUITY> 17,395,407
<SALES> 0
<TOTAL-REVENUES> 17,616
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,169,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,012,243
<INCOME-PRETAX> (30,812,259)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,988,037)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,824,222)
<CHANGES> 0
<NET-INCOME> (30,812,259)
<EPS-PRIMARY> (1.99)
<EPS-DILUTED> (1.99)

</TABLE>