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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT
OF 1934



For the fiscal year ended December 31, 2004



Commission File No. 1-13481



METRO-GOLDWYN-MAYER INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-4605850                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                               |  |           
|---------------------------------------------- |  | ----------
|10250 Constellation Boulevard, Los Angeles, CA |  | 90067-6241
|(Address of principal executive offices)       |  | (Zip Code)



Registrants
telephone number, including area code: (310) 449-3000



Securities registered pursuant to Section 12(b) of the Act:



|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of each class           |  | Name of each exchange on which registered
|Common Stock, par value $0.01 |  | New York Stock Exchange                  



Securities
registered pursuant to Section 12(g) of the Act: None



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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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  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 the Registrants best knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment
to this Form 10-K.    x



The aggregate market value of the voting stock (based on the last sale price of such stock as reported by the Dow Jones News Retrieval) held by non-affiliates of the Registrant as of June 30, 2004 was $742,865,500.



The number of shares of the Registrants common stock
outstanding as of February 24, 2005 was 238,635,783.



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PART I



Item 1.    Business



General



Metro-Goldwyn-Mayer Inc. (MGM or the Company) is a premier global entertainment content company, and we are one of seven major U.S. film and television studios. We are actively engaged in the
development and worldwide production and distribution of entertainment product, including theatrical motion pictures, television programming, home video, interactive media, music, and licensed merchandise. See Note 12 to Consolidated Financial
Statements for information on our business segments. Our principal subsidiaries are Metro-Goldwyn-Mayer Studios Inc., United Artists Corporation, United Artists Films Inc. and Orion Pictures Corporation. Our library contains approximately
4,000 theatrically released feature film titles and over 10,000 television episodes and is the largest collection of post-1948 feature films in the world. Films in our library have won over 200 Academy Awards, including Best Picture Awards for
Annie Hall, The Apartment, The Best Years of Our Lives, Dances With Wolves, Hamlet, In the Heat of the Night, Marty, Midnight Cowboy, Platoon, Rain Man, Rocky, The Silence of the Lambs, Tom Jones and West Side Story.Our library
also includes 22 titles in the James Bond film franchise, five titles in the Rocky film franchise and nine titles in the Pink Panther film franchise.



In addition, through MGM Networks, we have ownership interests in television channels that are distributed to subscribers in over 100 countries and
territories around the globe.



MGM was incorporated in Delaware
on July 10, 1996. Our executive offices are located at 10250 Constellation Boulevard, Los Angeles, California 90067-6241. Our telephone number is (310) 449-3000.



We make available free of charge (on or through our Internet website under the caption Investor RelationsSEC
Filings) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission, which is within 24 hours. Our Internet address is www.mgm.com.



Background of the Company



Tracinda Corporation, senior management of MGM Studios at the time and a company formed under the laws of Australia, formed MGM to acquire from an indirect wholly-owned subsidiary of Consortium de Realisation all of the outstanding capital
stock of MGM Studios and its subsidiaries, including United Artists, in October 1996 for an aggregate consideration of $1.3 billion. Tracinda is wholly owned by Kirk Kerkorian.



In July 1997, we acquired all of the outstanding capital stock of Orion and its subsidiaries, including the entity formerly
known as The Samuel Goldwyn Company and now known as Orion Film Classics Company, from Metromedia International Group, Inc. In connection with the Orion acquisition, we obtained the film and television libraries of the Orion companies consisting of
approximately 1,900 film titles and 3,000 television episodes.



In November 1997, we completed an initial public offering, whereby we issued and sold 9,000,000 new shares of common stock, $.01 par value per share, at a price per share of $20.00, less an underwriting discount, for net proceeds (after
expenses of the initial public offering) of $165.0 million. Concurrently with the consummation of the initial public offering, Tracinda Corporation (our principal stockholder) purchased directly from us, at a purchase price of $18.85 per share
(equal to the per share price to the public in the initial public offering, less the underwriting discount), 3,978,780 shares of the common stock for an aggregate purchase price of $75.0 million.



In November 1998, we completed a rights offering, whereby we issued and sold
84,848,485 new shares of the common stock at a subscription price of $8.25 per share for net proceeds (after expenses of the rights offering) of $696.5 million.



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In January 1999, we acquired from PolyGram N.V. and its subsidiaries certain film libraries and
film-related rights for $235.0 million. The PolyGram libraries contain over 1,300 feature films and are comprised of (a) the Epic library, which consists of approximately 1,000 film titles acquired between 1992 and 1997 by Credit Lyonnais Bank
Nederland and Consortium de Realisation from various filmed entertainment companies, (b) the library of films released by PolyGram before March 31, 1996 and (c) the Island/Atlantic and Vision/Palace libraries, which had been previously acquired by
PolyGram.



In April 1999, Alex Yemenidjian was appointed as
Chairman and Chief Executive Officer and Chris McGurk was named Vice Chairman and Chief Operating Officer of MGM.



In November 1999, we completed a rights offering, whereby we issued and sold 49,714,554 new shares of the common stock at a subscription price of $14.50
per share for net proceeds (after expenses of the rights offering) of approximately $715.0 million.



In May 2000, our shelf registration statement covering the sale of up to $750.0 million of securities was declared effective by the Securities and
Exchange Commission. During 2000, we sold 5,363,800 shares of common stock for total consideration of $134.1 million pursuant to the shelf registration statement.



In February and March 2001, we sold 16,080,590 additional shares of common stock to unaffiliated investors in private
placements pursuant to our shelf registration statement and 15,715,667 shares of Series B preferred stock (which shares were converted into 15,715,667 shares of common stock, on a one-for-one basis, upon stockholder approval on May 2, 2001) to
Tracinda, for total consideration of $635.6 million.



In March
2002, pursuant to our shelf registration statement, we sold 10,550,000 additional shares of common stock in a public offering for aggregate net proceeds of $164.8 million.



In January 2003, we filed a registration statement pursuant to registration rights held by Tracinda in connection with the
underwritten public offering by it of 25,000,000 shares of common stock.



On October 9, 2003, Mr. Kerkorian and Tracinda completed an unsolicited tender offer and purchased 15,000,000 shares of our common stock from existing stockholders at a net price of $16.00 per share.



Recent Developments



Merger with LOC Acquisition Company.    On September 23, 2004, we entered into an Agreement and
Plan of Merger with LOC Acquisition Company, a Delaware corporation owned by a consortium comprised of Sony Corporation of America, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners. Under the
agreement, the consortium will acquire MGM for $12.00 in cash per share of our common stock plus the assumption of our debt. Completion of the merger is subject to various regulatory approvals and customary closing conditions. JP Morgan Chase and
Credit Suisse First Boston have committed to provide the consortium with up to $4.25 billion of senior debt financing. The consortiums obligation to acquire MGM is conditioned upon consummation of the debt financing on the terms set forth in
the commitment letters delivered by JP Morgan Chase and Credit Suisse First Boston or substitute financing which, if the debt financing commitments become unavailable, the consortium is obligated to use its reasonable best efforts to obtain.
MGMs stockholders approved the merger at a special meeting held on December 17, 2004. In connection with merger agreement, Tracinda and 250 Rodeo, Inc. voted all of their shares of MGM common stock in favor of the merger.



In connection with the merger agreement, we and Sony entered into a Deposit
Agreement, dated as of September 13, 2004, as amended, pursuant to which Sony paid us a $150 million deposit. Under the Deposit Agreement, we must return the deposit to Sony at the effective time of the merger. Otherwise, the deposit is
nonrefundable unless (1) the merger agreement is terminated under circumstances where we are required to pay a termination fee to LOC Acquisition Company; provided that if the merger agreement is terminated by LOC Acquisition Company because (a) our
Board withdraws, or modifies in a manner adverse to LOC Acquisition



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Company, its recommendation that our stockholders adopt the merger agreement or recommends, approves or adopts an alternative takeover proposal, or (b) we
fail to include in the proxy statement relating to the merger (or any amendment) the recommendation of our Board that our stockholders vote in favor of the merger, or (c) a third party commences a tender or exchange offer for MGM and our Board does
not recommend rejection of the offer within ten business days or (d) our Board approves or recommends an alternative takeover proposal or approves or recommends that its stockholders tender their shares in any tender or exchange offer, the deposit
is only refundable if we enter into a binding agreement with a third party with respect to an alternative takeover proposal within nine months of termination of the merger agreement; or (2) a court has determined that there has been material adverse
effect with respect to MGM.



In addition, if LOC Acquisition
Company terminates the merger agreement because we have breached any of our covenants such that the conditions to closing cannot be satisfied and there is a final binding judgment of a court that we willfully and materially breached the merger
agreement (as to which all rights of appeal or other avenues of review have been exhausted or lapsed), then the amount of the deposit may be taken into account in determining any damages resulting from our willful and material breach.



In addition, in connection with the merger agreement, we entered into an
Indemnity Agreement with Tracinda, 250 Rodeo and Mr. Kerkorian pursuant to which we will indemnify Tracinda, 250 Rodeo and Mr. Kerkorian against certain liabilities relating to the transactions contemplated by the merger agreement.



The merger presently is expected to close shortly after the end of the
first quarter of 2005. However, there can be no assurance that all of the conditions to the merger, including the conditions within our control, will be satisfied or that the merger will be completed.



Although we have no reason to believe that the merger will not be
consummated, the pendency of a merger involving a motion picture studio tends to create uncertainty in the entertainment business community. As a result, it has been more difficult for us to attract development projects, attach talent to projects,
commence productions, and implement distribution initiatives in the home video and television sales markets during the progress of merger discussions and the executory period of the merger agreement. Accordingly, in the event that the merger should
fail to be consummated, there may be a gap or reduction in the number of motion picture releases for a period of time following termination of the merger agreement until we can reinvigorate its development, production and distribution activities. In
addition, we could face a loss of personnel or a decline in morale if the merger should fail to be consummated. Such occurrences could be expected to have, at least temporarily, a significant adverse effect upon our business. In the event that, as a
result of termination of the merger agreement, we retain Sonys $150 million deposit, these adverse effects would be mitigated but there is no guarantee that the deposit alone would be sufficient to mitigate the entire negative effect of
non-consummation of the merger.



Stockholder
Dividend.    On April 26, 2004, we declared a special one-time cash dividend of $8.00 per share to stockholders of record on May 7, 2004, which was paid on May 17, 2004. The cash dividend, aggregating approximately $1.89
billion, was financed by borrowings under our new $2.4 billion credit facility.



Pursuant to the provisions of the Amended and Restated 1996 Stock Incentive Plan, the Compensation Committee of the Board of Directors has adjusted the outstanding stock options issued on or before May 17, 2004 under
the plan such that following the payment of the one-time cash dividend to stockholders, each option holder shall receive upon exercise, in addition to the shares of common stock otherwise obtainable, a cash amount of $8.00 per share.



New Credit Facility.    On April 26, 2004, we
entered into a fourth amended and restated credit facility with a syndicate of banks aggregating $2.4 billion, consisting of a five-year $400.0 million revolving credit facility, a six-year $400.0 million term loan and a seven-year $1.6 billion term
loan, which replaced a pre-existing $1.75 billion amended credit facility. Proceeds from the loans under the new credit facility were used to finance the



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payment of the $1.89 billion stockholder dividend (see above) and to refinance loans under the pre-existing credit facility. The new revolving credit
facility will be used for general corporate purposes. The credit agreement provides that certain change of control transactions, including a transaction such as the pending merger with LOC Acquisition Company, constitute an event of default
resulting in acceleration of the loans and termination of the revolving credit facility. In connection with the closing of the merger, the credit facility will be replaced and superseded by debt financing arranged by the consortium.



In February 2002, MGM Domestic Television Distribution LLC and NBC
Enterprises, Inc. formed a joint venture to act as an agent to sell barter advertising spots received by us and NBC as full or partial consideration from the licensing of feature film and television programming product in the domestic television
syndication market. On September 30, 2004, the joint venture was terminated and all distribution agreements were terminated by December 31, 2004. We assumed the sale of advertising spots for our programming in the domestic television syndication
market.



Dutch Auction Tender
Offer.    On December 4, 2003, we commenced a Dutch Auction tender offer to purchase up to 10,000,000 shares of our common stock at a purchase price not greater than $18.00 nor less than $16.25 per share. Under the procedures
for the Dutch Auction tender offer, our stockholders had the opportunity to tender some or all of their shares of common stock at prices specified by the stockholders. We then determined the lowest price per share within the range of $16.25 to
$18.00 per share that would enable us to buy 10,000,000 shares, or such lesser number of shares that were properly tendered and not withdrawn. Shares accepted in the Dutch Auction tender offer were purchased by us at the same determined price per
share regardless of whether the stockholder tendered at a lower price. Tracinda Group, 250 Rodeo and Mr. Kerkorian, our principal stockholders, did not participate in the Dutch Auction tender offer; nor did any member of our Board of Directors or
executive management. The Dutch Auction tender offer expired on January 15, 2004. Pursuant to the Dutch Auction tender offer, we purchased 10,000,000 shares of our common stock at a price of $17.00 per share, or an aggregate amount of $170.0
million, plus offering expenses of approximately $1.0 million. The Dutch Auction tender offer was financed primarily from available cash on hand, net cash flow provided by operating activities and borrowings under the revolving credit facility.



Notice of Termination of Third Party International
Subdistribution Agreement.    In June 1999, we entered into an agreement with Twentieth Century Fox Home Entertainment, Inc. pursuant to which Fox Home Entertainment provides distribution services for our films in the
international home video market. This distribution arrangement became effective on February 1, 2000. On June 24, 2003, we gave notice to Fox Home Entertainment of our intent to terminate the agreement as of January 31, 2004 as permitted under the
agreement. Effective February 1, 2004, we entered into an amended agreement under which Fox Home Entertainment will continue to perform subdistribution services in certain territories. In 2003, we expanded our sales and marketing operations in
Western Europe, adding France and Germany to operations already in place in the UK. We also added to our North American sales, marketing and distribution operations with the addition of Canada to our existing U.S. distribution. Furthermore, in early
2004 we took control of all sales, marketing and distribution operations in the UK, France, Germany, Australia and Benelux. See Note 13 to the Consolidated Financial Statements.



Treasury Stock.    In July 2002, we publicly announced a share repurchase program to purchase up
to 10,000,000 shares of our common stock in the open market using available cash on hand. In November 2003, we announced that we had increased the number of shares of our common stock we could purchase in the share repurchase program by an
additional 2,500,000 shares (for a total of up to 12,500,000 shares). Under this program, as of December 31, 2004, we had repurchased 8,104,300 shares at an average price of $11.46 per share and at an aggregate cost of $92.9 million.



The Motion Picture and Television Industry



Motion PicturesGeneral.    The motion
picture industry consists of two principal activities: production and distribution. Production involves the development, financing and production of feature-length motion



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pictures. Distribution involves the promotion and exploitation of motion pictures throughout the world in a variety of media, including theatrical
exhibition, home entertainment, television and other ancillary markets. The U.S. motion picture industry can be divided into major studios and independent companies, with the major studios accounting for a large majority of the number of theatrical
releases. In addition to us (including MGM Studios, MGM Pictures, UA Films and Orion), the major studios are The Walt Disney Company (including Buena Vista, Touchstone and Miramax Films), Paramount Pictures Corporation, Sony Pictures Entertainment,
Inc. (including Columbia Pictures), Twentieth Century Fox Film Corp., NBC Universal (including Universal Studios) and Warner Bros. (including New Line Cinema and Castle Rock Entertainment). The major studios are typically large diversified
corporations that have strong relationships with creative talent, exhibitors and others involved in the entertainment industry and have global film production and distribution capabilities.



Historically, the major studios have produced and distributed the majority of
high grossing theatrical motion pictures released annually in the United States. In addition, most of the studios have created or accumulated substantial and valuable motion picture libraries that generate significant revenues. These revenues can
provide the major studios with a stable source of earnings that partially offsets the variations in the financial performance of their current motion picture releases and other aspects of their motion picture operations.



The independent companies generally have more limited production and
distribution capabilities than do the major studios. While certain independent companies may produce as many films as a major studio in any year, independent motion pictures typically have lower negative costs and are not as widely released as
motion pictures produced and distributed by the major studios. Additionally, the independent companies may have limited or no internal distribution capability and may rely on the major studios for distribution and financing.



Motion Picture Production.The production of a
motion picture begins with the screenplay adaptation of a popular novel or other literary work acquired by the producer of the motion picture or the development of an original screenplay based upon a story line or scenario conceived or acquired by
the producer. In the development phase, the producer may seek production financing and tentative commitments from a director, the principal cast members and other creative personnel. A proposed production schedule and budget are prepared. At the end
of this phase, the decision is made whether or not to greenlight, or approve for production, the motion picture.



After greenlighting, pre-production of the motion picture begins. In this phase, the producer engages creative personnel to the extent not previously
committed, finalizes the filming schedule and production budget, obtains insurance or self insures and secures completion guaranties, if necessary. Moreover, the producer establishes filming locations, secures any necessary studio facilities and
stages and prepares for the start of actual filming.



Principal
photography, or the actual filming of the screenplay, generally extends from seven to 16 weeks, depending upon such factors as budget, location, weather and complications inherent in the screenplay. Following completion of principal photography, the
motion picture enters what is typically referred to as post-production. In this phase, the motion picture is edited, opticals, dialogue, music and any special effects are added, and voice, effects and music soundtracks and pictures are synchronized.
This results in the production of the negative from which release prints of the motion picture are made. Major studios and independent film companies hire editors, composers and special effects technicians on the basis of their suitability for a
particular picture.



The production and marketing of theatrical
motion pictures requires substantial capital. The costs of producing and marketing motion pictures have increased substantially in recent years. These costs may continue to increase in the future at rates greater than normal inflation, thereby
increasing the costs to us of our motion pictures. Production costs and marketing costs are generally rising at a faster rate than increases in either domestic admissions to movie theaters or admission ticket prices, leaving us and all producers of
motion pictures more dependent on other media, such as home entertainment and television, and foreign markets.



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Motion Picture Distribution.    The distribution of a motion picture involves
the licensing of the picture for distribution or exploitation in various markets, both domestically and internationally, pursuant to a release pattern. These markets include theatrical exhibition, non-theatrical exhibition (which includes airlines,
hotels and armed forces facilities), home entertainment (including rental and sell-through of video and DVD), presentation on television (including pay-per-view, pay, network, syndication and basic cable) and marketing of the other rights in the
picture and underlying literary property, which may include publishing, merchandising and soundtracks. The domestic and international markets generally follow the same release pattern, with the starting date of the release in the international
market varying from being concurrent with the domestic theatrical release to being as long as nine months afterwards. A motion picture typically is distributed by a major studio or one or more distributors that acquire rights from a studio or other
producer in one or more markets or media or a combination of the foregoing.



Both major studios and independent film companies often acquire pictures for distribution through a customary industry arrangement known as a negative pickup, under which the studio or independent film
company agrees before commencement of or during production to acquire from a production company all rights to a film upon completion of production, and also acquire completed films, as well as all associated obligations.



Television Production.    The production of
television series programming involves the development of a format based on a creative concept or literary property into a television script, the hiring of talent, the filming or taping of the program and the technical and post-production work
necessary to produce a finished program. Television producers may originate projects internally or acquire them from others. If a concept is deemed suitable for development, the studio or other producer or network typically commissions and pays for
a script. Once a script is ordered, one or more license agreements are negotiated with the potential broadcasters of such program. A pilot episode usually is ordered or commissioned prior to the determination of whether a series will be produced.



Television production can generally be divided into two
distinct markets: (a) network production, consisting of production for the broadcast networks (i.e., ABC, CBS, NBC, FOX, UPN and WB) and made-for-cable networks (i.e., pay and basic cable networks) and (b) first-run syndication production. The
economics of the two types of television production are different. In broadcast network and made-for-cable network production, a network generally orders a minimum number of initial episodes (approximately six to 13 episodes if produced for a
broadcast network and approximately 13 to 22 episodes if produced for a cable network) of each new series for a license fee equal to a percentage of the programs cost. The balance of the production cost for such shows (which is customarily
lower for made-for-cable productions than for productions made for broadcast networks) can only be recouped through international sales and, if a series is successful, syndication, second run domestic basic cable, and home entertainment sales, and
generally remains unrecouped for at least four years. In the first-run syndication production business, a producer seeking to launch a new series, commits to produce a minimum number of episodes if the producer can clear the series by
selling to individual television stations in sufficient markets throughout the country (generally comprising at least 75 percent of U.S. television households). Once produced, the episodes are immediately available for licensing to international
broadcasters as well and can subsequently be licensed to a domestic basic cable network. This approach generally involves a lower production cost risk and earlier return on investment than the network production business; however, first-run
syndicated programming generally reduces the potential total return on investment as compared to successful network production. See ProductionTelevision Production.



Television Distribution.    The U.S. television
market is served by network affiliated stations, independent stations and cable systems, although the number of independent stations has decreased as many formerly independent stations have become affiliated with new networks in recent years. During
prime time hours, network affiliates primarily broadcast programming produced for the network. In non-prime time, network affiliates broadcast network programming, off-network programming, first-run programming (programming produced for
distribution on a syndicated basis) and programming produced by the local stations themselves. Independent television stations and cable networks, during both prime and non-prime time, produce their own



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programs and telecast off-network programs or first-run programs acquired from independent producers or syndicators. Syndicators generally are companies that
sell to independent television stations and network affiliates programming produced or acquired by the syndicator for distribution.



Business Strategy



Our goal has been to become a fully-integrated global entertainment content company, thereby maximizing the value of our assets, including our film and
television library and our film and television production and distribution units. To achieve this goal, we have sought to:



Build and Leverage Our Library.    We plan to build and leverage our film and television library by:



| |  |  | Producing new motion pictures and television episodes;
| | - |  | ------------------------------------------------------



| |  |  | Aggressively marketing and repackaging our librarys titles;
| | - |  | ------------------------------------------------------------



| |  |  | Developing new distribution channels;
| | - |  | -------------------------------------



| |  |  | Capitalizing on developments in technology;
| | - |  | -------------------------------------------



| |  |  | Further penetrating emerging international markets;
| | - |  | ---------------------------------------------------



| |  |  | Licensing others the right to base television programming on our library titles; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Incentivizing our employees to drive growth in sales of our librarys titles.
| | - |  | -----------------------------------------------------------------------------



Create Branded Cable and Satellite Programming Channels.    We believe we can create significant
value by utilizing our library and current production to establish MGM branded cable and satellite channels. We have launched channels serving over 100 countries and territories around the globe and have been actively exploring strategic
alternatives to gain carriage for additional proposed channels. See Branded Cable and Satellite Channels.



Maintain Film and Television Production While Improving Our Risk Profile.    Current management intends to conduct our
production business in a financially disciplined manner by:



| |  |  | Tightly monitoring development and production expenditures;
| | - |  | -----------------------------------------------------------



| |  |  | Seeking co-financing partners for some of our pictures and television product, where appropriate;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Entering into production agreements and joint ventures with key producers of motion pictures and television product;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Entering into agreements to sell distribution rights for some of our pictures in foreign territories, where appropriate;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Increasing our focus on the production of commercially targeted motion pictures; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Using our film library as a proven source for sequels and remakes and the expansion of certain well-tested, familiar film franchises.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



Currently, we intend to produce or co-produce and distribute seven to ten
motion pictures annually through MGM Pictures across a variety of genres. Through UA Films, we also intend to distribute annually an additional five to ten specialty motion pictures that will have substantially lower average costs and will be
produced mainly by third parties.



Currently, we plan to
develop, produce and distribute television programs focusing in part on low financial risk formats, such as pre-clearing a television series for distribution prior to committing to development expenditures, as well as joint ventures, co-productions
and other partnering arrangements for certain of our series.



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Increase Distribution Revenues.    We have taken steps to obtain greater
flexibility in distributing our own product to enable us to realize additional revenue opportunities while reducing the costs associated with distribution. In 1999, we terminated our agreement with Warner Home Video so that, on February 1, 2000, we
regained full control over the home video exploitation of our films. On October 31, 2000, we completed our withdrawal from United International Pictures (UIP) with respect to the international theatrical distribution of our films. We executed the
transition of our international home video and theatrical/non-theatrical distribution from Warner Home Video and UIP to gain more control over our international distribution in those media and to maximize our revenue opportunities.



We plan to increase distribution revenues by:



| |  |  | Self-distributing our library as well as all motion pictures produced by MGM Pictures and UA Films in the U.S. and Canada;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Distributing films that we co-produce with a third party in those territories where we have distribution rights and capabilities, where appropriate;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distributing motion pictures produced by others; and
| | - |  | ----------------------------------------------------



| |  |  | Taking advantage of new distribution platforms.
| | - |  | -----------------------------------------------



Capitalize on a Well Recognized Brand Name.    We believe that the MGM name and lion logo are among the most recognized in the
world. We seek to capitalize on the value inherent in our name and logo through the distribution of branded programming and the development of consumer products.



Impact of Merger.    The foregoing discussion of business strategy was based upon the
Companys current status as an independent publicly-traded entity. Upon and after consummation of the merger agreement with LOC Acquisition Company, the Companys business strategy is likely to change significantly.



Film and Television Library



We currently own or hold certain distribution rights to approximately 4,000
theatrically released motion pictures. Our library also contains the largest collection of feature films produced since 1948. In 1948, certain major studios negotiated consent decrees requiring that the studios separate their exhibition businesses
from their production and distribution businesses and mandating the divestiture of certain theater holdings. This is generally believed to have triggered at the time greater competition among the studios and an increased emphasis on the potential
for commercial success in the development and production stages, resulting in a greater focus on the content and quality of the motion pictures produced and distributed by the studios. We believe that films produced and developed after 1948
generally are more valuable than pre-1948 films, a number of which are black and white.



In addition to being the largest modern motion picture library in the world, our library is also one of the most critically acclaimed libraries in the motion picture industry, representing one of the largest
collections of Academy Award-winning films. The motion pictures in our library have won over 200 Academy Awards. Fourteen motion pictures in our library have won the Academy Award for Best Picture: Annie Hall, The Apartment, The Best Years of Our
Lives, Dances With Wolves, Hamlet, In the Heat of the Night, Marty, Midnight Cowboy, Platoon, Rain Man, Rocky, The Silence of the Lambs, Tom Jones and West Side Story.



Our library also includes over 10,000 episodes from television series previously broadcast on prime-time network television,
cable or in first-run syndication, including episodes of The Addams Family, AmericanGladiators, Bat Masterson, Cagney & Lacey, Fame, Green Acres, Highway Patrol, In the Heat of the Night, Mr. Ed, The Patty Duke Show, Pink Panther, Sea
Huntandthirtysomething.Programming in our library has won, among others, 87 Emmy awards and 18 Golden Globe awards.





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Our library includes titles from a wide range of genres, including dramas, comedies, action-adventure
movies, westerns and suspense thrillers. We believe that our librarys diversity, quality and extensive size provides us with substantial competitive advantages. We seek to continue to build upon these advantages by producing and acquiring new
motion pictures across a variety of genres and budget ranges to update and enhance our library. See ProductionMotion Picture Production.



Currently, we seek to continue to implement the strategy of developing or licensing the development of new projects from existing library assets. Our
library represents a readily-available, market tested source of development ideas. For example, in 2005, we are releasing The Pink Panther, the latest installment in the Pink Panther franchise; Beauty Shop, a spin-off of
the Barbershop series; and Be Cool, a sequel to the 1995 film Get Shorty. We are currently developing Yours, Mine and Ours, a remake, in a single-pot co-production with Paramount. In 2004 we released a remake of Walking
Tall. Additionally, in 1999 we had success with the remake of The Thomas Crown Affair and in 1995 we had success withThe Birdcage, a remake of La Cage aux Folles. Furthermore, we have successfully expanded the valuable film
franchises within our library, most notably the James Bond franchise, with the commercial success of GoldenEyein 1995, Tomorrow Never Diesin 1997, The World Is Not Enoughin 1999 and Die Another Day in 2002.
Additionally, we have successfully developed television series based on library motion pictures such as: Poltergeist: The Legacybased on Poltergeist; Stargate SG-1and Stargate Atlantisbased on Stargate;and All Dogs
Go to Heaven,based on the movie of the same name. We also have produced a remake of Twelve Angry Men and Inherit The Wind as made-for-television movies for Showtime Networks and Carrie as a made-for-television movie for
NBC.



We, together with Danjaq LLC, are the sole owners of all
of the James Bond motion pictures. Twenty James Bond motion pictures in our library were produced and are distributed pursuant to a series of agreements with Danjaq. The James Bond motion pictures are produced by Danjaq, and we have the right to
approve all key elements of the pictures, such as the selection of the director and the leading actors. The copyright in each of the motion pictures is owned jointly by MGM and Danjaq. Historically, we have the right to distribute each of the
pictures in all media worldwide in perpetuity or for a term of 15 years. Where our distribution rights are not perpetual, the rights revert to joint control by MGM and Danjaq after expiration of the distribution term. On January 21, 2004, we entered
into an extension agreement with Danjaq. Under that agreement, our distribution term for each of the non-perpetual James Bond motion pictures was extended by 15 years from the previously scheduled expiration date, and the initial distribution term
for new James Bond pictures, beginning with Die Another Day, was extended from 15 years to 20 years. Danjaq controls certain merchandising rights with respect to the pictures, and we are entitled to receive a portion of the revenues from
Danjaqs merchandising licenses. Additionally, we control all the marketing rights and the music from The Living Daylights (1987) and all subsequent pictures. All other rights relating to the pictures are controlled jointly by MGM and
Danjaq. The agreements contain certain restrictions on the sale or licensing by MGM of any of our rights in the pictures.



In 1998, we acquired the rights to Never Say Never Again, produced by Warner Bros. and Taliafilms and, in 1999, we acquired the distribution rights
to Casino Royale, produced by Columbia and Famous Artists Productions (a subsidiary of MGM). Accordingly, our library now contains every James Bond motion picture ever made, and we are the only studio to hold such rights.



We seek aggressively to market and distribute titles in our film library in
existing pay and free television, home video and other markets worldwide. We believe that the size of our library allows us to minimize the over-exploitation of any title and therefore better preserve the ongoing value of our library by actively
managing the rotation of titles through such markets. As of December 31, 2004, approximately 80 percent of the theatrical motion picture titles and approximately 92 percent of the television title episodes in our library have been exploited.



We also seek aggressively to market and distribute our titles
through developing technology. See DistributionHome Video Distribution. We believe that the development and growth of direct broadcast satellite and other new distribution systems may generate significant incremental profits
for the industry as the number of channels requiring content grows.



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We have differing types of rights to the various titles in our library. In some cases, we own the title
outright, with the right to exploit the title in all media and territories for an unlimited time. In other cases, the title may be owned by a third party and we may have obtained the right to distribute the title in certain media and territories for
a limited term. Even if we own a title, we may have granted rights to exploit the title in certain media and territories to others. As of December 31, 2004, we owned outright, or had been granted rights in perpetuity to, approximately 67 percent of
the titles in our library. Our rights in the other library titles are limited in time and, pursuant to the terms of the existing arrangements, the rights granted to us expire, with respect to approximately three percent of the library over the next
two years (i.e. through the end of 2006), with respect to another approximately 23 percent over the seven years thereafter (from 2007 to 2014), and with respect to another approximately seven percent thereafter (from 2014 on). We have generally been
able to renew such rights on acceptable terms; however, we cannot assure you that we will continue to be able to do so in the future. In accordance with industry practice, for purposes of calculating the size of the library, we include any title
that we have the right to distribute in any territory in any media for any term.



Certain long-term pre-paid licenses were entered into before 1993 by a prior management. As of December 31, 2004, the titles included in these licenses represent a cross-section of the titles in the library,
including approximately 15 percent of all pre-1990 MGM and UA titles, which remain under license in one or more of the U.S., France and Spain and approximately 15 percent of the Orion and PolyGram titles which remain under license to television in
one or more of France, Spain, Germany and the United Kingdom. See DistributionTelevision Distribution. We expect to benefit as certain rights to the library that have been previously licensed to others revert to us over time.
See Distribution.



Because we have
historically derived approximately 35 to 40 percent of our revenues from non-U.S. sources, our business is subject to risks inherent in international trade, many of which are beyond our control. These risks include: changes in laws and policies
affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and to withholding taxes; differing degrees of protection for intellectual property; financial instability and increased market concentration of
buyers in foreign television markets, including in European pay television markets; the instability of foreign economies and governments; fluctuating foreign exchange rates; and war and acts of terrorism. See Regulation, Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures about Market Risk.



Production



Motion Picture Production



We currently develop and produce theatrical motion picture projects through two separate production entities, MGM Pictures and UA Films. MGM Pictures
concentrates on developing and producing mainstream, major studio budget level films. UA Films concentrates on developing, producing and acquiring specialized films with a net cost of less than $10.0 million. Both production units are supported by
centralized marketing, sales, legal, physical production and distribution functions.



MGM Pictures plans to distribute approximately seven to ten motion pictures annually across a variety of genres and budget ranges. MGM Pictures employs a development staff of creative executives who refine concepts
and scripts so that projects are developed to the point that production decisions can be made. MGM Pictures has entered into production alliances with a select group of producers, many of them genre-specific. These producers will develop and produce
motion pictures exclusively or semi-exclusively for MGM Pictures and will use their relationships and creative abilities to provide another source of product for MGM Pictures. The seven to ten pictures distributed by MGM Pictures are anticipated to
be a combination of internally developed pictures, pictures developed and/or produced by the allied producers, pictures which are co-produced or co-financed with other major studios or independent partners and pictures acquired through negative
pickups or other distribution arrangements. MGM Pictures strategy is to both increase creative diversity and mitigate



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financial risk in connection with motion picture production. We expect to enhance creative diversity by employing the production alliance strategy discussed
above and by entering into selective production agreements with successful established producers.



We also intend to seek to spread the financial risk inherent in motion picture production, as well as increase the breadth of our release slate, by
entering into co-production and/or co-financing arrangements. As an example of this strategy, in December 2003, we entered into an agreement with Miramax Films pursuant to which MGM and Miramax would jointly produce, finance and distribute a remake
of The Amityville Horror. Additionally, we are currently developing Yours, Mine and Ours, a remake, in a single-pot co-production with Paramount.



We have established UA Films as a speciality artist-friendly division for quality, independent films, which will release
approximately five to ten motion pictures each year. These motion pictures will be produced or co-produced by UA Films or acquired through negative pickups or other distribution arrangements and will include some motion pictures in a variety of
genres generally involving producers, directors, writers or other talent who typically work outside of the studio system as well as lower budget films from established filmmakers. Our investment in such pictures is expected to be significantly less
than our investment for pictures produced through MGM Pictures. We believe that this strategy of releasing specialty motion pictures will add greater diversity to our release slate and enhance the library both through the addition of new film
product and the building of relationships with up-and-coming producers and directors, writers and other talent.



Compared to other major studios, we believe we have entered into, and seek to pursue, fewer traditional producer or talent overhead
arrangements in which a studio pays a portion of the overhead of creative talent (i.e., producer, director or actor) for the right to receive a first look at that partys projects. We generally believe that our capital resources are
better allocated to acquire literary properties or the services of talent for a specific project. In addition, our current business plan also calls for our annual release slates to be comprised of proportionately fewer large budget event
motion pictures than the current release slates of the other major studios.



We do not own any studio facilities or stages, but lease facilities and sound stages on an as needed basis in connection with the production of specific motion picture and television projects. We have not
experienced any difficulties in leasing appropriate facilities and sound stages when needed.



Motion picture production and distribution is highly speculative and inherently risky. There can be no assurance of the economic success of any motion picture since the revenues derived from the production and
distribution of a motion picture (which do not necessarily bear a direct correlation to the production or distribution costs incurred) depend primarily upon its acceptance by the public, which cannot be predicted. The commercial success of a motion
picture also depends upon the acceptance of competing films released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible
and intangible factors, all of which can change and cannot be predicted with certainty. Further, the theatrical success of a motion picture is generally a key factor in generating revenues from other distribution channels. There is a substantial
risk that some or all of our motion pictures will not be commercially successful, resulting in costs not being recouped or anticipated profits not being realized. See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations.



Finally, consummation of the
merger with LOC Acquisition Company would likely result in a change in our plans and business model described above.



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The following table details our tentative 2005 domestic theatrical release



Release Schedule



|                            |  |                         |  |                                                                                                                                                                                                                         |  |                                                                                                                   
|--------------------------- |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|Title                       |  | ApproximateRelease Date |  | Summary                                                                                                                                                                                                                 |  | Principal Actors                                                                                                  
|Be Cool (MGM)               |  | March 2005              |  | Movie producer and gangster Chili Palmer suddenly finds himself mixing it up in the rough and tumble world of music when a new idea for a movie leads him into the music business.                                      |  | John Travolta, Uma Thurman, Dwayne The Rock Johnson, Cedric the Entertainer, Vince Vaughn, Danny DeVito         
|                            |  |                         | 
|Beauty Shop (MGM)           |  | March 2005              |  | Gina, from Barbershop 2, quits her job at an uptown Chicago salon and buys her own shop back in her old neighborhood. Worlds collide when Ginas uptown clients clash with her
downtown clients in her new Beauty Shop. |  | Queen Latifah, Alicia Silverstone, Andie MacDowell, Alfre Woodard, Kevin Bacon                                    
|The Amityville Horror (MGM) |  | April 2005              |  | Newlyweds move into a house where a murder was committed and experience strange, terrifying manifestations which drive them away.                                                                                       |  | Ryan Reynolds, Melissa George, Philip Baker Hall, Jimmy Bennett                                                   
|                            |  |                         | 
|Into the Blue (MGM)         |  | July 2005               |  | Young vacationers are involved in a dangerous conflict with treasure hunters when they discover a deadly wreck.                                                                                                         |  | Paul Walker, Jessica Alba, Ashley Scott, Scott Caan                                                               
|                            |  |                         | 
|Romance and Cigarettes (UA) |  | August 2005             |  | A down-and-dirty musical love story set in the world of the working class.                                                                                                                                              |  | James Gandolfini, Susan Sarandon, Kate Winslet, Steve Buscemi, Christopher Walken, Mandy Moore, Mary Louise Parker
|                            |  |                         | 
|The Woods (UA)              |  | September 2005          |  | When a neglected young girls parents drop her off at a remote all-girl boarding school in the forest, the headmistress discovers she has the talent that the teachers have been
searching for.                       |  | Agnes Bruckner, Patricia Clarkson, Bruce Campbell, Rachel Nichols                                                 



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|                             |  |                         |  |                                                                                                                                                                  |  |                                                                              
|---------------------------- |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|Title                        |  | ApproximateRelease Date |  | Summary                                                                                                                                                          |  | Principal Actors                                                             
|Pink Panther (MGM)           |  | September 2005          |  | The ever-bumbling Inspector Clouseau investigates the murder of a French soccer star and the mysterious disappearance of the legendary Pink Panther diamond.   |  | Steve Martin, Kevin Kline, Jean Reno, Beyoncé Knowles                        
|                             |  |                         | 
|Art School Confidential (UA) |  | September 2005          |  | A disillusioned young art student, resentful of people around him, struggles to win the heart of a model while mistakenly becoming entwined in a murder mystery. |  | John Malkovich, Steve Buscemi, Jim Broadbent, Angelica Huston, Max Minghella 
|                             |  |                         | 
|Capote (UA)                  |  | Fall 2005               |  | Truman Capote becomes involved with self-confessed killer Perry Smith when writing In Cold Blood.                                                              |  | Phillip Seymour Hoffman, Clifton Collins, Jr., Catherine Keener, Chris Cooper



The release date of a
motion picture may be revised as the production schedule changes or in such a manner as the distributor believes is likely to maximize revenues. Additionally, there can be no assurance that any of the motion pictures scheduled for release will be
completed, that completion will occur in accordance with the anticipated schedule or budget, or that the motion pictures will necessarily involve all of the creative talent listed above. See the discussion above in Motion Picture
Production.



Television Production



We have in the past engaged in the development and production of episodic
television series, mini-series and movies for distribution on domestic and international television networks, local independent and network affiliated television stations, pay television networks, basic cable networks and home video. Since the re-
establishment of our television series production operations in 1994, we have obtained commitments for approximately 1,525 hours of television programming, of which approximately four percent remained to be aired as of December 31, 2004.



Our strategy has been to focus on the development and production of series
for cable television and the first-run syndication market, which involves a lower production investment risk, and movies and mini-series for both network and off-network broadcasters. As part of our strategy, in 1994 we entered into a programming
arrangement with Showtime whereby we provided television series and movies for premiere on Showtime. Showtime agreed to license from us exclusive U.S. pay television rights to the following television series: (a) 132 hours (six seasons) of The
Outer Limits (winner of the Cable Ace award for Best Dramatic Series in 1995 and 1996), all of which have aired; (b) 66 episodes (three seasons) of Poltergeist: The Legacy, all of which have aired; and (c) 110 episodes (five seasons) of
Stargate SG-1, all of which have aired. We have no further commitments from Showtime with respect to these series. Following their initial exhibition cycle on Showtime, we have exploited these programs further in other markets. In this
respect, we entered into a license agreement with USA/Sci-Fi Channel for the exclusive domestic basic cable exhibition rights of The Outer Limits, Poltergeist: The Legacy andStargate SG-1.We are producing 84 new episodes of
Stargate SG-1 for USA/Sci Fi, of which 54 episodes have aired as of December 31, 2004, 20 episodes will be aired in 2005 and ten episodes will be aired in 2006. In continuance of this strategy, we have entered into a license agreement with
USA/Sci-Fi Channel with respect to the production of 40 episodes of Stargate Atlantis, a new one-hour action adventure series based on our successful Stargate franchise. Ten episodes of Stargate Atlantis have aired as of
December 31, 2004, 20 episodes will air in 2005 and ten episodes will air in 2006.



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The programming agreement with Showtime also included a commitment by Showtime to license eight
made-for-television movies from us, none of which remain to be produced as of December 31, 2004. One of the licensed movies, Dirty Pictures, won the Golden Globe award for Best Mini-Series or Motion Picture Made for Television in
2001, giving Showtime its first ever victory in that category. In addition, Showtime has committed to licensing three one-hour series, the first of which, Jeremiah, is a one-hour action series. Thirty-five episodes of Jeremiah have
been produced, and all of such episodes have aired as of December 31, 2004. The second series is Dead Like Me, a one-hour drama. Thirty episodes have been produced and all have aired as of December 31, 2004. The additional series commitment
remains to be produced.



In first-run syndication, we launched
a new series for the 2002/2003 broadcast season called She Spies in an arrangement with NBC for station clearances on NBC owned and operated stations. She Spies was renewed for the 2003/2004 broadcast season. Forty episodes of the
series were produced as of December 31, 2003, and all episodes have aired as of December 31, 2004. In addition, all 40 episodes have been cleared on NBC owned and operated stations for the 2004/2005 broadcast season.



As the risks involved in the first-run syndication business have increased
significantly in recent years with the advent of mass vertical integration, the resulting consolidation in the marketplace, and the recent downturn in the economy and advertising market, we are evaluating production of series for network television
and continuing to focus on cable television. Although network television production typically requires greater deficit financing while offering the potential for greater financial return, we intend to pursue joint ventures, co-productions and other
partnering arrangements for some of our future series in order to minimize our financial risk. Recently, reality-based programming has been an exception to the high deficit/high risk network model as networks will typically cover most, if not all,
of the production costs of such programming. Although the potential financial return for reality programming is significantly lower than it is for high-deficit network programming, we intend to explore this market due to the minimization of
financial risk it offers. In fact, during the summer of 2003, we produced 12 episodes of Fame, a one-hour reality-based series inspired by our feature film for NBC.



Our rich film library provides us with a vast resource for developing television production and potential licensing
opportunities. Much of our past success has resulted from transforming such library product into successful television franchises, such as In the Heat of the Night, Stargate SG-1, Stargate AtlantisandThe Outer Limits. Currently, we
are developing the following projects, among others: Legally Blonde, a one-hour series adaptation of our recent hit feature films; Barbershop, a half-hour series adaptation of our recent hit feature film; and The Thomas Crown
Affairs, a one-hour adaptation of our popular feature film.



Since our ability to recover production costs and realize profits on our television programs depends on various factors, including but not limited to the programs acceptance by the public, fluctuations in prevailing advertising rates
and the ability to distribute the programs subsequent to their first-run license, there can be no assurance that we can recover the production costs or realize profits on any television series. Thus, there is a substantial risk that some or all of
our television projects will not be commercially successful, resulting in costs not being recouped or anticipated profits not being realized. See Distribution and Competition. There is also financial exposure to
us after the programming is licensed to the extent that advertising revenues and/or license fees we receive are not sufficient to cover production costs. Moreover, we may have certain financial obligations to the producer of a series if we cancel
production prior to commencement of production for any broadcast season for which the series was licensed.



Distribution



Theatrical Distribution



General.    The initial step in the release of a motion picture is the booking of engagements with theatrical exhibitors. The exhibitors retain a portion of admissions paid at the box office, which generally
includes a fixed amount per week, as well as a percentage of the gross receipts that escalates over time. A studios or other



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producers (or third party distributors) share is generally approximately 50 percent of gross box office receipts, although that percentage has
generally decreased in recent years and varies depending upon factors such as market competition and the overall performance of the film.



Our goal is to release a slate of films appealing to a wide variety of audiences. By strategically timing the release of our motion pictures throughout
the year, we seek to avoid some of the risks posed when a motion picture is inappropriately released during the most crowded and competitive box office seasons. We believe that this strategy is unlikely to have a negative impact on our ability to
generate home video rentals.



All motion pictures that we
release theatrically in the U.S. and Canada, whether produced by MGM Pictures, UA Films or third parties, are marketed and distributed by MGM Distribution Co.



In June 1999, we entered into an agreement with Fox pursuant to which Fox provides distribution services for our films in the international theatrical
market. This distribution services arrangement took effect on November 1, 2000. Although Fox is servicing international theatrical distribution activities on our behalf, we have reserved broad powers to direct and control the handling and release of
our films. We believe that this arrangement with Fox reduces the amount of fixed overhead related to the distribution of our theatrical product in the international marketplace.



Co-Production and Distribution Agreements.    In addition to producing motion pictures
independently, we enter into co-production agreements, split rights deals and similar arrangements under which we retain certain distribution rights with respect to a picture and share the cost of production with a partner that obtains other rights.
While such agreements limit our risk relating to a motion pictures performance as they reduce our production costs, such agreements also limit profitability. We also acquire rights to distribute films through negative pickup arrangements under
which we acquire a completed motion picture, or certain rights therein, from a third party. Under co-production agreements, split rights deals or negative pickup arrangements, we may be committed to spend specified amounts for prints and
advertising. Additionally, we occasionally enter into rent-a-system arrangements under which we provide distribution services to an independent film company for a percentage distribution fee. Under rent-a-system arrangements, the
independent film company generally is responsible for all print and advertising costs. These types of arrangements may be entered into before, during or after production of a particular motion picture.



Digital Distribution.    On March 27, 2002, a
wholly-owned subsidiary, MGM Digital Development Inc., acquired a one-seventh interest in NDC, LLC, a partnership created with the six other major studios to (a) develop and/or ratify standards for digital motion picture equipment and for
digital cinema technology to be used in the delivery of high quality in-theatre digital cinema and (b) update and deploy a limited amount of new digital motion picture equipment in theatres. We have contributed approximately $1.2 million for our
equity interest in the joint venture. The initial term of the agreement has been extended and now expires on September 30, 2005.



Theatrical Marketing.    Our theatrical marketing department consists of five functional groups: research, media planning,
advertising, promotion and publicity. The objective of the marketing department is to maximize each motion pictures commercial potential by designing and implementing a marketing campaign tailored to appeal to the pictures most receptive
audience. The marketing process begins with research before a motion picture is completed. The research department determines, through audience screenings and focus groups, a motion pictures appeal to its most likely target audience. The
marketing group begins to develop marketing materials well in advance of a motion pictures scheduled theatrical release. The marketing campaign generally begins six months before release with the circulation of teaser trailers, posters and
exhibitor advertising materials. The campaign becomes more aggressive two to three months before release as full-length trailers are released in theaters and additional materials are sent to exhibitors. Finally, a national media campaign is launched
four to five weeks before opening day. This media campaign generally involves advertising a pictures release on national television, including network prime time and syndication markets, national cable and radio and in



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magazines, newspapers and specific target markets. In addition, public appearances, such as television talk shows, are arranged for a pictures stars in
order to promote the film. The entire process is managed by our in-house staff, although outside agencies are frequently retained to provide certain creative services.



Home Video Distribution



Our marketing and distribution strategy in the home video market domestically and internationally has been to (a) market our motion picture and
television titles in cohesive consumer and retailer promotions, (b) create branded product lines, (c) adapt to a maturing VHS market and a growing DVD market and (d) release new motion pictures into the home entertainment market at the time of the
year that we believe will achieve the best results.



In
addition to organizing our VHS and DVD product into branded collections, we have launched an integrated sales and marketing branding initiative designed to create awareness for MGM catalog product and to drive store traffic to dedicated displays in
key customer outlets. Under the MGM Means Great Movies umbrella message, the general advertising, retailer-specific advertising and all in-store signage for the MGM dedicated sections are combined to create awareness and demand for MGM
catalog titles and to help consumers find them in stores.



Additionally, in connection with new films which we release into the market, we often release related library films, or groups of library films, in order to increase sales of both the library films and new releases. An example is the
release of theJames Bondlibrary titles in connection with the November 2002 theatrical release of Die Another Day. Another example is the re-promotion of Barbershop in connection with the February 2004 theatrical release of
Barbershop 2. Furthermore, we have released 1,000 MGM DVD titles and now have a critical mass of properties in the marketplace from which we are able to create effective promotions that target the growing DVD consumer base.



MGM Home Entertainment manages the marketing and distribution of our current
feature motion pictures and library product in the home video and other home entertainment markets.



In June 1999, we entered into an agreement with Fox Home Entertainment pursuant to which Fox Home Entertainment provides distribution services for our
films in the international home video market. This distribution arrangement became effective on February 1, 2000. On June 24, 2003, we gave notice to Fox Home Entertainment of our intent to terminate the agreement as of January 31, 2004 as
permitted under the agreement. However, we negotiated to continue the agreement in a modified form under which Fox has continued to provide subdistribution services in certain territories and we continue to reserve broad powers to direct and control
the handling of our home video product. In 2003, we expanded our sales and marketing operations in Western Europe, adding France and Germany to operations already in place in the UK. We also added to our North American sales, marketing and
distribution operations with the addition of Canada to our existing U.S. distribution. Furthermore, in early 2004 we took control of all sales, marketing and distribution operations in the UK, France, Germany, Australia and Benelux.



From 2001 to 2004, we increased our annual worldwide home video gross revenue
from feature films from $584.5 million to $919.2 million. We believe that this increase is in part a result of effective and efficient sales, marketing and distribution of new release and library product and the growth of the DVD market.



In 2004, we continued to focus on developing strong retail relationships
and programs that have increased our in-store presence. This presence has, in turn, increased our exposure to the end-consumer at retail and has had a positive impact on sales. Furthermore, our retailers have recognized our successful sales and
distribution effort. In 2004, we were named Sams Club Vendor of the Third Quarter, K-Marts Entertainment & Leisure Vendor of the Year for Australia and received the AAFES Best Partner Award. In 2003, we were named Vendor of the Year
from Best Buy, an award we also won in 2001. We also received the Altitunes Vendor of the Year award and the Shopko Vendor of the Year award for the second consecutive year.



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We have entered into revenue sharing agreements for our new releases and certain library titles, pursuant
to which we lease titles to rental establishments and receive a percentage of the consumer rental revenues generated from such titles. Although we can provide no assurance, we believe that such arrangements may increase our revenues from the home
video rental market by allowing us to participate in increased revenues from successful titles even though these revenues will be received over a longer period.



In 2004, we continued efforts to expand our video library domestically and internationally through the acquisition of distribution rights from third
parties, and the internal development of films that leverage our properties. An example of this is the December 2004 DVD premiere and release of Species III, which is the sequel to the Species and Species II theatrical features.



We intend to continue capitalizing on growing distribution
formats such as DVD. The DVD console installed base in the United States grew from over one million households at the beginning of 1999 to a base of approximately 68 million households by the end of 2004. We believe that this rapid growth, combined
with the strong desire among new DVD owners to create new film collections, will continue to be a source of incremental revenue for us.



Our DVD sales have increased from $388.1 million in 2001 to $910.8 million in 2004, an increase of approximately 135 percent. The increase in DVD sales
was partially offset by a drop in videocassette format sales, resulting in an approximate 64 percent increase in worldwide home video sales. We intend to continue expansion and exploitation of our DVD library product into 2005.



We also seek to capitalize on emerging distribution technologies such as
video-on-demand, a technology that gives consumers the ability to order and control the playback of a feature film or other property. As an example, in 2001, we entered into a video-on-demand joint venture, now named Movielink, with four other major
studios to distribute our properties. In 2002, Movielink launched a video-on-demand service over the Internet.



The development and/or emergence of such distribution technologies, platforms and formats, however, is dependent on the development and rollout of
technology, as well as other external factors, and may create new risks to our ability to protect our intellectual property. See Competition.



Television Distribution



General.    We frequently license our current theatrical motion pictures for pay television through output agreements pursuant
to which films not yet produced are pre-licensed for a specified fee paid on delivery. We believe that output agreements with international distributors with recognized expertise are beneficial.



We seek to enter into relatively short-term licenses of our library motion
pictures for pay and free television with title selections designed for the relevant marketplace. We have created a proprietary database for use by our sales force which contains detailed information on each of our films, including dates of
availability, media controlled by us, sales history, genre, format, length, stars, soundtrack, etc. The sales force can utilize this information in order to fulfill customer demand for strategically designed offerings of motion pictures based on
various criteria. We believe that this system has provided our sales force with an advantage in a competitive marketplace that requires large amounts of diverse content.



Domestic Pay Television.    We have a theatrical motion picture output agreement with Showtime
requiring our future theatrical motion pictures to air on Showtimes pay television network. We have extended the output term of the agreement with Showtime to cover pictures theatrically released in the U.S. commencing January 1, 2000 and
continuing until the earlier of December 31, 2008 or the delivery of 270 pictures under the agreement. We have delivered 61 titles to date. The license fees for each picture are generally determined according to a formula based on U.S. theatrical
rentals of such picture.



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In September 2001, we entered into a ten-year licensing agreement with Starz Encore Group that includes
over 1,100 of our library films. The deal generates significant revenue and cash flow from the library titles and, because the movies will shift in and out of Starz Encore windows, we will also be able to sell them to other buyers throughout the
course of the license term.



Domestic Free
Television.    We distribute our feature motion pictures to U.S. and Canadian networks, local television stations and basic cable networks in the U.S. and Canada. We also generate revenue by granting syndication licenses on a
barter basis. Barter syndication allows the television stations to license our product in exchange for a portion of the local commercial airtime. We, in turn, sell commercial airtime to advertisers on a national basis, while the television stations
retain a portion of the commercial airtime for local advertisers. We have used outside barter companies to sell television spots to advertisers in the past, but we commenced our own barter sales business in 1996.



In February 2002, we transitioned our barter sales operations to MGM-NBC
Media Sales, LLC, a new media sales company formed by MGM Domestic Television Distribution LLC and NBC Enterprises, Inc., to act as an agent to sell barter advertising spots received by each company as full or partial consideration from the
licensing of feature film and television programming product in the domestic syndication market. The joint venture recognized income from fees earned on each companys barter sales and incurred overhead costs to operate the joint venture, which
were shared between the companies. Each company was entitled to its share of the net profits or losses of MGM-NBC Media Sales, LLC based on a contractual formula as specified in the agreement. As of June 30, 2004 the parties agreed to terminate the
venture as of the end of 2004. Under the termination agreement, we assumed the sale of advertising spots for our programming in the domestic television syndication market in July 2004. On September 30, 2004 the joint venture was terminated and all
distribution agreements were terminated by December 31, 2004.



In connection with the acquisition of MGM/UA by Pathe in November 1990, MGM-Pathe licensed the domestic free television rights to a substantial portion of its library (the UA library and the post-1986 MGM/UA titles in theatrical release at
the time, constituting approximately 850 titles) and selected television programs to Turner for a period of ten years beginning from the availability of each such product in that market. The license excludes motion pictures released theatrically
beginning in 1987. With respect to all but 85 motion pictures covered by the Turner license, the domestic free television rights revert to us by the end of 2005. We expect to receive relatively little revenue from the licensing of the product
covered by the agreement with Turner in the domestic free television market until such product reverts to us. We completed negotiations with Turner to accelerate the termination of the Turner license. All rights revert by the end of 2006. We believe
that, due to the significant increases in licensing fees for domestic television since 1990, the expiration of the Turner license and our subsequent ability to freely license the library in this market, together with our ability to utilize these
titles on MGM branded cable and satellite channels, will generate incremental revenue for us. See Film and Television Library.



In June 2001, we entered into an agreement with the United Paramount Network (UPN) to supply one film per week to the network, which is broadcast in its
Saturday daytime slot. We sell the network advertising within the films in a revenue sharing arrangement with UPN. In April 2002, UPN exercised its first option to renew the agreement for an additional year. In March 2003, UPN exercised its second
option to renew the agreement for a third year through September 5, 2004. Currently, we have a new movie weekly agreement through Fall 2005 with an option for an additional three years.



In April 2002, MGM Worldwide Television Distribution entered into an agreement with the Viacom owned television networks,
The New TNN: The National Network (now named Spike TV), CBS and UPN for them to license from us the exclusive U.S. television rights to 15 classic titles from the James Bond franchise. The agreement represents the first time that the three Viacom
networks, Spike TV, CBS and UPN, acquired programming in one cross-platform agreement. In March 2003, we entered into another agreement with those networks for additional Bond titles and in February 2004 we renewed the April 2002 agreement through
2006. In



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May 2003, we entered into a Prime Time 52-Week Movie Package agreement with PAX TV. In February 2004, we renewed our MGM Movie Night deal with PAX TV for an
additional season through September 2005.



In May 2003,
effective in July 2003, we entered into an agreement with Rainbow Media Holdings, Inc., American Movie Classics Company, WE: Womens Entertainment LLC and The Independent Film Channel LLC for them to license from us approximately 200 library
films on an exclusive basis and approximately 250 library films on a non-exclusive basis for use on their cable channels. With respect to the exclusive films, the license provides for 12-month windows of exhibition, which are shorter than customary
license windows.



In 2004 we concluded negotiations for a
French-language free television Canadian output agreement with TQS, Inc. which includes ten library features per year over the next four years. We have reached agreement to license Stargate Atlantis in Canada to Coru Entertainment and
SPACE/CHUM Television.



Network
Television.    In 2002, we launched She Spies into syndication with NBC. The show ran on the NBC network during the summer and in syndication in the fall. In early 2003, we renewed the series on the NBC stations for a
second season and it cleared over 98 percent of the U.S. for 2003-2004 season. She Spies has been cleared in over 98 percent of the U.S. for the 2004-2005 season.



International Pay and Free Television.    We currently distribute our motion pictures and
television product through pay television licenses in over 100 territories. We have output agreements with licensees in major territories, including Germany, France, the United Kingdom, Italy, Japan, Latin America and Brazil. Financial instability
and increased concentration of buyers in foreign television markets, including in European pay television markets, may adversely affect our ability to renew output agreements on favorable terms. In 2004, we recognized $94.6 million in revenue from
international pay television distribution, accounting for five percent of our total revenue for the year. In October 2002, we entered into a new output agreement with Premiere, the leading pay-television provider in Germany and Austria. The new
agreement replaces our prior agreement with KirchGruppe, which filed for bankruptcy protection in Germany. The new agreement contains lower license fees but also provides for the launch of an MGM-branded channel in Germany. See Branded
Cable and Satellite Channels.



We currently distribute
our motion pictures and television product through free television licenses in over 100 territories. In 2004, we recognized $193.7 million in revenues under these agreements, accounting for 11 percent of our total revenues for the year. These
license arrangements typically provide licensees with the right to exhibit the licensed motion pictures on television for a specific number of airings over a period of three to seven years.



In 1984, MGM/UA entered into a long-term license of free television rights
for theatrical, television movies and television series in our library with Degeto Film (Germany). Substantially all of the license fees have already been paid to us, and, therefore, we do not expect to receive significant revenues in future
periods. The distribution rights to the motion pictures and television series licensed under the Degeto agreement were scheduled to return to us incrementally through 2010. Effective January 2000, we amended the Degeto agreement to reclaim
non-exclusive pay television rights in Germany to the approximately 425 titles subject to the license. In exchange, we agreed to extend Degetos now non-exclusive license periods on a majority of the licensed titles by approximately 18 months
beyond the original end dates for those titles. This agreement with Degeto now provides us with an opportunity to generate incremental revenue in Germanys pay television market. See Film and Television Library.



Additionally, Orion entered into certain long-term licenses covering a
significant number of its library motion pictures in the international free and pay television markets. Orion had already received substantially all of the license fees under these licenses, prior to our acquisition of Orion, and therefore, we do
not expect significant revenue from these licenses in future periods. Orion licensed titles to Capitol Film and TV International (Germany), Compagnie Luxembourgeoise de Telediffusion (France), Film Finance Group, Inc.,



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Principal Network Limited (Italy), Mitsubishi Corporation (Japan) and Televisio de Catalunya, S.A. (Spain). The distribution rights granted to Capitol Film
and TV International originally reverted to Orion in 2025. In 2001, we negotiated the early return of 52 titles under license to Capitol Film & TV International for German-speaking Europe, which gives us the opportunity to receive additional
incremental license fees for the titles. The majority of distribution rights granted to Compagnie Luxembourgeoise de Telediffusion revert to Orion between 2009 and 2013. The distribution rights granted to Film Finance Group, Inc. and Principal
Network Limited revert to Orion through 2013. The distribution rights granted to Televisio de Catalunya, S.A. currently are reverting to Orion, with such reversion being complete in 2010. We believe that, due to the importance of France, Spain,
Japan and Italy and the significant increases in licensing fees for television in these markets since 1990, the expiration of these licenses and our subsequent ability to freely license our library in these markets could create substantial
incremental revenue.



In March 2001, we entered into an
innovative, multi-year agreement with NBC Enterprises & Syndication which was extended in January 2003, under which we will provide distribution services for certain NBC Studios programming across all territories outside of North America. We
handle the sales and distribution of all of NBC Studios current and future series and movies for television, including the prime-time series Crossing Jordan, Will & Grace, Las Vegas, American Dreams andHappy
Family. Also included in the agreement are a library component, made-for-television movies, mini-series, soap operas and specials.



In May 2002, we entered into an arrangement to acquire the foreign television rights (including Canada) to the Showtime series entitled The L Word.
Showtime aired the two-hour pilot and 13 one-hour episodes in 2004 for season one. Twelve one-hour episodes for season two are scheduled for 2005. In January 2005 Showtime announced 12 new one-hour episodes to run in the third season.



Branded Cable and Satellite Channels.    We
believe that pursuing our strategy of providing strategically pooled, branded MGM programming through the licensing of television channels to cable and satellite operators, as well as through the development of new channels of distribution that
deliver our programming, will provide opportunities in the international marketplace as foreign countries continue to develop cable and satellite television infrastructures. We cannot assure you that we will have the financing that may be necessary
for such acquisitions or investments, that we will consummate such transactions or that we will be able to realize any anticipated benefits from any such transactions.



We have interests in channels reaching the following markets:



Latin America:    In May 1998, MGM and an indirect subsidiary of United Global Com, Inc. combined
our respective Latin American cable programming businesses into a joint venture to form MGM Networks Latin America. Under the terms of the joint venture, we acquired a 50 percent equity interest in the venture by contributing our branded Brazilian
channel, which began operations in December 1997. In turn, UGC contributed its 100 percent interest in United Family Communications, which also produced and distributed Casa Club TV to satellite and cable television distributors throughout Latin
America and Brazil for a 50 percent interest in the joint venture. We have a license agreement with MGM Networks Latin America, licensing certain motion pictures and trademarks to the venture. MGM Networks Latin Americas Spanish language
channel and its Portuguese language channel are primarily movie-driven channels programmed by the joint venture primarily with our theatrical and television product. Currently, MGM Network Latin Americas Spanish language channel is distributed
throughout Spanish speaking Latin America and the Caribbean, and MGM Networks Latin Americas Portuguese language channel is distributed in Brazil, Portugal and Portuguese speaking markets in Africa. Casa Club TV is a lifestyle channel offering
home and garden, food and other lifestyle programming and is distributed in Latin America, Brazil and the United States.



Israel:    In August 1999, we entered into an agreement with Tel-Ad (Israel) to establish a movie channel showcasing the MGM
film library in the region. The MGM Movie Channel launched on July 1, 2001 into digital cable and direct to home satellite. We hold a 35 percent equity interest in the channel. We have entered into a



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program licensing agreement with the channel and receive a branding fee for the channels use of the MGM brand.



India:    In August 2000, we entered into an
agreement with Zee TV (India) to launch a Zee/MGM branded library movie service in India (and the surrounding markets of Pakistan, Bangladesh, Nepal, Sri Lanka and Maldives). Our agreement provided us with a 30 percent equity interest in the
venture, which was launched on November 1, 2000. In October 2004, we ceased our co-branding of the channel and allowed our program license and trademark agreements with the channel to expire. We are currently involved in negotiations with Zee to
resolve outstanding claims related to the service.



New
Zealand:    In 2001, we entered into a deal with Sky New Zealand whereby Sky agreed to carry a movie channel showcasing our film library in New Zealand. The channel launched in June 2001 and is broadcast on Skys direct
to home satellite service. We own 100 percent of the channel.



Pan Regional:    In 2001, we launched what is now our Pan-Regional MGM service. Since our launch, we have entered into numerous affiliations with cable and direct-to-home satellite operators to distribute the
channel across a wide array of markets, including Africa, the former Soviet Union, Greece, Turkey, the Netherlands, Poland, Malta, Iceland and the Middle East. We own 100 percent of our Pan-Regional channel. In June 2004, we expanded our
Pan-Regional service into two separate channel feeds, each targeting different sets of markets within the Pan-Regional footprints.



South Korea:    In February 2002, we entered into an agreement with Spectrum DVD Co. Ltd. to launch a 24-hour MGM branded movie
channel in South Korea. The channel launched in March 2002 and is carried on the Skylife direct-to-home satellite service across South Korea. We own 33 percent of this joint venture. In 2003, we launched a second 24-hour per day MGM branded movie
channel in South Korea through the same joint venture.



German-Speaking Europe:    In October 2002, we announced that we had entered into an agreement with Premiere to launch an MGM-branded channel in Germany and Austria. The channel was launched in April 2003. In
October 2003, we began distributing this channel into Switzerland and Liechtenstein through an agreement with Teleclub AG.



Greater China and Southeast Asia:    In July 2003, we announced that we had entered into a strategic alliance with CNBC Asia
Pacific to produce and distribute a new MGM branded channel (in English with Chinese subtitles) to cable, satellite and other platform operators across Southeast Asia and the Greater China markets. We own 100 percent of this channel. Since the
launch of this channel in October 2003, we have entered into a variety of affiliations with platform, operators to distribute the channel to subscribers across a number of markets in the region, including Malaysia, Hong Kong, Singapore, Indonesia,
Taiwan, Thailand and Macau.



Spain:    In May 2004, we announced that we had entered into an agreement with Media Park S.A. of Barcelona, Spain to launch and distribute a Castilian-dubbed 24-hour per day MGM branded channel to subscribers in
Spain. As part of this agreement, Media Park agreed to re-brand its existing canalstar channel as the MGM channel, and program the channel with selections from the MGM library. The MGM Channel in Spain launched on July 1, 2004.



In addition to licensing films and MGM branded television
channels, we hold equity positions ranging from approximately five percent to 25 percent in joint ventures such as LAPTV, Telecine, Star Channel and The Movie Network Channels, which are international premium pay television networks broadcasting in
different territories around the world. We have entered into license agreements with respect to each of LAPTV, Telecine, Star Channel and The Movie Network Channels, licensing theatrical and television motion pictures to each of the ventures.





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Trademarks and Consumer Products



We own a portfolio of over 2,200 trademark registrations around the world for such venerable trademarks as
METRO-GOLDWYN-MAYER, MGM, the MGM Lion Logo, UNITED ARTISTS, UA, ORION, CANNON and variations thereof. We also own or control trademarks and characters associated with motion pictures and television series we produced and/or distributed, such as THE
PINK PANTHER and ROCKY. In 2004, we realized over $27.1 million in revenue from the licensing of these trademarks and characters, including interactive media products.



The MGM name and the MGM Lion Logo are among the most recognized trademarks in the world, and have for over 75 years
designated the source of the highest quality entertainment-related goods and services. We believe these trademarks represent assets of which the value has been substantially unrealized in the past. We plan to pursue a focused branded strategy that
will capitalize on our name and logo, and to seek licensing opportunities for such name and logo, as well as our other trademarks, in a wide range of product categories and distribution channels.



In February 1980, our predecessor-in-interest granted to a
predecessor-in-interest of MGM MIRAGE an exclusive open-ended royalty-free license to use the trademark MGM, as well as certain stylized lion depictions, in its resort hotel and/or gaming businesses and other businesses not related to filmed
entertainment. This license was amended in 1998. In June 2000, the license was further amended to allow MGM MIRAGE to use the trademark MGM in combination with the trademark MIRAGE to the same extent that it was permitted theretofore with regard to
the MGM Grand trademark. In consideration of this further grant of rights, MGM MIRAGE agreed to pay an annual license fee of $1.0 million. MGM MIRAGE paid us $1.0 million (in advance) in June 2000, $1.0 million in July 2001, $1.0 million in July
2002, and $1.0 million in July 2003. Beginning in the Fall of 2003, the Company entered into discussions with MGM MIRAGE to clarify certain terms of the license and to separate ownership of the MGM MIRAGE trademarks from the Companys
trademarks. In May 2004, we entered into a Trademark Coexistence and Assignment Agreement with MGM MIRAGE whereby the MGM Grand trademarks were assigned to MGM MIRAGE in exchange for a broadening of the category of goods and services for which MGM
has exclusivity with regard to the use of the trademark MGM (and derivatives thereof). This agreement replaces and supersedes the above-named license (as amended), but maintains (in a separate license agreement) all of the terms and conditions
(including the $1.0 million annual payment) of the June 2000 amendment regarding the use by MGM MIRAGE of the trademark MGM in combination with the trademark MIRAGE. MGM MIRAGE paid us $1.0 million on June 30, 2004 in accordance with the provisions
of this new License Agreement.



In December 2000, pursuant to a
Merchandise License Agreement, we granted a subsidiary of MGM MIRAGE the right to use certain of our trademarks and logos in connection with the retail sale of merchandise at MGM MIRAGEs properties. We are to receive royalties based on retail
sales of the licensed merchandise. The agreement has a term of five years, subject to the MGM MIRAGEs right to extend the term for one additional five-year period and its option to terminate the agreement at any time upon 60 days notice.



Competition



Motion picture production and distribution are highly competitive
businesses. We face competition from companies within the entertainment business, as well as alternative forms of leisure entertainment. We compete with the other major studios, numerous independent motion picture and television production
companies, television networks and pay television systems for the acquisition of literary properties, the services of performing artists, directors, producers and other creative and technical personnel and production financing. Numerous
organizations with which we compete in the motion picture industry have significantly greater financial and other resources than MGM, while the independent production companies may have less overhead than MGM. Most of the other major studios are
part of large, diversified corporate groups with a variety of other operations, including television networks and cable channels, which can provide both means of distributing their



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products and stable sources of earnings that offset the fluctuations in the financial performance of their motion picture and television operations. See
DistributionTelevision Distribution.



In addition, our motion pictures compete for audience acceptance and exhibition outlets with motion pictures produced and distributed by other companies. As a result, the success of any of our motion pictures is dependent not only on the
quality and acceptance of a particular picture, but also on the quality and acceptance of other competing motion pictures released into the marketplace at or near the same time. The number of films released by our competitors, particularly the other
major film studios, in any given period may create an oversupply of product in the market, thereby potentially reducing our share of gross box office admissions and making it more difficult for our films to succeed.



Competition is also intense within the television industry. There are
numerous suppliers of television programming, including the networks, the television production divisions of the major studios and independent producers, all of which compete actively for the limited number of available broadcast hours. Our
programming competes with first-run programming, network reruns and programs produced by local television stations. Competition is also intense in supplying motion pictures and other programming for the pay television and home video markets.
Numerous organizations with which we compete in the television industry have significantly greater financial and other resources than MGM.



The entertainment industry in general, and the motion picture and television industry in particular, are continuing to undergo significant changes,
primarily due to technological developments. For example, as motion pictures begin to be distributed using emerging technologies such as the Internet and online services, the ability to protect intellectual property rights in motion pictures will be
threatened by advances in technology that enable digital piracy. This is because digital formats currently do not contain mechanisms for tracking the source or ownership of digital content. As a result, users may be able to download and distribute
unauthorized or pirated copies of copyrighted motion pictures over the Internet. In addition, there could be increased proliferation of devices capable of making unauthorized copies of motion pictures. As long as pirated content is
available to download digitally, many consumers may choose to digitally download such pirated motion pictures rather than paying for legitimate motion pictures. Digital piracy of our films may adversely impact the gross receipts received from the
exploitation of such films. Due to this rapid growth of technology and with it, piracy, as well as shifting consumer tastes and the popularity and availability of other forms of entertainment, it is impossible to predict the overall effect these
factors will have on the potential revenue and profitability of feature-length motion pictures and television programming.



Employees and Labor Matters



As of December 31, 2004, we had approximately 1,440 full-time and part-time regular employees in our worldwide operations. Of that total, approximately
100 were primarily engaged in production and development, approximately 680 were primarily engaged in sales, marketing and distribution and approximately 660 were primarily engaged in management and administration. There are 279 of our employees who
are currently covered by employment contracts. We also hire additional employees on a picture-by-picture basis in connection with the production of our motion pictures and television programming. The salaries of these additional employees, as well
as portions of the salaries of certain full-time employees who provide direct production services, are typically allocated to the capitalized cost of the related motion pictures or television programming. We believe that our employee and labor
relations are good.



There are 17 of our current employees (and
many of the employees or independent contractors that we hire on a project-by-project basis) who are represented under industry-wide collective bargaining agreements with various unions, including the Writers Guild of America, the Directors Guild of
America, the Screen Actors Guild and the International Alliance of Theatrical Stage Employees. The motion picture and television programs produced by MGM Studios, and the other major studios in the United States, generally employ actors, writers and
directors who are members of the Screen Actors Guild, Writers Guild of America and Directors Guild of



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America, respectively, pursuant to industry-wide collective bargaining agreements. The collective bargaining agreement with the Writers Guild of America
expires on October 31, 2007. The collective bargaining agreement with the Screen Actors Guild expires on June 30, 2005. The parties are currently in negotiations for a successor agreement. The collective bargaining agreement with the Directors Guild
of America expires on June 30, 2008. Many productions also employ members of a number of other labor organizations including, without limitation, the International Alliance of Theatrical and Stage Employees and the International Brotherhood of
Teamsters. The collective bargaining agreement with Teamsters Local 399 expires on July 31, 2007. The collective bargaining agreement with the International Alliance of Theatrical and Stage Employees expires on July 31, 2006. A strike by one or more
of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time involved, could cause delay or
interruption in our release of new motion pictures and television programs and thereby could adversely affect our cash flow and revenues. Our revenues from motion pictures and television programs in our library should not be affected and may
partially offset the effects of a strike to the extent, if any, that television exhibitors buy more library product to compensate for interruption in their first-run programming.



Regulation



In 1994, the U.S. was unable to reach agreement with its major international trading partners to include audiovisual works, such as television programs
and motion pictures, under the terms of the World Trade Organization. The failure to include audiovisual works under GATT allows many countries (including members of the European Union, which currently consists of Austria, Belgium, Denmark, Germany,
Greece, Finland, France, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom) to continue enforcing quotas that restrict the amount of U.S. produced television programming which may be aired on television in
such countries. The European Union Council of Ministers has adopted a directive requiring all member states of the European Union to enact laws specifying that broadcasters must reserve, where practicable, a majority of their transmission time
(exclusive of news, sports, game shows and advertising) for European works. The directive must be implemented by appropriate legislation in each member country. Under the directive, member states remain free to require broadcasters under their
jurisdiction to comply with stricter rules. For example, France requires that original French programming constitute a required portion of all programming aired on French television. These quotas apply only to television programming. Several
countries (including France, Italy and Korea) also have quotas on the theatrical exhibition of motion pictures. We cannot assure you that additional or more restrictive theatrical or television quotas will not be enacted or that countries with
existing quotas will not more strictly enforce such quotas. Additional or more restrictive quotas or more stringent enforcement of existing quotas could materially and adversely affect our business by limiting our ability to exploit fully our motion
pictures internationally.



Distribution rights to motion
pictures are granted legal protection under the copyright laws of the U.S. and most foreign countries, which laws provide substantial civil and criminal sanctions for unauthorized duplication and exhibition of motion pictures. We seek to take
appropriate and reasonable measures to secure, protect and maintain or obtain agreements to secure, protect and maintain copyright protection for all of our motion pictures or television programming under the laws of applicable jurisdictions. Motion
picture piracy is an international as well as a domestic problem. Motion picture piracy is extensive in many parts of the world, including South America, Asia (including Korea, China and Taiwan), the countries of the former Soviet Union and other
former Eastern bloc countries. In addition to the MPAA, the Motion Picture Association, the American Film Marketing Association and the American Film Export Association monitor the progress and efforts made by various countries to limit or prevent
piracy. In the past, these various trade associations have enacted voluntary embargoes of motion picture exports to certain countries in order to pressure the governments of those countries to become more aggressive in preventing motion picture
piracy. In addition, the U.S. government has publicly considered trade sanctions against specific countries which do not take steps to prevent copyright infringement of U.S. produced motion pictures. There can be no assurance that voluntary industry
embargoes or U.S. government trade sanctions will be enacted. If enacted, such actions could impact the amount of revenue that we realize from



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the international exploitation of our motion pictures depending upon the countries subject to such action and the duration and effectiveness of such action.
If not enacted or if other measures are not taken, the motion picture industry (including MGM) may continue to lose an indeterminate amount of revenues as a result of motion picture piracy.



The Code and Ratings Administration of the MPAA assigns ratings indicating
age-group recommendations for theatrical distribution of motion pictures. We have followed and will continue to follow the practice of submitting our pictures for such ratings. As a substantial number of our films are rated R, under
rules which are the theatrical exhibitors responsibility to enforce, children under 17 may attend the applicable motion picture only if accompanied by an adult.



United States television stations and networks as well as foreign governments impose content restrictions on motion pictures
that may restrict in whole or in part exhibition on television or in a particular territory. There can be no assurance that such restrictions will not limit or alter our ability to exhibit certain motion pictures in such media or markets.



By letter dated November 15, 2001, we received a request from
the Department of Justice for a voluntary production of information and documents relating to our Movielink video-on-demand joint venture with four other major studios. We complied with that request. On June 3, 2004, the Department of Justice
announced that it had closed its investigation of Movielink.



Item
2.    Properties



We lease
approximately 341,600 square feet, as well as related parking and storage facilities, for our corporate headquarters in Los Angeles, California under a 15-year lease expiring in May 2018. We also lease approximately 28,500 square feet in New York
City for our East Coast publicity, marketing and theatrical and television distribution offices under a lease that expires on October 31, 2014. We also lease approximately 146,400 square feet under a five-year lease which began in August 2003 in the
Colorado Center office complex in Santa Monica, California. On December 31, 2004 the aggregate monthly rent for our New York City office and our Los Angeles and Santa Monica offices was approximately $2.1 million (in addition to taxes, insurance and
certain expenses paid by us). In addition, we maintain small home entertainment and domestic theatrical and television distribution branches in various locations in the United States. We have small international television and home entertainment
distribution offices in cities including London, Melbourne, Sydney, Frankfurt, Paris, Amsterdam, Brussels and Toronto. The current annual rent for international properties is approximately $1.8 million in the aggregate. Our current monthly rent
for the warehouse and storage facilities that house, among other things, our film and video inventory, records, furniture and artwork, is approximately $118,200. We also lease studio facilities and stages from unaffiliated parties. Such leases are
generally on an as-needed basis in connection with the production of specific motion picture and television projects.



Item 3.    Legal Proceedings



On November 15, 2004, Metro-Goldwyn-Mayer Pictures Inc. was served with a complaint in Bradley Richlin, Lance Richlin, Mark Mannis, and Abigail Richlin
Schwartz v. Metro-Goldwyn-Mayer Pictures Inc., Geoffrey Productions, Inc., and Does 1 through 10 (Louise Richlin, Elyssa Parton and Michelle Forkel, Nominal Defendants and Involuntary Plaintiffs), filed in the United States District Court for
the Central District of California, Case No. CV 04-9162 DDP(AJWx). Plaintiffs allege that the screenplay for the original The Pink Panther film (the Film) was based on a separately copyrightable treatment created by
Maurice Richlin and Blake Edwards and that joint authorship rights in that treatment reverted to Richlins heirs in 1991, the year the copyright in the Film was renewed. Plaintiffs seek a declaration that they own a 50 percent share
of the copyright in the treatment, that the Film and all works based on the Film are derivative works of such treatment, and that Plaintiffs are owed 50 percent of monies received by Defendants from the exploitation of the
treatment since 1991. Plaintiffs seek an accounting of all financial records related to the Film and its derivative works. Metro-Goldwyn-Mayer Pictures Inc. filed an answer to the complaint on January 4, 2005.



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On April 16, 2004, MGM and MGM Studios (along with Eon Productions Limited, Danjaq SA and Danjaq LLC)
were served with a complaint in Legislator 1357 Limited/Legislator 1358 Limited (suing as the Trustees of the Ian Fleming Will Trust) v. Eon Productions et al. filed in the High Court of Justice Chancery Division in London, England. Claimants
seek an accounting and payment of sums pursuant to that accounting or, alternatively, seek a declaration that the Ian Fleming Trust is entitled to an audit with respect to the James Bond pictures.



Following our submission of a claim for coverage under the Contingent Extra
Expense Insurance Policy issued in connection with the picture Red Corner, certain of the insurers disputed coverage and,on December 1, 2000, filed a lawsuit entitled HIH Casualty and General Insurance Ltd., et al., v.
Metro-Goldwyn-Mayer Inc. and United Artists Corporation Limitedin the Commercial Court in England, purporting to avoid the policy and/or seeking damages for alleged misrepresentations and/or non-disclosures. We retained English counsel and
sought to enforce our rights pursuant to the policy. In June 2004, settlements with all remaining parties were reached.



On December 13, 2002, MGM, one of its subsidiaries, and five retail entities (each of which is indemnified by MGM), were served with a complaint in
Warren Eallonardo v. Metro-Goldwyn-Mayer Inc. et al.(L.A.S.C. Case No. BC286950) which is a class action lawsuit alleging fraud, false advertising and unfair business practices under the California Business & Professions Code and
Consumer Legal Remedies Act arising from representations contained in packaging of certain of MGMs DVDs that allegedly mislead or deceive consumers regarding the characteristics of MGMs widescreen DVDs. The class is alleged to include
all those who purchased MGM widescreen DVDs shot in the aspect ratio of 1:85 or 1:33 between certain dates. On July 10, 2003, plaintiff filed its final and Third Amended Complaint in which it added an additional named plaintiff and also added a
cause of action for breach of the implied warranty of merchantability. Plaintiffs seek compensatory and punitive damages and attorneys fees. The court thus far has made no findings as to the merits of the litigation, or any ruling to certify a
class. On May 5, 2004, the Court granted plaintiffs unopposed Motion to Enforce Settlement and subsequently adopted our Notice Plan. The parties finalized the Long Form Notice and the Settlement Agreement, and on December 20, 2004, the Court
signed the Order which preliminarily approved the settlement. The 60-day claim filing window closes on March 31, 2005, and final approval of the settlement is scheduled for hearing on May 16, 2005. Class-action counsel for plaintiffs also will seek
an award of attorneys fees.



In addition, from time to
time, we become involved in other litigation arising in the normal course of business. We believe that none of the litigation currently pending will have a material adverse effect on our financial condition or results of operations.



Item 4.    Submission of Matters to a Vote of Securityholders



On December 17, 2004, a Special Meeting of the
Stockholders of MGM was held to consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of September 23, 2004, by and between LOC Acquisition Company and MGM. After a vote duly taken, the Agreement and Plan of Merger
was adopted and the results of the voting are as follows:



|                |  |            
|--------------- |  | -----------
|Voting Results  |  |            
|For Vote        |  | 218,708,450
|Against Vote    |  | 223,468    
|Abstain Vote    |  | 38,657     
|Broker Non-Vote |  | 0          



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PART II



Item 5.    Market for Registrants Common Equity and Related Stockholder Matters



Our common stock is listed with, and trades on, the New York Stock Exchange
under the symbol MGM. On February 24, 2005, the closing sale price per share of our common stock on the NYSE, as reported by the Dow Jones News Retrieval, was $11.90. The following table sets forth the high and low sale prices of the
common stock on the NYSE, as reported by the Dow Jones News Retrieval, for our two most recent fiscal years.



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|               |  | High |       | Low
|2003           |  |      |       |     |   |      
|First Quarter  |  | $    | 14.23 |     | $ | 9.11 
|Second Quarter |  |      | 12.75 |     |   | 10.26
|Third Quarter  |  |      | 15.45 |     |   | 11.65
|Fourth Quarter |  |      | 17.37 |     |   | 14.90
|               |  |     
|2004           |  |      |       |     |   |      
|First Quarter  |  | $    | 18.15 |     | $ | 15.70
|Second Quarter |  |      | 21.06 |     |   | 11.71
|Third Quarter  |  |      | 12.86 |     |   | 11.01
|Fourth Quarter |  |      | 11.89 |     |   | 11.60



As of February 24,
2005, there were 238,635,783 shares issued and outstanding and in excess of 2,000 beneficial holders of our common stock, including individual participants in security position listings.



On April 26, 2004, we declared a special one-time cash dividend of $8.00 per share to stockholders of record on May 7, 2004,
which was paid on May 17, 2004. The cash dividend, aggregating approximately $1.89 billion, was financed by borrowings under our new $2.4 billion credit facility. Under the merger agreement, we are prohibited from paying any other dividend. See
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.



The following table provides information as of December 31, 2004 with respect to shares of the common stock that are authorized for issuance and may be
issued under the Companys equity compensation plans from time to time to employees and directors of the Company. All of the Companys equity compensation plans, including the Stock Incentive Plan, the Director Stock Plan and the Employee
Incentive Plan, have been approved by the Companys stockholders.



|                                                       |  |                                                                                          |     |  |                                                                          |       |                                                                                                                                       |           |    
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------- | --- |  | ------------------------------------------------------------------------ | ----- | ------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|Plan Category                                          |  | Number of Securities tobe Issued Upon Exerciseof Outstanding Options,Warrants and Rights |     |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of SecuritiesRemaining Available forFuture Issuance UnderEquity
CompensationPlans (ExcludingSecurities Reflected in Column(a)) |          
|                                                       |  | (a)                                                                                      |     |  | (b)                                                                      |       | (c)                                                                                                                                   |          
|Equity compensation plans approved by stockholders     |  | 26,714,799                                                                               | (1) |  | $                                                                        | 11.49 |                                                                                                                                       | 3,718,734 | (2)
|Equity compensation plans not approved by stockholders |  |                                                                                         |     |  |                                                                          |      |                                                                                                                                       |          |    

---

|(1) |  | Consists of shares subject to issuance upon the exercise of outstanding stock options.
|--- |  | --------------------------------------------------------------------------------------



|(2) |  | Includes 31,394 shares available for future issuance under the Director Stock Plan and 1,000,000 shares reserved for issuance under certain circumstances pursuant to the Employee
Incentive Plan.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



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Item 6.    Selected Consolidated Financial Data



Our selected consolidated financial data presented below have been derived
from our audited consolidated financial statements and should be read in conjunction with the related Notes thereto and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.



|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|--------------------------------------------------------------- |  | ----------------------------------------------- | ----------- | - | ------- | - | ----------- | ------- |  | - | ----------- | - |  | ------- | ----------- | - |  | - | ----------- | -
|                                                                |  | Year Ended December 31,                         |            
|                                                                |  | 2000                                            |             |   | 2001(1) |   |             | 2002(1) |  |   | 2003(1)     |   |  | 2004(1) |            
|                                                                |  | (in thousands, except share and per share data) |            
|Statements of Operations Data:                                  |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Revenues                                                        |  | $                                               | 1,237,447   |   |         | $ | 1,387,531   |         |  | $ | 1,654,102   |   |  | $       | 1,883,027   |   |  | $ | 1,724,804   |  
|Expenses:                                                       |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Operating                                                       |  |                                                 | 771,811     |   |         |   | 766,330     |         |  |   | 1,062,956   |   |  |         | 983,939     |   |  |   | 865,776     |  
|Selling, general and administrative                             |  |                                                 | 339,458     |   |         |   | 585,255     |         |  |   | 671,817     |   |  |         | 882,906     |   |  |   | 809,551     |  
|Severance and related costs (recoveries)                        |  |                                                 | (3,715      | ) |         |   |            |         |  |   |            |   |  |         |            |   |  |   |            |  
|Depreciation and non-film amortization                          |  |                                                 | 28,648      |   |         |   | 32,952      |         |  |   | 20,467      |   |  |         | 17,300      |   |  |   | 15,147      |  
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|                                                                |  |                                                 | 1,136,202   |   |         |   | 1,384,537   |         |  |   | 1,755,240   |   |  |         | 1,884,145   |   |  |   | 1,690,474   |  
|                                                                |  |                                                 |             |   |        
|Operating income (loss)                                         |  |                                                 | 101,245     |   |         |   | 2,994       |         |  |   | (101,138    | ) |  |         | (1,118      | ) |  |   | 34,330      |  
|Write-down on investment in cable channels                      |  |                                                 |            |   |         |   |            |         |  |   |            |   |  |         | (93,059     | ) |  |   |            |  
|Gain on sale of equity interest in cable channel                |  |                                                 |            |   |         |   |            |         |  |   | 32,514      |   |  |         |            |   |  |   |            |  
|Equity in net earnings (losses) of affiliates                   |  |                                                 | 1,953       |   |         |   | (2,421      | )       |  |   | 13,561      |   |  |         | 310         |   |  |   | (4,847      | )
|Interest expense, net of amounts capitalized                    |  |                                                 | (51,425     | ) |         |   | (51,494     | )       |  |   | (79,929     | ) |  |         | (60,229     | ) |  |   | (63,601     | )
|Interest and other income, net                                  |  |                                                 | 12,706      |   |         |   | 9,478       |         |  |   | 7,432       |   |  |         | 16,148      |   |  |   | 8,411       |  
|Other non-recurring costs                                       |  |                                                 |            |   |         |   |            |         |  |   |            |   |  |         | (5,099      | ) |  |   | (7,026      | )
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Income (loss) before (provision) benefit for income taxes       |  |                                                 | 64,479      |   |         |   | (41,443     | )       |  |   | (127,560    | ) |  |         | (143,047    | ) |  |   | (32,733     | )
|Income tax (provision) benefit                                  |  |                                                 | (13,480     | ) |         |   | (14,297     | )       |  |   | (14,687     | ) |  |         | (18,714     | ) |  |   | 3,522       |  
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Net income (loss) before cumulative effect of accounting change |  |                                                 | 50,999      |   |         |   | (55,740     | )       |  |   | (142,247    | ) |  |         | (161,761    | ) |  |   | (29,211     | )
|Cumulative effect of accounting change                          |  |                                                 |            |   |         |   | (382,318    | )       |  |   |            |   |  |         |            |   |  |   |            |  
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Net income (loss)                                               |  | $                                               | 50,999      |   |         | $ | (438,058    | )       |  | $ | (142,247    | ) |  | $       | (161,761    | ) |  | $ | (29,211     | )
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Income (loss) per share:                                        |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Basic:                                                          |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Net income (loss) before cumulative effect of accounting change |  | $                                               | 0.25        |   |         | $ | (0.24       | )       |  | $ | (0.57       | ) |  | $       | (0.66       | ) |  | $ | (0.12       | )
|Cumulative effect of accounting change                          |  |                                                 |            |   |         |   | (1.65       | )       |  |   |            |   |  |         |            |   |  |   |            |  
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Net income (loss)                                               |  | $                                               | 0.25        |   |         | $ | (1.89       | )       |  | $ | (0.57       | ) |  | $       | (0.66       | ) |  | $ | (0.12       | )
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Diluted:                                                        |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Net income (loss) before cumulative effect of accounting change |  | $                                               | 0.24        |   |         | $ | (0.24       | )       |  | $ | (0.57       | ) |  | $       | (0.66       | ) |  | $ | (0.12       | )
|Cumulative effect of accounting change                          |  |                                                 |            |   |         |   | (1.65       | )       |  | $ |            |   |  |         |            |   |  |   |            |  
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Net income (loss)                                               |  | $                                               | 0.24        |   |         | $ | (1.89       | )       |  | $ | (0.57       | ) |  | $       | (0.66       | ) |  | $ | (0.12       | )
|                                                                |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Weighted average number of common shares outstanding:           |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Basic                                                           |  |                                                 | 204,797,589 |   |         |   | 232,082,403 |         |  |   | 248,355,556 |   |  |         | 245,584,705 |   |  |   | 237,243,202 |  
|Diluted                                                         |  |                                                 | 210,313,274 |   |         |   | 232,082,403 |         |  |   | 248,355,556 |   |  |         | 245,584,705 |   |  |   | 237,243,202 |  
|                                                                |  |                                                 |             |   |        
|Other Operating Data (unaudited):                               |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Cash flow provided by (used in) operating activities            |  | $                                               | (182,459    | ) |         | $ | 3,815       |         |  |   | (88,779     | ) |  | $       | 192,515     |   |  | $ | 140,841     |  
|Cash flow provided by (used in) investing activities            |  |                                                 | (18,244     | ) |         |   | (844,787    | )       |  |   | 241,113     |   |  |         | 477,580     |   |  |   | (18,187     | )
|Cash flow provided by (used in) financing activities            |  |                                                 | 125,845     |   |         |   | 766,941     |         |  |   | 437,932     |   |  |         | (1,201,621  | ) |  |   | (67,285     | )
|EBITDA (unaudited)(2, 3)                                        |  |                                                 | 129,893     |   |         |   | 35,946      |         |  |   | (80,671     | ) |  |         | 16,182      |   |  |   | 49,477      |  
|Capital expenditures                                            |  |                                                 | 12,259      |   |         |   | 9,905       |         |  |   | 23,055      |   |  |         | 27,459      |   |  |   | 15,471      |  
|Depreciation expense                                            |  |                                                 | 13,913      |   |         |   | 18,218      |         |  |   | 20,467      |   |  |         | 17,300      |   |  |   | 15,147      |  
|                                                                |  |                                                 |             |   |        
|Balance Sheet Data:                                             |  |                                                 |             |   |         |   |             |         |  |   |             |   |  |         |             |   |  |   |             |  
|Cash and cash equivalents                                       |  | $                                               | 77,140      |   |         | $ | 2,698       |         |  | $ | 593,131     |   |  | $       | 61,894      |   |  | $ | 117,365     |  
|Film and television costs, net                                  |  |                                                 | 2,422,799   |   |         |   | 2,035,277   |         |  |   | 1,870,692   |   |  |         | 1,788,225   |   |  |   | 1,771,183   |  
|Total assets                                                    |  |                                                 | 3,548,190   |   |         |   | 3,923,164   |         |  |   | 4,268,974   |   |  |         | 3,106,571   |   |  |   | 3,283,801   |  
|Bank and other debt                                             |  |                                                 | 709,952     |   |         |   | 836,186     |         |  |   | 1,156,725   |   |  |         | 813         |   |  |   | 1,984,000   |  
|Stockholders equity                                            |  |                                                 | 2,309,687   |   |         |   | 2,489,482   |         |  |   | 2,514,466   |   |  |         | 2,328,371   |   |  |   | 322,311     |  



29



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|(1) |  | Reflects the adoption of American Institute of Certified Public Accountants Statement of Position 00-2 on January 1, 2001, which established new accounting and reporting standards
for all producers and distributors that own or hold the rights to distribute or exhibit films. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsNew Accounting
Pronouncements. We recorded a one-time, non-cash cumulative effect charge to earnings of $382.3 million for adoption of the standard, primarily to reduce the carrying value of our film and television costs.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | EBITDA is defined as earnings before interest, taxes, depreciation and non-film amortization. While management considers EBITDA to be an important measure of comparative
operating performance, it should not be construed as an alternative to operating income or cash flows from operating activities (as determined in accordance with generally accepted accounting principles); EBITDA does not reflect cash necessary or
available to fund cash requirements, and the items excluded from EBITDA, such as depreciation and non-film amortization, are significant components in assessing our financial performance. Other significant uses of cash flows are required before cash
will be available to us, including debt service, taxes and cash expenditures for various long-term assets. Our calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. See
Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Our calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. For purposes of our calculation, EBITDA
includes operating income (loss) and the add-back of depreciation and non-film amortization expense of $15,147, $17,300, $20,467, $32,952 and $28,648 for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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Item 7.    Managements Discussion and Analysis of Financial Condition and Results of
Operations



This report includes forward-looking
statements. Generally, the words believes, anticipates, may, will, should, expect, intend, estimate, continue, and similar expressions or the
negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with
the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date
hereof. We undertake no obligation to update these forward-looking statements.



The following discussion and analysis should be read in conjunction with Item 6. Selected Consolidated Financial Data and our consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-K.



General



We are engaged primarily in the development, production
and worldwide distribution of theatrical motion pictures and television programming.



Recent Developments



Merger with LOC Acquisition Company.    On September 23, 2004, we entered into an Agreement and Plan of Merger with LOC Acquisition Company, a Delaware corporation owned by a consortium comprised of Sony
Corporation of America, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners. Under the agreement, the consortium will acquire MGM for $12.00 in cash per share of our common stock plus the assumption
of our debt. Completion of the merger is subject to various regulatory approvals and customary closing conditions. JP Morgan Chase and Credit Suisse First Boston have committed to provide the consortium with up to $4.25 billion of senior debt
financing. The consortiums obligation to acquire MGM is conditioned upon consummation of the debt financing on the terms set forth in the commitment letters delivered by JP Morgan Chase and Credit Suisse First Boston or substitute financing
which, if the debt financing commitments become unavailable, the consortium is obligated to use its reasonable best efforts to obtain. MGMs stockholders approved the merger at a special meeting held on December 17, 2004. In connection with the
merger agreement, Tracinda and 250 Rodeo voted all of their shares of MGM common stock in favor of the merger.



In connection with the merger agreement, we and Sony entered into a Deposit Agreement, dated as of September 13, 2004, as amended, pursuant to which Sony
paid us a $150 million deposit. In addition, in connection with the merger agreement, we entered into an Indemnity Agreement with Tracinda, 250 Rodeo and Mr. Kerkorian pursuant to which we will indemnify Tracinda, 250 Rodeo and Mr. Kerkorian
against certain liabilities relating to the transactions contemplated by the merger agreement.



Under the Deposit Agreement, we must return the deposit to Sony at the effective time of the merger. Otherwise, the deposit is nonrefundable unless (1) the merger agreement is terminated under circumstances where we
are required to pay a termination fee to LOC Acquisition Company; provided that if the merger agreement is terminated by LOC Acquisition Company because (a) our Board withdraws, or modifies in a manner adverse to LOC Acquisition Company, its
recommendation that our stockholders adopt the merger agreement or recommends, approves or adopts an alternative takeover proposal, or (b) we fail to include in the proxy statement relating to the merger (or any amendment) the recommendation of our
Board that our stockholders vote in favor of the merger, or (c) a third party commences a tender or exchange offer for MGM and our Board does not recommend rejection of the offer within ten business days or (d) our Board approves or recommends an
alternative takeover proposal or approves or recommends that its stockholders tender their shares in any tender or exchange offer, the deposit is only refundable if we enter into a binding agreement with a third



31



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party with respect to an alternative takeover proposal within nine months of termination of the merger agreement; or (2) a court has determined that there
has been material adverse effect with respect to MGM.



Although
we have no reason to believe that the merger will not be consummated, the pendency of a merger involving a motion picture studio tends to create uncertainty in the entertainment business community. As a result, it has been more difficult for us to
attract development projects, attach talent to projects, commence productions, and implement distribution initiatives in the home video and television sales markets during the progress of merger discussions and the executory period of the merger
agreement. Accordingly, in the event that the merger should fail to be consummated, there may be a gap or reduction in the number of motion picture releases for a period of time following termination of the merger agreement until we can reinvigorate
our development, production and distribution activities. In addition, we could face a loss of personnel or a decline in morale if the merger should fail to be consummated. Such occurrences could be expected to have, at least temporarily, a
significant adverse effect upon our business. In the event that, as a result of termination of the merger agreement, we retain Sonys $150 million deposit, these adverse effects would be mitigated but there is no guarantee that the deposit
alone would be sufficient to mitigate the entire negative effect of non-consummation of the merger.



In addition, if LOC Acquisition Company terminates the merger agreement because we have breached any of our covenants such that the conditions to closing
cannot be satisfied and there is a final binding judgment of a court that we willfully and materially breached the merger agreement (as to which all rights of appeal or other avenues of review have been exhausted or lapsed), then the amount of the
deposit may be taken into account in determining any damages resulting from our willful and material breach.



The merger agreement is presently expected to close shortly after the end of the first quarter of 2005. However, there can be no assurance that all of the
conditions to the merger, including the conditions within our control, will be satisfied or that the merger will be completed.



Stockholder Dividend.    On April 26, 2004, we declared a special one-time cash dividend of $8.00 per share to stockholders of
record on May 7, 2004, which was paid on May 17, 2004. The cash dividend, aggregating approximately $1.89 billion, was financed by borrowings under our new $2.4 billion credit facility (see Liquidity and Capital ResourcesBank
Borrowings).



Pursuant to the provisions of the Amended
and Restated 1996 Stock Incentive Plan, the Compensation Committee of the Board of Directors has adjusted the outstanding stock options issued on or before May 17, 2004 under the plan such that following the payment of the one-time cash dividend to
stockholders, each option holder shall receive upon exercise, in addition to the shares of common stock otherwise obtainable, a cash amount of $8.00 per share.



New Credit Facility.    On April 26, 2004, we entered into a fourth amended and restated credit facility with a syndicate of
banks aggregating $2.4 billion, consisting of a five-year $400.0 million revolving credit facility, a six-year $400.0 million term loan and a seven-year $1.6 billion term loan, which replaced a pre-existing $1.75 billion amended credit facility.
Proceeds from the loans under the new credit facility were used to finance the payment of the $1.89 billion stockholder dividend (see above) and to refinance loans under the pre-existing credit facility. The new revolving credit facility will be
used for general corporate purposes.



The credit agreement
provides that certain change of control transactions, including a transaction such as the pending merger with LOC Acquisition Company, constitute an event of default resulting in acceleration of the loans and termination of the revolving credit
facility. In connection with the closing of the merger, the credit facility will be replaced and superseded by debt financing arranged by the consortium.



32



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In connection with the refinancing of the prior credit facility, we wrote off deferred loan fees of $6.9
million in the year ended December 31, 2004.



Dutch Auction
Tender Offer.    On December 4, 2003 we commenced a Dutch Auction tender offer to purchase up to 10,000,000 shares of our common stock at a purchase price not greater than $18.00 nor less than $16.25 per share. Under the
procedures for the Dutch Auction tender offer, our stockholders had the opportunity to tender some or all of their shares of common stock at prices specified by the stockholders. We then determined the lowest price per share within the range of
$16.25 to $18.00 per share that would enable us to buy 10,000,000 shares, or such lesser number of shares that are properly tendered and not withdrawn. All shares accepted in the Dutch Auction tender offer were purchased by us at the same determined
price per share regardless of whether the stockholders tendered at a lower price. Tracinda, 250 Rodeo and Mr. Kerkorian, our principal stockholders, did not participate in the Dutch Auction tender offer, nor did any members of our Board of Directors
or executive management.



The Dutch Auction tender offer
expired on January 15, 2004. Pursuant to the Dutch Auction tender offer, we purchased 10,000,000 shares of our common stock at an average purchase price of $17.00 per share, or an aggregate amount of $170.0 million, plus offering expenses of
approximately $1.0 million. The Dutch Auction tender offer was financed primarily from available cash on hand, net cash flow provided by operating activities and borrowings under the revolving credit facility. See Liquidity and Capital
Resources. Currently, Mr. Kerkorian, Tracinda and 250 Rodeo together own approximately 73 percent of our outstanding common stock.



Notice of Termination of Third Party International Subdistribution Agreement.    In June 1999, we entered into an agreement
with Fox Home Entertainment pursuant to which Fox Home Entertainment provides distribution services for our films in the international home video market. This distribution arrangement became effective on February 1, 2000. On June 24, 2003, we gave
notice to Fox Home Entertainment of our intent to terminate the agreement as of January 31, 2004 as permitted under the agreement. Effective February 1, 2004, we entered into an amended agreement with Fox Home Entertainment under which Fox Home
Entertainment will continue to perform subdistribution services in certain territories. All termination payments required under the amended agreement were paid during the quarter ended March 31, 2004. Under the terms of the amended agreement, we pay
Fox Home Entertainment a distribution fee based on gross receipts, as defined.



Termination of MGM-NBC Media Sales Joint Venture.    On September 30, 2004, MGM Domestic Television Distribution LLC and NBC Enterprises Inc. terminated their joint venture, MGM-NBC Media
Sales, LLC, and all distribution agreements were terminated by December 31, 2004. The joint venture was formed in February 2002 to act as an agent to sell barter advertising spots received by us and NBC as full or partial consideration from the
licensing of feature film and television programming product in the domestic television syndication market. Upon termination of the joint venture, we assumed the sale of advertising spots for our programming in the domestic television syndication
market.



Sources of Revenue



The principal sources of motion picture industry revenue are the domestic
and international distribution of motion pictures, including theatrical exhibition, home entertainment and television (pay-per-view, pay, network, syndication and basic cable). Over the last decade, the relative contributions of these components of
revenues have changed dramatically. Although revenues from domestic theatrical distribution have increased, growth in total motion picture industry revenues has resulted predominantly from increased revenues derived from the distribution of motion
pictures internationally as well as from other media and distribution channels.



Our feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with theatrical exhibition. Thereafter, feature films are first made available for



33



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home video generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to
five years after theatrical release. Our television programming is produced for initial broadcast on either pay, syndicated or network television in the United States, followed by international territories and, in some cases, worldwide video
markets.



We distribute our motion picture and television
productions in foreign countries and, in recent years, have derived approximately 35 to 40 percent of our revenues from foreign sources. Approximately 25 percent of our revenues are denominated in foreign currencies. In addition, we incur certain
operating and production costs in foreign currencies. As a result, fluctuations in foreign currency exchange rates can adversely affect our business, results of operations and cash flows. We, in certain instances, enter into foreign currency
exchange contracts in order to reduce exposure to changes in foreign currency exchange rates that affect the value of our firm commitments and certain anticipated foreign currency cash flows. These contracts generally mature within one year. We do
not enter into foreign currency contracts for speculative purposes. Realized gains and losses on contracts that hedge anticipated future cash flows were not material in any of the periods presented herein. We had foreign currency exchange contracts
of a notional amount of 20,346 Euros (or the equivalent $27,538) outstanding at December 31, 2004. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk.



Cost Structure



General.    In the motion picture industry, the largest component of the cost of producing a
motion picture generally is the negative cost, which includes the above-the-line and below-the-line costs of producing the film. Above-the-line costs are costs related to the acquisition of picture rights and the costs
associated with the producer, the director, the writer and the principal cast. Below-the-line costs are the remaining costs involved in producing the picture, such as film studio rental, principal photography, sound and editing.



The major studios generally fund production costs from cash flow generated by
motion picture and related distribution activities or bank and other financing methods. Over the past decade, expenses in the motion picture industry have increased rapidly as a result of increased production costs and distribution expenses.
Additionally, each of the major studios must fund substantial overhead costs, consisting primarily of salaries and related costs of the production, distribution and administrative staffs, as well as facilities costs and other recurring overhead.



Distribution
Expenses.    Distribution expenses consist primarily of the costs of advertising and preparing release prints. The costs of advertising associated with a major domestic theatrical motion picture release are significant and
typically involve national and target market media campaigns, as well as public appearances of a films stars. These advertising costs are separate from the advertising costs associated with other domestic distribution channels and the
international market.



Advertising and other promotional costs
are included in selling, general and administrative expenses. The Company includes the cost of duplicating prints, which is a physical product, in operating costs. However, the Company considers the costs of shipping the prints to customers to be a
selling cost as it is part of the Companys distribution activities, and categorizes such activities as selling costs together with advertising, marketing and other promotional costs. Shipping and handling costs of $89.2 million, $72.8 million
and $47.7 million for the years ended December 31, 2004, 2003 and 2002, respectively, have been included in selling, general and administrative expense in the consolidated statements of operations, respectively.



Production Overhead.    The Company capitalizes
production overhead, including allocable costs of individuals or departments with exclusive or significant responsibility for the production of films in accordance with SOP 00-2 Accounting by Producers or Distributors of Films, as a
component of film costs. Such allocable costs of departments are those with exclusive responsibility for the production of films, including physical production and post production. Allocable costs of such departments principally include compensation
costs of employees as well as certain other direct costs, such as travel costs and outside services. We compute the



34



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overhead to be allocated to film and television costs based on the criteria noted above, and allocate such costs to film and television properties in
proportion to the direct production expenditures of each property on an annual basis.



Collective Bargaining Agreements.    The motion picture and television programs produced by MGM Studios, and the other major studios in the United States, generally employ actors, writers
and directors who are members of the Screen Actors Guild, Writers Guild of America and Directors Guild of America, respectively, pursuant to industry-wide collective bargaining agreements. The collective bargaining agreement with the Writers Guild
of America expires on October 31, 2007. The collective bargaining agreement with the Screen Actors Guild expires on June 30, 2005. The parties are currently in negotiations for a successor agreement. The collective bargaining agreement with the
Directors Guild of America expires on June 30, 2008. Many productions also employ members of a number of other labor organizations including, without limitation, the International Alliance of Theatrical and Stage Employees and the International
Brotherhood of Teamsters. The collective bargaining agreement with Teamsters Local 399 expires on July 31, 2007. The collective bargaining agreement with the International Alliance of Theatrical and Stage Employees expires on July 31, 2006. A strike
by one or more of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time involved, could
cause delay or interruption in our release of new motion pictures and television programs and thereby could adversely affect our cash flow and revenues. Our revenues from motion pictures and television programs in our library should not be affected
and may partially offset the effects of a strike to the extent, if any, that television exhibitors buy more library product to compensate for interruption in their first-run programming.



Critical Accounting Estimates



Accounting for Motion Picture and Television Costs.    In accordance with accounting principles generally accepted in the
United States and industry practice, we amortize the costs of production, including capitalized interest and overhead, as well as participations and talent residuals, for feature films and television programming using the individual-film-forecast
method under which such costs are amortized for each film or television program in the ratio that revenue earned in the current period for such title bears to managements estimate of the total revenues to be realized from all media and markets
for such title. All exploitation costs, including advertising and marketing costs, are expensed as incurred. Theatrical print costs are amortized over the periods of theatrical release of the respective territories.



Management regularly reviews, and revises when necessary, its total revenue
estimates (defined as ultimates) on a title-by-title basis, which may result in a change in the rate of amortization and/or a write-down of the film or television asset to estimated fair value. The Company determines the estimated fair
value for individual film and television properties based on the estimated future cash flows resulting from the ten year ultimate revenues and costs (in accordance with SOP 00-2). These ten year ultimates are also used to amortize the capitalized
film costs in accordance with SOP 00-2. The estimated future cash flows are discounted using a net present value model.



Any revisions to ultimates can result in significant quarter-to-quarter and year-to-year fluctuations in film write-downs and amortization. A typical film
or television program recognizes a substantial portion of its ultimate revenues within the first two years of release. By then, a film has been exploited in the domestic and international theatrical markets and the domestic and international home
video markets, as well as the domestic and international pay television and pay-per-view markets, and a television program has been exploited on network television or in first-run syndication. A similar portion of the films or television
programs capitalized costs should be expected to be amortized accordingly, assuming the film or television program is profitable.



The commercial potential of individual motion pictures and television programming varies dramatically, and is not directly correlated with production or
acquisition costs. Therefore, it is difficult to predict or project a trend of our income or loss. However, the likelihood that we report losses, particularly in the year of a motion



35



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pictures release, is increased by the industrys method of accounting which requires the immediate recognition of the entire loss (through
increased amortization) in instances where it is estimated the ultimate revenues of a motion picture or television program will not recover our capitalized costs. On the other hand, the profit of a profitable motion picture or television program
must be deferred and recognized over the entire revenue stream generated by that motion picture or television program. This method of accounting may also result in significant fluctuations in reported income or loss, particularly on a quarterly
basis, depending on our release schedule, the timing of advertising campaigns and the relative performance of individual motion pictures or television programs.



Other Estimates.    We estimate reserves for future returns of product in the home video markets as well as provisions for
uncollectible receivables. In determining the estimate of home video product sales that will be returned, we perform an analysis that considers historical returns, changes in customer demand and current economic trends. Based on this information, a
percentage of each sale is reserved provided that the customer has the right of return. We estimate provisions for uncollectible receivables by monitoring delinquent accounts and estimating a reserve based on contractual terms and other customer
specific issues. Specifically reviewed receivables include all receivables with past due balances greater than ninety days. Additionally, we record a general reserve against all customers not reviewed on a specific basis. We compute the percentage
to be used to calculate the general reserve by reviewing historical write-offs of receivables not previously specifically reserved.



New Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, which
establishes criteria to identify variable interest entities and the primary beneficiary of such entities. An entity that qualifies as a variable interest entity must be consolidated by its primary beneficiary. All other holders of interests in a
variable interest entity must disclose the nature, purpose, size and activity of the variable interest entity as well as their maximum exposure to losses as a result of involvement with the variable interest entity. Interpretation No. 46 was revised
in December 2003 and is effective for financial statements of public entities that have special-purpose entities, as defined, for periods ending after December 15, 2003. For public entities without special-purpose entities, it is effective for
financial statements for periods ending after March 15, 2004. We do not have any special-purpose entities, as defined. We adopted Interpretation No. 46 on January 1, 2004. The adoption of Interpretation No. 46 did not have a material effect on our
financial statements.



In December 2003, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers disclosures about
pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by Statement of Financial Accounting Standards No. 87, Employers Accounting for Pensions, Statement of
Financial Accounting Standards No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and Statement of Financial Accounting Standards No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions. This statement retains the disclosure requirements contained in Statement of Accounting Standards No. 132, Employers Disclosures about Pensions and
Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement of Financial Accounting Standards No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This statement is effective for financial statements
with fiscal years ending after December 15, 2003. We implemented the Statement of Financial Accounting Standards No. 132 (revised 2003) on December 31, 2003.



In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R) (revised 2004), Share-Based
Payment, which is a revision of Statement of Financial



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Accounting Standards No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes Accounting Opinions Board No. 25,
Accounting for Stock Issued to Employees, and amends Statement of Financial Accounting Standards No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement
123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than July 1, 2005 and we plan to adopt Statement 123(R) on January 1, 2005.



We adopted the fair-value-based method of accounting for share-based payments effective January 1, 2004 using the modified prospective method
described in Financial Accounting Standards Board Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Currently, we use the Binomial model to estimate the value of stock options granted to employees
and expect to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R). We do not anticipate that adoption of Statement 123(R) will have a material impact on our results of operations or our financial
position. Statement 123(R) also requires that the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees
exercise stock options), the amounts are not expected to material because we have not historically recorded any tax benefits.



Under the modified prospective method of adoption selected by us under the provisions of Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure, stock-based employee compensation expense recognized in 2004 is the same as that which would have been recognized had the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 been applied to all awards from its original effective date. During the year ended December 31, 2004, we recorded compensation expense of $30.8 million related to our employee stock incentive plan,
which charge has been included in selling, general and administrative expenses in the consolidated statements of operations.



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Results of Operations



The following table sets forth our reported operating results for the years ended December 31, 2004, 2003 and 2002.



|                                                 |  |                         |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------ |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                 |  | Year Ended December 31, |          
|                                                 |  | 2004                    |           |   | 2003 |   |           | 2002 | 
|                                                 |  | (in thousands)          |          
|Revenues:                                        |  |                         |           |   |      |   |           |      |  |   |           |  
|Feature films                                    |  | $                       | 1,438,640 |   |      | $ | 1,651,870 |      |  | $ | 1,416,947 |  
|Television programs                              |  |                         | 240,530   |   |      |   | 189,997   |      |  |   | 171,220   |  
|Other                                            |  |                         | 45,634    |   |      |   | 41,160    |      |  |   | 65,935    |  
|                                                 |  |                         |           |   |      |   |           |      |  |   |           |  
|Total revenues                                   |  |                         | 1,724,804 |   |      |   | 1,883,027 |      |  |   | 1,654,102 |  
|                                                 |  |                         |           |   |      |   |           |      |  |   |           |  
|Operating income (loss):                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Feature films                                    |  |                         | 148,736   |   |      |   | 107,922   |      |  |   | (40,052   | )
|Television programs                              |  |                         | 52,309    |   |      |   | 24,869    |      |  |   | 4,902     |  
|Other                                            |  |                         | 26,537    |   |      |   | 23,034    |      |  |   | 39,336    |  
|General and administration expenses              |  |                         | (178,105  | ) |      |   | (139,643  | )    |  |   | (84,857   | )
|Depreciation                                     |  |                         | (15,147   | ) |      |   | (17,300   | )    |  |   | (20,467   | )
|                                                 |  |                         |           |   |      |   |           |      |  |   |           |  
|Operating income (loss)                          |  |                         | 34,330    |   |      |   | (1,118    | )    |  |   | (101,138  | )
|Write-down of investment in cable channels       |  |                         |          |   |      |   | (93,059   | )    |  |   |          |  
|Gain on sale of equity interest in cable channel |  |                         |          |   |      |   |          |      |  |   | 32,514    |  
|Equity in net earnings (losses) of affiliates    |  |                         | (4,847    | ) |      |   | 310       |      |  |   | 13,561    |  
|Interest expense, net of amounts capitalized     |  |                         | (63,601   | ) |      |   | (60,229   | )    |  |   | (79,929   | )
|Interest and other income, net                   |  |                         | 8,411     |   |      |   | 16,148    |      |  |   | 7,432     |  
|Other non-recurring costs                        |  |                         | (7,026    | ) |      |   | (5,099    | )    |  |   |          |  
|                                                 |  |                         |           |   |      |   |           |      |  |   |           |  
|Loss before benefit (provision) for income taxes |  |                         | (32,733   | ) |      |   | (143,047  | )    |  |   | (127,560  | )
|Income tax benefit (provision)                   |  |                         | 3,522     |   |      |   | (18,714   | )    |  |   | (14,687   | )
|                                                 |  |                         |           |   |      |   |           |      |  |   |           |  
|Net loss                                         |  | $                       | (29,211   | ) |      | $ | (161,761  | )    |  | $ | (142,247  | )
|                                                 |  |                         |           |   |      |   |           |      |  |   |           |  



Overview



Year Ended December 31, 2004 vs
2003:    In the year ended December 31, 2004, our revenues decreased $158.2 million, or eight percent, to $1,724.8 million as compared to the year ended December 31, 2003. The decrease in revenues principally reflected lower
theatrical and home video revenues in 2004, principally reflecting the contribution in 2003 of Die Another Day, as well as the overall performance of the film slate in 2004 as compared to 2003. The decrease in theatrical and home video
revenues was partially offset by an increase in television licensing revenues.



Operating income in 2004 increased to $34.3 million from an operating loss of $1.1 million in 2003, an improvement of $35.4 million. The improvement principally reflected decreased theatrical print and advertising
costs, which were $133.1 million lower than in 2003 as our film slate in 2004 had lower releasing costs. Other benefits included the performance of Stargate SG-1 and Stargate Atlantis in worldwide television and home video markets, as
well as the collection of an insurance recovery of $6.1 million in 2004. Additionally, in 2003 we incurred a charge associated with the settlement of negotiations with a third party distributor regarding the distribution of our product in the
international home video markets. There were no comparable charges in 2004.



In 2004, bad debt expense increased by $16.2 million, principally due to the bankruptcy of a significant international television customer, and general and administrative expenses increased by $38.5 million
principally due to our adoption on January 1, 2004 of the fair value recognition provisions of employee stock option accounting, as well as increased facilities expenses and professional fees.



38



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Net loss in 2004 improved to $29.2 million, or $0.12 per share, from a net loss of $161.8 million, or
$0.66 per share, in 2003. The decrease in net loss reflected the aforementioned improvement in operating margin. Additionally, we realized certain tax benefits due to a reduction in tax reserves of $10.9 million in 2004 relating to an amendment to a
tax ruling, as well as benefits realized due to changes in certain foreign tax withholding rates. In 2003, we incurred a write-down of $93.1 million on our investment in three cable channels, American Movie Classics, The Independent Film Channel and
WE: Womens Entertainment, which were sold in July 2003. In 2004, interest costs increased by $3.4 million, which included the write-off of $6.9 million of deferred loan fees due to the refinancing of our credit facility in April 2004.
Additionally, in 2004 interest income decreased by $7.7 million due to lower invested cash balances



Year Ended December 31, 2003 vs 2002:    In the year ended December 31, 2003, our revenues increased $228.9 million, or 14
percent, to $1,883.0 million as compared to the year ended December 31, 2002. The increase in revenues reflected substantially higher worldwide home video revenues, principally due to the home video release in 2003 of Die Another Day, with no
comparably performing film in 2002.



Operating loss in 2003
improved to $1.1 million from an operating loss of $101.1 million in 2002. The improvement of $100.0 million reflected the significant contribution from the release in 2003 of Die Another Dayas well as lower feature film write-downs than in
2002. Feature film and television program write-downs in 2003 were $6.7 million as compared to write-downs of $103.2 million in 2002. Other savings in 2003 included lower bad debt expense and development project write-offs. General and
administrative expenses, however, increased in 2003 by $54.8 million principally due increased incentive plan costs, facilities charges and professional fees. Additionally, in 2003, we incurred a charge associated with the settlement of negotiations
with a third party distributor regarding the distribution of our product in the international home video markets.



Net loss in 2003 increased to $161.8 million, or $0.66 per share, from a net loss of $142.2 million, or $0.57 per share, in 2002. In 2003, we incurred a
write-down of $93.1 million on our investment in three cable channels, American Movie Classics, The Independent Film Channel and WE: Womens Entertainment, which were sold in July 2003. In December 2002, MGM Networks U.S. and Cablevision,
together with an affiliate of Cablevision, sold their ownership interests in Bravo to an affiliate of the National Broadcasting Company for $1.25 billion. We received $250.0 million in cash from an affiliate of the National Broadcasting Company for
our interest in Bravo, and recorded a gain of $32.5 million on the sale. Due to the sale of these interests, our equity in the net earnings of affiliates decreased in 2003 by $13.3 million.



Additionally, in 2003 interest costs decreased by $19.7 million as we had
lower average debt balances than in 2002. Additionally, in 2003 interest income increased by $8.7 million due to higher average invested cash balances than in 2002.



EBITDA



While management considers EBITDA to be an important measure of comparative operating performance, it should be considered in addition to, but not as a
substitute for or superior to, operating income, net earnings, cash flow and other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States. EBITDA does not reflect cash available to
fund cash requirements, and the items excluded from EBITDA, such as depreciation and non-film amortization, are significant components in assessing our financial performance. Other significant uses of cash flows are required before cash will be
available to us, including debt service, taxes and cash expenditures for various long-term assets. We use EBITDA to evaluate the operating performance of our business segments and as a measure of performance for compensation purposes. We believe
that EBITDA is also used by some investors, equity analysts and others as a measure of performance to make informed investment decisions. Our calculation of EBITDA may be different from the calculation used by other companies and, therefore,
comparability may be limited.



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The following table reconciles consolidated EBITDA to net loss for the years ended December 31, 2004,
2003 and 2002:



|                                                 |  |                         |         |   |      |   |          |      |  |   |          |  
|------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                 |  | Year ended December 31, |        
|                                                 |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|                                                 |  | (in thousands)          |        
|EBITDA                                           |  | $                       | 49,477  |   |      | $ | 16,182   |      |  | $ | (80,671  | )
|Depreciation                                     |  |                         | (15,147 | ) |      |   | (17,300  | )    |  |   | (20,467  | )
|                                                 |  |                         |         |   |      |   |          |      |  |   |          |  
|Operating income (loss)                          |  |                         | 34,330  |   |      |   | (1,118   | )    |  |   | (101,138 | )
|Write-down of investment in cable channels       |  |                         |        |   |      |   | (93,059  | )    |  |   |         |  
|Gain on sale of equity interest in cable channel |  |                         |        |   |      |   |         |      |  |   | 32,514   |  
|Equity in net earnings (losses) of affiliates    |  |                         | (4,847  | ) |      |   | 310      |      |  |   | 13,561   |  
|Interest expense, net of amounts capitalized     |  |                         | (63,601 | ) |      |   | (60,229  | )    |  |   | (79,929  | )
|Interest and other income                        |  |                         | 8,411   |   |      |   | 16,148   |      |  |   | 7,432    |  
|Other non-recurring costs                        |  |                         | (7,026  | ) |      |   | (5,099   | )    |  |   |         |  
|                                                 |  |                         |         |   |      |   |          |      |  |   |          |  
|Loss before benefit (provision) for income taxes |  |                         | (32,733 | ) |      |   | (143,047 | )    |  |   | (127,560 | )
|Income tax benefit (provision)                   |  |                         | 3,522   |   |      |   | (18,714  | )    |  |   | (14,687  | )
|                                                 |  |                         |         |   |      |   |          |      |  |   |          |  
|Net loss                                         |  | $                       | (29,211 | ) |      | $ | (161,761 | )    |  | $ | (142,247 | )
|                                                 |  |                         |         |   |      |   |          |      |  |   |          |  



See further details of
operating changes under segments discussion below.



Feature
Films



Consolidated feature films revenues, operating
income (loss) are as follows:



|                        |  |                         |           |      |   |           |  |   |           |  
|----------------------- |  | ----------------------- | --------- | ---- | - | --------- |  | - | --------- | -
|                        |  | Year ended December 31, |          
|                        |  | 2004                    |           | 2003 |   | 2002      | 
|                        |  | (in thousands)          |          
|Revenues                |  | $                       | 1,438,640 |      | $ | 1,651,870 |  | $ | 1,416,947 |  
|Operating income (loss) |  | $                       | 148,736   |      | $ | 107,922   |  | $ | (40,052   | )



Year Ended December
31, 2004 Compared to Year Ended December 31, 2003



Revenues.    Feature film revenues decreased by $213.2 million, or 13 percent, to $1,438.6 million in the year ended December 31, 2004 as compared to the year ended December 31, 2003.



Worldwide theatrical revenues decreased by $116.8 million, or 53 percent, to
$104.1 million in 2004. Domestically, we released 14 new films in each of 2004 and 2003. Internationally, we released six films in 2004 as compared to 11 films in 2003. In 2004, our releases included Barbershop 2: Back In Business, Walking
Tall, Soul Plane, Agent Cody Banks 2: Destination London, Wicker Park, Sleepover, De-Lovely, SavedandHotel Rwanda. In 2003, we generated higher theatrical revenues from the continued successful worldwide theatrical release of
Die Another Day as well as the new releases Legally Blonde 2: Red, White and Blonde, Out of Time, Uptown Girls, Jeepers Creepers 2, Good Boy! and Agent Cody Banks.



Worldwide home video revenues decreased by $132.4 million, or 12 percent, to
$919.2 million in 2004. In 2004, our home video releases included Barbershop 2: Back In Business, Out of Time, Walking Tall, Uptown Girls, Good Boy!, Agent Cody Banks 2: Destination London, Soul Plane, Wicker Parkand Sleepover, among others. In 2003, our home video releases included Die Another Day, Legally Blonde 2: Red, White and Blonde, Barbershop, Agent Cody Banks, Jeepers Creepers 2, Bulletproof Monk, Bowling For
Columbine, A Guy Thing and Dark Blue,among others.The decrease in home video revenues principally reflected the release ofDie Another Dayin 2003, which generated $140.1 million in worldwide home video revenues.
There were no



40



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comparable releases in 2003.In 2004, worldwide DVD sales were $831.6 million as compared to $916.1 million in 2003, which included Die Another
Day.



Worldwide pay television revenues from feature films
decreased by $1.4 million, or one percent, to $165.6 million in 2004. In 2004, we delivered 14 new films to domestic pay television, including Legally Blonde 2: Red, White and Blonde, Agent Cody Banks, Out of Time, Uptown Girls, Jeepers
Creepers 2, Good Boy! and Bulletproof Monk. In 2003, we delivered 18 new films to domestic pay television, including Die Another Day, Barbershop, Windtalkers, Crocodile Hunter, Harts War, A Guy Thingand
Bowling ForColumbine. Network television revenues decreased by $12.9 million, or 53 percent, to $11.5 million in 2004, principally due to the delivery of Legally Blonde and Bandits in 2004 as compared to Hannibal
and Return To Me in 2003, which in the aggregate carried higher license fees. Worldwide syndicated television revenues from feature films increased by $40.5 million, or 23 percent, to $218.1 million in 2004, principally due to the sale to
basic cable of Hannibal, Legally Blonde, Jeepers Creepers, Heartbreakers, Whats The Worst That Could Happen, Harts War, Rollerball and Original Sin in 2004, as compared to the sale of Autumn In New York
and Anti-trust in 2003.



Other revenues increased by
$9.7 million in 2004, principally due to the receipt of entitlement royalties and timing of miscellaneous income and royalties.



Operating Results.    Operating income from feature films increased by $40.8 million, or 38 percent, to $148.7 million in 2004.
Although overall revenues decreased in 2004, we benefited from lower theatrical releasing costs associated with our film slate in 2004 as compared to the film slate in 2003. Theatrical releasing costs in 2004 were $133.1 million lower than in 2003.
Additionally, television licensing revenues increased in 2004, which carry lower distribution costs. We also realized an insurance recovery of $6.1 million in 2004. Additionally, in 2003, we incurred a charge associated with the settlement of
negotiations with a third party distributor regarding the distribution of our product in the international home video markets (see Recent DevelopmentsNotice of Termination of Third Party International Home Video Subdistribution
Services Agreement).



Partially offsetting these benefits
in 2004 were new provisions for outside producer claims of $5.5 million. Additionally, feature film write-downs were $7.6 million in 2004 as compared to write-downs of $3.5 million incurred in 2003. Bad debt expense increased by $12.0 million,
primarily due to the bankruptcy of a significant international television customer during 2004. There were no such occurrences in 2003.



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002



Revenues.    Feature film revenues increased by $234.9 million, or 17 percent, to $1,651.9
million in the year ended December 31, 2003 as compared to the year ended December 31, 2002.



Worldwide theatrical revenues decreased by $40.4 million, or 15 percent, to $220.9 million in 2003. In 2003, we benefited from the theatrical releases Legally Blonde 2: Red, White and Blonde, Good Boy!, Out Of
Time, Agent Cody Banks, Jeepers Creepers 2 and Uptown Girls, as well as the continued successful worldwide theatrical release of Die Another Day. Additionally, in 2003 we released Bulletproof Monk, It Runs In The Family, A Guy
Thing and Dark Blue, as well as the release on a limited basis of four other films. In 2002, our releases generated higher theatrical revenues, principally due to the release of Die Another Dayand Barbershop.During 2002 we
also releasedWindtalkers, Crocodile Hunter, Bowling For Columbine, Rollerball, Harts War and Deuces Wild, as well as 11 other titles released on a limited basis. Overall, in 2003, we released 14 new feature films
domestically and 11 films internationally, as compared to the release of 19 new feature films domestically and five films internationally in 2002.



Worldwide home video revenues increased by $292.4 million, or 39 percent, to $1,051.6 million in 2003. In 2003, our home video releases, including Die
Another Day, Legally Blonde 2: Red, White and Blonde, Barbershop, Agent Cody Banks, Jeepers Creepers 2, Bulletproof Monk, Bowling For Columbine, A Guy Thing,



41



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Dark Blue, It Runs In The Family, Igby Goes Down, Evelyn and Killing Me Softly, generated substantially more revenue than our 2002 home video
releases earned in 2002, which included the home video releases Windtalkers,Crocodile Hunter, Bandits, Rollerball, Jeepers Creepers, Harts War, Whats The Worst That Could Happen, Original Sin, Ghost World and
Deuces Wild. Additionally, in 2003, worldwide DVD sales increased to $916.1 million, or 58 percent, from $579.5 million in 2002.



Worldwide pay television revenues from feature films increased by $15.0 million, or ten percent, to $167.0 million in 2003. In 2003, we delivered 18 new
films to domestic pay television, including Die Another Day, Barbershop, Windtalkers, Crocodile Hunter, Harts War, A Guy Thing, Bowling For Columbine, Igby Goes Down and Deuces Wild, as compared to the delivery of
ten new films in 2002, which included Hannibal, Legally Blonde, Heartbreakers, Bandits, Jeepers Creepers, Whats The Worst That Could Happen and Original Sin. Sales in international pay television markets increased in 2003
due to the licensing of Legally Blonde internationally and increased sales of library product. Network television revenues decreased by $8.9 million, or 27 percent, to $24.4 million in 2003, principally due to the delivery of Hannibal
and Return To Me in 2003, which combined carried lower license fees than The World Is Not Enough and The Thomas Crown Affair which were delivered in 2002. Worldwide syndicated television revenues from feature films decreased by
$24.0 million, or 12 percent, to $177.5 million in 2003. In 2002, we realized significant license fees from the sale of the James Bond films to domestic television. There were no similar sales in 2003.



Other revenues increased by $0.8 million, or eight percent, to $10.6 million
in 2003, principally due to increased entitlement royalties.



Operating Results.    Operating income from feature films improved by $155.5 million to $115.4 million in 2003 as compared to a loss of $40.1 million in 2002. This improvement generally reflected the significant
increase in revenues discussed above as well as improved film performance. In 2003, we benefited from the continued successful theatrical release of Die Another Dayas well as the theatrical releases ofLegally Blonde 2: Red, White and
Blonde, Good Boy!, Out Of Time, Agent Cody Banks, Jeepers Creepers 2 and Uptown Girls, and the home video release of Die Another Day, Legally Blonde 2: Red, White and Blonde, Barbershop, Agent Cody BanksandJeepers Creepers
2, among others. Additionally, in 2003, we benefited from significant television license fees generated by Die Another Day in domestic pay television and Hannibal in network television. In 2002, we benefited from the successful
theatrical releases of Die Another Day, Barbershop, Crocodile HunterandBowling For Columbineand the home video release of Windtalkers, Bandits and Crocodile Hunter, as well as the network and
international television licensing of The World Is Not Enough.



Operating results in 2002 principally reflected the disappointing theatrical performances of certain of our releases, including Windtalkers, Rollerball and Harts War. In 2003, we incurred feature film write-downs of only
$3.5 million as compared to write-downs of $82.0 million in 2002 relating to the aforementioned films. Our home video margin improved in 2003 due to increased sales, product mix and lower manufacturing costs. In 2003, we incurred lower project
development write-offs than in 2002, which improved operating results by $8.0 million compared to 2002. Also, in 2002 we incurred higher bad debt expenses associated with customer bankruptcies or liquidity issues, resulting in additional charges of
$11.9 million as compared to 2003. The improved results in 2003 were partially offset by increased distribution costs, which were $20.8 million higher than in 2002, associated with our theatrical release slate (see above) and film library.
Additionally, in 2003, we incurred a charge associated with the settlement of negotiations with a third-party distributor regarding the distribution of our product in the international home video markets (see Recent
DevelopmentsNotice of Termination of Third Party International Home Video Subdistribution Services Agreement).



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Television Programming



Consolidated television programming revenues, operating income are as follows:



|                 |  |                         |         |      |   |         |  |   |        
|---------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                 |  | Year ended December 31,
|                 |  | 2004                    |         | 2003 |   | 2002   
|                 |  | (in thousands)         
|Revenues         |  | $                       | 240,530 |      | $ | 189,997 |  | $ | 171,220
|Operating income |  | $                       | 52,309  |      | $ | 24,869  |  | $ | 4,902  



Year Ended December
31, 2004 Compared to Year Ended December 31, 2003



Revenues.    Television programming revenues increased by $50.5 million, or 27 percent, to $240.5 million in the year ended December 31, 2004 as compared to the year ended December 31, 2003.



There were no network television revenues in 2004 as compared to $9.4 million
in 2003, which included the network series Fame. Worldwide pay television revenues decreased by $2.2 million, or seven percent, to $32.0 million in 2004. In 2004, we had one series on domestic pay television, Dead Like Me, as compared
to two series in 2003, Jeremiahand Dead Like Me, as well as the delivery in international markets of two made-for-television movies in 2003. Worldwide syndicated television programming revenues increased by $21.3 million, or 21
percent, to $123.3 million in 2004. In 2004, we delivered the new series Stargate Atlantis to domestic basic cable. Worldwide home video revenues with respect to television programming increased by $38.1 million, or 89 percent, to $81.1
million in 2004, primarily due to increased worldwide home video sales of Stargate SG-1.



Other revenues increased by $2.6 million in 2004 due to increased entitlement revenue.



Operating Results.    Operating income from television programming increased by $27.4 million, or
110 percent, to $52.3 million in 2004, principally due to the performance of Stargate SG-1 and Stargate Atlantis in worldwide television and home video markets and increased entitlement revenue.



Partially offsetting the improvement in operating results in 2004 was an
increase in bad debt expense of $4.1 million, principally due to the bankruptcy of a significant international television customer during the year. There were no such occurrences in 2003.



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002



Revenues.    Television programming revenues
increased by $18.8 million, or 11 percent, to $190.0 million in the year ended December 31, 2003 as compared to the year ended December 31, 2002.



Network television revenues increased by $2.2 million, or 31 percent, to $9.4 million in 2003 due to the delivery of the new series Fame. There
were no new series on network television in 2002. Worldwide pay television revenues increased by $11.9 million, or 53 percent, to $34.3 million in 2003, principally due to the delivery of the new series Dead Like Me and the second year of
Jeremiah on domestic pay television, as well as the delivery in international markets of two made-for-television movies. In 2002, we had Jeremiah on domestic pay television as well as the delivery of one made-for-television miniseries,
Carrie. Worldwide syndicated television programming revenues decreased by $15.1 million, or 13 percent, to $101.9 million in 2003. In 2003, we delivered only one season of Stargate SG-1 to basic cable as compared to the delivery in
2002 of four seasons of Stargate SG-1 to domestic basic cable. Additionally, we had the new series She Spiesin syndication in both 2003 and 2002. Worldwide home video revenues with respect to television programming increased by $20.2
million, or 89 percent, to $43.0 million in 2003, primarily due to worldwide sales of Stargate SG-1.



43



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Other revenues decreased by $0.4 million, or 22 percent, to $1.4 million in 2003 due to lower third party
royalties collected in the period.



Operating
Results.    Operating income from television programming increased by $20.0 million, or 407 percent, to $24.9 million in 2003, principally due to the increase in revenues discussed above and lower write-downs associated with
new series, as well as decreased bad debt expense.



Other
Businesses



Consolidated revenues and operating income
from other businesses, including consumer products, interactive media and branded programming services, music soundtrack and royalty income, are as follows:



|                 |  |                         |        |      |   |        |  |   |       
|---------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                 |  | Year ended December 31,
|                 |  | 2004                    |        | 2003 |   | 2002  
|                 |  | (in thousands)         
|Revenues         |  | $                       | 45,634 |      | $ | 41,160 |  | $ | 65,935
|Operating income |  | $                       | 26,537 |      | $ | 23,034 |  | $ | 39,336



Year Ended December
31, 2004 Compared to Year Ended December 31, 2003



Revenues.    Revenues from other businesses increased by $4.5 million, or 11 percent, to $45.6 million in 2004 as compared to 2003. Operating results in 2004 included consumer products revenue of $16.1 million and
music soundtrack and royalty revenue of $11.8 million, as compared to consumer products revenue of $14.0 million and music soundtrack and royalty revenue of $8.7 million in 2003. Consumer products revenue increased in 2004 due to higher royalty and
licensing revenue. Music soundtrack and royalty revenue increased in 2004 due to higher soundtrack revenue realized on Barbershop 2: Back In Business. Interactive media revenues were $11.0 million in 2004 as compared to $14.4 million in 2003.
The decrease in interactive media revenues in 2004 principally reflected the timing of release of our interactive games. Branded programming services revenues aggregated $6.2 million in 2004 as compared to $3.3 million in 2003. The increase in
branded programming services revenues in 2004 was principally due to expansion of our investment in international cable channels resulting in an increase in subscription revenues. Revenues from other businesses in 2004 also included the receipt of
$0.5 million in third-party audit recoveries and other miscellaneous income as compared to $0.7 million in 2003.



Operating Results.    Operating income from other businesses increased by $3.5 million, or 15 percent, to $26.5 million in
2004. Expenses for other businesses include interactive product costs of $6.4 million in 2004 as compared to $8.2 million in 2003. The decrease in interactive product costs reflected the corresponding decrease in interactive product revenue.
Consumer products costs were $5.0 million in 2004 and $2.6 million in 2003. The increase in consumer products costs corresponded to the increase in consumer products revenue. Overhead costs related to other businesses aggregated $8.5 million in 2004
and $7.8 million in 2003. Other expenses, including distribution costs associated with music and branded programming services, aggregated $4.5 million in 2004 and $5.5 million in 2003, which included a music distribution settlement. We recognized
foreign currency transaction gains of $5.2 million in 2004 as compared to foreign currency gains of $6.1 million in 2003.



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002



Revenues.    Revenues from other businesses decreased by $24.8 million, or 38 percent, to $41.2
million in 2003 as compared to 2002. Operating results in 2003 included consumer products revenue of $14.0 million and music soundtrack and royalty revenue of $8.7 million, as compared to consumer products revenue of $13.3 million and music
soundtrack and royalty revenue of $9.8 million in 2002. Interactive media revenues were $14.4 million in 2003, which included royalties from the interactive game 007-Nightfirewhich was initially released in 2002, as compared to interactive
revenues of $25.6 million in 2002, which included royalties from the interactive



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game releases 007-Nightfireand007-Agent Under Fire. Branded programming services revenues aggregated $3.8 million in 2003 as compared to $1.9
million in 2002. The increase in branded programming services revenue in 2003 was due to additional MGM branded cable channels launched during the year. Other revenues in 2002 included a favorable settlement with a vendor of $13.2 million. There
were no comparable recoveries in 2003. Revenues from other businesses in 2003 included the receipt of $0.3 million in third-party audit recoveries and other miscellaneous income as compared to $2.1 million for such items in 2002.



Operating Results.    Operating income from other
businesses decreased by $16.3 million, or 41 percent, to $23.0 million in 2003. Expenses for other businesses include interactive product costs of $8.2 million in 2003 as compared to $15.5 million of such costs in 2002, which were associated with
the increased interactive game revenues in 2002. Consumer product costs were $2.6 million in 2003 and $2.7 million in 2002. Overhead costs related to other businesses aggregated $7.8 million in 2003 and $5.8 million in 2002. Other expenses,
including distribution costs associated with music and branded programming services, aggregated $5.5 million in 2003 and $4.0 million in 2002. We recognized foreign currency transaction gains of $6.1 million in 2003 and $1.3 million in 2002.



Corporate and Other



Year Ended December 31, 2004 Compared to Year Ended December 31, 2003



General and Administrative
Expenses.    In 2004, general and administrative expenses increased by $38.5 million, or 28 percent, to $178.1 million, as compared to 2003.



Beginning January 1, 2004, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (see New Accounting Pronouncements). In 2004, we recognized compensation expense of $30.8 million related to our employee stock option plan. Additionally, in 2004 our
facilities and insurance charges increased by $5.0 million as compared to 2003, principally due to increased rent associated with the expansion of our home entertainment operations. Other increases of $2.7 million generally reflected higher employee
compensation costs and temporary services.



Depreciation.    Depreciation expense in 2004 decreased by $2.2 million, or 12 percent, to $15.1 million, as compared to 2003, due to fixed assets retired when we moved to our new corporate headquarters in June
2003.



Write-Down of Investment in Cable
Channels.    On July 18, 2003, we sold our 20 percent equity interest in the American Movie Classics, The Independent Film Channel and WE: Womens Entertainment cable channels to Cablevision Systems Corporation for
$500.0 million. As our investment in these cable channels exceeded the net selling price, we recorded a write-down of our investment in the cable channels of $93.1 million in 2003.



Equity in Net Earnings (Losses) of Affiliates.    In 2004, loss from equity investees was $4.8
million as compared to income from our equity investees of $0.3 million in 2003. In 2003, we benefited from the inclusion (for one quarter) of our 20 percent share of the operating results of the Rainbow Media Group cable channels, which contributed
income of $4.8 million. Our equity interest in these cable channels were sold in July 2003.



Interest Expense, Net of Amounts Capitalized.    Net interest expense in 2004 increased by $3.4 million, or six percent, to $63.6 million, as compared to 2003, primarily due to the
refinancing of our credit facilities in April 2004, which resulted in the write-off of deferred loan fees of $6.9 million.



Interest and Other Income, Net.    Interest and other income in 2004 decreased by $7.7 million, or 48 percent, to $8.4 million,
as compared to 2003, due to reduced average invested cash balances in 2004 related to the repayment of our Term Loans in October 2003.



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Other Non-Recurring Costs.    In 2004, we incurred certain non-recurring costs
of $7.0 million related to our pending merger transaction (see Recent Developments), as compared to $5.1 million of costs in 2003 associated with our pursuit of potential strategic alternatives.



Income Tax Benefit (Provision).    We realized a
benefit for income taxes in 2004 of $3.5 million consisting of a reduction in tax reserves of $10.9 million associated with an amendment to a tax ruling, as well as decreased foreign remittance taxes due to reduced international distribution
revenues and changes to tax treaties in certain international territories. In 2003, the provision for income taxes of $18.7 million principally consisted of foreign remittance taxes attributable to international distribution revenues.



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002



General and Administrative
Expenses.    In 2003, general and administrative expenses increased by $54.8 million, or 65 percent, to $139.6 million, as compared to 2002. In 2003, incentive plan costs were $41.1 million higher than in 2002, when we
realized a benefit principally from the change in the price of our common stock, associated with certain of our current employees and certain of our former senior executives. Additionally, in 2003 facilities charges increased by $9.1 million,
reflecting increased office space and higher insurance costs. We also incurred relocation costs of approximately $1.5 million in 2003 to move to our new corporate headquarters. The balance of the increase reflected higher professional fees in 2003.



Depreciation.    Depreciation
expense in 2003 decreased by $3.2 million, or 15 percent, to $17.3 million, as compared to 2002, due to fixed asset retirements in the period related to our move to our new corporate headquarters, partially offset by new fixed asset purchases placed
in service during the period.



Write-Down of Investment in
Cable Channels.    On July 18, 2003, we sold our 20 percent equity interest in the American Movie Classics, The Independent Film Channel and WE: Womens Entertainment cable channels to Cablevision Systems Corporation for
$500.0 million. As our investment in these cable channels exceeded the net selling price, we recorded a write-down of our investment in the cable channels of $93.1 million during 2003.



Gain on Sale of Equity Interest in Cable Channel.    On December 5, 2002, MGM Networks U.S. and
Cablevision, together with an affiliate of Cablevision, sold their ownership interests in Bravo to an affiliate of the National Broadcasting Company for $1.25 billion, of which our portion was all in the form of cash. The proceeds were divided
between Cablevision and MGM Networks U.S. in accordance with their 80 percent and 20 percent ownership interests in Bravo. We received $250.0 million in cash from an affiliate of the National Broadcasting Company for our interest in Bravo, and
recorded a gain of $32.5 million on the sale.



Equity in Net
Earnings (Losses) of Affiliates.    In 2003, operating income from unconsolidated companies was $2.1 million and net income was $0.3 million (which included operating income of $5.0 million and net income of $4.8 million from
our interest in the Rainbow Media cable channels for the quarter ended March 31, 2003). Beginning April 1, 2003, we ceased recording our 20 percent share of the operating results of the Rainbow Media cable channels as the book value was written down
to the net sales proceeds. We subsequently sold our equity interest in the three remaining cable channels to Cablevision on July 18, 2003. Our equity interest in the Bravo cable channel was sold to an affiliate of the National Broadcasting Company
on December 5, 2002.



In 2002, operating income from
unconsolidated companies was $15.3 million and net income was $13.6 million. In 2002, we benefited from the inclusion of our share of the operating results of the Rainbow Media Group cable channels, which contributed operating income of $20.7
million and net income of $20.6 million. Due to the one-quarter lag in reporting of this investment, 2002 operating and net income was reduced by amortization of goodwill of $9.5 million related to our investment in the cable channels.



Interest Expense, Net of Amounts
Capitalized.    Net interest expense in 2003 decreased by $19.7 million, or 25 percent, to $60.2 million, as compared to 2002. The decrease was primarily due to the repayment of $1.15



46



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billion of term loans on October 27, 2003, previously outstanding under our credit facilities, as well as reduced borrowing rates. Additionally, in 2003 we
wrote-off deferred financing fees of $3.9 million associated with the repayment of the term debt, which have been included in interest expense.



Interest and Other Income, Net.    Interest and other income in 2003 increased by $8.7 million, or 117 percent, to $16.1
million, as compared to 2002 due to increased interest income earned on our short-term investments. We had significantly higher average invested cash balances in 2003 than in 2002, principally due to the net proceeds received from the sale of the
Rainbow Media cable channels in 2002 and 2003, which aggregated approximately $750.0 million, as well as the receipt of an additional $40 million in dividends in 2002 and 2003 from the Rainbow Media cable channels, as well as the refinancing of our
credit facilities in June 2002.



In 2003, we incurred $0.5
million in expenses for the completion of a tender offer for our common stock by Tracinda, 250 Rodeo and Mr. Kerkorian, our principal stockholders.



Due Diligence Expenses.    In 2003, we incurred due diligence expenses associated with the investigation of the target of a
potential acquisition that was not completed. These costs aggregated approximately $5.1 million.



Income Tax Provision.    The provision for income taxes in 2003 increased by $4.0 million, or 27 percent, to $18.7 million, as
compared to 2002, principally due to foreign remittance taxes attributable to increased international distribution revenues.



Liquidity and Capital Resources



General.    Our operations are capital intensive. In recent years we have funded our operations primarily from (a) the sale of
equity securities, (b) bank borrowings and (c) internally generated funds. During 2004, the net cash provided by operating activities was $140.8 million, which included spending associated with film and television production and distribution costs
of $683.7 million; net cash used in investing activities was $18.2 million, which included $15.5 million in property and equipment purchases and $4.7 million in advances to affiliates, partially offset by the receipt of dividends from equity
investees of $2.0 million; and net cash used in financing activities was $67.3 million, including $1.89 billion for the payment of the stockholder dividend on May 17, 2004 (see below), $171.0 million for the Dutch Auction tender offer, the
acquisition of treasury shares of $10.4 million under our share repurchase program and $19.4 million of financing fees paid for our new credit facilities, partially offset by $1.98 billion of net bank borrowings as well as $43.1 million collected
from the issuance of our common stock to related parties.



Stockholder Dividend.    On April 26, 2004, we declared a special one-time cash dividend of $8.00 per share to stockholders of record on May 7, 2004, which was paid on May 17, 2004. The cash dividend, aggregating
$1.89 billion, was financed by borrowings under our new $2.4 billion credit facility (see Bank Borrowings).



Pursuant to the provisions of the Amended and Restated 1996 Stock Incentive Plan, the Compensation Committee of the Board of Directors has adjusted the
outstanding stock options issued on or before May 17, 2004 under the plan such that following the payment of the one-time cash dividend to stockholders, each option holder shall receive upon exercise, in addition to the shares of common stock
otherwise obtainable, a cash amount of $8.00 per share.



Dutch Auction Tender Offer.    On December 4, 2003, we commenced a Dutch Auction tender offer to purchase up to 10,000,000 shares of our common stock at a purchase price not greater than $18.00 nor less than
$16.25 per share. Under the procedures for a Dutch Auction tender offer, our stockholders had the opportunity to tender some or all of their shares of common stock at prices specified by the stockholders. We then determined the lowest price per
share within the range of $16.25 to $18.00 per share that would enable us to buy 10,000,000 shares, or such lesser number of shares that are properly tendered and not withdrawn. All shares accepted in the Dutch Auction tender offer were purchased by
us at the same determined price per share regardless of whether



47



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the stockholder tendered at a lower price. Tracinda, 250 Rodeo and Mr. Kerkorian, our principal stockholders, did not participate in the Dutch Auction tender
offer, nor did any members of our Board of Directors or any of our executive management.



The Dutch Auction tender offer expired on January 15, 2004. Pursuant to the Dutch Auction tender offer, we purchased 10,000,000 shares of our common stock at an average purchase price of $17.00 per share, or an
aggregate amount of $170.0 million, plus offering expenses of approximately $1.0 million. The Dutch Auction tender offer was financed primarily from available cash on hand, net cash flow provided by operating activities and borrowings under the
revolving credit facility.



Treasury
Stock.    On July 26, 2002, we announced a share repurchase program authorizing the purchase of up to 10,000,000 million shares of our common stock. We intend to fund the repurchase program from available cash on hand. On
November 12, 2003, our Board of Directors increased its authorization for our share repurchase program by an additional 2,500,000 shares, to a total of 12,500,000 shares. As of December 31, 2004, under the share repurchase program, we had
repurchased 8,104,300 shares of common stock at an average price of $11.46 per share, for an aggregate cost of $92.9 million.



Bank Borrowings.    On April 26, 2004, we entered into a fourth amended and restated $2.4 billion credit facility with a
syndicate of banks, which replaced the pre-existing $1.75 billion amended credit facility, consisting of a five-year $400.0 million revolving credit facility, a six-year $400.0 million term loan and a seven-year $1.6 billion term loan. The revolving
facility and the $400.0 million term loan bear interest at 2.25 percent over the Adjusted LIBOR rate, as defined (4.81 percent at February 24, 2005) and the $1.6 billion term loan bears interest at 2.50 percent over the Adjusted LIBOR rate, as
defined (5.06 percent at February 24, 2005).



Proceeds from the
loans under the new credit facility were used to finance the payment of the $1.89 billion stockholder dividend and to refinance loans under the pre-existing revolving credit facility. The new revolving credit facility will be used for general
corporate purposes.



As of February 24, 2005, the term loans
under the amended credit facility had an outstanding balance of $1.984 billion. Scheduled amortization of the term loans is as follows (in millions):



|      |  |   |        
|----- |  | - | -------
|2005  |  | $ | 64.0   
|2006  |  |   | 64.0   
|2007  |  |   | 64.0   
|2008  |  |   | 64.0   
|2009  |  |   | 64.0   
|2010  |  |   | 164.0  
|2011  |  |   | 1,500.0
|      |  |   |        
|Total |  | $ | 1,984.0
|      |  |   |        



As of February 24,
2005, we had $379.9 million, including commercial letters of credit, available under our revolving facility. The revolving facility matures on April 30, 2009.



Our credit facility contains various covenants, including limitations on indebtedness, dividends and capital expenditures, and maintenance of certain
financial ratios. Additionally, the credit facility requires mandatory prepayments under certain conditions. Restricted net assets of MGM Studios and Orion at December 31, 2004 are approximately $2.4 billion. Although we are in compliance with all
terms of our credit facility, there can be no assurances that we will remain in compliance with such covenants or other conditions under our credit facility in the future.



48



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Cash Provided by Operating Activities.    In 2004, cash provided by operating
activities was $140.8 million compared to cash provided by operating activities of $192.5 million in 2003. Cash provided by operating activities included film and television production and distribution costs of $683.7 million in 2004 as compared to
$840.5 million in 2003.



Cash Used In Investing
Activities.    In 2004, cash used in investing activities was $18.2 million, which included property and equipment purchases of $15.5 million and advances to affiliates of $4.7 million, partially offset by dividends received
from equity investees of $2.0 million. In 2003, cash provided by investing activities was $477.6 million, which included the receipt of $497.3 million (net of selling costs) from the sale of our 20 percent equity interest in three cable channels, an
additional $10.0 million in dividends received from the cable channels and $6.5 million collected from the maturity of short-term investments, partially offset by property and equipment purchases of $27.5 million, $5.1 million in other non-recurring
costs and advances to affiliates of $3.6 million.



Cash Used
in Financing Activities.    In 2004, cash used in financing activities was $67.3 million, which included $1.89 billion for the payment of the stockholder dividend on May 17, 2004, $171.0 million for the Dutch Auction tender
offer, $10.4 million for the acquisition of treasury shares under our share repurchase program and $19.4 million of financing fees paid for our new credit facilities, partially offset by $1.98 billion of net bank borrowings as well as $43.1 million
collected from the issuance of our common stock to related parties. In 2003, cash used in financing activities was $1.20 billion, which included the repayment of our term loans of $1.15 billion and the cost of acquisition of treasury stock of $49.8
million.



Commitments.    Future
minimum annual commitments under bank and other debt agreements, non-cancelable operating leases, employment agreements, creative talent agreements and commercial letters of credit as of December 31, 2004 are as follows (in thousands):



|                           |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |           |  |   |          
|-------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | --------- |  | - | ---------
|                           |  | 2005 |         | 2006 |   | 2007    |  | 2008 |        | 2009 |   | Thereafter |  | Total
|Bank and other debt        |  | $    | 64,000  |      | $ | 64,000  |  | $    | 64,000 |      | $ | 64,000     |  | $     | 64,000 |  | $ | 1,664,000 |  | $ | 1,984,000
|Operating leases           |  |      | 28,216  |      |   | 29,128  |  |      | 30,049 |      |   | 30,700     |  |       | 31,043 |  |   | 231,294   |  |   | 380,430  
|Employment agreements      |  |      | 55,419  |      |   | 31,185  |  |      | 5,030  |      |   |           |  |       |       |  |   |          |  |   | 91,634   
|Creative talent agreements |  |      | 71,353  |      |   | 12,440  |  |      | 38     |      |   |           |  |       |       |  |   |          |  |   | 83,831   
|Letters of credit          |  |      | 20,123  |      |   |        |  |      |       |      |   |           |  |       |       |  |   |          |  |   | 20,123   
|                           |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |           |  |   |          
|Total                      |  | $    | 239,111 |      | $ | 136,753 |  | $    | 99,117 |      | $ | 94,700     |  | $     | 95,043 |  | $ | 1,895,294 |  | $ | 2,560,018
|                           |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |           |  |   |          



We do not expect our
obligations for property and equipment expenditures, including the purchase of computer systems and equipment and leasehold improvements, to exceed $35.0 million per year.



We are obligated to fund 50 percent of the expenses of MGM Networks Latin America up to a maximum of $25.25 million. We have
funded $24.8 million under such obligation as of December 31, 2004. Although historically MGM Latin America has incurred losses from operations, we have not provided any additional cash funding to the joint venture since 2002. Based on MGM Latin
Americas current business plan, the joint venture is expected to remain cash self-sustaining into the foreseeable future, unless business conditions change. At this time, we are not forecasting any additional cash commitment to MGM Latin
America. Additionally, we have analyzed the recoverability of our investment in MGM Latin America based on a discounted future cash flow model and have determined that no write-down is necessary.



We are committed to fund our share of the operating expenses of certain joint
ventures, as required. These joint ventures include Movielink, LLC, a joint venture established to create an on-demand movie service via digital delivery for broadband internet users in the United States in which we own a 20 percent ownership
interest with four other major studios, as well a one-seventh ownership interest we hold in NDC, LLC, a partnership created with six other major studios to develop and deploy digital cinema technology and equipment



49



---

in theatres. We are obligated to fund $30.0 million to Movielink for our share of the ventures operating expenses over a five year term ending in
August 2006. As of December 31, 2004, we have funded $20.2 million of this commitment. As of December 31, 2004, we have funded $1.2 million regarding our interest in NDC, LLC. As of December 31, 2004, we have no significant future cash funding
requirements to any of our cable channel or other joint ventures.



Anticipated Needs.    Our current strategy and business plan call for substantial ongoing investments in the production of new feature films and television programs. Furthermore, we may wish to continue to make
investments in new distribution channels to further exploit our motion picture and television library. Currently, we would require additional sources of financing if we decided to make any additional significant investments in new distribution
channels. We plan to continue to evaluate the level of such investments in the context of the capital available to us and changing market conditions. Upon and after consummation of the merger agreement with LOC Acquisition Company, our business
strategy is likely to change significantly.



We believe that
the amounts available from cash on hand, the unused portion of our revolving facility, and from operating cash flow will be adequate for us to conduct our operations in accordance with our business plan for at least the next 12 months. This belief
is based in part on the assumption that our future releases will perform as planned. Any significant decline in the performance of our films could adversely impact our cash flows and require us to obtain additional sources of funds.



If necessary in order to manage our cash needs, we may also delay or alter
production or release schedules or seek to reduce our aggregate investment in new film and television production costs. There can be no assurance that any such steps would be adequate or timely, or that acceptable arrangements could be reached with
third parties if necessary. In addition, although these steps would improve our short-term cash flow and, in the case of partnering, reduce our exposure should a motion picture perform below expectations, such steps could adversely affect long-term
cash flow and results of operations in subsequent periods.



Item
7A.    Quantitative and Qualitative Disclosures About Market Risk



We are exposed to the impact of interest rate changes as a result of our variable rate long-term debt. Historically, we have entered into interest rate swap agreements whereby we agree with other parties to exchange,
at specified intervals, the difference between fixed-rate and floating-rate amounts calculated by reference to an agreed notional principal amount. As of February 24, 2005, the outstanding balance of $1.98 billion under our amended credit facility
was exposed to interest rate risk. Our amended credit facility requires that by October 23, 2005 we enter into interest rate swaps or other appropriate hedging arrangements to convert to fixed rate or otherwise limit the floating rate interest rate
risk on at least 331/3percent of term loans outstanding for a period of not less than three years. As of
February 24, 2005, we had not entered into any such arrangements. We will continue to evaluate strategies to manage the impact of interest rate changes on earnings and cash flows.



50



---

We are subject to market risks resulting from fluctuations in foreign currency exchange rates because
approximately 25 percent of our revenues are denominated, and we incur certain operating and production costs, in foreign currencies. In certain instances, we enter into foreign currency exchange contracts in order to reduce exposure to changes in
foreign currency exchange rates that affect the value of our firm commitments and certain anticipated foreign currency cash flows. We currently intend to continue to enter into such contracts to hedge against future material foreign currency
exchange rate risks. The following table provides information about our foreign currency forward contracts outstanding at December 31, 2004 (in thousands, except spot and forward rates):



|                                       |  |                                                                   |       |                                         |   |  
|-------------------------------------- |  | ----------------------------------------------------------------- | ----- | --------------------------------------- | - | -
|                                       |  | Amounts Scheduledfor Maturity for the Year EndedDecember 31, 2005 |       | EstimatedFair Value atDecember 31, 2004
|Foreign Currency Forward Contracts:    |  |                                                                   |       |                                         |   |  
|Contract amount (receive EUR, pay $US) |  | $                                                                 | 28    |                                         | $ | 
|Spot rate                              |  |                                                                   | 1.356 |                                         |   |  
|Forward rate                           |  |                                                                   | 1.354 |                                         |   |  



Item
8.    Financial Statements and Supplementary Data



The Reports of Independent Auditors, our Consolidated Financial Statements and Schedules and Notes thereto appear in a separate section of this Form 10-K (beginning on Page 73 following Part IV). The index to our
Consolidated Financial Statements is included in Item 15.



51



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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None



Item 9A.    Controls and Procedures



Evaluation of Disclosure Controls and Procedures



We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.



As of the end of the period covered by this report (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation
Date, our disclosure controls and procedures were effective at the reasonable assurance level.



Design and Evaluation of Internal Control Over Financial Reporting



Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of managements assessment of the design and effectiveness of its
internal controls as part of this Annual Report on Form 10-K for the year ended December 31, 2004. Our independent registered public accounting firm also attested to, and reported on, managements assessment of the effectiveness of internal
control over financial reporting. Managements report and the independent registered public accounting firms attestation report are included in our 2004 Financial Statements under the captions entitled Managements Report on
Internal Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.



Changes in Internal Control Over Financial Reporting



There has been no change in our internal controls over financial reporting during the year ended December 31, 2004 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reports.



Item 9B.    Other Information



Not applicable



52



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PART III



Item 10. Directors and Executive Officers of Registrant



The following table sets forth the name of each director and executive officer of the Company and provides information concerning each such persons
principal occupation for at least the past five years, age as of February 25, 2005 and certain other matters.



|                      |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------- |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                  |  | Age |  | Principal Occupation and Other Directorships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Alex Yemenidjian      |  | 49  |  | Mr. Yemenidjian has been Chairman of the Board and Chief Executive Officer of the Company since April 1999 and has been a director of the Company since November 1997. Mr. Yemenidjian currently
serves as a director of MGM MIRAGE (formerly MGM Grand, Inc.), a position he has held since 1989. From July 1995 through December 1999, Mr. Yemenidjian served as President of MGM MIRAGE. Mr. Yemenidjian also served MGM MIRAGE in other capacities
during such period, including as Chief Operating Officer from June 1995 until April 1999 and as Chief Financial Officer from May 1994 to January 1998. In addition, Mr. Yemenidjian served as an executive of Tracinda from January 1990 to January 1997
and from February 1999 to April 1999.
|                      |  |    
|Christopher J. McGurk |  | 48  |  | Mr. McGurk has been Vice Chairman of the Board and Chief Operating Officer of the Company since April 1999. From November 1996 until joining the Company, Mr. McGurk served in executive
capacities with Universal Pictures, a division of Universal Studios Inc., most recently as President and Chief Operating Officer. Prior to joining Universal, Mr. McGurk served eight years in executive capacities, including as President, Motion
Pictures Group, Walt Disney Studios, a division of The Walt Disney Company, from 1994 to 1996 and as Executive Vice President and Chief Financial Officer thereof from 1990 to 1994.                                                                                                                    
|                      |  |    
|James D. Aljian       |  | 72  |  | Mr. Aljian has been a director of the Company since October 1996. Mr. Aljian has served as an executive of Tracinda since October 1987. In addition, Mr. Aljian serves on the board of
directors of MGM MIRAGE. Mr. Aljian was a director of Chrysler Corporation from February 1996 to November 1998 and was a member of shareholders committee of DaimlerChrysler AG from November 1998 to December 2000.                                                                                                                                                                                                                                                                                                                                         
|                      |  |    
|Willie D. Davis       |  | 70  |  | Mr. Davis has been a director of the Company since November 1998. Mr. Davis is President and a director of All-Pro Broadcasting, Inc., an AM and FM radio broadcasting company. Mr. Davis has
served on the board of directors of MGM MIRAGE since 1989 and serves on the boards of directors of Sara Lee Corporation, Johnson Controls, Inc., Alliance Bank, Dow Chemical Company, Checkers Drive-In Restaurants, Inc., Strong Fund, Wisconsin Energy
Inc. and MANPOWER INC. and served on the board of directors of Bassett Furniture Industries, Incorporated, from January 1998 to December 2004.                                                                                                                                                
|                      |  |    
|Michael R. Gleason    |  | 50  |  | Mr. Gleason is engaged in personal investments and has been a director and part-time employee of the Company since August 2000 and was a director of the Company from October 1996 until September
1998. Mr. Gleason has been President of Celsus Financial Corp., a Delaware corporation, since July 1996. Mr. Gleason also served as President of MPK Capital, Inc., the general partner of Culmen Group, L.P., a Texas limited                                                                                                                                                                                                                                                                                                                    



53



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|                       |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                   |  | Age |  | Principal Occupation and Other Directorships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                       |  |     |  | partnership, from November 1993 until January 2002 and as a director and Chairman of the Board of Change Technology Partners, Inc. from March 2000 until February 2004 and as Chief Executive
Officer from June 2003 until February 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                       |  |    
|Alexander M. Haig, Jr. |  | 80  |  | Mr. Haig has been a director of and consultant to the Company since November 1998. Mr. Haig is Chairman of Worldwide Associates Inc., an international business advisory firm. In addition, Mr.
Haig has served on the board of directors and as a consultant to MGM MIRAGE since 1990 and served on the board of directors of DOR BioPharma, Inc. from January 2003 to November 2004, SDC International, Inc. from September 2001 to July 2003 and of
INDEVUS Pharmaceuticals Inc. from January 1990 to September 2003. Mr. Haig is the host of the weekly television program, World Business Review.                                                                                                                                                                                                                                                                                                                                                                   
|                       |  |    
|Kirk Kerkorian         |  | 87  |  | Mr. Kerkorian has been a director of the Company since October 1996 and has had a professional relationship with MGM Studios and its predecessors for over 25 years. Mr. Kerkorian has served as
Chief Executive Officer, President and sole director and stockholder of Tracinda for more than the past five years. In addition, Mr. Kerkorian serves on the board of directors of MGM MIRAGE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                       |  |    
|Frank G. Mancuso       |  | 71  |  | Mr. Mancuso has been a director of the Company since October 1996. Mr. Mancuso is Chairman of the Corporate Board of the Motion Picture and Television Fund. Mr. Mancuso was Chairman of the
Board and Chief Executive Officer of the Company from October 1996 to April 1999 and was the Chairman of the Board and Chief Executive Officer of MGM Studios from July 1993 to April 1999. Prior to joining MGM Studios, Mr. Mancuso was Chairman
and Chief Executive Officer of Paramount Pictures Corporation from September 1984 to May 1991, having served Paramount in numerous other capacities beginning in 1959.                                                                                                                                                                                                                                                                                                                                                   
|                       |  |    
|A. N. Andy Mosich    |  | 76  |  | Dr. Mosich has been a director of the Company since May 2003. Dr. Mosich is Professor of Accounting Emeritus, School of Business Administration, University of Southern California, having
held numerous positions in the School of Business Administration and the Graduate School of Business since 1964. Professor Mosich is a recognized expert in the field of accounting and has co-authored five widely-used accounting textbooks, published
numerous articles and served on a number of committees with such organizations as the American Institute of Certified Public Accountants, the American Accounting Association and the California Society of CPAs. He has served on the boards of
directors of Olympic National Bancorp, Western Waste Industries, Inc. and Strategic Mortgage Investments, Inc. and as a Commissioner of the City of Los Angeles Quality and Productivity Commission. He currently serves on the board of the Bill Hannon
Foundation.
|                       |  |    
|Priscilla Presley      |  | 59  |  | Ms. Presley has been a director of the Company since November 2000. Ms. Presley has served on the board of directors of Sports Entertainment Enterprises Inc. since February 2005. Ms. Presley has
served as Chairperson and President of Elvis Presley Enterprises, Inc. since 1982. In addition to being an actress, author and producer, Ms. Presley has been President of Graceland Enterprises, Inc. since 1979. Concurrently, starting in 1988, Ms.
Presley has been the developer and spokesperson for an international fragrance line.                                                                                                                                                                                                                                                                                                                                                                                                                           



54



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|                     |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                 |  | Age |  | Principal Occupation and Other Directorships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Henry D. Winterstern |  | 47  |  | Mr. Winterstern has been a director of the Company since February 2001. Mr. Winterstern co-founded Capital Entertainment in June 2001 and since then has been a managing partner of such firm.
Since 1993, Mr. Winterstern has been the owner and President of Winterstern & Associates Inc., an investment firm specializing in commercial transactions in the real estate and media sectors. Between 1991 and 1993, Mr. Winterstern served as an
advisor to the North American Trust Co., the National Trust Co. and the Ultramar Corporation. Prior to 1991, Mr. Winterstern served as Senior Associate with the Edgecombe Group, the finance and realty arm of the North American Life Assurance Co. of
Canada. Mr. Winterstern served on the board of directors of the Consoltex Group from May 1996 to October 1999 and as Vice Chairman from May 1997 to October 1999. Mr. Winterstern serves on the board of directors of dick clark productions, inc. He
served on the boards of directors of Mosaic Media Group, Inc. and Mosaic Music Publishing LLC until December 2003 and was Co-Chairman of Lakeshore Entertainment LLC until August 2003. Mr. Winterstern has served as Chairman of Wet Seal since August
2004.
|                     |  |    
|Jerome B. York       |  | 66  |  | Mr. York has been a director of the Company since October 1996. Mr. York is Chief Executive Officer of Harwinton Capital Corporation, a private investment company which he controls. From
February 2000 to September 2003, he was Chairman, President and Chief Executive Officer of MicroWarehouse, Inc., a reseller of computer hardware, software and peripheral products. Mr. York previously served as Vice Chairman of Tracinda from
September 1995 to October 1999 and as a director of MGM MIRAGE from November 1995 to May 2002. Prior to joining Tracinda, Mr. York served as Senior Vice President and Chief Financial Officer of IBM Corporation from May 1993 to September 1995 and as
a director of IBM Corporation from January 1995 to September 1995. Prior thereto, Mr. York served as Executive Vice President-Finance and Chief Financial Officer of Chrysler Corporation from May 1990 to May 1993 and as a director of Chrysler
Corporation from April 1992 to May 1993. In addition, Mr. York serves on the boards of directors of Apple Computer, Inc. and Tyco International Ltd.                                                                                                                    
|                     |  |    
|William A. Jones     |  | 63  |  | Mr. Jones has been Senior Executive Vice President and Secretary since June 1997 and, prior thereto, served as Executive Vice PresidentCorporate Affairs and Secretary since January
1995. Mr. Jones served as Executive Vice President, General Counsel and Secretary from May 1991 to January 1995 and as General Counsel and Secretary of our predecessors since 1983. Mr. Jones was a director of MGM-Pathe from June 1991 to January
1992.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                     |  |    
|Jay Rakow            |  | 52  |  | Mr. Rakow has been Senior Executive Vice President and General Counsel since August 2000. From May 1988 to l993 and from l996 to 2000, Mr. Rakow was a partner in the law firm of
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP. From 1993 to 1996, Mr. Rakow took a leave from the firm to become Senior Vice President and General Counsel of Paramount Pictures Corporation. Prior to May 1988 Mr. Rakow was with
the law firm of Wyman, Bautzer, Christensen, Kuchel & Silbert.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                     |  |    
|Daniel J. Taylor     |  | 48  |  | Mr. Taylor has been Senior Executive Vice President and Chief Financial Officer since June 1998 and, prior thereto, was Executive Vice PresidentCorporate Finance since August
1997. From May 1991 to July 1997, Mr. Taylor served as an executive of Tracinda. Prior thereto, Mr. Taylor served as Vice PresidentTaxes and in various other capacities at our predecessor from 1985 to May 1991.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



55



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Identification of Audit Committee and Financial Expert.    The Audit Committee
of the Board of Directors currently consists of Messrs. Davis, Mosich and York (Chairman), each of whom has been determined by the Board of Directors to be independent within the meaning of the current listing standards of the New York
Stock Exchange (the NYSE) and the rules and regulations of the Securities and Exchange Commission (the SEC) and free from any relationship that would interfere with the exercise of independent judgment as a committee member.
The Board of Directors has determined in its business judgment that Mr. York, by virtue of his extensive background and expertise in accounting and financial management matters, qualifies as an audit committee financial expert within the meaning of
Section 407 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission issued pursuant thereto.



Section 16(a) Beneficial Ownership Reporting Compliance



To the Companys knowledge (based solely upon a review of the copies of Section 16(a) reports prepared by or furnished to the Company and
representations that no other reports were required), during the year ended December 31, 2004, the Companys officers, directors and ten percent beneficial owners complied with all applicable Section 16(a) filing requirements.



Adoption of Code of Ethics



The Company has adopted a Code of Conduct and Conflict of Interest Policy
applicable to all directors, officers and employees, including the principal executive officer, principal financial officer and principal accounting officer, which is posted on the Companys website at www.mgm.com under the caption
Investor RelationsCode of Conduct.



To
facilitate the receipt, retention and treatment of accounting complaints, we have adopted the Ethicspoint System which can be accessed through the Companys Internet websitewww.mgm.comunder the caption
CorporateEthicspoint.com.



56



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Item 11.    Executive Compensation



Compensation Summary.    The following table sets
forth the cash and other compensation (including cash and stock bonuses) paid or awarded by the Company for the fiscal years ended December 31, 2004, 2003, and 2002, as applicable, to the Chief Executive Officer and the four other most highly
compensated executive officers of the Company (collectively, the Named Executive Officers).



Summary Compensation Table



|                                                                             |  |              |  |                             |                             |                             |                                 |        |                 |         |  |                          |  |     |  |                    |    
|---------------------------------------------------------------------------- |  | ------------ |  | --------------------------- | --------------------------- | --------------------------- | ------------------------------- | ------ | --------------- | ------- |  | ------------------------ |  | --- |  | ------------------ | ---
|Name and Principal Position                                                  |  | Year         |  | Annual Compensation         |                             | Long-Term Compensation      |                                
|                                                                             |  | Salary ($)   |  | Bonus($)(1)                 |                             | Other AnnualCompensation($) |                                 | Awards |                 | Payouts |  | All OtherCompensation($) | 
|                                                                             |  |              |  |                             | RestrictedStockAwards($)(2) |                             | SecuritiesUnderlyingOptions (#) |        | LTIPPayouts ($) |        
|Alex Yemenidjian Chairman of the Board and Chief Executive Officer           |  | 200420032002 |  | 2,500,0002,500,0002,500,000 |                             | 1,125,0001,454,442         |                                 |     |                 |      |  | 1,500,000              |  |  |  | 25,07425,00023,600 | (3)
|                                                                             |  |              |  |                             |                             |                             |                                 |       
|Christopher J. McGurk Vice Chairman of the Board and Chief Operating Officer |  | 200420032002 |  | 2,300,0002,273,4622,198,750 |                             | 1,035,0001,338,087         |                                 |     |                 |      |  | 900,000                |  |  |  | 17,83517,40014,800 | (4)
|                                                                             |  |              |  |                             |                             |                             |                                 |       
|William A. Jones Senior Executive Vice President and Secretary               |  | 200420032002 |  | 715,600675,408665,600       |                             | 315,000407,244             |                                 |     |                 |      |  | 130,000                |  |  |  | 53,99553,19553,195 | (5)
|                                                                             |  |              |  |                             |                             |                             |                                 |       
|Jay Rakow Senior Executive Vice President and General Counsel                |  | 200420032002 |  | 750,000715,385600,000       |                             | 337,500436,333             |                                 |     |                 |      |  | 250,000                |  |  |  | 21,42317,40017,400 | (4)
|                                                                             |  |              |  |                             |                             |                             |                                 |       
|Daniel J. Taylor Senior Executive Vice President and Chief Financial Officer |  | 200420032002 |  | 954,061888,461865,600       |                             | 427,500523,599             |                                 |     |                 |      |  | 250,000                |  |  |  | 17,83517,40017,400 | (4)

---

|(1) |  | Bonus awards with respect to 2004 and 2003 were made pursuant to the Employee Incentive Plan.
|--- |  | ---------------------------------------------------------------------------------------------



|(2) |  | No restricted stock awards were made to any of the Named Executive Officers during the period covered by the table.
|--- |  | -------------------------------------------------------------------------------------------------------------------



|(3) |  | Includes a contribution of $17,835 paid by the Company for the benefit of Mr. Yemenidjian under the Savings Plan and approximately $7,239 reimbursed for the cost of Mr.
Yemenidjians medical self-insurance.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Represents a contribution paid by the Company for the benefit of each of Messrs. McGurk, Rakow and Taylor under the Savings Plan.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Includes a contribution of $32,800 under the Savings Plan and $21,195 in life insurance premiums paid by the Company for the benefit of Mr. Jones. See Employment
AgreementsWilliam A. Jones.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



57



---

Option Grants and Long Term Incentive Awards.    There were no grants of stock
options or other long-term incentive awards by the Company to the Named Executive Officers for the fiscal year ended December 31, 2004. See Stock-Based PlansStock Incentive Plan.



The following table sets forth information with respect to the ownership and
value of options held by the Named Executive Officers as of December 31, 2004. No Named Executive Officer exercised any options during the fiscal year ended December 31, 2004.



Aggregated Option Exercises in Fiscal Year Ended December 31, 2004

and Option Values as of December 31, 2004



|                      |  |                           |                 |               |                   |                                                                  |                 |                                                                   |                   |            |  |          
|--------------------- |  | ------------------------- | --------------- | ------------- | ----------------- | ---------------------------------------------------------------- | --------------- | ----------------------------------------------------------------- | ----------------- | ---------- |  | ---------
|Name                  |  | SharesAcquired onExercise |                 | ValueRealized |                   | Securities Underlying UnexercisedOptions at December 31, 2004(1) |                 | Value of Unexercised In-The-Money Options at December 31, 2004(2)
|                      |  |                           | Exercisable (#) |               | Unexercisable (#) |                                                                  | Exercisable ($) |                                                                   | Unexercisable ($)
|Alex Yemenidjian      |  |                          |                 |              |                   | 10,333,336(3)                                                    |                 | 1,166,664(4)                                                      |                   | 26,186,677 |  | 4,503,323
|Christopher J. McGurk |  |                          |                 |              |                   | 3,347,500(5)                                                     |                 | 702,500(6)                                                        |                   | 8,242,000  |  | 2,702,000
|William A. Jones      |  |                          |                 |              |                   | 223,994(7)                                                       |                 | 76,006(8)                                                         |                   | 1,064,480  |  | 377,648  
|Jay Rakow             |  |                          |                 |              |                   | 300,000(9)                                                       |                 | 200,000(10)                                                       |                   | 1,041,000  |  | 709,000  
|Daniel J. Taylor      |  |                          |                 |              |                   | 557,848(11)                                                      |                 | 192,152(12)                                                       |                   | 2,068,215  |  | 1,177,916

---

|(1) |  | Represents the total number of options granted to the Named Executive Officers under the Stock Incentive Plan. Except as otherwise noted, such options vest over a period of five
years. See Stock-Based PlansStock Incentive Plan.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | In accordance with the rules of the Securities and Exchange Commission, values are determined by subtracting the exercise price of unexercised in-the-money stock options from the
fair market value of the common stock as of December 31, 2004. For purposes of this table, (i) such fair market value is deemed to be $11.88 per share, the closing sale price of the common stock on the NYSE (as reported by the Dow Jones News
Retrieval) on December 31, 2004 and (ii) the exercise price of the in-the-money options shall be deemed to be reduced by the amount of the $8.00 per share special cash dividend that optionee is entitled to receive upon exercise.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Of the options represented hereby, 5,000,000 were granted at $14.90 per share, 5,000,000 at $30.00 per share and 333,336 (vesting over a three-year period commencing May 31, 2004)
at $16.02 per share.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | The options represented hereby were granted at $16.02 per share and vest over a three-year period commencing May 31, 2004.
|--- |  | --------------------------------------------------------------------------------------------------------------------------



|(5) |  | Of the options represented hereby, 1,500,000 were granted at $14.90 per share, 1,500,000 at $30.00 per share, 147,500 at $23.19 per share and 200,000 (vesting over a three-year
period commencing May 31, 2004) at $16.02 per share.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Of the options represented hereby, 2,500 were granted at $23.19 per share and 700,000 at $16.02 per share. The latter options vest over a three-year period commencing May 31, 2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Of the options represented hereby, 213,751 were granted at $14.90 per share and 10,243 at $23.19 per share.
|--- |  | -----------------------------------------------------------------------------------------------------------



|(8) |  | Of the options represented hereby, 173 were granted at $23.19 per share and 75,833 at $14.90 per share.
|--- |  | -------------------------------------------------------------------------------------------------------



|(9) |  | Of the options represented hereby, 162,500 were granted at $16.74 per share and 137,500 at $16.02 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------

|(10) |  | Of the options represented hereby, 87,500 were granted at $16.74 per share and 112,500 at $16.02 per share.
|---- |  | -----------------------------------------------------------------------------------------------------------



|(11) |  | Of the options represented hereby, 179,168 were granted at $14.90 per share, 262,013 at $19.19 per share and 116,667 at $11.35 per share.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------



|(12) |  | Of the options represented hereby, 58,819 were granted at $19.19 per share and 133,333 at $11.35 per share.
|---- |  | -----------------------------------------------------------------------------------------------------------



58



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Pension Plans.    The Company maintains a retirement plan (the MGM
Retirement Plan) covering approximately 900 current and former employees of the Company. Effective as of December 31, 2000, the MGM Retirement Plan was amended to (i) freeze the benefit accrual service of all participants, (ii) prohibit the
further accrual of benefits thereunder and (iii) prohibit any additional employees from commencing participation therein on or after January 1, 2001. See Benefit PlansMGM Retirement Plan. Concurrently therewith, the Savings
Plan was amended to provide for the addition of certain fixed and variable contributions by the Company in shares of the common stock based on an age-weighted percentage of each participants base salary. See Benefit PlansMGM
Savings Plan.



As of December 31, 2004, Messrs.
Yemenidjian, McGurk, Jones, Rakow and Taylor had accrued annual benefits under the MGM Retirement Plan of $2,963, $2,963, $54,036, $0 and $11,127, respectively. Benefits become vested upon completion of five years of service. As of December 31,
2004, Messrs. Yemenidjian, McGurk, Jones, Rakow and Taylor were credited with 5, 5, 21, 4 and 12 years of service, respectively.



The compensation covered by the MGM Retirement Plan includes base salary only. The pension to which a participant is entitled is an annual amount equal to
(i) for each year of credited service up to 35 years, 1.55 percent of annual base salary up to the Social Security wage base ($90,000 for 2005) plus 1.9 percent of annual base salary above the Social Security wage base up to the maximum allowable
under the MGM Retirement Plan (currently $210,000 per year) and (ii) for each year of service in excess of 35 years, 1.55 percent of total annual base salary up to the maximum allowable under the MGM Retirement Plan. Benefits become vested upon
completion of five years of service. For each of the Named Executive Officers, the current compensation covered by the MGM Retirement Plan is the maximum allowable under the MGM Retirement Plan, which is substantially less than the annual
compensation for each such Named Executive Officer listed in the Salary column of the Summary Compensation Table.



Stock-Based Plans



Stock Incentive Plan.    The Company has a Stock Incentive Plan. Awards under the Stock Incentive Plan are generally not
restricted to any specific form or structure and may include, without limitation, qualified or non-qualified stock options, incentive stock options, restricted stock awards and stock appreciation rights (collectively, Awards). Awards may
be conditioned on continued employment, have various vesting schedules and accelerated vesting and exercisability provisions in the event of, among other things, a change in control of the Company such as that contemplated by the pending merger
agreement with LOC Acquisition Company. The Stock Incentive Plan is administered by the Compensation Committee, which has broad authority to amend the plan, and, in the case of the Named Executive Officers, by the Compensation Subcommittee.



Originally, 8,125,065 shares of the common stock were reserved
and authorized for issuance under the Stock Incentive Plan. An additional 27,874,935 shares (for an aggregate of 36,000,000 shares) were subsequently reserved and authorized for issuance thereunder. As of December 31, 2004, (a) 589,100 shares of the
common stock had been issued as stock bonuses under the Stock Incentive Plan (of which 177,500 were subsequently reacquired by the Company as treasury shares), (b) 1,062,787 shares of the common stock had been issued to certain holders of bonus
interests under the Senior Management Bonus Plan in lieu of cash otherwise payable with respect to the December 31, 2002 and December 31, 2003 Determination Dates (defined below) and (c) options to purchase 26,714,799 shares of the common stock were
outstanding. Of the outstanding options, 22,285,014 are held by the Named Executive Officers and certain other current and former senior employees of the Company and 4,429,785 are held by approximately 675 other employees. All of the outstanding
options generally vest over a period of five years and are not exercisable unless vested (subject in certain cases to early vesting and exercisability in certain events, including the death or permanent disability of the optionee, termination of the
optionees employment under certain circumstances or a Designated Change in Control of the Company (as defined in the Stock Incentive Plan), which would occur upon consummation of the merger with LOC Acquisition Company).



As a result of the dividend adjustment made by the
Compensation Committee in April 2004, each option granted on or before May 17, 2004 entitles the holder to receive upon exercise, in addition to the shares otherwise



59



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obtainable, a cash amount equal to $8.00 per share. Further, pursuant to action taken by the Compensation Committee in January 2005, all options outstanding
at the time the merger is consummated shall become fully vested and exercisable and shall be converted into the right to receive, with respect to each such option, the difference, if any, between the merger consideration (plus $8.00 with respect to
options granted on or before May 17, 2004) and the exercise price of the option.



Senior Management Bonus Plan.    The Company has a Senior Management Bonus Plan under which 2,420,685 bonus interests were originally granted to 18 present and former senior executives of
the Company. The Senior Management Bonus Plan is administered by the Compensation Committee of the Board of Directors and may only be amended or terminated early with the consent of the Boards of Directors of the Company and MGM Studios and persons
then holding a majority in interest of the outstanding bonus interests. As of December 31, 2004, all outstanding bonus interests have been paid or terminated and, under the terms of the Senior Management Bonus Plan, no additional bonus interests may
be granted.



Pursuant to agreements reached with the Company,
Mr. Mancuso, a member of the Board of Directors, received a total of 658,526 shares of the common stock in lieu of a cash payment of approximately $13.0 million otherwise payable under the Senior Management Bonus Plan, and Mr. Jones, a Named
Executive Officer, received 60,201 shares in lieu of a cash payment of approximately $1.2 million. Shares issued to Messrs. Mancuso and Jones were issued as stock awards pursuant to the Stock Incentive Plan.



Director Compensation



Each director who is not an employee of the Company (a Non-Employee Director), a total of nine persons, is paid
(i) $40,000 per annum for serving as a director, (ii) $15,000 per annum additional if such Non-Employee Director is a member of the Executive Committee, (iii) $2,000 per meeting for attendance at Audit Committee meetings if such Non-Employee
Director is a member of the Audit Committee, (iv) $4,000 per annum for attendance at Compensation Committee meetings if such Non-Employee Director is a member of the Compensation Committee and (v) $2,000 per meeting for attendance at meetings of the
Special Committee and the Special Trademark Committee if such Non-Employee Director is a member of such committees. No additional compensation was paid for attendance at meetings of the Compensation Subcommittee. Non-Employee Directors (other than
Mr. Kerkorian) have received non-qualified stock options from time to time in addition to other compensation for service on the Board of Directors and its committees.



Mr. Haig, a member of the Board of Directors, renders consulting services to the Company for which he receives fees at the
rate of $50,000 per annum in addition to any director fees paid to him.



Until the termination of the 1998 Non-Employee Director Stock Plan (the Director Plan) on January 20, 2005, each Non-Employee Director was entitled to elect to receive all or a portion of the cash compensation earned as a
director in the form of shares of the Companys common stock. Shares were issued in equal quarterly installments, and the actual number of shares to be received was determined based on the fair market value of the Companys common stock on
the date of issuance. Up to 100,000 shares of the common stock, subject to certain adjustments, were reserved for issuance under the Director Plan. The Director Plan was administered by the Director Plan Committee, which had the power to amend or
terminate the Director Plan, subject to certain limitations. During the 2004 plan year, which commenced the day immediately following the 2004 Annual Meeting and ended upon termination of the Director Plan on January 20, 2005, five Non-Employee
Directors participated in the Director Plan, electing to receive between 50 percent and 100 percent of their annual cash compensation as directors in shares of the common stock. As of December 31, 2004, the Company had issued an aggregate of 68,606
shares of the common stock under the Director Plan as follows: 1,759 shares were issued to Mr. Aljian; 8,321 shares were issued to Frances Ford Coppola (a former director); 8,812 shares were issued to Mr. Davis; 11,694 shares were issued to Mr.
Mancuso; 8,866 shares were issued to Ms. Presley; 9,293 shares were issued to Mr. Winterstern and 19,861 shares were issued to Mr. York.



On March 12, 2001, the Compensation Committee recommended, and the Board of Directors on March 13, 2001 approved, an amendment to the Stock Incentive Plan
(which received subsequent stockholder approval) to



60



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broaden the category of persons eligible to receive awards thereunder to include Non-Employee Directors. On May 2, 2001, following stockholder approval of
such amendment, the Board adopted a program whereby Non-Employee Directors (other than Mr. Kerkorian, who waived any rights with respect thereto) would receive an initial grant of 10,000 stock options and subsequent yearly grants of 5,000 stock
options during their respective terms as directors. As of December 31, 2004, an aggregate of 205,000 stock options had been granted to Non-Employee Directors as follows: 25,000 options to each of Messrs. Aljian, Davis, Haig, Mancuso, Winterstern,
York and Ms. Presley; 15,000 options to Mr. Coppola (a former director) and 15,000 options to Dr. Mosich.



In addition, directors who are not full-time employees of the Company receive reimbursement for out-of-pocket expenses in attending meetings of the Board
of Directors and any committees thereof on which they serve. See Item 13. Certain Relationships and Related Transactions for a description of certain transactions involving directors or their affiliates and the Company.



Employment Agreements



Alex Yemenidjian.    The Company entered into an employment agreement with Mr. Yemenidjian
effective as of April 26, 1999, as amended March 25, 2002, which provides that he will serve as Chairman of the Board and Chief Executive Officer for a term that ends on April 30, 2007. Pursuant to the agreement, Mr. Yemenidjian is entitled to a
current annual salary of $2,500,000 and an annual performance-based bonus determined in accordance with the Employee Incentive Plan. Mr. Yemenidjian holds options under the Stock Incentive Plan to purchase 5,000,000 shares of the common stock with
an exercise price of $14.90 per share and 5,000,000 shares with an exercise price of $30.00 per share. Twenty percent of the foregoing stock options vest on the first anniversary of the date of grant and thereafter at the rate of 1/60 per month
until fully vested. Mr. Yemenidjian also holds options to purchase 1,500,000 shares at an exercise price of $16.02 per share. Such additional options vest at the rate of 1/36 per month commencing April 30, 2004 until fully vested. If Mr.
Yemenidjians employment is terminated without cause or if he terminates the agreement for good reason, which includes a Designated Change in Control, his unvested stock options under the Stock Incentive Plan will vest
immediately and he will be entitled to continue to receive his annual salary and all other benefits for the remainder of the term of the employment agreement.



Christopher J. McGurk.    The Company entered into an employment agreement with Mr. McGurk effective as of April 28, 1999,
as amended March 25, 2002, which provides that he will serve as Vice Chairman of the Board and Chief Operating Officer for a term which ends on April 30, 2007. Pursuant to the agreement, Mr. McGurk is entitled to a current annual salary of
$2,300,000 through the remainder of the term and an annual performance-based bonus determined in accordance with the Employee Incentive Plan. In addition, Mr. McGurk received a one-time signing bonus of $1,700,000 and an award of 500,000 shares of
the common stock of which 177,500 were retained by the Company to cover withholding taxes. Mr. McGurk holds options under the Stock Incentive Plan to purchase 1,500,000 shares of the common stock with an exercise price of $14.90 per share, 1,500,000
shares with an exercise price of $30.00 per share and 150,000 shares with an exercise price of $23.19 per share. Twenty percent of the foregoing stock options vest on the first anniversary of the date of grant and vest thereafter at the rate of 1/60
per month until fully vested. Mr. McGurk also holds options to purchase 900,000 shares at an exercise price of $16.02 per share. Such additional options vest at the rate of 1/36 per month commencing April 30, 2004 until fully vested. If Mr.
McGurks employment is terminated without cause or if he terminates the agreement for good reason, which includes a Designated Change in Control, his unvested stock options under the Stock Incentive Plan will vest
immediately and he will be entitled to continue to receive his annual salary and all other benefits for the remainder of the term of the employment agreement.



William A. Jones.    The Company entered into an employment agreement with Mr. Jones effective as of October 10, 1996, as
amended as of July 16, 1999 and October 10, 2003, which provides that he will serve as Senior Executive Vice President for a term which ends on October 9, 2006. The Company has an option exercisable on or before 180 days prior to the expiration of
the initial term to extend the term of the agreement for two additional years at a salary at least ten percent higher than the salary immediately prior thereto. Pursuant to the agreement, as amended, Mr. Jones is entitled to a current annual salary
of $700,000, subject to adjustment



61



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as determined by the Company. Mr. Jones also received 74,209 Bonus Interests under the Senior Management Bonus Plan and holds options under the Stock
Incentive Plan to purchase 289,584 shares of the common stock with an exercise price of $14.90 per share and 10,416 shares with an exercise price of $23.19 per share. Twenty percent of the stock options vest on the first anniversary of the date of
grant and thereafter at the rate of 1/60 per month until fully vested. The Company is also obligated to maintain a term life insurance policy in the face amount of $2,000,000 on Mr. Jones life for his benefit. If Mr. Jones employment is
terminated without cause or if he terminates the agreement for good reason, he will be entitled to continue to receive his annual salary and all other benefits for the remainder of the term of the employment agreement and, in either such
event, or in the event of a Designated Change in Control, his unvested stock options under the Stock Incentive Plan will vest immediately.



Jay Rakow.    The Company entered into an employment agreement with Mr. Rakow effective as of August 7, 2000, as amended
as of March 1, 2001 and March 15, 2003 (the 2003 Amendment), which provides that he will serve as Senior Executive Vice President and General Counsel for an initial term which ends on March 14, 2006. The Company has an option exercisable
on or before 180 days prior to the expiration of the initial term to extend the term of the agreement for two additional years at a salary at least ten percent higher than the salary immediately prior thereto. Pursuant to the agreement, as amended,
Mr. Rakow is entitled to a current annual salary of $750,000, subject to adjustment as determined by the Company, and participation in the Employee Incentive Plan at a level commensurate with his position and title. Mr. Rakow holds options under the
Stock Incentive Plan to purchase 250,000 shares of the common stock with an exercise price of $16.74 per share and 250,000 shares at an exercise price of $16.02 per share. Twenty percent of the stock options vest on the first anniversary of the date
of grant and vest thereafter at the rate of 1/60 per month until fully vested. If Mr. Rakows employment is terminated without cause or if he terminates the agreement for good reason, he will be entitled to continued to receive his
annual salary and all other benefits for the remainder of the term of the employment agreement and, in either such event, or in the event of a Designated Change in Control, his unvested stock options under the Stock Incentive Plan will
vest immediately.



Daniel J.
Taylor.    The Company entered into an employment agreement with Mr. Taylor effective as of August 1, 1997, as amended as of June 15, 1998, November 1, 2000 and March 15, 2003 (the 2003 Amendment), which provides
that he will serve as Senior Executive Vice President and Chief Financial Officer for a term which ends on June 14, 2006. The Company has an option exercisable on or before December 15, 2005 to extend the term of the agreement for two additional
years at a salary at least ten percent higher than the salary immediately prior thereto. Pursuant to the agreement, as amended, Mr. Taylor is entitled to a current annual salary of $950,000, subject to adjustment as determined by the Company and an
annual performance-based bonus determined in accordance with the Employee Incentive Plan. Mr. Taylor also received 54,042 Bonus Interests under the Senior Management Bonus Plan and holds options under the Stock Incentive Plan to purchase 179,168
shares of the common stock with an exercise price of $14.90 per share, 320,832 shares with an exercise price of $19.19 per share and 250,000 shares at an exercise price of $11.35 per share. If Mr. Taylors employment is terminated without cause
by the Company or if he terminates the agreement for good reason, he will be entitled to receive his annual salary and all other benefits for the remainder of the term of the employment agreement and, in either such event, or in the
event of a Designated Change in Control, his unvested stock options under the Stock Incentive Plan will vest immediately. The consortium has announced that Mr. Taylor will be named President of the Company following consummation of the
merger.



With respect to each of the above named executives,
the merger would constitute a Designated Change in Control.



Each of the above named executives also is entitled to receive certain other benefits, which may include medical insurance and participation in the benefit plans which the Company provides for its senior officers generally. The employment
agreements of each of the above named executives also contain: (a) certain nondisclosure provisions which are effective for the term of such individuals employment with the Company and for an indefinite period thereafter and (b) a provision
prohibiting the solicitation for employment and



62



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employment of certain Company employees, or making derogatory public statements concerning the Company, for a period of one year following termination of
employment.



As a result of the dividend adjustment made by the
Compensation Committee in April 2004, each of the above-named executives is entitled to receive upon exercise, in addition to the shares otherwise obtainable, a cash amount equal to $8.00 per share. Further, pursuant to action taken by the
Compensation Committee in January 2005, the outstanding options held by each of the above-named executives as of the consummation of the merger shall become fully vested and exercisable and shall be converted into the right to receive, with respect
to each such option, the difference, if any, between $20 and the exercise price thereof.



Pursuant to the Employee Security Plan for Named Executive Officers dated as of May 14, 2004, if the employment of any of the above-named executives is terminated by the Company without cause or by such executives for
good reason, in either event within one year following a change in control, he will be entitled to receive, at his election and in lieu of any severance benefits or other rights available to him pursuant to his employment contract or otherwise, a
lump-sum cash payment equal to either (i) the base salary and other contractual monetary payments (collectively, the Base Salary) that he would have received over the remainder of the term of his employment agreement or (ii) thirty
months of his then-current Base Salary. In addition, pursuant to the Security Plan, the Company is required, if necessary, to make additional gross-up payments to offset fully the effect of any excise tax imposed by Section 4999 of the
Internal Revenue Code on any excess parachute payment, whether made pursuant to the Security Plan, his employment agreement or otherwise.



Limitation of Liability and Indemnification Matters



As permitted by applicable provisions of the Delaware General Corporation Law, the Companys Amended and Restated Certificate of Incorporation, as
amended to date, contains a provision whereunder the Company will indemnify each of the officers and directors of the Company (or their estates, if applicable), and may indemnify any employee or agent of the Company (or their estates, if
applicable), to the fullest extent permitted by Delaware law as it exists or may in the future be amended.



In addition, the Company has entered into indemnification agreements with its directors, executive officers and certain other officers providing for
indemnification by the Company, including under circumstances in which indemnification is otherwise discretionary under Delaware law. These agreements constitute binding agreements between the Company and each of the other parties thereto, thus
preventing the Company from modifying its indemnification policy in a way that is adverse to any person who is a party to such an agreement.



Further, in connection with the merger agreement, the Company has agreed, subject to limited exceptions, to indemnify Tracinda, 250 Rodeo and Mr.
Kerkorian against liabilities in connection with any actual or threatened action, suit or proceeding based upon, arising from, relating to or by reason of the execution, delivery and/or performance of the merger agreement and/or the voting and
support agreement and the transactions contemplated by those agreements.



The Company currently maintains insurance on behalf of its officers and directors against certain liabilities that may be asserted against any such officer or director in his or her capacity as such, subject to
certain customary exclusions. The amount of such insurance is deemed by the Board of Directors to be adequate to cover such liabilities.



Benefit Plans



MGM Retirement Plan



The MGM Retirement Plan is a defined benefit plan under which all contributions are made by the Company. Employees of the Company who had completed at least one year of service prior to December 31, 2000 are participants in the plan and
become vested upon completion of five years of service. Participants, or



63



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their beneficiaries, are entitled to receive benefits which have vested under the plan (i) upon their normal, early or deferred retirement or (ii) upon total
and permanent disability, death or other termination of such participants employment and after attaining normal or early retirement age. The compensation covered by the MGM Retirement Plan includes base salary only, and not bonus or other
amounts.



The Company has the right to amend or terminate the
MGM Retirement Plan at any time. If the plan is terminated, the available assets held in trust will be used to pay benefits to participants. If termination occurs when the plans assets are not sufficient to pay all benefits accrued to the date
of the termination, the assets held in trust under the plan will be allocated among participants in accordance with the provisions of the Employee Retirement Income Security Act of 1974, as amended. The Company is not liable for the payment of MGM
Retirement Plan benefits from its own assets. Upon full satisfaction of the MGM Retirement Plans liability to employees and their beneficiaries, any amount remaining in the plan will be returned to the Company.



The Internal Revenue Code requires certain provisions for benefit accruals if
a defined benefit plan becomes top heavy, that is, if the value of accrued benefits for key employees is more than 60 percent of the total value of all accrued benefits. While the Company believes that it is unlikely that the
MGM Retirement Plan will ever become top heavy, in such an event, it may become necessary to amend the MGM Retirement Plan to conform it to the applicable Internal Revenue Code requirements.



Effective as of December 31, 2000, the MGM Retirement Plan was amended to (i)
freeze the benefit accrual service of all participants, (ii) prohibit the further accrual of benefits thereunder and (iii) prohibit any additional employees from commencing participation therein on or after January 1, 2001. See Pension
Plans.



MGM Savings Plan



Employees of the Company who have completed one year of service participate
in the MGM Savings Plan (the Savings Plan), a defined contribution plan managed by MFS Investment Management. Participants may contribute a portion of their pre-tax compensation (up to a maximum of $14,000, and after-tax compensation
(subject to certain limitations) into the Savings Plan and direct the investment of such contributions. The Company matches 100 percent of such employee contributions up to four percent of such employees eligible compensation.



Effective January 1, 1998, the Savings Plan was amended to allow the matching
contributions to be made either in cash or in shares of the common stock. All subsequent matching contributions were made in shares of the common stock until January 1, 2005, thereafter matching contributions have been made in cash. The employee
contributions to the Savings Plan and the earnings thereon are always 100 percent vested. The matching contributions and any earnings thereon vest 20 percent for each full year of service and employees become 100 percent vested (i) after five years
of service, (ii) upon their total and permanent disability or (iii) upon their death.



Effective as of January 1, 2001, the Savings Plan was further amended to provide for the addition of certain fixed and variable contributions by the Company in shares of the common stock, the amount of such
contributions to be based on an age-weighted percentage of each participants base salary. Such additional contributions vest upon a participants completion of five years of service with the Company. See Pension Plans.
As of December 31, 2004, the Company had made aggregate matching and fixed contributions to the Savings Plan of 1,315,955 shares of the common stock of the Company. The Savings Plan was subsequently amended to provide that commencing with
contributions for the month of January 2005, all future contributions will be in the form of cash.



Effective October 15, 2002, the Savings Plan was further amended to eliminate the restriction on the ability of participants to transfer amounts
attributable to matching, fixed and variable contributions in their accounts from the common stock to non-employer stock investment funds.



64



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Effective as of January 1, 2005, employees age 50 or over may contribute an additional $4,000 pre-tax,
which is not eligible for a Company match.



Post-Merger Benefits



Pursuant to the merger agreement, MGM will provide, for
at least one year following completion of the merger, to persons who continue to be employed by MGM, benefits during their employment (other than equity-based benefits) that are substantially comparable in the aggregate to the benefits provided to
those employees as of the date of the merger agreement, but MGM will not be required to retain the services of MGMs current employees after the merger.



For purposes of eligibility and vesting under any employee benefit plan of MGM after the completion of the merger, persons who continue to be employed by
MGM and its subsidiaries shall receive credit for prior service with MGM to the extent that such service was recognized under any analogous employee benefit plan of MGM prior to the effective time, subject to certain limitations. After the
consummation of the merger, MGM shall honor all employment, severance, termination, retention agreements, plans, programs or arrangements of MGM that were in effect prior to the effective time, subject to the terms of the Employee Security Plan.



Pursuant to our Employee Security Plan dated as of May 14,
2004, if the employment of any employee is terminated by MGM without cause or by the employee for good reason as defined therein, in either event within one year following a change in control, such employee will be entitled to receive, at the
employees election and in lieu of any severance benefits or other rights available to such employee (including, in the case of contract employees, any right to receive their remaining base salary and other compensation under their contract), a
lump-sum cash payment based on years of service to MGM and/or on their level of seniority, with the maximum payment under such Plan (in the case of Presidents and Executive Vice Presidents) of twenty-four months of base salary. The Employee Security
Plan for Named Executive Officers is described in Item 13. Certain Relationships and Related TransactionsInterest of Certain Persons in the MergerEmployee Security Plan for Named Officers.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------



Equity Compensation Plan Information



The following table provides information as of December 31, 2004 with respect to shares of the Companys common stock that are authorized for
issuance and may be issued under the Companys equity compensation plans from time to time to employees and directors of the Company. All of the Companys equity compensation plans, including the Stock Incentive Plan, the Director Stock
Plan and the Employee Incentive Plan, have been approved by the Companys stockholders.



|                                                       |  |                                                                                          |     |  |                                                                          |       |                                                                                                                                      |           |    
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------- | --- |  | ------------------------------------------------------------------------ | ----- | ------------------------------------------------------------------------------------------------------------------------------------ | --------- | ---
|Plan Category                                          |  | Number of Securities tobe Issued Upon Exerciseof Outstanding Options,Warrants and Rights |     |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of SecuritiesRemaining Available forFuture Issuance UnderEquity CompensationPlans (ExcludingSecurities Reflected
inColumn(a)) |          
|                                                       |  | (a)                                                                                      |     |  | (b)                                                                      |       | (c)                                                                                                                                  |          
|Equity compensation plans approved by stockholders     |  | 26,714,799                                                                               | (1) |  | $                                                                        | 11.49 |                                                                                                                                      | 3,718,734 | (2)
|Equity compensation plans not approved by stockholders |  |                                                                                         |     |  |                                                                          |      |                                                                                                                                      |          |    

---

|(1) |  | Consists of shares subject to issuance upon the exercise of outstanding stock options.
|--- |  | --------------------------------------------------------------------------------------

|(2) |  | Includes 31,394 shares available for future issuance under the Director Stock Plan and 1,000,000 shares reserved for issuance under certain circumstances pursuant to the Employee
Incentive Plan.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Security Ownership of Certain Beneficial Owners and Management



The table below sets forth the beneficial ownership of the common stock of
the Company as of December 31, 2004 of (i) each director of the Company, (ii) each of the Named Executive Officers (as defined in Item 11 above), (iii) the directors and Named Executive Officers as a group and (iv) each person who at such time,
to the Companys knowledge, beneficially owned more than five percent of the outstanding shares of the common stock of the Company.



|                                                                   |  |                                              |  |                    |  
|------------------------------------------------------------------ |  | -------------------------------------------- |  | ------------------ | -
|Name and Address of Beneficial Owner(1)                            |  | AggregateNumber ofSharesBeneficiallyOwned(2) |  | Percentageof Class |  
|The Tracinda Group(3)                                              |  | 164,049,644                                  |  | 68.8               | %
|Alex Yemenidjian(4)                                                |  | 10,424,362                                   |  | 4.2                | %
|Christopher J. McGurk(5)                                           |  | 3,749,586                                    |  | 1.5                | %
|James D. Aljian(6)                                                 |  | 36,065                                       |  | *                  |  
|Willie D. Davis(6)                                                 |  | 21,400                                       |  | *                  |  
|Michael R. Gleason(7)                                              |  | 205,082                                      |  | *                  |  
|Alexander M. Haig, Jr.(6)                                          |  | 13,334                                       |  | *                  |  
|Kirk Kerkorian(8)                                                  |  | 174,049,644                                  |  | 73.0               | %
|Frank G. Mancuso(9)                                                |  | 2,378,678                                    |  | *                  |  
|A. N. Andy Mosich(6)                                             |  | 4,668                                        |  | *                  |  
|Priscilla Presley(6)                                               |  | 21,200                                       |  | *                  |  
|Henry D. Winterstern(6)                                            |  | 21,627                                       |  | *                  |  
|Jerome B. York(6)                                                  |  | 47,976                                       |  | *                  |  
|William A. Jones(10)                                               |  | 384,836                                      |  | *                  |  
|Jay Rakow(11)                                                      |  | 328,477                                      |  | *                  |  
|Daniel J. Taylor(12)                                               |  | 593,010                                      |  | *                  |  
|All directors and Named Executive Officers as a group (15 persons) |  | 192,279,915                                  |  | 75.2               | %

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|* |  | Less than 1 percent.
|- |  | --------------------

|(1) |  | Unless otherwise indicated, the address for the persons listed is 10250 Constellation Blvd., Los Angeles, CA 90067.
|--- |  | -------------------------------------------------------------------------------------------------------------------



|(2) |  | The number of shares shown includes shares over which the person named has either sole or shared voting or investment power and shares as to which certain directors and executive
officers disclaim beneficial ownership. The shares of the common stock which a person has the right to acquire within 60 days of December 31, 2004 and the shares of common stock underlying options that are vested as of December 31, 2004 or that
will become vested within 60 days thereafter are deemed to be outstanding for the purpose of calculating the beneficial ownership of the holder of such options or other rights, but are not deemed to be outstanding for the purpose of computing the
beneficial ownership of any other person. As a result, the aggregate percentage ownership of the common stock shown above may exceed 100 percent.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | The Tracinda Group refers to, collectively, Tracinda, 250 Rodeo and Mr. Kerkorian as sole stockholder of Tracinda. All of the shares of the common stock held by the Tracinda Group
are pledged to a group of banks to secure a syndicated credit facility to the Tracinda Group. The address of the Tracinda Group and Mr. Kerkorian is 150 S. Rodeo Drive, Suite 250, Beverly Hills, CA 90212.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Includes: 10,416,670 shares of the common stock underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date held by a trust of which Mr.
Yemenidjian is sole trustee, 7,692 shares of the common stock allocated to Mr. Yemenidjians account in the Savings Plan (as defined in Item 11. Executive CompensationBenefit PlansMGM Savings Plan) as of December 31,
2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Includes: 3,400,000 shares of the common stock underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date, 7,511
shares of the common stock allocated to
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Mr. McGurks account in the Savings Plan as of December 31, 2004 and 342,075 shares of the common stock owned outright by Mr. McGurk.
| | -------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Includes: with respect to Messrs. Aljian, Davis, Haig, Winterstern and York and Ms. Presley, 12,334 shares of common stock, and with respect to Dr. Mosich, 3,668 shares of the
common stock, underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Includes: 204,500 shares of the common stock underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date and 582 shares of the common
stock allocated to Mr. Gleasons account in the Savings Plan as of December 31, 2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) |  | Mr. Kerkorian is the chief executive officer, president, and sole stockholder and director of Tracinda. Includes: 164,049,644 shares of the common stock held by the Tracinda Group
and 10,000,000 shares of the common stock owned directly by Mr. Kerkorian.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(9) |  | Includes: 1,758,014 shares of the common stock underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date. Also includes 7,578 shares
of the common stock owned by Mr. Mancusos children and grandchildren as to which Mr. Mancuso disclaims beneficial ownership and 613,086 shares of the common stock owned outright by Mr. Mancuso.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) |  | Includes: 230,667 shares of the common stock underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date, 14,427 shares of the common
stock allocated to Mr. Jones account in the Savings Plan as of December 31, 2004, 99,742 shares of the common stock allocated to Mr. Jones account in the MGM Deferred Compensation Plan and 40,000 shares of the common stock owned outright
by Mr. Jones. See Item 11. Executive CompensationCompensation Summary and Item 11. Executive CompensationStock-Based PlansSenior Management Bonus Plan.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) |  | Includes: 320,834 shares of the common stock underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date and 7,613 shares of the common
stock allocated to Mr. Rakows account in the Savings Plan as of December 31, 2004.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) |  | Includes: 582,222 shares of the common stock underlying options vested as of December 31, 2004 or that will become vested within 60 days of such date and 9,258 shares of the common
stock allocated to Mr. Taylors account in the Savings Plan as of December 31, 2004 and 1,530 shares of the common stock owned outright by Mr. Taylor.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13.    Certain Relationships and Related Transactions



Merger with LOC Acquisition Company



On September 23, 2004, we entered into an Agreement and Plan of Merger with
LOC Acquisition Company, a Delaware corporation owned by a consortium comprised of Sony Corporation of America, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners. Under the agreement, the
consortium will acquire MGM for $12.00 in cash per share of our common stock plus the assumption of our debt. Completion of the merger is subject to various regulatory approvals and customary closing conditions. JP Morgan Chase and Credit Suisse
First Boston have committed to provide the consortium with up to $4.25 billion of senior debt financing. The consortiums obligation to acquire MGM is conditioned upon consummation of the debt financing on the terms set forth in the commitment
letters delivered by JP Morgan Chase and Credit Suisse First Boston or substitute financing which, if the debt financing commitments become unavailable, the consortium is obligated to use its reasonable best efforts to obtain. MGMs
stockholders approved the merger at a special meeting held on December 17, 2004.



In connection with the merger agreement, we and Sony Corporation of America entered into a Deposit Agreement, dated as of September 13, 2004, as amended, pursuant to which Sony paid us a $150 million deposit. In
addition, in connection with the merger agreement, we entered into an Indemnity Agreement with Tracinda, 250 Rodeo and Mr. Kerkorian pursuant to which we will indemnify Tracinda, 250 Rodeo and Mr. Kerkorian against certain liabilities relating
to the transactions contemplated by the merger agreement.



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Under the Deposit Agreement, we must return the deposit to Sony at the effective time of the merger.
Otherwise, the deposit is nonrefundable unless (1) the merger agreement is terminated under circumstances where we are required to pay a termination fee to LOC Acquisition Company; provided that if the merger agreement is terminated by LOC
Acquisition Company because (a) our Board withdraws, or modifies in a manner adverse to LOC Acquisition Company, its recommendation that our stockholders adopt the merger agreement or recommends, approves or adopts an alternative takeover proposal,
or (b) we fail to include in the proxy statement relating to the merger (or any amendment) the recommendation of our Board that our stockholders vote in favor of the merger, or (c) a third party commences a tender or exchange offer for MGM and our
Board does not recommend rejection of the offer within ten business days or (d) our Board approves or recommends an alternative takeover proposal or approves or recommends that its stockholders tender their shares in any tender or exchange offer,
the deposit is only refundable if we enter into a binding agreement with a third party with respect to an alternative takeover proposal within nine months of termination of the merger agreement; or (2) a court has determined that there has been
material adverse effect with respect to MGM.



In addition, if
LOC Acquisition Company terminates the merger agreement because we have breached any of our covenants such that the conditions to closing cannot be satisfied and there is a final binding judgment of a court that we willfully and materially breached
the merger agreement (as to which all rights of appeal or other avenues of review have been exhausted or lapsed), then the amount of the deposit may be taken into account in determining any damages resulting from our willful and material breach.



The merger agreement presently is expected to close shortly
after the end of the first quarter of 2005. However, there can be no assurance that all of the conditions to the merger, including the conditions within our control, will be satisfied or that the merger will be completed.



Although we have no reason to believe that the merger will not be
consummated, the pendency of a merger involving a motion picture studio tends to create uncertainty in the entertainment business community. As a result, it has been more difficult for us to attract development projects, attach talent to projects,
commence productions, and implement distribution initiatives in the home video and television sales markets during the progress of merger discussions and the executory period of the merger agreement. Accordingly, in the event that the merger should
fail to be consummated, there may be a gap or reduction in the number of motion picture releases for a period of time following termination of the merger agreement until we can reinvigorate its development, production and distribution activities. In
addition, we could face a loss of personnel or a decline in morale if the merger should fail to be consummated. Such occurrences could be expected to have, at least temporarily, a significant adverse effect upon our business. In the event that, as a
result of termination of the merger agreement, we retain Sonys $150 million deposit, these adverse effects would be mitigated but there is no guarantee that the deposit alone would be sufficient to mitigate the entire negative effect of
non-consummation of the merger.



Interests of Certain Persons in the Merger



Some of our executive officers and directors have
interests in the merger in addition to their interests as stockholders of MGM which interests relate to or arise from, among other things: the continued indemnification of current directors and officers of MGM under the merger agreement and
providing these individuals with directors and officers insurance; the potential receipt of severance and retention payments; and the conversion, acceleration and cancellation of stock options.



Indemnification; Directors and Officers Insurance



As permitted by applicable provisions of the Delaware
General Corporation Law, the Companys Amended and Restated Certificate of Incorporation, as amended to date, contains a provision whereunder the Company will indemnify each of the officers and directors of the Company (or their estates, if
applicable), and may indemnify any employee or agent of the Company (or their estates, if applicable), to the fullest extent permitted by Delaware law as it exists or may in the future be amended.



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In addition, the Company has entered into indemnification agreements with its directors, executive
officers and certain other officers providing for indemnification by the Company, including under circumstances in which indemnification is otherwise discretionary under Delaware law. These agreements constitute binding agreements between the
Company and each of the other parties thereto, thus preventing the Company from modifying its indemnification policy in a way that is adverse to any person who is a party to such an agreement.



Under the merger agreement, LOC Acquisition Company has agreed that the
surviving corporation will indemnify all present and former directors and officers of MGM and its subsidiaries, acting in such capacities, to the fullest extent permitted by law, against any expenses or losses incurred in connection with any claim,
action, suit, proceeding or investigation arising out of or pertaining to matters pending, existing or occurring at or prior to the merger. LOC Acquisition Company has also agreed that the surviving corporation will cause to be maintained, for six
years after the effective date, charter and bylaw provisions with respect to elimination of liability of directors, and indemnification of officers, directors, employees and agents, that are no less favorable to the intended beneficiaries than those
contained in our certificate of incorporation and bylaws or the certificate of incorporation and bylaws of the relevant subsidiary as in effect on the date the merger agreement was signed. LOC Acquisition Company has also agreed that the surviving
corporation will honor all indemnification agreements entered into by MGM or any of its subsidiaries.



In addition, LOC Acquisition Company has agreed that the surviving corporation will provide or, in the alternative, MGM has the right to acquire, for six
years after the merger, directors and officers liability insurance in respect of acts or omissions occurring at or prior to the merger covering each person currently covered by our directors and officers liability insurance
policy on terms and in amounts no less favorable than those of our policy in effect on the date the merger agreement was signed, provided that the surviving corporation will not be required to pay annual premiums for such insurance in excess of 300
percent of our annual premium in effect on the date the merger agreement was signed and if MGM acquires the insurance prior to the closing of the merger, it may not pay a one time premium in excess of 300 percent of our annual premium in effect on
the date the merger agreement was signed.



Employee Security
Plan for Named Executive Officers



Pursuant to our
Employee Security Plan for Named Executive Officers dated as of May 14, 2004, (which we refer to as the Security Plan), if the employment of any of Alex Yemenidjian, Christopher J. McGurk, William A. Jones, Jay Rakow, Daniel J. Tayor is
terminated by MGM without cause or by such executive for good reason, in either event within one year following a change in control, he will be entitled to receive, at his election and in lieu of any severance benefits or other rights
available to him pursuant to his employment contract or otherwise, a lump-sum cash payment equal to either (i) the base salary and other contractual monetary payments, collectively referred to as, the Base Salary, that he would have
received over the remainder of the term of his employment agreement or (ii) thirty months of his then-current Base Salary. In addition, pursuant to the Security Plan, MGM is required, if necessary, to make additional gross-up payments to
a participant in the Security Plan to offset fully the effect of any excise tax imposed by Section 4999 of the Internal Revenue Code on any excess parachute payment, whether made to the participant pursuant to the Security Plan, his employment
agreement or otherwise. In general, Section 4999 imposes an excise tax on the recipient of any excess parachute payment equal to 20 percent of such payment. Under Section 280G of the Internal Revenue Code, a parachute payment is any
payment that is contingent upon a change in control. Excess parachute payments consist of the excess of parachute payments over an individuals average taxable compensation received by him from the employer during the five taxable years (or if
less, the entire period of employment) preceding the year in which the change in control occurs.



The merger will constitute a change in control under the Security Plan and Section 280G of the Internal Revenue Code. Assuming current compensation
information remains in effect, that the merger is consummated on June 30, 2005, that a termination by MGM without cause or by the executive for good reason occurs immediately thereafter and that the executive elects to receive a lump-sum payment
under the Security Plan, the



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approximate value of the cash payments due under the Security Plan to each of the executive officers, not including any payments that may be made with
respect to any excise tax, would be: Mr. Yemenidjian, $6,250,000; Mr. McGurk, $5,750,000; Mr. Jones, $1,789,000; Mr. Rakow, $1,931,250; and Mr. Taylor, $2,505,250.



Employee Incentive Plan



During its meeting on May 12, 2004, our Board of Directors determined that it was in the best interests of MGM and our stockholders that MGM be able to
make payments under our Employee Incentive Plan in respect of the 2004 and the 2005 performance periods whether or not the target performance levels for those performance periods are met. This determination by our Board, which was communicated to
our employees and approved by our compensation committee in the summer of 2004, reflects our Boards recognition that a potential change in control of MGM could cause a temporary disruption in our business which, in turn, could prevent the
target performance levels under the Employee Incentive Plan from being met.



The merger agreement does not permit us to waive the performance targets under the Employee Incentive Plan. However, Tracinda has agreed to make a capital contribution to MGM, concurrently with the closing of the
merger, in an amount (which we refer to as the bonus differential) equal to (a) the aggregate bonuses actually paid under the Employee Incentive Plan for 2004 and 2005 minus (b) the aggregate bonuses that participants in the Employee Incentive Plan
for 2004 and 2005 would have been paid if the target performance levels for such performance periods were not waived, less (c) $5.0 million, representing the amount that would otherwise have been allocated to the payment of retention bonuses to our
employees. LOC Acquisition Company has agreed that, as a result of this arrangement, MGM may make payments under our Employee Incentive Plan in respect of the 2004 and the 2005 performance periods whether or not the target performance levels for
those performance periods are met.



Based on our 2004 operating
results, the total of the bonus differential payments pursuant to this arrangement is approximately $5.1 million (after taking into account the $5.0 million that would otherwise have been allocated to the payment of retention bonuses) and our
executive officers received approximate bonus differential payments for 2004 of: Mr. Yemenidjian, $563,000; Mr. McGurk, $518,000; Mr. Jones, $158,000; Mr. Taylor, $214,000; and Mr. Rakow, $169,000. The total bonus payments that may be paid for 2005
under the Employee Incentive Plan will not exceed $24.8 million for the full year. If the merger is completed prior to the end of 2005, then the total bonus payments will be prorated. The maximum bonuses payable to our executive officers for 2005
under the Employee Incentive Plan at target levels of performance are approximately: Mr. Yemenidjian, $1,125,000; Mr. McGurk, $1,035,000; Mr. Jones $315,000; Mr. Taylor, $427,500; and Mr. Rakow, $337,500. If the merger is completed prior to the
end of 2005, these amounts will be prorated. As of the date of this report, we cannot determine the portion of these bonus payments that would not have been paid if the target performance levels for 2005 were not met.



Option Payments



In connection with the merger, we will cash out and cancel all options to
purchase shares of our common stock at a price equal to the excess, or spread, if any, of $20.00 per share over the per share exercise price of each option. The $20.00 amount was determined by adding $8.00 to the merger consideration of $12.00 per
share to take into account the $8.00 per share dividend paid to holders of MGM common stock on May 17, 2004. However, if the exercise price of an option has already been adjusted as a result of the $8.00 per share dividend paid on May 17, 2004 or if
such option was granted after May 17, 2004, then the holder of such option will receive a payment equal to the excess, or spread, if any, of $12.00 per share over the per-share exercise price of the option.



As of the record date, our executive officers and directors held options with
a positive spread (after giving effect to the $8.00 per share dividend) to purchase a total of 12,635,264 shares of common stock, all of which were granted prior to May 17, 2004. The aggregate spread for these options is approximately $60,297,977.



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Deferred Compensation Plan



Our Deferred Compensation Plan provides for certain portions of participants accounts under the plan to be paid a lump
sum upon a Change in Control (as defined in the plan). A participant earns hypothetical rates of return on his account based upon the actual investment performance of funds chosen by the participant from a list made available by MGM.
Upon a Change in Control, all amounts credited to a participants account that are attributable to bonuses payable in shares of MGM common stock pursuant to the MGM Senior Management Bonus Plan will be distributed to the participant in a lump
sum cash payment as soon as practicable after the Change in Control, unless the participant has previously made an election within a prescribed time period to receive the distribution in quarterly installments over a period of between one and 15
years. The merger would constitute a Change in Control for these purposes. Mr. Jones account includes shares of MGM common stock that are attributable to bonuses pursuant to the Senior Management Bonus Plan, and, since he has not made an
election to defer the distribution of such amounts, he will receive a lump sum payment in respect of such amounts as soon as practicable after the closing of the merger. All other amounts credited to a participants account that are not
attributable to deferrals of bonuses payable in shares of MGM common stock pursuant to the Senior Management Bonus Plan will be distributed to the participant in accordance with the otherwise applicable provisions of the Deferred Compensation Plan.



Exemption from Section 16



Pursuant to the merger agreement, the Compensation Committee has adopted,
and the Board has ratified, resolutions exempting our directors and executive officers from all liability under Section 16(b) of the Securities Exchange Act of 1934 related to the cancellation of their outstanding stock options in exchange for the
payments described above under Option Payments and the disposition of their shares of MGM common stock in exchange for the right to receive the merger consideration.



Shareholders Agreement



The following is a summary description of the material terms of the Amended and Restated Shareholders Agreement (the Shareholders Agreement)
dated as of August 4, 1997, as amended, by and among the Company, Metro-Goldwyn-Mayer Studios Inc., Tracinda and the current and former executives specified on the signature pages thereto (such specified persons, collectively,
Executives). For purposes of the Shareholders Agreement, any shares of the common stock beneficially owned, directly or indirectly, by any member of the Tracinda Group or by Mr. Kerkorian will be deemed to be owned by the Tracinda Group.



Tag-Along Rights.    The Tracinda
Group has agreed to be bound by certain tag-along restrictions with respect to certain transfers of its shares of the common stock. Subject to certain exceptions, if any member of the Tracinda Group desires to transfer shares of the
common stock beneficially owned by it, directly or indirectly, in whole or in part (a Tag-Along Sale), then each Executive shall have the right, but not the obligation, (i) to exercise certain options held by such Executive pursuant to
the Stock Incentive Plan (as defined below) to the extent required to realize the tag-along rights of such Executive and (ii) to elect that such member of the Tracinda Group be obligated to require, as a condition to such Tag-Along Sale,
that the proposed purchaser purchase from each such electing Executive a proportional number of shares.



Registration Rights.    Subject to certain exceptions and conditions, the Tracinda Group and the Executives have the right to
make up to three requests, in the case of the Tracinda Group, and up to two requests with respect to all of the Executives, for registration (Demand Registration) under the Securities Act of 1933, as amended (the Securities
Act), of all or part of the common stock or certain other securities (the Registrable Securities) held by them. Any request for a Demand Registration must include such Registrable Securities with an estimated value of no less than
$50 million. Demand Registration requests may be for shelf registrations covering sales on a delayed or continuous basis. The Tracinda Group has exercised one of its Demand Registration rights.



In addition, if the Company proposes to register any of its equity securities
under the Securities Act (other than (i) a registration on Form S-4 or Form S-8 or (ii) a registration in connection with a pro rata distribution of



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rights to subscribe for shares of the common stock), whether or not for sale for its own account, then, subject to certain exceptions and conditions, each
member of the Tracinda Group and each of the Executives shall be entitled to request that the Registrable Securities of the same class beneficially owned by such party be included in such registration (a Piggyback Registration).



The Company will pay all of the expenses of any Demand or
Piggyback Registration, including the fees and expenses of a single counsel retained by the selling stockholders; however, each selling stockholder will be responsible for the underwriting discounts and commissions and transfer taxes in connection
with shares sold by such stockholder. Each selling stockholder and the underwriters through whom shares are sold on behalf of a selling stockholder will be entitled to customary indemnification from the Company against certain liabilities, including
liabilities under the Securities Act. See Item 13. Certain Relationships and Related TransactionsOther Transactions with Tracinda and Affiliates.



Certain Holdback Agreements.    The Tracinda Group and each of the Executives have agreed, under
certain circumstances, if requested by the Company or any managing underwriters of a registration of securities of the Company, not to effect any public sale or distribution (including sales pursuant to Rule 144 under the Securities Act) of equity
securities of the Company, or any securities convertible into or exchangeable or exercisable for equity securities, for a period not to exceed the period commencing with the date seven days prior to and ending with the date 180 days after the
effective date of any underwritten registration by the Company of the securities (except as part of such underwritten registration). The Company has agreed to a similar restriction (except as part of such underwritten registration or pursuant to
registrations on Form S-4 or Form S-8 or any successor forms) and to use its best efforts to cause certain holders of its capital stock (other than in a registered public offering) to so agree.



Other Transactions with Tracinda and its Affiliates



In connection with the merger agreement, the Company has agreed, subject to
limited exceptions, to indemnify Tracinda, 250 Rodeo and Mr. Kerkorian against liabilities in connection with any actual or threatened action, suit or proceeding based upon, arising from, relating to or by reason of the execution, delivery and/or
performance of the merger agreement and/or the voting and support agreement and the transactions contemplated by those agreements.



Pursuant to the Contribution Agreement between the Company and Tracinda, dated as of November 18, 2004, Tracinda has agreed to make a capital contribution
to the Company, concurrently with the closing of the merger, in an amount (which we refer to as the bonus differential) equal to (a) the aggregate bonuses actually paid under the Employee Incentive Plan for 2004 and 2005 minus (b) the aggregate
bonuses that participants in the Employee Incentive Plan for 2004 and 2005 would have been paid if the target performance levels for such performance periods were not waived, less (c) $5.0 million, representing the amount that would otherwise have
been allocated to the payment of retention bonuses to employees. Based on our operating results for the year ended December 31, 2004, the bonus differential for 2004 is approximately $5.1 million (after taking into account the $5.0 million that
would otherwise have been allocated to the payment of retention bonuses). The bonus differential for 2005 cannot yet be computed.



In February 1980, our predecessor-in-interest granted to a predecessor-in-interest of MGM MIRAGE an exclusive open-ended royalty-free license to use the
trademark MGM, as well as certain stylized lion depictions, in its resort hotel and/or gaming businesses and other businesses not related to filmed entertainment. This license was amended in 1998. In June 2000, the license was further amended to
allow MGM MIRAGE to use the trademark MGM in combination with the trademark MIRAGE to the same extent that it was permitted theretofore with regard to the MGM Grand trademark. In consideration of this further grant of rights, MGM MIRAGE agreed to
pay an annual license fee of $1.0 million. MGM MIRAGE paid us $1.0 million (in advance) in June 2000, $1.0 million in July 2001, $1.0 million in July 2002, and $1.0 million in July 2003. Beginning in the Fall of 2003, the Company entered into
discussions with MGM MIRAGE to clarify certain terms of the license and to separate ownership of the MGM MIRAGE trademarks from the Companys trademarks. In May 2004, we entered into a Trademark Coexistence and Assignment Agreement with MGM
MIRAGE whereby the



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MGM Grand trademarks were assigned to MGM MIRAGE in exchange for a broadening of the category of goods and services for which MGM has exclusivity with regard
to the use of the trademark MGM (and derivatives thereof). This agreement replaces and supersedes the above-named license (as amended), but maintains (in a separate license agreement) all of the terms and conditions (including the $1.0 million
annual payment) of the June 2000 amendment regarding the use by MGM MIRAGE of the trademark MGM in combination with the trademark MIRAGE. MGM MIRAGE paid us $1.0 million on June 30, 2004 in accordance with the provisions of this new License
Agreement.



Additionally, the Company and affiliates of
Tracinda occasionally conduct cross-promotional campaigns, in which the Companys motion pictures and video games and the affiliates hotels are promoted together; however, the Company believes that the amounts involved are not material.



The Company and MGM Grand Hotel, LLC, a subsidiary of MGM
MIRAGE, have an ongoing relationship whereby Grand Hotel can utilize key art, still photographs of artwork and one-minute film clips from certain of the Companys motion picture releases on an as-needed basis. In addition, the Company makes
several seats at certain premieres and screenings of the Companys theatrical motion picture releases available to Grand Hotel. The Company did not receive any monetary compensation for the use of these assets.



The Company periodically sells to Grand Hotel and certain of its affiliates,
on a wholesale basis, videocassettes and other merchandise such as baseball caps, clothing, keychains and watches bearing the Companys trademarks and logos for resale to consumers in retail shops located within Grand Hotels properties.
In December 2000, pursuant to a Merchandise License Agreement, the Company granted a subsidiary of MGM MIRAGE the right to use certain of the Companys trademarks and logos in connection with the retail sale of merchandise at MGM MIRAGEs
properties. The Company receives royalties based on retail sales of the licensed merchandise. The agreement has a term of five years, subject to the MGM MIRAGEs right to extend the term for one additional five-year period and its option to
terminate the agreement at any time upon 60 days notice. The licensing and royalty revenues received to date by the Company under this arrangement have not been material.



From time to time, the Company charters airplanes from MGM MIRAGE and Tracinda for use in the Companys business. The
Company believes that the terms of the charter arrangements are no less favorable to the Company than those that could be obtained from unrelated third parties. During the two years ended December 31, 2003 and 2002, the aggregate of the payments
made to MGM MIRAGE and Tracinda for such charters were approximately $91,000 and $79,000, respectively. There were no such payments in 2004.



From time to time, the Company reserves hotel rooms from MGM MIRAGE for special events. For the years ended December 31, 2004, 2003 and 2002 the aggregate
amount paid by the Company for such rooms was approximately $207,000, $305,000 and $465,000, respectively.



The Company and MGM MIRAGE have entered into various other transactions and arrangements which, individually and in the aggregate, are not material.



Other Transactions



Mr. Gleason, a member of the Board of Directors of the Company, is a
part-time employee of the Company rendering services in the areas of capital markets and corporate strategy. For such services, he is paid a salary of $40,000 per annum and reimbursement for his reasonable expenses in the performance of his duties.
In addition, Mr. Gleason holds options under the Stock Incentive Plan to purchase 55,000 shares of the common stock at an exercise price of $25.13 per share and 300,000 shares at an exercise price of $14.90 per share, granted in each case at or
above the fair market value of the common stock on the date of grant. See Item 12. Security Ownership of Certain Beneficial Owners and Management. The exercise price of the foregoing options has been effectively reduced by the amount of
the $8.00 per share special cash dividend that Mr. Gleason is entitled to receive upon exercise.



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Mr. Haig, a member of the Board of Directors of the Company, renders consulting services to the Company
for which he receives fees at the rate of $50,000 per annum.



Another motion picture studio has acquired from the Company the right, for a designated period of time, to produce a motion picture. The Company has retained the option to either co-finance such motion picture or receive a rights fee and
passive profit participation. Ms. Presley, a director of the Company, is a producer of such contemplated motion picture. During 2003, the Company paid $12,500 to a company owned by Ms. Presley in connection with such motion picture. No payments to
Ms. Presley were made during 2004 with respect to such motion picture.



The Company entered into a license arrangement in December 2004 with Capital Entertainment Enterprises with respect to certain episodes of three library television series (My Mother the Car and two
Flipper series) pursuant to which the Company has granted to Capital the right to distribute such series in DVD in return for Capitals commitments to fund the costs of clearance and re-mastering of the programs for DVD
release, to use the Company as its sub-distributor and to pay the Company a guaranteed royalty. Mr. Winterstern, a member of the Board of Directors of the Company, is a principal of Capital Entertainment Enterprises. No royalties have as yet accrued
or been paid.



In February 2004, MGM Television Entertainment
produced a direct-to-video motion picture entitled Species IIIbased on the popular sci-fi theatrical motion picture franchise. Frank Mancuso, Jr. who was a producer on Speciesand Species II also rendered producing
services on Species III. Frank Mancuso, Jr. is the son of Frank Mancuso, a current member of the MGM Board of Directors. Frank Mancuso, Jr. was paid $50,000 and received a percentage profit participation for his services on Species
III.



In August 2002, MGM Television Entertainment
commenced development of a television series based on the theatrical motion picture entitled Ronin. Pursuant to a producer employment agreement with Frank Mancuso, Jr. entered into in connection with such theatrical motion
picture, Frank Mancuso, Jr. was granted a rolling right of first negotiation to render producing services with regard to future productions based on the picture. In October 2002, Mr. Mancuso, Jr. relinquished his first negotiation right pursuant to
an agreement with MGM Television Entertainment to render producing services in connection with any future television or other non-theatrical production based on the picture. In consideration thereof, he was paid $150,000 in April 2004. Mr. Mancuso,
Jr. has certain rights with respect to certain development deals which in the aggregate are not material.



In 1994, in connection with the formation of Movie Network Channels, a joint venture in which the Company has a non-controlling interest, the Company
licensed to the joint venture certain of its current theatrical and television motion pictures, as well as a number of its library pictures, for distribution on Australian pay television. The agreement expires on June 30, 2005, with all motion
pictures covered by the agreement reverting to the Company within one year after that date, but both the Company and Movie Network Channels have the right to extend the license for a further four years. The Company receives a license fee for each
picture that is based on the number of Movie Network Channels subscribers. The Company recognized such license fee revenues of $6,363,000, $6,152,000 and $4,014,000 during the years ended December 31, 2004, 2003 and 2002, respectively. The
Company believes that the terms of the agreement are no less favorable to the Company than those contained in its licenses with unaffiliated licensees.



The Company, under various agreements, licenses the right to distribute certain motion picture and television product in the domestic television market to
the Rainbow Media cable channels, in which the Company acquired a 20 percent equity interest on April 2, 2001. The Company sold its equity interest in the Bravo Cable channel on December 5, 2002 and its interest in the remaining cable channels on
July 18, 2003. During the years ended December 31, 2003 and 2002, the Company recognized revenues of $12,421,000 and $4,768,000, respectively, under these licensing arrangements. The Company believes that the terms of these agreements are no less
favorable to the Company than those contained in its licenses with unaffiliated licensees.



The Company has equity interests ranging from five percent to 50 percent in certain television channels located in various international territories in which the Company licenses certain library pictures and
theatrical



74



---

motion pictures and television series, miniseries and made-for-television movies produced or distributed by the Company during the terms of the agreements.
The Company recognized aggregate license fees under these agreements of $22,590,000, $24,403,000 and $22,804,000 during the years ended December 31, 2004, 2003 and 2002, respectively.



The Company had a 50 percent equity interest in MGM-NBC Media, LLC which acts as agent to sell advertising time received by
the Company and NBC Enterprises, Inc. as barter ad spots as full or partial consideration from the sale of feature film and television product in the syndication market. In the years ended December 31, 2004 and December 31, 2003, the Company
incurred a sales agency fees to MGM-NBC Media Sales of $1,269,000 and $2,750,000, respectively. At December 31, 2004 and December 31, 2003, the Company had receivables from MGM-NBC Media Sales of $1,984,000 and $8,710,000, respectively, for the
distribution of its product and certain administration charges. As of June 30, 2004, the parties agreed to terminate the venture as of the end of 2004. Per the termination agreements, we assumed the sale of advertising spots for our programming in
the domestic television syndication market in July 2004. On September 30, 2004, the joint venture was terminated and all distribution agreements were terminated by December 31, 2004.



Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, a law firm of which Jay Rakow, Senior Executive Vice
President and General Counsel of the Company, was a partner, has performed extensive legal services for the Company relating to mergers and acquisitions, litigation, sales of securities, general corporate matters, real estate and other transactions
and agreements.



Item 14.    Principal Accounting Fees
and Services



Fees of Ernst & Young



The following table presents fees for professional audit services rendered
by Ernst & Young, the Companys independent auditors, for the audit of the Companys financial statements for the fiscal years ended December 31, 2004 and 2003 and fees billed for other services performed for the years ended
December 31, 2004 and 2003.



Fees for professional services by
our independent auditors for the fiscal years 2004 and 2003 in each of the following categories are as follows:



|                      |  |                |           |             |   |          
|--------------------- |  | -------------- | --------- | ----------- | - | ---------
|                      |  | Fiscal 2004    |           | Fiscal 2003
|                      |  | (in thousands)
|Audit fees(1)         |  | $              | 2,057,950 |             | $ | 908,800  
|Audit-related fees(2) |  |                | 106,500   |             |   | 679,716  
|Tax fees(3)           |  |                | 157,500   |             |   | 86,000   
|                      |  |                |           |             |   |          
|Total                 |  | $              | 2,321,950 |             | $ | 1,674,516
|                      |  |                |           |             |   |          

---

|(1) |  | Audit fees include fees associated with the annual audit, reviews of the quarterly reports on Form 10-Q, and statutory audits.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Audit-related fees principally included due diligence services, audits of employee benefit plans and audits of distribution agreements with third parties.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Tax fees included tax compliance, tax advice and tax planning.
|--- |  | --------------------------------------------------------------



Pre-Approval Policies and Procedures



The Audit Committee pre-approves all audit and non-audit services provided by the independent auditors prior to the rendition of such services. The Audit
Committee on October 21, 2002 delegated to its Chairman the authority to pre-approve the rendition of permitted non-audit services by the independent auditors, provided such pre-approval is presented to the Audit Committee at its next meeting.



75



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PART IV



Item 15.    Exhibits, Financial Statements, Schedules, and Reports on Form 8-K



(a) The following documents are filed as part of this report:



| | 1. |  | Consolidated Financial Statements
| | -- |  | ---------------------------------



The financial statements listed in the accompanying Index to Financial Statements are filed as part of this Form 10-K at pages 79 to 118.



| | 2. |  | Financial Statement Schedules
| | -- |  | -----------------------------



The financial statement schedules listed in the accompanying Index to Financial Statements are filed as part of this Form 10-K at page
119.



| | 3. |  | Exhibits
| | -- |  | --------



The exhibits listed in the accompanying Exhibit Index on pages 127 to 129 are filed as part of this Form 10-K.



(b) Reports on Form 8-K



|                                                      |  |                                                                                                                        
|----------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------
|Period or Date Filed                                  |  | Relating to                                                                                                            
|Dated and Filed February 18, 2004                     |  | Item 7. Financial Statements and Exhibits Item 9.
Regulation FD Disclosure                                             
|Dated March 15, 2004 and Filed March 16, 2004         |  | Item 5. Other Events Item 7. Financial Statements and
Exhibits                                                         
|Dated April 6, 2004 and Filed April 7, 2004           |  | Item 5. Other Events Item 7. Financial Statements and
Exhibits                                                         
|Dated April 26, 2004 and Filed April 27, 2004         |  | Item 5. Other Events Item 7. Financial Statements and
Exhibits                                                         
|Dated April 29, 2004 and Filed April 29, 2004         |  | Item 7. Financial Statements and Exhibits Item 12. Results of Operations and Financial Condition                       
|Dated and Filed May 5, 2004                           |  | Item 5. Other Events Item 7. Financial Statements and
Exhibits                                                         
|Dated May 17, 2004 and Filed May 18, 2004             |  | Item 5. Other Events Item 7. Financial Statements and
Exhibits                                                         
|Dated and Filed July 29, 2004                         |  | Item 7. Financial Statements and Exhibits Item 12. Results of Operations and Financial Condition                       
|Dated and Filed July 29, 2004                         |  | Item 7. Financial Statements and Exhibits Item 12. Disclosure of Results of Operations and Financial Condition         
|Dated September 1, 2004 and Filed September 2, 2004   |  | Item 8.01 Other Events Item 9.01 Financial Statements
and Exhibits                                                     
|Dated September 13, 2004 and Filed September 14, 2004 |  | Item 1.01 Entry Into a Material Definitive Agreement Item 8.01 Other Events Item 9.01 Financial Statements and
Exhibits
|Dated September 23, 2004 and Filed September 24, 2004 |  | Item 1.01 Entry Into a Material Definitive Agreement Item 8.01 Other Events Item 9.01 Financial Statements and
Exhibits
|Dated October 26, 2004 and Filed October 27, 2004     |  | Item 2.02 Disclosure of Results of Operations and Financial Condition Item 9.01 Financial Statements and Exhibits      
|Dated and Filed December 9, 2004                      |  | Item 7.01 Regulation FD Disclosure Item 9.01
Financial Statements and Exhibits                                         



76



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



February 25, 2005



METRO-GOLDWYN-MAYER INC.By:

/s/    ALEX
YEMENIDJIANAlex Yemenidjian Chairman of the Board of Directors 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 and in the capacities and on the dates indicated.



|                                                    |  |                                                                          |  |                  
|--------------------------------------------------- |  | ------------------------------------------------------------------------ |  | -----------------
|Signature                                           |  | Title                                                                    |  | Date             
|                                                    |  |                                                                         
|/s/    ALEX
YEMENIDJIANAlex
Yemenidjian             |  | Chairman of the Board of Directors, Chief Executive Officer and Director |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    CHRISTOPHER J.
MCGURKChristopher J.
McGurk   |  | Vice Chairman, Chief Operating Officer and Director                      |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    JAMES D. ALJIANJames D. Aljian               |  | Director                                                                 |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    WILLIE D. DAVISWillie D. Davis               |  | Director                                                                 |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    MICHAEL R.
GLEASONMichael R.
Gleason         |  | Director                                                                 |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    ALEXANDER M. HAIG,
JR.Alexander M. Haig,
Jr. |  | Director                                                                 |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    KIRK KERKORIANKirk Kerkorian                 |  | Director                                                                 |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    FRANK G.
MANCUSOFrank G. Mancuso             |  | Director                                                                 |  | February 25, 2005
|                                                    |  |                                                                         
|/s/    A.N. ANDY
MOSICHA.N. Andy
Mosich         |  | Director                                                                 |  | February 25, 2005



77



---

|                                                |  |                                                             |  |                  
|----------------------------------------------- |  | ----------------------------------------------------------- |  | -----------------
|Signature                                       |  | Title                                                       |  | Date             
|                                                |  |                                                            
|/s/    PRISCILLA
PRESLEYPriscilla Presley       |  | Director                                                    |  | February 25, 2005
|                                                |  |                                                            
|/s/    HENRY D.
WINTERSTERNHenry D.
Winterstern |  | Director                                                    |  | February 25, 2005
|                                                |  |                                                            
|/s/    JEROME B. YORKJerome B. York             |  | Director                                                    |  | February 25, 2005
|                                                |  |                                                            
|/s/    DANIEL J.
TAYLORDaniel J. Taylor         |  | Senior Executive Vice President and Chief Financial Officer |  | February 25, 2005



78



---

INDEX TO FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                                              |  | 80  
|Management Report on Internal Control over Financial Reporting                                       |  | 81  
|Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting |  | 82  
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                         |  | 83  
|Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002           |  | 84  
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2003 and 2002 |  | 85  
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002           |  | 86  
|Notes to Consolidated Financial Statements                                                           |  | 87  
|                                                                                                     | 
|Financial Statement Schedules                                                                        |  |     
|Report of Independent Registered Public Accounting Firm                                              |  | 119 
|Schedule I: Financial Information of Registrant                                                      |  | 120 
|Schedule II: Valuation and Qualifying Accounts and Reserves                                          |  | 126 



79



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Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders

Metro-Goldwyn-Mayer Inc.



We have audited the accompanying consolidated balance sheets of Metro-Goldwyn-Mayer Inc. (the Company) as of December 31, 2004
and 2003, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Metro-Goldwyn-Mayer Inc. as of December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.



As discussed in
Note 1 to the consolidated financial statements, effective January 1, 2004, the Company changed its method of accounting for stock-based compensation.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Metro-Goldwyn-Mayer
Inc.s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated February 14, 2005 expressed an unqualified opinion thereon.



Ernst & Young LLP



Los Angeles, California

February 14, 2005



80



---

Managements Report on Internal Control Over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f). Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of internal control over financial reporting
based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



Based on our evaluation under the framework in Internal ControlIntegrated Framework, management concluded that internal control over financial
reporting was effective as of December 31, 2004. Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included herein.



Metro-Goldwyn-Mayer Inc.

Los Angeles, California

February 14, 2005



|    |  |                                                                    |  |     |  |                                                                             
|--- |  | ------------------------------------------------------------------ |  | --- |  | ----------------------------------------------------------------------------
|    |  |                                                                    | 
|By: |  | /s/    ALEX YEMENIDJIAN                                            |  | By: |  | /s/    DANIEL J. TAYLOR                                                     
|    |  | Alex Yemenidjian Chairman of the Board and Chief Executive Officer |  |     |  | Daniel J. Taylor Senior Executive Vice President
and Chief Financial Officer



81



---

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting



The Board of Directors and Stockholders

Metro-Goldwyn-Mayer Inc.



We have audited managements assessment, included in the accompanying
Managements Report on Internal Control Over Financial Reporting, that Metro-Goldwyn-Mayer Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.



We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



In our opinion, managements assessment
that Metro-Goldwyn-Mayer Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Metro-Goldwyn-Mayer Inc. maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of
Metro-Goldwyn-Mayer Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2004, and our report dated
February 14, 2005 expressed an unqualified opinion thereon.



Ernst & Young LLP



Los Angeles, California

February 14, 2005



82



---

PART I. FINANCIAL INFORMATION



Item 1.    Financial Statements



METRO-GOLDWYN-MAYER INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                |  |                  |            |   |                  |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                |  | December 31,2004 |            |   | December 31,2003 |  
|ASSETS                                                                                                          |  |                  |            |   |                  |   |            |  
|Cash and cash equivalents                                                                                       |  | $                | 117,365    |   |                  | $ | 61,894     |  
|Accounts and contracts receivable (net of allowance for doubtful accounts of $29,835 and $46,671, respectively) |  |                  | 586,927    |   |                  |   | 615,907    |  
|Film and television costs, net                                                                                  |  |                  | 1,771,183  |   |                  |   | 1,788,225  |  
|Investments in and advances to affiliates                                                                       |  |                  | 21,770     |   |                  |   | 24,050     |  
|Property and equipment, net                                                                                     |  |                  | 69,282     |   |                  |   | 68,657     |  
|Goodwill                                                                                                        |  |                  | 516,706    |   |                  |   | 516,706    |  
|Restricted cash                                                                                                 |  |                  | 150,789    |   |                  |   |           |  
|Other assets                                                                                                    |  |                  | 49,779     |   |                  |   | 31,132     |  
|                                                                                                                |  |                  |            |   |                  |   |            |  
|                                                                                                                |  | $                | 3,283,801  |   |                  | $ | 3,106,571  |  
|                                                                                                                |  |                  |            |   |                  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                            |  |                  |            |   |                  |   |            |  
|Liabilities:                                                                                                    |  |                  |            |   |                  |   |            |  
|Bank and other debt                                                                                             |  | $                | 1,984,000  |   |                  | $ | 813        |  
|Accounts payable and accrued liabilities                                                                        |  |                  | 226,467    |   |                  |   | 234,397    |  
|Accrued participants share                                                                                     |  |                  | 301,069    |   |                  |   | 320,347    |  
|Income taxes payable                                                                                            |  |                  | 23,365     |   |                  |   | 37,129     |  
|Advances and deferred revenues                                                                                  |  |                  | 96,205     |   |                  |   | 72,908     |  
|Merger deposit                                                                                                  |  |                  | 150,789    |   |                  |   |           |  
|Other liabilities                                                                                               |  |                  | 179,595    |   |                  |   | 112,606    |  
|                                                                                                                |  |                  |            |   |                  |   |            |  
|Total liabilities                                                                                               |  |                  | 2,961,490  |   |                  |   | 778,200    |  
|                                                                                                                |  |                  |            |   |                  |   |            |  
|Commitments and contingencies                                                                                   |  |                  |            |   |                  |   |            |  
|Stockholders equity:                                                                                           |  |                  |            |   |                  |   |            |  
|Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued                                      |  |                  |           |   |                  |   |           |  
|Common stock, $.01 par value, 500,000,000 shares authorized, 251,960,505 shares issued                          |  |                  | 2,520      |   |                  |   | 2,520      |  
|Additional paid-in capital                                                                                      |  |                  | 2,058,827  |   |                  |   | 3,915,777  |  
|Deficit                                                                                                         |  |                  | (1,536,784 | ) |                  |   | (1,507,573 | )
|Accumulated other comprehensive income                                                                          |  |                  | 13,464     |   |                  |   | 2,046      |  
|Less: treasury stock, at cost, 13,729,671 and 7,347,530 shares, respectively                                    |  |                  | (215,716   | ) |                  |   | (84,399    | )
|                                                                                                                |  |                  |            |   |                  |   |            |  
|Total stockholders equity                                                                                      |  |                  | 322,311    |   |                  |   | 2,328,371  |  
|                                                                                                                |  |                  |            |   |                  |   |            |  
|                                                                                                                |  | $                | 3,283,801  |   |                  | $ | 3,106,571  |  
|                                                                                                                |  |                  |            |   |                  |   |            |  



The accompanying Notes
to Consolidated Financial Statements are an integral part of these consolidated statements.



83



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METRO-GOLDWYN-MAYER INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)



|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|---------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                 |  | Year Ended December 31, |            
|                                                                 |  | 2004                    |             |   | 2003 |   |             | 2002 | 
|Revenues                                                         |  | $                       | 1,724,804   |   |      | $ | 1,883,027   |      |  | $ | 1,654,102   |  
|Expenses:                                                        |  |                         |             |   |      |   |             |      |  |   |             |  
|Operating                                                        |  |                         | 865,776     |   |      |   | 983,939     |      |  |   | 1,062,956   |  
|Selling, general and administrative                              |  |                         | 809,551     |   |      |   | 882,906     |      |  |   | 671,817     |  
|Depreciation                                                     |  |                         | 15,147      |   |      |   | 17,300      |      |  |   | 20,467      |  
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|Total expenses                                                   |  |                         | 1,690,474   |   |      |   | 1,884,145   |      |  |   | 1,755,240   |  
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|                                                                 |  |                         |            
|Operating income (loss)                                          |  |                         | 34,330      |   |      |   | (1,118      | )    |  |   | (101,138    | )
|Other income (expense):                                          |  |                         |             |   |      |   |             |      |  |   |             |  
|Write-down on investment in cable channels                       |  |                         |            |   |      |   | (93,059     | )    |  |   |            |  
|Gain on sale of equity interest in cable channel                 |  |                         |            |   |      |   |            |      |  |   | 32,514      |  
|Equity in net earnings (losses) of affiliates                    |  |                         | (4,847      | ) |      |   | 310         |      |  |   | 13,561      |  
|Interest expense, net of amounts capitalized                     |  |                         | (63,601     | ) |      |   | (60,229     | )    |  |   | (79,929     | )
|Interest and other income, net                                   |  |                         | 8,411       |   |      |   | 16,148      |      |  |   | 7,432       |  
|Other non-recurring costs                                        |  |                         | (7,026      | ) |      |   | (5,099      | )    |  |   |            |  
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|Total other expenses                                             |  |                         | (67,063     | ) |      |   | (141,929    | )    |  |   | (26,422     | )
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|                                                                 |  |                         |            
|Loss from operations before benefit (provision) for income taxes |  |                         | (32,733     | ) |      |   | (143,047    | )    |  |   | (127,560    | )
|Income tax benefit (provision)                                   |  |                         | 3,522       |   |      |   | (18,714     | )    |  |   | (14,687     | )
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|Net loss                                                         |  | $                       | (29,211     | ) |      | $ | (161,761    | )    |  | $ | (142,247    | )
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|Loss per share:                                                  |  |                         |             |   |      |   |             |      |  |   |             |  
|Basic and diluted                                                |  | $                       | (0.12       | ) |      | $ | (0.66       | )    |  | $ | (0.57       | )
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  
|Weighted average number of common shares outstanding:            |  |                         |             |   |      |   |             |      |  |   |             |  
|Basic and diluted                                                |  |                         | 237,243,202 |   |      |   | 245,584,705 |      |  |   | 248,355,556 |  
|                                                                 |  |                         |             |   |      |   |             |      |  |   |             |  





The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.



84



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METRO-GOLDWYN-MAYER INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share data)



|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------- |  | --------------- |  | ------------ | - | -------------------- | ----------- | -------- | ------- | ----- |  | --------------------------- | ---------- | - | --------------------------------------- | - | ---------- | ------------------ |  | - | ------------------------ | - |  | - | ------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                              |  | Preferred Stock |  | Common Stock |   | Addl Paid-inCapital |             |          | Deficit |       |  | Compre- hensiveIncome(Loss) |            |   | Accum. OtherCompre- hensiveIncome(Loss) |   |            | Less:TreasuryStock |  |   | TotalStockholdersEquity |  
|                                                              |  | No. ofShares    |  | ParValue     |   | No. of Shares        |             | ParValue |         |       |  |                             |            |  
|Balance December 31, 2001                                     |  |                |  | $            |  |                      | 239,629,500 |          | $       | 2,396 |  | $                           | 3,717,767  |   |                                         | $ | (1,203,565 | )                  |  | $ |                         |   |  | $ | (27,116 | ) |  | $ |         |   |  | $ | 2,489,482  |  
|Common stock issued to outside parties, net                   |  |                |  |              |  |                      | 10,550,000  |          |         | 106   |  |                             | 164,665    |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | 164,771    |  
|Acquisition of treasury stock, at cost                        |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (32,709  | ) |  |   | (32,709    | )
|Contribution of treasury stock to deferred compensation plan  |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (7,608   | ) |  |   | (7,608     | )
|Common stock issued to directors, officers and employees, net |  |                |  |              |  |                      | 1,781,005   |          |         | 18    |  |                             | 32,491     |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   | 1,513    |   |  |   | 34,022     |  
|Comprehensive income (loss):                                  |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Net loss                                                      |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   | (142,247   | )                  |  |   | (142,247                 | ) |  |   |        |   |  |   |         |   |  |   | (142,247   | )
|Unrealized gain on derivative instruments                     |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 13,195                   |   |  |   | 13,195  |   |  |   |         |   |  |   | 13,195     |  
|Unrealized loss on securities                                 |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | (585                     | ) |  |   | (585    | ) |  |   |         |   |  |   | (585       | )
|Change in unfunded pension obligation                         |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | (3,994                   | ) |  |   | (3,994  | ) |  |   |         |   |  |   | (3,994     | )
|Foreign currency translation adjustments                      |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 139                      |   |  |   | 139     |   |  |   |         |   |  |   | 139        |  
|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Comprehensive loss                                            |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | (133,492                 | ) |  |   |         |   |  |   |          |   |  |   |            |  
|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Balance December 31, 2002                                     |  |                |  |              |  |                      | 251,960,505 |          |         | 2,520 |  |                             | 3,914,923  |   |                                         |   | (1,345,812 | )                  |  |   |                         |   |  |   | (18,361 | ) |  |   | (38,804  | ) |  |   | 2,514,466  |  
|Acquisition of treasury stock, at cost                        |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (49,785  | ) |  |   | (49,785    | )
|Common stock issued to directors, officers and employees, net |  |                |  |              |  |                      |            |          |         |      |  |                             | 854        |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   | 4,190    |   |  |   | 5,044      |  
|Comprehensive income (loss):                                  |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Net loss                                                      |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   | (161,761   | )                  |  |   | (161,761                 | ) |  |   |        |   |  |   |         |   |  |   | (161,761   | )
|Unrealized gain on derivative instruments                     |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 16,629                   |   |  |   | 16,629  |   |  |   |         |   |  |   | 16,629     |  
|Unrealized loss on securities                                 |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 1,303                    |   |  |   | 1,303   |   |  |   |         |   |  |   | 1,303      |  
|Change in unfunded pension obligation                         |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | (356                     | ) |  |   | (356    | ) |  |   |         |   |  |   | (356       | )
|Foreign currency translation adjustments                      |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 2,831                    |   |  |   | 2,831   |   |  |   |         |   |  |   | 2,831      |  
|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Comprehensive loss                                            |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | (141,354                 | ) |  |   |         |   |  |   |          |   |  |   |            |  
|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Balance December 31, 2003                                     |  |                |  |              |  |                      | 251,960,505 |          |         | 2,520 |  |                             | 3,915,777  |   |                                         |   | (1,507,573 | )                  |  |   |                         |   |  |   | 2,046   |   |  |   | (84,399  | ) |  |   | 2,328,371  |  
|Payment of stockholder dividend                               |  |                |  |              |  |                      |            |          |         |      |  |                             | (1,892,983 | ) |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | (1,892,983 | )
|Acquisition of treasury stock, at cost                        |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (181,370 | ) |  |   | (181,370   | )
|Common stock issued to directors, officers and employees, net |  |                |  |              |  |                      |            |          |         |      |  |                             | 1,419      |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   | 50,053   |   |  |   | 51,472     |  
|Adoption of SFAS No. 123                                      |  |                |  |              |  |                      |            |          |         |      |  |                             | 3,823      |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | 3,823      |  
|Stock-based employee compensation                             |  |                |  |              |  |                      |            |          |         |      |  |                             | 30,791     |   |                                         |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | 30,791     |  
|Comprehensive income (loss):                                  |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Net loss                                                      |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   | (29,211    | )                  |  |   | (29,211                  | ) |  |   |        |   |  |   |         |   |  |   | (29,211    | )
|Unrealized loss on derivative instruments                     |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | (2,770                   | ) |  |   | (2,770  | ) |  |   |         |   |  |   | (2,770     | )
|Unrealized gain on securities                                 |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 805                      |   |  |   | 805     |   |  |   |         |   |  |   | 805        |  
|Change in unfunded pension obligation                         |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 4,350                    |   |  |   | 4,350   |   |  |   |         |   |  |   | 4,350      |  
|Foreign currency translation adjustments                      |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | 9,033                    |   |  |   | 9,033   |   |  |   |         |   |  |   | 9,033      |  
|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Comprehensive loss                                            |  |                |  |              |  |                      |            |          |         |      |  |                             |           |   |                                         |   |           |                    |  |   | (17,793                  | ) |  |   |         |   |  |   |          |   |  |   |            |  
|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Balance December 31, 2004                                     |  |                |  | $            |  |                      | 251,960,505 |          | $       | 2,520 |  | $                           | 2,058,827  |   |                                         | $ | (1,536,784 | )                  |  | $ |                         |   |  | $ | 13,464  |   |  | $ | (215,716 | ) |  | $ | 322,311    |  
|                                                              |  |                 |  |              |   |                      |             |          |         |       |  |                             |            |   |                                         |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  



The accompanying Notes
to Consolidated Financial Statements are an integral part of these consolidated statements.



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METRO-GOLDWYN-MAYER INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                  |  | Year Ended December 31, |           
|                                                                                                  |  | 2004                    |            |   | 2003 |   |            | 2002 | 
|Operating activities:                                                                             |  |                         |            |   |      |   |            |      |  |   |            |  
|Net loss                                                                                          |  | $                       | (29,211    | ) |      | $ | (161,761   | )    |  | $ | (142,247   | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:         |  |                         |            |   |      |   |            |      |  |   |            |  
|Additions to film costs, net                                                                      |  |                         | (439,001   | ) |      |   | (427,367   | )    |  |   | (468,083   | )
|Amortization of film and television costs and participants share                                 |  |                         | 613,325    |   |      |   | 709,550    |      |  |   | 798,411    |  
|Depreciation and amortization of property and equipment                                           |  |                         | 15,147     |   |      |   | 17,300     |      |  |   | 20,467     |  
|Amortization of goodwill and deferred financing costs                                             |  |                         | 9,903      |   |      |   | 7,575      |      |  |   | 16,637     |  
|Stock-based employee compensation                                                                 |  |                         | 30,791     |   |      |   |           |      |  |   |           |  
|Stock contributions to employees, directors and employee savings plan                             |  |                         | 5,177      |   |      |   | 4,387      |      |  |   | 4,252      |  
|Change in fair value of financial instruments                                                     |  |                         |           |   |      |   | (18        | )    |  |   | (462       | )
|Change in fair value of Rabbi Trust                                                               |  |                         | 1,852      |   |      |   | 2,730      |      |  |   | (3,246     | )
|Provision for bad debt and other reserves                                                         |  |                         | 16,257     |   |      |   | 5,592      |      |  |   | 21,205     |  
|Equity in net (earnings) losses of affiliates                                                     |  |                         | 4,847      |   |      |   | (310       | )    |  |   | (13,561    | )
|Write-down on investment in cable channels                                                        |  |                         |           |   |      |   | 93,059     |      |  |   |           |  
|Gain on sale of equity interest in cable channel                                                  |  |                         |           |   |      |   |           |      |  |   | (32,514    | )
|Increase in accounts and contracts receivable and other assets                                    |  |                         | 21,704     |   |      |   | (10,828    | )    |  |   | (171,169   | )
|Decrease in accounts payable, accrued and other liabilities, accruedparticipants share and taxes |  |                         | (127,988   | ) |      |   | (49,195    | )    |  |   | (102,694   | )
|Increase (decrease) in advances and deferred revenues                                             |  |                         | 23,297     |   |      |   | 7,857      |      |  |   | (17,105    | )
|Foreign currency exchange (gain) loss                                                             |  |                         | (5,259     | ) |      |   | (6,056     | )    |  |   | 1,330      |  
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) operating activities                                               |  |                         | 140,841    |   |      |   | 192,515    |      |  |   | (88,779    | )
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Investing activities:                                                                             |  |                         |            |   |      |   |            |      |  |   |            |  
|Sales of equity interests in cable channels                                                       |  |                         |           |   |      |   | 497,250    |      |  |   | 250,000    |  
|Dividend received from cable channels                                                             |  |                         | 1,961      |   |      |   | 10,000     |      |  |   | 30,000     |  
|Investments in and advances to affiliates                                                         |  |                         | (4,677     | ) |      |   | (3,600     | )    |  |   | (9,376     | )
|(Purchase) sales of short-term investments                                                        |  |                         |           |   |      |   | 6,488      |      |  |   | (6,456     | )
|Additions to property and equipment                                                               |  |                         | (15,471    | ) |      |   | (27,459    | )    |  |   | (23,055    | )
|Other investing activity                                                                          |  |                         |           |   |      |   | (5,099     | )    |  |   |           |  
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) investing activities                                               |  |                         | (18,187    | ) |      |   | 477,580    |      |  |   | 241,113    |  
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Financing activities:                                                                             |  |                         |            |   |      |   |            |      |  |   |            |  
|Additions to borrowed funds                                                                       |  |                         | 2,201,000  |   |      |   | 261,500    |      |  |   | 1,337,410  |  
|Dividend paid                                                                                     |  |                         | (1,892,983 | ) |      |   |           |      |  |   |           |  
|Net proceeds from issuance of equity securities to outside parties                                |  |                         |           |   |      |   |           |      |  |   | 164,771    |  
|Net proceeds from issuance of equity securities to related parties                                |  |                         | 43,128     |   |      |   | 121        |      |  |   | 2,154      |  
|Acquisition of treasury stock                                                                     |  |                         | (181,370   | ) |      |   | (49,785    | )    |  |   | (32,709    | )
|Repayments of borrowed funds                                                                      |  |                         | (217,666   | ) |      |   | (1,412,690 | )    |  |   | (1,016,871 | )
|Financing costs and other                                                                         |  |                         | (19,394    | ) |      |   | (767       | )    |  |   | (16,823    | )
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                                               |  |                         | (67,285    | ) |      |   | (1,201,621 | )    |  |   | 437,932    |  
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Net change in cash and cash equivalents from operating, investing and financing activities        |  |                         | 55,369     |   |      |   | (531,526   | )    |  |   | 590,266    |  
|Net increase (decrease) in cash due to foreign currency fluctuations                              |  |                         | 102        |   |      |   | 289        |      |  |   | 167        |  
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Net change in cash and cash equivalents                                                           |  |                         | 55,471     |   |      |   | (531,237   | )    |  |   | 590,433    |  
|Cash and cash equivalents at beginning of the year                                                |  |                         | 61,894     |   |      |   | 593,131    |      |  |   | 2,698      |  
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents at end of the year                                                      |  | $                       | 117,365    |   |      | $ | 61,894     |      |  | $ | 593,131    |  
|                                                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  



The accompanying Notes
to Consolidated Financial Statements are an integral part of these consolidated statements.



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METRO-GOLDWYN-MAYER INC.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2004



Note 1Basis of Presentation and Summary of Significant Accounting
Policies



Basis of
Presentation.    The accompanying consolidated financial statements include the accounts of Metro-Goldwyn-Mayer Inc. (MGM), Metro-Goldwyn-Mayer Studios Inc. and its majority owned subsidiaries (collectively,
MGM Studios) and Orion Pictures Corporation and its majority owned subsidiaries (collectively, Orion) (collectively, the Company). MGM is a Delaware corporation formed on July 10, 1996 specifically to acquire MGM
Studios, and is majority owned by an investor group comprised of Kirk Kerkorian, Tracinda Corporation and a corporation that is principally owned by Tracinda (collectively, Tracinda) and certain current and former executive officers of
the Company. The acquisition of MGM Studios by MGM was completed on October 10, 1996, at which time MGM commenced principal operations. The acquisition of Orion was completed on July 10, 1997. The Company completed the acquisition of certain film
libraries and film related rights that were previously owned by PolyGram N.V. and its subsidiaries (collectively, PolyGram) on January 7, 1999.



As permitted by the American Institute of Certified Public Accountants Statement of Position (SOP) 00-2, Accounting by Producers
or Distributors of Films, the Company has presented unclassified consolidated balance sheets. Certain reclassifications have been made to amounts reported in prior periods to conform with the current presentation.



Business.    The Company is engaged primarily in
the development, production and worldwide distribution of theatrical motion pictures and television programs. The Company also distributes films produced or financed, in whole or in part, by third parties. Until July 18, 2003, the Company held
equity interests in three domestic cable channels (see Note 4). Additionally, the Company holds equity interests in various international cable channels. The Companys business units have been aggregated into four reportable operating segments:
feature films, television programming, cable channels and other operating activities (see Note 12). Operating units included in the other operating segment include consumer products, interactive media and music.



Motion picture and television production and distribution is highly
speculative and inherently risky. There can be no assurance of the economic success of such motion pictures and television programming since the revenues derived from the production and distribution (which do not necessarily bear a direct
correlation to the production or distribution costs incurred) depend primarily upon their acceptance by the public, which cannot be predicted. The commercial success of a motion picture also depends upon the quality and acceptance of other competing
films released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change and
cannot be predicted with certainty. Further, the theatrical success of a motion picture is generally a key factor in generating revenues from other distribution channels. There is a substantial risk that some or all of our motion pictures will not
be commercially successful, resulting in costs not being recouped or anticipated profit not being realized.



The success of the Companys television programming also may be impacted by, among other factors, prevailing advertising rates, which are
subject to fluctuation. Therefore, there is a substantial risk that some or all of the Companys motion picture and television projects will not be commercially successful, resulting in costs not being recouped or anticipated profits not being
realized.



Principles of
Consolidation.    The consolidated financial statements include the accounts of MGM, MGM Studios, Orion and all of their majority-owned and controlled subsidiaries. The Companys investments in related companies, which
represent a 20% to 50% ownership interest, over which the Company has significant influence but not control are accounted for using the equity method (see Note 4). All significant intercompany balances and transactions have been eliminated.



87



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cash and Cash Equivalents.    The Company considers all highly liquid debt
instruments, purchased with an initial maturity of three months or less, to be cash equivalents. The Company held restricted cash of $150,789,000 at December 31, 2004 in the form of a deposit received as part of a merger agreement expected to close
in 2005 (see Note 16). There were no restricted cash balances at December 31, 2003. The Company has reclassified a $18,951,000 and $12,303,000 bank overdraft to accounts payable at December 31, 2004 and 2003, respectively. The carrying value of the
Companys cash equivalents approximated fair value at each balance sheet date.



Short-Term Investments.    Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized
cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in other
comprehensive income, a separate component of stockholders equity. The Company held no short-term investments as of December 31, 2004 and 2003.



Accounts and Contracts Receivable.    At December 31, 2004, accounts and contracts receivable aggregated $616,762,000 (before
allowance for doubtful accounts), of which approximately $459,370,000 is due within one year and $331,250,000 is unbilled. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general
dispersion of accounts which constitute the Companys customer base. The Company performs credit evaluations of its customers and in some instances requires collateral. At December 31, 2004 and 2003, there were no customers accounting for
greater than ten percent of the Companys accounts and contracts receivable.



Allowance for Doubtful Accounts.    At December 31, 2004 and 2003, the allowance for doubtful accounts receivable aggregated $29,835,000 and $46,671,000, respectively. The Company determines
its allowance by monitoring its delinquent accounts and estimating a reserve based on contractual terms and other customer specific issues. Additionally, the Company records a general reserve against all customers not reviewed on a specific basis.
The Company charges off trade and contracts receivable against the allowance when the receivable is deemed uncollectible.



Sales Returns.    In the home entertainment market, the Company calculates an estimate of future returns of product. In
determining the estimate of product sales that will be returned, the Company performs an analysis that considers historical returns, changes in customer demand and current economic trends. Based on this information, a percentage of each sale is
reserved provided that the customer has the right of return.



Revenue Recognition.    Revenue is recognized upon meeting all recognition requirements of SOP 00-2. Revenues from theatrical distribution of feature films are recognized on the dates of exhibition. Revenues from
direct home entertainment distribution are recognized, net of an allowance for estimated returns, together with related costs, in the period in which the product is available for sale by the Companys customers. Under revenue sharing
arrangements, the Company also participates in consumer rental revenues generated in the home entertainment market by rental establishments and records revenues as earned. Revenues from television licensing, together with related costs, are
recognized when the feature film or television program is initially available to the licensee for telecast. Payments received in advance of initial availability are classified as deferred revenue until all SOP 00-2 revenue recognition requirements
have been met. As of December 31, 2004, deferred revenue primarily consists of advances related to the Companys television licensing contracts under which the related product will become available in future periods. Long-term,
non-interest-bearing receivables arising from



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



licensing agreements are discounted to present value in accordance with Accounting Principles Board (APB) Opinion No. 21, Interest on
Receivables and Payables.



Barter
Transactions.    The Company accounts for advertising time spots received as full or partial consideration from the sale of feature film and television programming product in the domestic syndication market at the estimated
fair value of the advertising received in accordance with the provisions of Emerging Issues Task Force Issue No. 99-17, Accounting for Advertising Barter Transactions. The Company recognized barter revenues of $25,757,000, $26,944,000
and $19,411,000 in the years ended December 31, 2004, 2003 and 2002, respectively.



From February 2002 until September 30, 2004, the Company used a joint venture, MGM-NBC Media Sales, LLC (the Joint Venture), to act as its agent to sell barter advertising spots received by the Company and
NBC Enterprises Inc. (NBC Enterprises) as full or partial consideration from the licensing of feature film and television programming product in the domestic television syndication market. On April 30, 2004, MGM Domestic Television
Distribution, Inc., a wholly-owned subsidiary of the Company, and NBC Enterprises agreed to terminate the Joint Venture effective on September 30, 2004. Upon termination of the Joint Venture, the Company assumed the sale of advertising spots
received as full or partial consideration for its programming in the domestic television syndication market.



Film and Television Costs.    Except for purchase accounting adjustments, film costs include the costs of production,
capitalized overhead and interest. These costs, as well as participations and talent residuals, are charged against earnings on an individual film basis in the ratio that the current years gross film revenues bear to managements estimate
of total remaining ultimate gross film revenues as of the beginning of the current year from all sources (the individual film forecast method). The cost allocated to films revalued in purchase accounting (including the MGM, Orion and
PolyGram film libraries) is being amortized over their estimated economic lives not to exceed 20 years.



Beginning January 1, 2001, under SOP 00-2 (see New Accounting Pronouncements), exploitation costs, including advertising and marketing
costs, are expensed as incurred. The Company incurred advertising and marketing costs of approximately $390,000,000, $505,000,000 and $410,000,000, respectively, for the years ended December 31, 2004, 2003 and 2002. Theatrical print costs are
amortized over the periods of theatrical release of the respective territories and are included in operating expenses.



Capitalized film costs are stated at the lower of unamortized cost or estimated fair value on an individual film basis. Revenue and cost forecasts are
continually reviewed by management and revised when warranted by changing conditions. When estimates of total revenues and costs indicate that a feature film or television program will result in an ultimate loss, additional amortization is
recognized to the extent that capitalized film costs exceed estimated fair value.



The Company also maintains home entertainment product in inventory, which primarily consists of digital video discs and videocassette tapes and are stated at the lower of cost or market. The Company accounts for its
home entertainment inventory using the weighted average moving cost method.



Shipping and handling costs are included in operating costs under selling, general and administrative expenses in the consolidated statements of operations.



Property and Equipment.    Except for purchase
accounting adjustments, property and equipment are stated at cost. Property and equipment acquired as part of the acquisitions of MGM Studios and Orion are stated at



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



estimated fair market value at the date of acquisition. Depreciation of property and equipment is computed under the straight-line method over the expected
useful lives of applicable assets, ranging from three to five years.



Leasehold improvements are amortized under the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the related leases. Leasehold improvements include amounts reimbursed by landlords as lease
incentives. As required by FASB Technical Bulletin 88-1, Issues Relating to Accounting for Leases, lease incentive reimbursements are recorded as an obligation within other liabilities and amortized over the lease term as a reduction in
rent expense. When property is sold or otherwise disposed of, the cost and related accumulated depreciation and amortization is removed from the accounts, and any resulting gain or loss is included in income. The costs of normal maintenance, repairs
and minor replacements are charged to expense when incurred.



Goodwill.    Goodwill represents the excess cost of acquisition over the fair market value of identifiable net assets acquired by the Company. Beginning January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (see New Accounting Pronouncements). According to this statement, goodwill and intangible assets with indefinite lives are no longer
subject to amortization, but rather an annual assessment of impairment by applying a fair-value based test is performed. Fair value of goodwill is based on discounted cash flows, market multiples and/or appraised values as appropriate. Under SFAS
No. 142, the carrying value of assets are calculated at the lowest level for which there are identifiable cash flows, which include feature film operations, television programming operations, cable channels and other businesses (consumer products,
music and interactive operations). SFAS No. 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is
less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Upon adoption and during each of the years ended December 31, 2004, 2003 and
2002, the Company completed an impairment review and did not recognize any impairment of goodwill and other intangible assets included in the financial statements. The Company expects to receive future benefits from previously acquired goodwill over
an indefinite period of time. Accordingly, beginning January 1, 2002, the Company has foregone all related amortization expense. Until March 31 2003, when the Company announced its intention to sell its equity interest in the Cable Channels (see
Note 4), the Company was recording its equity in net earnings of the Cable Channels on a one-quarter lag. Therefore, amortization of goodwill of the Cable Channels is not included in the calculation of the Companys equity in the net earnings
in this investment commencing on April 1, 2002 (amortization of goodwill of the Cable Channels was $9,528,000 for the quarter ended March 31, 2002).



For the year ended December 31, 2002, the reconciliation of reported net loss and net loss per share to adjusted net loss and adjusted net loss per share
reflecting the elimination of goodwill amortization is as follows (in thousands, except per share data):



|                                                                 |  |          |          |   |                |   |       |  
|---------------------------------------------------------------- |  | -------- | -------- | - | -------------- | - | ----- | -
|                                                                 |  | Net Loss |          |   | Per Share Data |  
|Net loss, as reported                                            |  | $        | (142,247 | ) |                | $ | (0.57 | )
|Elimination of goodwill amortization related to equity investees |  |          | 9,528    |   |                |   | 0.04  |  
|                                                                 |  |          |          |   |                |   |       |  
|Net loss, as adjusted                                            |  | $        | (132,719 | ) |                | $ | (0.53 | )
|                                                                 |  |          |          |   |                |   |       |  



Income
Taxes.    In accordance with SFAS No. 109, Accounting for Income Taxes, deferred tax assets and liabilities are recognized with respect to the tax consequences attributable to differences between the financial
statement carrying values and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected
to be recovered or settled. Further, the effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Foreign Currency Translation.    Foreign subsidiary assets and liabilities
are translated into United States dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses of foreign subsidiaries are translated into United States dollars at the average exchange rates that prevailed during the
period. The gains or losses that result from this are included as a component of the accumulated other comprehensive income in stockholders equity. Foreign currency denominated transactions are recorded at the exchange rate in effect at the
time of occurrence, and the gains or losses resulting from subsequent translation at current exchange rates are included in the accompanying statements of operations.



Financial Instruments.    The carrying values of short-term trade receivables and payables
approximate their estimated fair values because of the short maturity of these instruments. The carrying values of receivables with maturities greater than one year have been discounted at LIBOR plus 2.75 percent (approximately five percent at
December 31, 2004 and four percent at December 31, 2003, respectively), which approximates the Companys current effective borrowing rates, in accordance with APB Opinion No. 21.



Derivatives.    The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. In certain instances, the Company enters into foreign currency exchange forward contracts in order to reduce exposure to changes in foreign currency exchange rates that affect the value of the
Companys firm commitments and certain anticipated foreign currency cash flows. Additionally, historically the Company has used derivative financial instruments to manage well-defined interest rate risks. The Company entered into interest rate
swaps to lower funding costs, to diversify sources of funding, or to alter interest rate exposures arising from differences between assets and liabilities. Interest rate swaps allowed the Company to raise long-term borrowings at floating rates and
effectively swap them into fixed rates that were lower than those available to the Company if fixed-rate borrowings were made directly. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount.



The Company accounts for its derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS
No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. The Company measures interest rate swap contracts and foreign currency forward contracts for effectiveness on a quarterly basis. The Company uses
mark-to-market accounting to determine the fair value of the derivatives. Changes in the fair value of effective hedges are reflected in accumulated other comprehensive income, a separate component of stockholders equity, while changes in
ineffective hedges are reflected in the statement of operations. The amounts recognized for ineffective hedges during the years ended December 31, 2004, 2003 and 2002, respectively, were not material. Factors that determine the effectiveness of
hedges include (i) the forward contract is for the same quantity as the hedged forecasted purchase, (ii) the fair value of the forward contract or interest rate swap at inception is zero, and (iii) the notional amount of the swap matches the
principal amount of the interest bearing liability being hedged.



Earnings Per Share.    The Company computes earnings per share in accordance with SFAS No. 128, Earnings Per Share (EPS). The weighted average number of shares used in computing basic and
diluted earnings or loss per share was 237,243,202, 245,584,705 and 248,355,556 in the years ended December 31, 2004, 2003 and 2002, respectively. Dilutive securities of 5,798,663, 355,640 and 1,000,720 are not included in the calculation of diluted
EPS in the years ended December 31, 2004, 2003 and 2002, respectively, because they are antidilutive. Additionally, potentially dilutive securities of 8,930,365, 15,226,130 and 30,850,065 have not been included in the calculation of diluted EPS in
the years ended December 31, 2004, 2003 and 2002, respectively, because their exercise prices are greater than the average market price of the Companys common stock during such years.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Comprehensive Income (Loss).    The Company computes comprehensive income
(loss) pursuant to SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in financial statements and thereby reports a measure
of all changes in equity of an enterprise that result from transactions and other economic events other than transactions with owners. Total comprehensive income (loss) for the Company includes net income (loss) and other comprehensive income (loss)
items, including unrealized gain (loss) on derivative instruments, unrealized gain (loss) on securities, changes in unfunded pension plan obligations and cumulative foreign currency translation adjustments. Components of other comprehensive income
(loss), net of related income tax effect, are shown below (in thousands):



|                                                    |  |                         |         |   |      |   |          |      |  |   |          |  
|--------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                    |  | Year Ended December 31, |        
|                                                    |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Net loss                                            |  | $                       | (29,211 | ) |      | $ | (161,761 | )    |  | $ | (142,247 | )
|Other comprehensive income (loss):                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Unrealized gain (loss) on derivative instruments    |  |                         | (2,770  | ) |      |   | 16,629   |      |  |   | 13,195   |  
|Unrealized gain (loss) on securities                |  |                         | 805     |   |      |   | 1,303    |      |  |   | (585     | )
|Change in unfunded pension plan obligation          |  |                         | 4,350   |   |      |   | (356     | )    |  |   | (3,994   | )
|Cumulative foreign currency translation adjustments |  |                         | 9,033   |   |      |   | 2,831    |      |  |   | 139      |  
|                                                    |  |                         |         |   |      |   |          |      |  |   |          |  
|Total comprehensive loss                            |  | $                       | (17,793 | ) |      | $ | (141,354 | )    |  | $ | (133,492 | )
|                                                    |  |                         |         |   |      |   |          |      |  |   |          |  



Components of
accumulated other comprehensive income (loss) are shown below (in thousands):



|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  
|---------------------------- |  | -------------------------------------------- | ------- | - | --------------------------------- | - | ----- | ------------------------------ |  | - | -------------------------------- | - | ------------------------------------------ | - | ------ |  | - | ------- | -
|                             |  | UnrealizedGain (Loss)onDerivativeInstruments |         |   | UnrealizedGain(Loss) onSecurities |   |       | UnfundedPension PlanObligation |  |   | CumulativeTranslationAdjustments |   | AccumulatedOtherComprehensiveIncome (Loss) |  
|Balance at December 31, 2002 |  | $                                            | (13,859 | ) |                                   | $ | (782  | )                              |  | $ | (3,994                           | ) |                                            | $ | 274    |  | $ | (18,361 | )
|Current year change          |  |                                              | 16,629  |   |                                   |   | 1,303 |                                |  |   | (356                             | ) |                                            |   | 2,831  |  |   | 20,407  |  
|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  
|Balance at December 31, 2003 |  |                                              | 2,770   |   |                                   |   | 521   |                                |  |   | (4,350                           | ) |                                            |   | 3,105  |  |   | 2,046   |  
|Current year change          |  |                                              | (2,770  | ) |                                   |   | 805   |                                |  |   | 4,350                            |   |                                            |   | 9,033  |  |   | 11,418  |  
|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  
|Balance at December 31, 2004 |  | $                                            |        |   |                                   | $ | 1,326 |                                |  | $ |                                 |   |                                            | $ | 12,138 |  | $ | 13,464  |  
|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  



Stock-Based
Compensation.    On January 1, 2004, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Under the modified
prospective method of adoption selected by the Company under the provisions of SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, stock-based employee compensation expense recognized in 2004 is the same
as that which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied to all awards from its original effective date. During the year ended December 31, 2004, the Company recorded compensation expense of
$30,791,000 regarding its employee stock incentive plan, which has been included in selling, general and administrative expenses in the consolidated statements of operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Prior to January 1, 2004, the Company applied Accounting Principles Board Opinion No. 25,
Accounting For Stock Issued to Employees, and related interpretations in accounting for its stock incentive plan. Had compensation cost for the plan been determined consistent with the fair value recognition provisions of SFAS No. 123 in
each period, the Companys net loss and loss per share would have been the following pro forma amounts (in thousands, except per share data):



|                                                                               |  |                         |         |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                               |  | Year Ended December 31, |        
|                                                                               |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Net loss:                                                                      |  |                         |         |   |      |   |          |      |  |   |          |  
|As reported                                                                    |  | $                       | (29,211 | ) |      | $ | (161,761 | )    |  | $ | (142,247 | )
|Add: Stock-based compensation included in reported net loss, net of tax effect |  |                         | 30,791  |   |      |   |         |      |  |   |         |  
|Deduct: Stock-based compensation, net of tax effect                            |  |                         | (30,791 | ) |      |   | (43,584  | )    |  |   | (47,218  | )
|                                                                               |  |                         |         |   |      |   |          |      |  |   |          |  
|Pro forma                                                                      |  | $                       | (29,211 | ) |      | $ | (205,345 | )    |  | $ | (189,465 | )
|                                                                               |  |                         |         |   |      |   |          |      |  |   |          |  
|Basic and diluted loss per share:                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|As reported                                                                    |  | $                       | (0.12   | ) |      | $ | (0.66    | )    |  | $ | (0.57    | )
|Add: Stock-based compensation included in reported net loss, net of tax effect |  |                         | 0.13    |   |      |   |         |      |  |   |         |  
|Deduct: Stock-based compensation, net of tax effect                            |  |                         | (0.13   | ) |      |   | (0.18    | )    |  |   | (0.19    | )
|                                                                               |  |                         |         |   |      |   |          |      |  |   |          |  
|Pro forma                                                                      |  | $                       | (0.12   | ) |      | $ | (0.84    | )    |  | $ | (0.76    | )
|                                                                               |  |                         |         |   |      |   |          |      |  |   |          |  



The fair value of
option grants issued prior to January 1, 2004 were estimated using the Black-Scholes model and the fair value of option grants issued in 2004 were estimated using a binomial model. The weighted average fair value of stock options granted in the
years ended December 31, 2004, 2003 and 2002 was $7.00, $5.73 and $7.31, respectively. The fair values were determined using the following assumptions: the dividend yield was 0 percent in all periods, and expected volatility was 44.8 percent, 50.7
percent and 51.0 percent for the years ended December 31, 2004, 2003 and 2002, respectively. The weighted average expected life was 5.0 years in all periods, and the weighted average assumed risk-free interest rate was 3.6 percent, 2.9 percent and
4.4 percent for the years ended December 31, 2004, 2003 and 2002, respectively.



Use of Estimates in the Preparation of Financial Statements.    The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Management estimates ultimate revenues and costs for feature films and television programs for each market based on anticipated release
patterns, public acceptance and historical results for similar products. Actual results could differ materially from those estimates.



New Accounting Pronouncements.    In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets.
According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an annual assessment of impairment by applying a fair-value based test is performed. Fair value of goodwill is based
on discounted cash flows, market multiples and/or appraised values as appropriate. Under SFAS No. 142, the carrying value of assets are calculated at the lowest level for which there are identifiable cash flows, which include feature film
operations, television programming operations, cable channels and other businesses (consumer products, music and interactive operations). The Company adopted SFAS No. 142 beginning January 1, 2002, and upon adoption the Company did not recognize any
impairment of goodwill and other intangible assets already included in the financial statements. The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. Accordingly, beginning January 1,
2002, the Company has foregone all related amortization expense.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of SFAS No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.
This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require prominent disclosures in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS No. 148 on January 1, 2003.



In January 2003, the FASB issued Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities, which establishes
criteria to identify variable interest entities (VIE) and the primary beneficiary of such entities. An entity that qualifies as a VIE must be consolidated by its primary beneficiary. All other holders of interests in a VIE must disclose
the nature, purpose, size and activity of the VIE as well as their maximum exposure to losses as a result of involvement with the VIE. FIN 46 was revised in December 2003 and is effective for financial statements of public entities that have
special-purpose entities, as defined, for periods ending after December 15, 2003. For public entities without special-purpose entities, it is effective for financial statements for periods ending after March 15, 2004. The Company does not have any
special-purpose entities, as defined, and is currently evaluating the provisions of this statement as it relates to its various forms of investments. The Company adopted FIN No. 46 on January 1, 2004. The impact of such adoption did not have a
material effect on the Companys financial statements.



In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an as a liability or an asset in some circumstances. Many of those instruments were previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The impact of such adoption did not
have a material effect on the Companys financial statements.



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. This statement retains the disclosure requirements contained
in SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This statement is effective
for financial statements with fiscal years ending after December 15, 2003. The Company implemented SFAS No. 132 (revised 2003) on December 15, 2003.



In December 2004, the FASB issued FASB Statement No. 123(R) (revised 2004), Share-Based Payment, which is a revision of FASB Statement No.
123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than July 1, 2005 and the Company plans to adopt Statement 123(R) on January 1, 2005.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company adopted the fair-value-based method of accounting for share-based payments effective
January 1, 2004 using the modified prospective method described in FASB Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Currently, the Company uses the Binomial model to estimate the
value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R). The Company does not anticipate that adoption of Statement 123(R) will have a material
impact on its results of operations or its financial position. Statement 123(R) also requires that the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. While the Company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock options), the amounts are not expected to be material because the Company has not historically recorded any tax benefits.



Note 2Severance and Other Related Costs



In June 1999, the Company incurred $85,171,000 of severance and other
related costs, as well as the estimated costs of withdrawing from the Companys arrangements with United International Pictures B.V. (UIP) on November 1, 2000. The severance charge in 1999 included the termination of 46 employees,
including the Companys former Chairman and Vice Chairman, across all divisions of the Company.



In June 2000, the Company reduced previously charged reserves by $5,000,000 due to a negotiated settlement with UIP regarding the Companys
withdrawal from the joint venture. Additionally, in June 2000, the Company incurred severance and other related charges of $1,285,000 related to the closure of a foreign sales office.



As of December 31, 2004, the Company has paid $54,844,000 of the severance and other related costs. In January and February
2002, in accordance with certain agreements with the Companys former Chairman and Vice Chairman, $16,964,000 of the severance and related costs were converted into 863,499 shares of common stock of the Company. The remaining unpaid severance
at December 31, 2004 consists of 1,745,680 unexercised stock options held by the Companys former Chairman. On January 1, 2004, upon adoption of the fair value recognition provisions of SFAS No. 123, such amount was transferred to additional
paid in capital.



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 3Film and Television Costs



Film and television costs, net of amortization, are summarized as follows (in thousands):



|                                 |  |                  |            |   |                  |   |            |  
|-------------------------------- |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                                 |  | December 31,2004 |            |   | December 31,2003 |  
|Theatrical productions:          |  |                  |            |   |                  |   |            |  
|Released                         |  | $                | 4,595,592  |   |                  | $ | 4,339,193  |  
|Less: accumulated amortization   |  |                  | (3,332,302 | ) |                  |   | (2,994,401 | )
|                                 |  |                  |            |   |                  |   |            |  
|Released, net                    |  |                  | 1,263,290  |   |                  |   | 1,344,792  |  
|Completed not released           |  |                  | 39,086     |   |                  |   | 6,724      |  
|In production                    |  |                  | 197,309    |   |                  |   | 170,514    |  
|In development                   |  |                  | 42,275     |   |                  |   | 34,317     |  
|                                 |  |                  |            |   |                  |   |            |  
|Subtotal: theatrical productions |  |                  | 1,541,960  |   |                  |   | 1,556,347  |  
|                                 |  |                  |            |   |                  |   |            |  
|Television programming:          |  |                  |            |   |                  |   |            |  
|Released                         |  |                  | 1,163,504  |   |                  |   | 1,044,399  |  
|Less: accumulated amortization   |  |                  | (939,171   | ) |                  |   | (831,127   | )
|                                 |  |                  |            |   |                  |   |            |  
|Released, net                    |  |                  | 224,333    |   |                  |   | 213,272    |  
|In production                    |  |                  | 3,771      |   |                  |   | 17,902     |  
|In development                   |  |                  | 1,119      |   |                  |   | 704        |  
|                                 |  |                  |            |   |                  |   |            |  
|Subtotal: television programming |  |                  | 229,223    |   |                  |   | 231,878    |  
|                                 |  |                  |            |   |                  |   |            |  
|                                 |  | $                | 1,771,183  |   |                  | $ | 1,788,225  |  
|                                 |  |                  |            |   |                  |   |            |  



Interest costs
capitalized to theatrical productions were $7,267,000, $7,863,000 and $14,520,000 during the years ended December 31, 2004, 2003 and 2002, respectively.



Based on the Companys estimates of projected gross revenues as of December 31, 2004, approximately 29 percent of completed film costs are expected
to be amortized over the next 12 months, and approximately $200,000,000 of accrued participants share as of December 31, 2004 will be paid in the next 12 months. Additionally, approximately 69 percent of unamortized film costs applicable to
released theatrical films and television programs, excluding acquired film libraries, will be amortized during the three years ending December 31, 2007, and 84 percent will be amortized by December 31, 2009. For acquired film libraries,
approximately $805,000,000 of net film costs as of December 31, 2004 remain to be amortized under the individual film forecast method over an average remaining life of 12 years.



Note 4Investments In and Advances to Affiliates



Investments are summarized as follows (in thousands):



|                       |  |                  |        |                  |   |       
|---------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                       |  | December 31,2004 |        | December 31,2003
|Foreign cable channels |  |                  | 16,267 |                  |   | 15,997
|Joint ventures         |  |                  | 5,353  |                  |   | 7,903 
|Others                 |  |                  | 150    |                  |   | 150   
|                       |  |                  |        |                  |   |       
|                       |  | $                | 21,770 |                  | $ | 24,050
|                       |  |                  |        |                  |   |       



96



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Domestic Cable Channels.    On April 2, 2001, the Company invested
$825,000,000 in cash for a 20 percent interest in two general partnerships which own and operate the American Movie Classics, the Independent Film Channel and WE: Womens Entertainment (formerly Romance Classics) and Bravo cable channels
(collectively, referred to as the Cable Channels.) These partnerships were wholly-owned by Rainbow Media Holdings, Inc. (Rainbow Media), a 74 percent subsidiary of Cablevision Systems Corporation (Cablevision).
The proceeds of the $825,000,000 investment were used as follows: (i) $365,000,000 was used to repay bank debt of the partnerships; (ii) $295,500,000 was used to repay intercompany loans from Cablevision and its affiliates; and (iii) $164,500,000
was added to the working capital of the partnerships. The Company financed the investment through the sale of equity securities (see Note 8), which provided aggregate net proceeds of approximately $635,600,000, and borrowings under the
Companys credit facilities. Based upon certain assumptions that management of the Company believes are reasonable, the Companys determination of the difference between the Companys original cost basis in their investment in the
Cable Channels and the Companys share of the underlying equity in net assets (referred to as intangible assets) was approximately $762,000,000.



On December 5, 2002, the Company and Cablevision, together with an affiliate of Cablevision, sold their ownership interests
in the Bravo cable channel (Bravo) to an affiliate of the National Broadcasting Company (NBC) for $1.25 billion. The proceeds were divided between Cablevision and the Company in accordance with their 80 percent and 20 percent
ownership interests in Bravo. The Company received $250,000,000 in cash from an affiliate of NBC for its interest in Bravo, and recorded a gain of $32,514,000 on the sale.



On July 18, 2003, the Company sold its 20 percent equity interest in the American Movie Classics, The Independent Film
Channel and WE: Womens Entertainment cable channels to Cablevision for $500,000,000, less sales-related expenses of $2,750,000. The Company received $250,000,000 in cash and a $250,000,000 promissory note that matured five months from the
closing date. The promissory note required monthly payments of $2,500,000 and bore interest at LIBOR, as defined, plus four percent. The Company collected the remaining balance due under the promissory note on December 18, 2003. As the
Companys cost basis in these cable channels exceeded the net selling price, the Company recorded a write-down of its investment in the cable channels of $93,059,000 during the year ended December 31, 2003.



The Company has accounted for its investment in the Cable Channels in
accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Pursuant to the requirements of APB No. 18, the Company has recorded its share of the earnings and losses in the Cable Channels based on
the most recently available financial statements received from the Cable Channels. Due to a lag in the receipt of the financial statements from the Cable Channels, the Company reported its interest in the Cable Channels on a one-quarter lag.



Summarized financial information for the Cable Channels
(including Bravo through December 5, 2002) for the quarter ended March 31, 2003 and the year ended September 30, 2002, were as follows (in thousands):



|                 |  |                             |         |                              |   |        
|---------------- |  | --------------------------- | ------- | ---------------------------- | - | -------
|                 |  | Quarter endedMarch 31, 2003 |         | Year endedSeptember 30, 2002
|Revenues, net    |  | $                           | 128,561 |                              | $ | 476,703
|Operating income |  | $                           | 36,414  |                              | $ | 143,341
|Net income       |  | $                           | 33,751  |                              | $ | 143,300



In the quarter ended
March 31, 2003 and the year ended December 31, 2002, the Companys share of the Cable Channels net operating results was a profit of $4,781,000 and $20,627,000 ($5,829,000 of the 2002 profit pertained to Bravo). Due to the one quarter lag
in reporting of the Cable Channels, the results for the year ended December 31, 2002 were reduced by the amortization of goodwill of $9,528,000 for the period from January 1 to March 31, 2002 (see Note 1).



97



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Foreign Cable Channels.    In May 1998, the Company acquired a 50 percent
interest in a Latin American cable programming joint venture, MGM Networks Latin America (MGM Latin America), for certain assets contributed by the Company to the joint venture. The Company shares equally in the profits of the venture
and is obligated to fund 50 percent of the joint ventures expenses up to a maximum of approximately $25,250,000, of which the Company had funded approximately $24,800,000 as of December 31, 2004. The Companys share of MGM Latin
Americas losses in the years ended December 31, 2004, 2003 and 2002 was $879,000, $1,126,000 and $2,672,000, respectively.



Additionally, the Company holds minority equity interests in various television channels located in certain international territories for which the
Company realized its share of the channels net operating results, which aggregated a net profit of $1,300,000 and $1,727,000 in the years ended December 31, 2004 and 2003, respectively, and a net loss of $265,000 in the year ended December 31,
2002.



Joint Ventures.    On August
13, 2001, the Company, through its wholly-owned subsidiary, MGM On Demand Inc., acquired a 20 percent interest in a joint venture established to create an on-demand movie service to offer a broad selection of theatrically-released motion pictures
via digital delivery for broadband internet users in the United States. Other partners in the joint venture include Sony Pictures Entertainment, Universal Studios, Warner Bros. and Paramount Pictures. The Company is obligated to fund up to
$30,000,000 to the joint venture for its share of the ventures operating expenses over a five year term ending in August 2006. The Company has funded $20,200,000 for its equity interest and its share of operating expenses of the joint venture
as of December 31, 2004. The Company financed its investment through utilization of cash on hand and borrowings under its credit facilities. The Company is accounting for its interest in the joint venture under the equity method. In the years
ended December 31, 2004, 2003 and 2002, the Company recognized net losses of $6,470,000, $6,096,00 and $3,352,000, respectively, for its share of the operating results of the joint venture.



In February 2002, the Company, through its wholly-owned subsidiary, MGM
Domestic Television Distribution LLC, and NBC Enterprises LLC (collectively, the Members) formed a joint venture, MGM-NBC Media Sales, LLC (MGM-NBC Media Sales), to act as an agent to sell advertising time received by the
Members as barter advertising spots as full or partial consideration from the sale of feature film and television programming product in the domestic syndication market. The joint venture recognized income from distribution fees of ten percent
earned on sales of each Members barter advertising, and incurred overhead costs to operate the joint venture, which were shared between the Members. Each Member was entitled to its share of the net profits or losses based on a contractual
formula as specified in the agreement. In the years ended December 31, 2004, 2003 and 2002, the Company recognized profits of $318,000, $1,024,000 and $243,000, respectively, for its share of the operating results of the joint venture.



On September 30, 2004, the joint venture was terminated and all
distribution agreements were terminated by December 31, 2004. Upon termination of the joint venture, the Company assumed the sale of advertising spots received as full or partial consideration for its programming in the domestic television
syndication market.



On March 27, 2002, the Company, through
its wholly-owned subsidiary, MGM Digital Development Inc. (MGM Digital), acquired a one-seventh interest in NDC, LLC (NDC), a partnership created with the six other major studios to (i) develop and/or ratify standards for
digital motion picture equipment and for digital cinema technology to be used in the delivery of high quality in-theatre digital cinema, and (ii) update and deploy a limited amount of new digital motion picture equipment in theatres. MGM Digital
contributed $979,000 for its initial interest in NDC. The initial term of the agreement has been extended and is now expiring on September 30, 2005. In the years ended December 31, 2004 and 2002, the Company recognized a loss of $175,000 and
$1,020,000 representing its aggregate investments to date in the joint venture. There were no investments in the joint venture in the year ended December 31, 2003.



98



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 5Property and Equipment



Property and equipment are summarized as follows (in thousands):



|                                                |  |                  |         |   |                  |   |         |  
|----------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | December 31,2004 |         |   | December 31,2003 |  
|Leasehold improvements                          |  | $                | 42,807  |   |                  | $ | 39,359  |  
|Furniture, fixtures and equipment               |  |                  | 105,501 |   |                  |   | 93,182  |  
|                                                |  |                  |         |   |                  |   |         |  
|                                                |  |                  | 148,308 |   |                  |   | 132,541 |  
|Less: accumulated depreciation and amortization |  |                  | (79,026 | ) |                  |   | (63,884 | )
|                                                |  |                  |         |   |                  |   |         |  
|                                                |  | $                | 69,282  |   |                  | $ | 68,657  |  
|                                                |  |                  |         |   |                  |   |         |  



Note 6Bank and Other Debt



Bank and other debt is summarized as follows (in
thousands):



|                                                   |  |                  |           |                  |   |    
|-------------------------------------------------- |  | ---------------- | --------- | ---------------- | - | ---
|                                                   |  | December 31,2004 |           | December 31,2003
|Revolving Facility                                 |  | $                |          |                  | $ |   
|Term Loans                                         |  |                  | 1,984,000 |                  |   |   
|Capitalized lease obligations and other borrowings |  |                  |          |                  |   | 813
|                                                   |  |                  |           |                  |   |    
|                                                   |  | $                | 1,984,000 |                  | $ | 813
|                                                   |  |                  |           |                  |   |    



Credit
Facilities.    On April 26, 2004, the Company, through its subsidiary MGM Studios, entered into a fourth amended and restated credit facility with a syndicate of banks (the 2004 Credit Facility) aggregating $2.4
billion, consisting of a five-year $400,000,000 revolving credit facility (the Revolving Facility), a six-year $400,000,000 term loan (Term A Facility) and a seven-year $1.6 billion term loan (Term B Facility)
(collectively, the Term Loans), which replaced the pre-existing $1.75 billion amended credit facility. The Revolving Facility and Term A Facility bear interest at 2.25 percent over the Adjusted LIBOR rate, as defined (4.81 percent at
December 31, 2004), and the Term B Loan bears interest at 2.50 percent over the Adjusted LIBOR rate, as defined (5.06 percent at December 31, 2004). The Revolving Facility matures on April 30, 2009. The Company incurred approximately $19,400,000 in
fees and other costs associated with the refinancing of the credit facility.



Proceeds from the loans under the 2004 Credit Facility were used to finance the payment of a $1.89 billion special one-time cash dividend to stockholders on May 17, 2004 (see Note 8), to refinance loans existing under
the previous credit facility and for general corporate purposes. See Note 16 regarding certain change of control transactions.



In connection with the refinancing of our credit facilities, the Company wrote-off deferred loan fees of $6,859,000 in the year ended December 31, 2004.
In connection with the repayment of $1.15 billion of pre-existing term loans in October 2003, the Company wrote-off deferred loan fees of $3,872,000 in the year ended December 31, 2003. In connection with an amendment of the pre-existing credit
facility, the Company wrote-off deferred loan fees of $11,443,000 in the year ended December 31, 2002. The write-off of the deferred loan fees in each year has been included in interest expense in the consolidated statements of operations.



The Companys borrowings under the 2004 Credit Facility
are secured by substantially all the assets of the Company, with the exception of the copyrights in the James Bond series of motion pictures. The 2004 Credit Facility contains various covenants, including limitations on indebtedness, dividends and
capital expenditures, and maintenance of certain financial ratios. The 2004 Credit Facility limits the amount of the investment in



99



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MGM which may be made by MGM Studios and Orion, both of which are wholly-owned subsidiaries, in the form of loans or advances, or purchases of capital stock
of MGM, from the date of the agreement up to a maximum aggregate amount of $75,000,000, which amount can be increased under certain circumstances. Such covenant does not preclude MGM from using its own resources to purchase its capital stock. As of
December 31, 2004, $7,026,000 was loaned to MGM by MGM Studios. Restricted net assets of MGM Studios and Orion at December 31, 2004 are approximately $2.4 billion. As of December 31, 2004, the Company was in compliance with all applicable covenants.



Capitalized lease obligations and other
borrowings.    Capitalized lease obligations and other borrowings relate principally to information systems leases and other contractual liabilities.



Maturity schedule.    See Note 13 for maturity schedule for credit facilities, lease and other
borrowings as of December 31, 2004.



Note 7Financial Instruments



The Company is subject to market risks resulting from
fluctuations in foreign currency exchange rates because approximately 25 percent of the Companys revenues are denominated, and the Company incurs certain operating and production costs, in foreign currencies. In certain instances, the Company
enters into foreign currency exchange forward contracts in order to reduce exposure to changes in foreign currency exchange rates that affect the value of the Companys firm commitments and certain anticipated foreign currency cash flows. The
Company currently intends to continue to enter into such contracts to hedge against future material foreign currency exchange rate risks. As of December 31, 2004, the Company had outstanding foreign currency forward contracts aggregating Euros
21,000. The fair value of such foreign currency forward contracts outstanding at December 31, 2004 was nil. As of December 31, 2003, the Company has outstanding foreign currency forward contracts aggregating Canadian $26,100,000 and British pounds
8,100,000. As of December 31, 2003, the Company would be entitled to receive approximately $2,770,000 if all such foreign currency forward contracts were terminated. The market value of the foreign currency forward contracts as of December 31, 2004
and 2003 have been included in other assets and accumulated other comprehensive income (loss).



The Company is exposed to the impact of interest rate changes as a result of its variable rate debt. The 2004 Credit Facility requires that the Company enters into interest rate swaps or other appropriate hedging
arrangements by October 23, 2005 to convert to fixed rate or otherwise limit the floating rate interest rate risk on at least 331/3% of the Term Loans outstanding for a period of not less than three years. At December 31, 2004 and 2003, the Company had no outstanding interest rate swap agreements.



Note 8Stockholders Equity



Private Placements.    On March 18, 2002,
pursuant to the Shelf Registration Statement, the Company completed the sale of 10,550,000 shares of common stock of the Company at $16.50 per share, less an underwriting discount of $0.825 per share, in an underwritten public offering for aggregate
net proceeds of $164,771,000. The Company used the net proceeds from the stock offering for general corporate purposes, including reduction of the revolving portion of its credit facility and financing of business operations.



Treasury Stock.    On January 3, 2002, certain
Senior Executives of the Company, pursuant to the conversion of bonus interests payable under a Senior Management Bonus Plan, contributed 383,940 shares of the Companys common stock valued at $7,608,000 to a senior executive deferred
compensation plan. These shares have been classified as treasury stock.



On July 26, 2002, the Company announced a share repurchase program authorizing the Company to purchase up to 10,000,000 shares of its common stock. The Company has funded the repurchase program from



100



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



available cash on hand. On November 12, 2003, the Board of Directors of the Company increased its authorization for the Companys share repurchase
program by 2,500,000 shares, to a total of 12,500,000 shares. As of December 31, 2004, under the share repurchase program, the Company had repurchased 8,104,300 shares of common stock, at an average price of $11.46 per share, for an aggregate cost
of $92,890,000. During the years ended December 31, 2004, 2003 and 2002, the Company issued 4,234,159, 363,743 and 143,131 shares of common stock, respectively, from treasury valued at $51,472,000, $4,509,000 and $1,598,000 respectively, for
directors, officers and employees.



Stock
Options.    In August 2002, Celsus Financial Corp., an entity wholly-owned by a director of the Company, exercised options to acquire 177,814 shares of the Companys common stock (as adjusted) at an exercise price of
$5.63 per share (as adjusted).



Common Stock Transactions by
Tracinda and Kirk Kerkorian.    Pursuant to the exercise by Tracinda of one of the demand registration rights granted to it in a shareholders agreement, the Company on January 21, 2003 filed a Registration Statement on Form
S-3 under the Securities Act covering the sale by Tracinda of up to 28,750,000 shares of the Companys common stock in an underwritten public offering. The sale was completed on January 30, 2003. The Company did not receive any of the proceeds
from this offering. Under the terms of the shareholders agreement, the Company paid certain expenses of the offering aggregating approximately $538,000.



On October 9, 2003, Kirk Kerkorian and Tracinda, the principal stockholders of MGM, completed an unsolicited tender offer and purchased 15,000,000 shares
of the Companys common stock from existing stockholders at a net price of $16 per share. In the year ended December 31, 2003, the Company incurred approximately $1,000,000 of expenses related to the tender offer, including the cost of a
fairness opinion requested by the Company.



Stockholder
Dividend.    On April 26, 2004, the Company declared a special one-time cash dividend of $8.00 per share to stockholders of record on May 7, 2004, which was paid on May 17, 2004. The cash dividend, aggregating approximately
$1.89 billion, was financed by borrowings under the 2004 Credit Facility (see Note 6).



Pursuant to the provisions of the Amended and Restated 1996 Stock Incentive Plan (the Plan), the Compensation Committee of the Board of Directors of the Company has adjusted the outstanding stock options
issued on or before May 17, 2004 under the Plan such that following the payment of the one-time cash dividend to stockholders, each option holder shall receive upon exercise, in addition to the shares of common stock otherwise obtainable, a cash
amount of $8.00 per share.



Dutch Auction Tender
Offer.    On December 4, 2003 the Company commenced a Dutch Auction tender offer (the Dutch Auction Tender Offer) to purchase up to 10,000,000 shares of its common stock at a purchase price not greater than $18.00
nor less than $16.25 per share. Under the procedures for the Dutch Auction Tender Offer, stockholders of the Company had the opportunity to tender some or all of their shares of common stock at prices specified by the stockholder. The Company then
determined the lowest price per share within the range of $16.25 to $18.00 per share that would enable it to buy 10,000,000 shares, or such lesser number of shares that are properly tendered and not withdrawn. All shares accepted in the Dutch
Auction Tender Offer were purchased by the Company at the same determined price per share regardless of whether the stockholder tendered at a lower price. Tracinda, 250 Rodeo, Inc. (250 Rodeo) and Mr. Kerkorian, the Companys
principal stockholders, did not participate in the Dutch Auction Tender Offer, nor did any members of the Companys Board of Directors or executive management.



101



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Dutch Auction Tender Offer expired on January 15, 2004. Pursuant to the Dutch Auction Tender
Offer, the Company purchased 10,000,000 shares of its common stock at a purchase price of $17.00 per share, or an aggregate amount of $170,000,000, plus offering expenses of approximately $1,000,000. The Dutch Auction Tender Offer was financed
primarily from available cash on hand, net cash flow provided by operating activities and borrowings under the Revolving Facility. Currently, Mr. Kerkorian, Tracinda and 250 Rodeo together own approximately 73 percent of the Companys
outstanding common stock (Tracinda and 250 Rodeo hold approximately 69 percent of the Companys outstanding common stock).



1996 Incentive Plan.    The Company has an Amended and Restated 1996 Stock Incentive Plan (the 1996 Incentive
Plan), which allows for the granting of stock awards aggregating not more than 36,000,000 shares. Awards under the 1996 Incentive Plan are generally not restricted to any specific form or structure and may include, without limitation,
qualified or non-qualified stock options, incentive stock options, restricted stock awards and stock appreciation rights (collectively, Awards). Awards may be conditioned on continued employment, have various vesting schedules and
accelerated vesting and exercisability provisions in the event of, among other things, a change in control of the Company. Outstanding stock options under the 1996 Incentive Plan generally vest over a period of five years and are not exercisable
until vested.



Stock option transactions under the 1996
Incentive Plan (all exercise prices of options granted on or before May 17, 2004 adjusted to reflect the special $8.00 per share cash dividend paid to stockholders on May 17, 2004) were as follows:



|                                         |  |                   |   |                   |                              |                   |        |            |   |                              |   |        |  |            |                              |  |   |      
|---------------------------------------- |  | ----------------- | - | ----------------- | ---------------------------- | ----------------- | ------ | ---------- | - | ---------------------------- | - | ------ |  | ---------- | ---------------------------- |  | - | -----
|                                         |  | December 31, 2004 |   | December 31, 2003 |                              | December 31, 2002
|                                         |  | Shares            |   |                   | WeightedAverageExercisePrice |                   | Shares |            |   | WeightedAverageExercisePrice |   | Shares |  |            | WeightedAverageExercisePrice
|Options outstanding at beginning of year |  | 29,431,461        |   |                   | $                            | 11.26             |        | 29,758,865 |   |                              | $ | 11.54  |  | 25,163,418 |                              |  | $ | 12.30
|Granted                                  |  | 895,900           |   |                   | $                            | 10.56             |        | 1,104,400  |   |                              | $ | 6.95   |  | 5,027,300  |                              |  | $ | 7.65 
|Exercised                                |  | (3,837,888        | ) |                   | $                            | 6.94              |        | (10,210    | ) |                              | $ | 3.88   |  | (79,748    | )                            |  | $ | 6.47 
|Cancelled or expired                     |  | (1,520,354        | ) |                   | $                            | 12.78             |        | (1,421,594 | ) |                              | $ | 13.80  |  | (352,105   | )                            |  | $ | 10.98
|                                         |  |                   |   |                   |                              |                   |        |            |   |                              |   |        |  |            |                              |  |   |      
|Options outstanding at end of year       |  | 24,969,119        |   |                   | $                            | 11.81             |        | 29,431,461 |   |                              | $ | 11.26  |  | 29,758,865 |                              |  | $ | 11.54
|                                         |  |                   |   |                   |                              |                   |        |            |   |                              |   |        |  |            |                              |  |   |      
|Options exercisable at end of year       |  | 19,151,064        |   |                   | $                            | 15.40             |        | 20,768,283 |   |                              | $ | 12.13  |  | 16,905,382 |                              |  | $ | 12.13
|                                         |  |                   |   |                   |                              |                   |        |            |   |                              |   |        |  |            |                              |  |   |      



The following table
summarizes information about the outstanding options as of December 31, 2004 under the 1996 Incentive Plan (with all exercise prices of options granted on or before May 17, 2004 adjusted to reflect the special $8.00 per share cash dividend paid to
stockholders on May 17, 2004):



|               |  |                              |  |                                        
|-------------- |  | ---------------------------- |  | ---------------------------------------
|Exercise price |  | OutstandingNumber of Options |  | WeightedAverageRemainingContractualLife
|$2.89$3.38    |  | 531,860                      |  | 7.29                                   
|$6.90          |  | 9,490,684                    |  | 4.59                                   
|$7.19$11.94   |  | 6,780,102                    |  | 7.06                                   
|$12.00$18.63  |  | 1,566,473                    |  | 6.48                                   
|$22.00         |  | 6,600,000                    |  | 4.35                                   
|               |  |                              |  |                                        
|               |  | 24,969,119                   |  |                                        
|               |  |                              |  |                                        



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pursuant to an employment termination agreement, in August 1999, the Company repriced stock options
of a former executive officer aggregating 1,745,680 shares. Such options have a remaining contractual life of 1.78 years, were initially repriced to $14.90 (and subsequently adjusted to reflect the special $8.00 per share cash dividend paid to
stockholders on May 17, 2004), became fully vested and exercisable and were outstanding at December 31, 2004 and 2003. Such options are not included in the above table.



As of December 31, 2004, total compensation cost related to non-vested awards not yet recognized under the 1996 Incentive
Plan was $31,909,000, which is expected to be recognized over a weighted average period of 1.3 years.



Senior Management Bonus Plan and Other Options.    The Company has a Senior Management Bonus Plan (the Senior Management
Bonus Plan) under which 2,420,685 bonus interests (Bonus Interests) were granted to certain senior employees. Subject to certain vesting and other requirements, each Bonus Interest held by the Executive Repricing Participants
entitles the holder to receive a cash payment if (a) the sum of the average closing price of common stock of the Company during the 20 trading days plus, in certain circumstances, per share distributions on the common stock (together, the
Price) preceding a Determination Date, as defined, is greater than (b) $14.90 and less than $29.80 (adjusted for stock splits, reverse stock splits and similar events). With respect to Bonus Interests held by all others, each Bonus
Interest entitles the holder to receive a cash payment if the Price preceding a Determination Date, as defined, is greater than $24.00 and less than $48.00 (adjusted for stock splits, reverse stock splits and similar events). The cash payment will
be equal to (i) the vested portion of the Bonus Interest at the Determination Date multiplied by (ii) the amount by which the Price at the Determination Date is less than $29.80, with respect to Executive Repricing Participants, or $48.00 with
respect to all others, multiplied by (iii) 1.61, with respect to the Executive Repricing Participants only (in each case, a maximum of $24.00 per Bonus Interest). Once a payment is made in respect of the vested portion of a Bonus Interest, no
further payment is due in respect of that portion. If at any Determination Date the Price equals or exceeds $29.80, with respect to Executive Repricing Participants, or $48.00, with respect to all others, no payments will thereafter be due in
respect of any then-vested portion of a Bonus Interest. Bonus Interests vested 20 percent at October 1, 1997 and 1/60 each month thereafter.



In October 2001, the Company entered into agreements with certain executives who are participants in the Senior Management Bonus Plan, pursuant to which
such executives agreed to accept in lieu of cash amount otherwise payable with respect to the December 31, 2001 Determination Date, shares of common stock of the Company, as determined by dividing such cash amount by the fair market value of the
common stock (as defined). In January 2002 and January 2003, 383,940 and 20,321 shares, respectively, of common stock were issued pursuant to these agreements. The shares issued in accordance with the agreements were deferred pursuant to the Amended
and Restated MGM Deferred Compensation Plan and are not transferable by any such executive during the holding period which ends the earlier of (i) January 1, 2003, (ii) the date such executive ceases to be employed by the Company, or (iii) a
designated change in control, as defined. In addition, in November 2001 and February 2002 the Company entered into similar agreements with three former executives who also held bonus interests under the Senior Management Bonus Plan. The 1,022,813
shares of common stock issued to such former executives in accordance with the aforementioned agreement were sold on the open market in accordance with a trading plan that complies with the Securities Exchange Act of 1934, as amended, or pursuant to
a Registration Statement on Form S-3 filed with the Securities and Exchange Commission.



At December 31, 2004, there were no Bonus Interests outstanding.



The Company recognized an expense of $1,500,000 in the year ended December 31, 2004 regarding a settlement with two former executive officers under these
plans. In the year ended December 31, 2003, the Company recognized an expense of $4,275,000 under these plans. In the year ended December 31, 2002, the Company recognized a benefit under these plans of $12,111,000 due to a decrease in the market
price of the Companys common stock.



103



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Employee Incentive Plan.    In January 2000 the Company approved the
adoption of an employee incentive plan (the Employee Incentive Plan) for eligible employees (the Participants), subject to stockholder approval, which was obtained May 4, 2000. In the case of certain named executive officers
of the Company (the Named Executive Officers), bonus awards are determined solely by the Compensation Committee of the Board of Directors (the Committee) as follows: (i) objective performance goals, bonus targets and
performance measures are pre-established by the Committee at a time when the actual performance relative to the goal remains substantially uncertain and may be based on such objective business criteria as the Committee may determine, including film
performance, cash flow and EBITDA, among others; (ii) the Committee may exercise discretion to reduce an award to a Named Executive Officer by up to 25% so long as such reduction does not result in an increase in the amount of the bonus of any other
Participant; and (iii) prior to the payment of any bonus to any of the Named Executive Officers, the Committee will certify to the Companys Board of Directors or the Executive Committee that the objective pre-established performance goals upon
which such bonus is based have been attained and that the amount of each bonus has been determined solely on the basis of the attainment of such goals (subject to the exercise of the negative discretion discussed above). The Company has expensed
$23,123,000, $22,469,000, and $2,750,000 for obligations under this plan for the years ended December 31, 2004, 2003 and 2002, respectively.



Pursuant to an agreement between the Company and Tracinda, dated as of November 18, 2004, Tracinda has agreed to make a capital contribution to the
Company, concurrently with the closing of the merger (see Note 16), in an amount (which we refer to as the bonus differential) equal to (a) the aggregate bonuses actually paid under the Employee Incentive Plan for 2004 and 2005 minus (b) the
aggregate bonuses that participants in the Employee Incentive Plan for 2004 and 2005 would have been paid if the target performance levels for such performance periods were not waived, less (c) $5,000,000, representing the amount that would
otherwise have been allocated to the payment of retention bonuses to employees. Based on the operating results for the year ended December 31, 2004, the bonus differential for 2004 is approximately $5,100,000. The bonus differential for 2005 cannot
yet be determined.



Note 9Income Taxes



The Companys domestic and foreign tax liability balances consist of
the following (in thousands):



|         |  |                  |        |                  |   |       
|-------- |  | ---------------- | ------ | ---------------- | - | ------
|         |  | December 31,2004 |        | December 31,2003
|Current  |  | $                | 23,365 |                  | $ | 37,129
|Deferred |  |                  |       |                  |   |      
|         |  |                  |        |                  |   |       
|         |  | $                | 23,365 |                  | $ | 37,129
|         |  |                  |        |                  |   |       



The income tax effects
of temporary differences between the book value and tax basis of assets and liabilities are as follows (in thousands):



|                                     |  |                  |          |   |                  |   |          |  
|------------------------------------ |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                     |  | December 31,2004 |          |   | December 31,2003 |  
|Deferred tax assets:                 |  |                  |          |   |                  |   |          |  
|Film and television costs            |  | $                | 345,464  |   |                  | $ | 380,711  |  
|Participations and residuals payable |  |                  | 18,121   |   |                  |   | 26,435   |  
|Reserves and investments             |  |                  | 59,882   |   |                  |   | 59,129   |  
|Net miscellaneous tax assets         |  |                  | 43,007   |   |                  |   | 41,659   |  
|Operating loss carryforwards         |  |                  | 212,635  |   |                  |   | 194,102  |  
|Capital loss carryforward            |  |                  | 41,138   |   |                  |   | 44,700   |  
|                                     |  |                  |          |   |                  |   |          |  
|Subtotal, gross deferred tax assets  |  |                  | 720,247  |   |                  |   | 746,736  |  
|Valuation allowance                  |  |                  | (652,647 | ) |                  |   | (649,295 | )
|                                     |  |                  |          |   |                  |   |          |  
|Total deferred tax assets            |  |                  | 67,600   |   |                  |   | 97,441   |  
|                                     |  |                  |          |   |                  |   |          |  



104



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                               |  |                  |         |   |                  |   |         |  
|------------------------------ |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                               |  | December 31,2004 |         |   | December 31,2003 |  
|Deferred tax liabilities:      |  |                  |         |   |                  |   |         |  
|Film revenue                   |  |                  | (29,794 | ) |                  |   | (60,697 | )
|Purchased film costs           |  |                  | (16,824 | ) |                  |   | (19,476 | )
|Goodwill                       |  |                  | (20,982 | ) |                  |   | (17,268 | )
|Total deferred tax liabilities |  |                  | (67,600 | ) |                  |   | (97,441 | )
|                               |  |                  |         |   |                  |   |         |  
|Net deferred tax liability     |  | $                |        |   |                  | $ |        |  
|                               |  |                  |         |   |                  |   |         |  



At December 31, 2004,
the Company and its subsidiaries had an aggregate net operating and capital loss carryforward for U.S. Federal tax purposes of approximately $650,703,000 which will be available to reduce future taxable income. The capital losses may only be used to
offset future capital gains. The capital loss carryforward of $105,483,000 expires over the next four years between 2005 and 2008, and the net operating loss carryforwards of $545,220,000 expire over the next seven to twenty years between 2011 and
2024. Presently, there are no limitations on the use of these carryforwards. In addition the Company has significant net operating loss carryovers in various states in which the Company files tax returns.



At December 31, 2004 and 2003, the Company has determined that deferred tax
assets in the amount of $652,647,000 and $649,295,000 do not satisfy the recognition criteria set forth in SFAS No. 109, Accounting for Income Taxes. Accordingly, the Company has recorded valuation allowances for these amounts.



Details of the (benefit) provision for income taxes are as
follows (in thousands):



|                                             |  |                         |         |   |      |   |          |      |  |   |         |  
|-------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                             |  | Year Ended December 31, |        
|                                             |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Current taxes:                               |  |                         |         |   |      |   |          |      |  |   |         |  
|Foreign taxes                                |  | $                       | 7,359   |   |      | $ | 18,714   |      |  | $ | 14,687  |  
|Federal and state taxes                      |  |                         | (10,881 | ) |      |   |         |      |  |   |        |  
|Deferred taxes:                              |  |                         |         |   |      |   |          |      |  |   |         |  
|Federal and state taxes                      |  |                         | (3,352  | ) |      |   | (206,138 | )    |  |   | (70,615 | )
|Adjustment for change in valuation allowance |  |                         | 3,352   |   |      |   | 206,138  |      |  |   | 70,615  |  
|                                             |  |                         |         |   |      |   |          |      |  |   |         |  
|Total tax (benefit) provision                |  | $                       | (3,522  | ) |      | $ | 18,714   |      |  | $ | 14,687  |  
|                                             |  |                         |         |   |      |   |          |      |  |   |         |  



The following is a
summary reconciliation of the federal tax rate to the effective tax rate:



|                                                         |  |                         |    |  |      |    |  |      |   
|-------------------------------------------------------- |  | ----------------------- | -- |  | ---- | -- |  | ---- | --
|                                                         |  | Year Ended December 31, |   
|                                                         |  | 2004                    |    |  | 2003 |    |  | 2002 |   
|Federal tax rate on pre-tax book income (loss)           |  | (35                     | )% |  | (35  | )% |  | (35  | )%
|Goodwill and other permanent differences                 |  | (3                      | )  |  | (3   | )  |  | (2   | ) 
|Foreign taxes, net of available federal tax benefit      |  | 15                      |    |  | 8    |    |  | 8    |   
|Adjustment to income tax reserves                        |  | (34                     | )  |  |     |    |  |     |   
|Loss carryforward and other tax attributes not benefited |  | 46                      |    |  | 43   |    |  | 41   |   
|                                                         |  |                         |    |  |      |    |  |      |   
|Effective tax rate                                       |  | (11                     | )% |  | 13   | %  |  | 12   | % 
|                                                         |  |                         |    |  |      |    |  |      |   



Because of the
uncertainty regarding the proper timing for adding participation and residual payments to a films basis for tax depreciation purposes, the Company had recorded income tax reserves of $10,881,000 to account for the potential exposure related to
its methodology. However, as a result of the amendment of section 167(g) of the American Jobs Creation Act, as well as subsequent guidance issued by the Internal Revenue Service, the Company determined that these tax reserves were unnecessary.
Accordingly, the Company released



105



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$10,881,000 of such reserves and this reduction has been included as an income tax benefit in the year ended December 31, 2004. In addition, the Company
incurred lower foreign remittance taxes in 2004 due to changes to tax treaties in certain international territories.



The Company has various foreign subsidiaries formed or acquired to produce or distribute motion pictures outside the United States. In the opinion of
management, the earnings of these subsidiaries are not permanently invested outside the United States. Pursuant to APB Opinion No. 23, Accounting For Income TaxesSpecial Areas, tax expense has accordingly been provided for these
unremitted earnings.



Note 10Retirement Plans



The Company has a non-contributory retirement plan (the Plan)
covering substantially all regular full-time, non-union employees. Benefits are based on years of service and compensation, as defined. The Companys disclosures are in accordance with SFAS No. 132 (revised 2003), Employers
Disclosures about Pensions and Other Post-retirement Benefits, which revised employers disclosures about pension and post-retirement benefit plans.



As of December 31, 2000, the Company amended the Plan to cease benefit accruals. Reconciliation of the funded status of the Plan and the amounts
included in the Companys consolidated balance sheets are as follows (in thousands):



|                                                                    |  |                  |        |   |                  |   |        |  
|------------------------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                                                    |  | December 31,2004 |        |   | December 31,2003 |  
|Projected benefit obligations:                                      |  |                  |        |   |                  |   |        |  
|Beginning obligations                                               |  | $                | 19,204 |   |                  | $ | 17,268 |  
|Service cost                                                        |  |                  |       |   |                  |   |       |  
|Interest cost                                                       |  |                  | 1,171  |   |                  |   | 1,145  |  
|Actuarial loss                                                      |  |                  | 775    |   |                  |   | 1,648  |  
|Benefits paid                                                       |  |                  | (913   | ) |                  |   | (857   | )
|                                                                    |  |                  |        |   |                  |   |        |  
|Ending obligations                                                  |  | $                | 20,237 |   |                  | $ | 19,204 |  
|                                                                    |  |                  |        |   |                  |   |        |  
|Fair value of plan assets (primarily debt securities):              |  |                  |        |   |                  |   |        |  
|Beginning fair value                                                |  | $                | 16,427 |   |                  | $ | 13,346 |  
|Actual return on plan assets                                        |  |                  | 1,483  |   |                  |   | 2,438  |  
|Employer contributions                                              |  |                  | 6,700  |   |                  |   | 1,500  |  
|Benefits paid                                                       |  |                  | (913   | ) |                  |   | (857   | )
|                                                                    |  |                  |        |   |                  |   |        |  
|Ending fair value                                                   |  | $                | 23,697 |   |                  | $ | 16,427 |  
|                                                                    |  |                  |        |   |                  |   |        |  
|Funded status of the plans:                                         |  |                  |        |   |                  |   |        |  
|Projected benefit obligations                                       |  | $                | 20,237 |   |                  | $ | 19,204 |  
|Plan assets at fair value                                           |  |                  | 23,697 |   |                  |   | 16,427 |  
|                                                                    |  |                  |        |   |                  |   |        |  
|Plan assets in excess of (less than) projected benefit obligations  |  |                  | 3,460  |   |                  |   | (2,777 | )
|Unrecognized net asset as of beginning of year                      |  |                  | (21    | ) |                  |   | (41    | )
|Unrecognized net loss                                               |  |                  | 5,951  |   |                  |   | 5,925  |  
|Unrecognized prior service credit                                   |  |                  | (65    | ) |                  |   | (79    | )
|                                                                    |  |                  |        |   |                  |   |        |  
|Net balance sheet asset                                             |  | $                | 9,325  |   |                  | $ | 3,028  |  
|                                                                    |  |                  |        |   |                  |   |        |  
|Key assumptions used in the actuarial computations were as follows: |  |                  |        |   |                  |   |        |  
|Discount rate                                                       |  |                  | 6.25   | % |                  |   | 6.75   | %
|                                                                    |  |                  |        |   |                  |   |        |  
|Long-term rate of return on assets                                  |  |                  | 6.25   | % |                  |   | 6.75   | %
|                                                                    |  |                  |        |   |                  |   |        |  
|Rate of increase in future compensation levels                      |  |                  | N/A    |   |                  |   | N/A    |  
|                                                                    |  |                  |        |   |                  |   |        |  



106



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The overall expected long-term rate of return on Plan assets was based on the performance of the Plan
assets in the past three years and on the expected performance of the Plan assets over the next five years pursuant to the investment policies and strategies stated within this pension footnote. The overall expected long-term rate of return on Plan
assets for pension footnote purposes was selected in coordination with the actuarial valuation interest rate for minimum funding purposes.



Amounts recognized in the consolidated balance sheets as of December 31, 2004 and 2003 were as follows (in thousands):



|                                       |  |                  |       |                  |   |        |  
|-------------------------------------- |  | ---------------- | ----- | ---------------- | - | ------ | -
|                                       |  | December 31,2004 |       | December 31,2003 |  
|Prepaid (accrued) benefit cost         |  | $                | 9,325 |                  | $ | (2,777 | )
|Accumulated other comprehensive income |  |                  |      |                  |   | 5,805  |  
|                                       |  |                  |       |                  |   |        |  
|Net amount recognized                  |  | $                | 9,325 |                  | $ | 3,028  |  
|                                       |  |                  |       |                  |   |        |  



Pension cost includes
the following components (in thousands):



|                                              |  |                         |        |   |      |   |       |      |  |   |        |  
|--------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                              |  | Year Ended December 31, |       
|                                              |  | 2004                    |        |   | 2003 |   |       | 2002 | 
|Service cost                                  |  | $                       |       |   |      | $ |      |      |  | $ |       |  
|Interest cost on projected benefit obligation |  |                         | 1,171  |   |      |   | 1,145 |      |  |   | 1,127  |  
|Expected return on plan assets                |  |                         | (1,004 | ) |      |   | (884  | )    |  |   | (1,058 | )
|Net amortization and deferral                 |  |                         | 235    |   |      |   | 191   |      |  |   | (7     | )
|                                              |  |                         |        |   |      |   |       |      |  |   |        |  
|Net periodic pension (benefit) cost           |  | $                       | 402    |   |      | $ | 452   |      |  | $ | 62     |  
|                                              |  |                         |        |   |      |   |       |      |  |   |        |  



The unrecognized net
asset is being amortized over the estimated remaining service life of 19.4 years. Domestic pension benefits and expense were determined under the entry age actuarial cost method.



The following supplemental information for the Plan is provided as of December 31, 2004 and 2003 (in thousands):



|                               |  |                  |        |                  |   |       
|------------------------------ |  | ---------------- | ------ | ---------------- | - | ------
|                               |  | December 31,2004 |        | December 31,2003
|Projected benefit obligation   |  | $                | 20,237 |                  | $ | 19,204
|Accumulated benefit obligation |  | $                | 20,237 |                  | $ | 19,204
|Fair value of plan assets      |  | $                | 23,697 |                  | $ | 16,427



As of December 31,
2004, benefits expected to be paid under the Plan are as follows (in millions):



|           |  |   |       |  | 
|---------- |  | - | ----- |  | 
|           |  |   |       | 
|2005       |  | $ | 320   |  | 
|2006       |  |   | 1,110 |  | 
|2007       |  |   | 850   |  | 
|2008       |  |   | 585   |  | 
|2009       |  |   | 600   |  | 
|Thereafter |  |   | 4,630 |  | 
|           |  |   |       |  | 
|Total      |  | $ | 8,095 |  | 
|           |  |   |       |  | 



107



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 31, 2004 and 2003, Plan assets by category were as follows:



|                  |  |                  |   |  |                  |  
|----------------- |  | ---------------- | - |  | ---------------- | -
|                  |  | December 31,2004 |   |  | December 31,2003 |  
|Equity securities |  | 44               | % |  | 56               | %
|Debt securities   |  | 14               | % |  | 19               | %
|Real estate       |  | 0                | % |  | 0                | %
|Other             |  | 42               | % |  | 25               | %
|                  |  |                  |   |  |                  |  
|Total             |  | 100              | % |  | 100              | %
|                  |  |                  |   |  |                  |  



The Plans
pension investments are allocated in a manner designed to provide a long-term investment return greater than the actuarial assumption, maximize investment return commensurate with appropriate levels of risk, and comply with the Employee Retirement
Income Security Act of 1974 (ERISA) by investing the funds in a manner consistent with ERISA fiduciary standards. Assets are allocated to provide adequate liquidity for the Plans disbursements, such as benefit payments and ongoing
expenses. The Plans assets are managed such that all retirement benefit payments are met as they become due. The Plans investment strategy focuses on the long- term to take into account the long-term nature of the Plans
liabilities. The asset allocation strategy is implemented with due regard for the Plans long-term needs and in a manner designed to control volatility and with regard for the Companys risk tolerance. The risk tolerance is comprised of
financial and other relevant characteristics of the Company, as well as the Companys risk philosophy for pension assets. Certain business characteristics may reduce the Companys tolerance for volatility of investment returns and
potential swings in contribution levels.



The Companys
portfolio managers asset/liability analyses indicate that approximately 30 percent of projected Plan assets are needed for upcoming disbursements and reserves. Accordingly, approximately 70 percent of the Plans assets are available to
invest in long-term securities, such as equities. However, the Plan is concerned about the level of volatility implicit in an asset mix of approximately 70 percent equity/30 percent fixed income and the attendant concern that the Company continue to
be able to meet contributions during years when the investment markets are down and its business environment is depressed. In summary, the quantitative analyses of the Plans assets and liabilities show approximately 55 percent is available to
invest in equities (approximately 70 percent is available to invest in equities less 15 percent for risk tolerance and philosophy).



The Plan currently targets the following as part of its long-term asset allocation strategy: approximately 45 percent in fixed income securities (20
percent for general account, 20 percent for fixed income (intermediate maturities), and five percent for high yield bonds) and approximately 55 percent in equity securities (27 percent for large capitalization United States equity securities, four
percent for mid-capitalization equity securities, ten percent for small capitalization United States equity securities, and 14 percent for international equity securities). Equity securities do not include any of the Companys common stock.



The Company contributed $6,700,000, $1,500,000 and $1,083,000,
respectively, to the Plan in the years ended December 31, 2004, 2003 and 2002. The Company does not expect to be required to contribute to the Plan in the year ended December 31, 2005.



A significant number of the Companys production employees are covered by union sponsored, collectively bargained
multi-employer pension plans. The Company contributed approximately $20,635,000, $14,477,000 and $17,487,000, respectively, for such plans for the years ended December 31, 2004, 2003 and 2002. Information from the plans administrators is not
sufficient to permit the Company to determine its share of unfunded vested benefits, if any.



108



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company also provides each of its employees, including its officers, who have completed one year
of service with the Company the opportunity to participate in the MGM Savings Plan (the Savings Plan). The Company contributed approximately $4,939,000, $4,131,000 and $3,536,000, respectively, in shares of the Companys common
stock to the Savings Plan in the years ended December 31, 2004, 2003 and 2002.



Note 11Related Party Transactions



In
February 1980, a predecessor-in-interest to the Company granted to a predecessor-in-interest to MGM Grand, Inc. an exclusive open-ended royalty-free license, which was amended in 1998. Pursuant to the license, as amended, MGM Grand Inc. (now known
as MGM MIRAGE) has the right to use certain trademarks that include the letters MGM, as well as logos and names consisting of or related to stylized depictions of a lion, in its resort hotel and/or gaming businesses and other
businesses that are not related to filmed entertainment. The Company did not receive any monetary compensation for this license. In June 2000, in consideration of the payment to the Company of an annual royalty of $1,000,000, such license was
further amended to permit MGM Grand, Inc. to use the letters MGM combined with the name Mirage in the same manner and to the same extent that it was permitted theretofore to use the name MGM Grand. Tracinda owns a
majority of the outstanding common stock of MGM MIRAGE, the parent of MGM Grand Hotel, Inc. (Grand Hotel). In 2003, the Company entered into discussions with MGM MIRAGE to clarify certain terms of the license and separate ownership of
the MGM MIRAGE trademarks from the Companys trademarks. In May 2004, the Company entered into a Trademark Coexistence and Assignment Agreement with MGM MIRAGE whereby the MGM Grand trademarks were assigned to MGM MIRAGE in exchange for a
broadening of the category of goods and services for which MGM MIRAGE has exclusivity with regard to the use of the trademark MGM (and derivatives thereof). This agreement replaces and supersedes the above-named license (as amended), but maintains
(in a separate license agreement) all of the terms and conditions (including the $1,000,000 annual payment) of the June 2000 amendment regarding the use by MGM MIRAGE of the trademark MGM in combination with the trademark MIRAGE. During the years
ended December 31, 2004, 2003 and 2002, MGM MIRAGE paid the Company $1,000,000 in each year in accordance with the provisions of these license agreements. Subsequent annual payments are due on each anniversary date thereafter. Additionally, the
Company and affiliates of Tracinda occasionally conduct cross-promotional campaigns, in which the Companys motion pictures and video games and the affiliates hotels are promoted together; however, the Company believes that the amounts
involved are immaterial.



The Company and Grand Hotel have an
ongoing relationship whereby Grand Hotel can utilize key art, still photographs of artwork and one minute film clips from certain of the Companys motion picture releases on an as-needed basis. In addition, the Company makes available to Grand
Hotel approximately 20 seats for casino guests at certain premieres of the Companys motion pictures. The Company did not receive any monetary compensation for the use of these assets.



The Company periodically sells to Grand Hotel and certain of its affiliates,
on a wholesale basis, videocassettes and other merchandise such as baseball caps, clothing, keychains and watches bearing the Companys trademarks and logos for resale to consumers in retail shops located within Grand Hotels hotels. In
December 2000, pursuant to a Merchandise License Agreement, the Company granted a subsidiary of MGM MIRAGE the right to use certain of the Companys trademarks and logos in connection with the retail sale of merchandise at MGM MIRAGEs
properties. The Company receives royalties based on retail sales of the licensed merchandise. The agreement has a term of five years, subject to the MGM MIRAGEs right to extend the term for one additional five-year period and its option to
terminate the agreement at any time upon 60 days notice. During the years ended December 31, 2004, 2003 and 2002, the Company recognized licensing and royalty revenues of $1,000, $3,000 and $4,000, respectively.



109



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



From time to time, the Company charters airplanes from MGM MIRAGE and Tracinda for use in the
Companys business. The Company believes that the terms of the charter arrangements are no less favorable to the Company than those that could be obtained from unrelated third parties. During the years ended December 31, 2003 and 2002, the
aggregate of the payments made to MGM MIRAGE and Tracinda for such charters were approximately $91,000 and $79,000, respectively. There were no such payments in 2004.



From time to time, the Company reserves hotel rooms from MGM MIRAGE for use by key exhibitors and employees. For the years
ended December 31, 2004, 2003 and 2002, the aggregate amount paid by the Company for such rooms was approximately $207,000, $305,000 and $465,000, respectively. Additionally, during the years ended December 31, 2004 and 2003, the Company paid MGM
MIRAGE $8,000 and $15,000 for other services.



In 1994, in
connection with the formation of Movie Network Channels, a joint venture in which the Company has a non-controlling interest, the Company licensed to the joint venture certain of its current theatrical and television motion pictures, as well as a
number of its library pictures, for distribution on Australian pay television. The agreement expires on June 30, 2005, with all motion pictures covered by the agreement reverting to the Company within one year after that date, but both the Company
and Movie Network Channels have the right to extend the license for a further four years. The Company receives a license fee for each picture that is based on the number of Movie Network Channels subscribers. The Company recognized such
license fee revenues of $6,363,000, $6,152,000 and $4,014,000 during the years ended December 31, 2004, 2003 and 2002, respectively. The Company believes that the terms of the agreement are no less favorable to the Company than those contained in
its licenses with unaffiliated licensees.



The Company, under
various agreements, licenses the right to distribute certain motion picture and television product in the domestic television market to the Rainbow Media cable channels, in which the Company acquired a 20 percent equity interest on April 2, 2001.
The Company sold its equity interest in the Bravo cable channel on December 5, 2002 and its interest in the remaining cable channels on July 18, 2003 (see Note 4). During the years ended December 31, 2003 and 2002, the Company recognized revenues of
$12,421,000 and $4,768,000, respectively, under these licensing arrangements. The Company believes that the terms of these agreements are no less favorable to the Company than those contained in its licenses with unaffiliated licensees.



The Company has equity interests ranging from five percent to 50 percent
in certain television channels located in various international territories, in which the Company licenses certain library pictures and theatrical motion pictures and television series, miniseries and made-for-television movies produced or
distributed by the Company during the terms of the agreements. The Company recognized aggregate license fees under these agreements of $22,590,000, $24,403,000 and $22,804,000 during the years ended December 31, 2004, 2003 and 2002, respectively.



Until September 30, 2004, the Company held a 50 percent equity
interest in MGM-NBC Media Sales (see Note 4), a joint venture formed to act as our agent to sell advertising time received by the Members as barter advertising spots as full or partial consideration from the sale of feature film and television
programming product in the syndication market. In the years ended December 31, 2004, 2003 and 2002, the Company incurred a sales agency fee to MGM-NBC Media Sales of $1,269,000, $2,750,000 and $1,298,000, respectively. Additionally, the joint
venture was required to pay the Company an annual fee of one percent of venture revenues, up to a maximum of $500,000, for administrative services. At December 31, 2004 and 2003, the Company had a receivable from MGM-NBC Media Sales of $1,984,000
and $8,710,000 for the distribution of its product and certain administration charges.



In March 2000, the Company entered into an agreement in principle with a subsidiary of American Zoetrope (Zoetrope), a production company owned by Mr. Coppola, for the financing and distribution in the
United States



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and Canada of lower budget theatrical motion pictures to be produced by Zoetrope over a three-year period. Under the agreement, the Company had an exclusive
first look on projects developed by Zoetrope with a budget (or anticipated budget) of less than $12,000,000 and, subject to certain conditions being met, the Company was able to acquire distribution rights in the United States and Canada
as well as certain other ancillary rights on up to ten qualifying pictures produced by Zoetrope in exchange for an amount equal to no more than $2,500,000 per picture. In addition, the Company agreed to spend a minimum of between approximately
$1,000,000 to $2,250,000 per qualifying picture in marketing and release costs. The agreement expired on September 3, 2003.



Another motion picture studio has acquired the right, for a designated period of time, from the Company to produce a motion picture. The Company has
retained the option to either co-finance such motion picture or receive a rights fee and passive profit participation. Priscilla Presley, a director of the Company, is a producer of such contemplated motion picture. During the year ended December
31, 2003, the Company paid $12,500 to a company owned by Ms. Presley in connection with such motion picture.



Pursuant to the exercise by Tracinda of one of the demand registration rights granted to it in the Shareholders Agreement, the Company on January 21, 2003
filed a Registration Statement on Form S-3 under the Securities Act covering the sale by Tracinda of up to 28,750,000 shares of MGM Common Stock in an underwritten public offering. Under the terms of the Shareholders Agreement, the Company paid
certain expenses of the offering, including the registration fees and the fees of legal counsel, accountants and financial printers, aggregating approximately $538,000.



In the year ended December 31, 2003, the Company incurred approximately $1,000,000 of expenses (including the cost of a
fairness opinion requested by the Company) related to a tender offer for the Companys common stock by Kirk Kerkorian and Tracinda, the principal stockholders of the Company (see Note 8). The tender offer was completed on October 9, 2003.



In February 2004, the Company produced a direct-to-video
motion picture in which Frank Mancuso, Jr., son of Frank Mancuso, a member of the Companys Board of Directors, rendered producing services. Frank Mancuso, Jr. was paid $50,000 and received a percentage profit participation for his services on
the film.



In August 2002, the Company commenced development of
a television series based on a theatrical motion picture. Pursuant to a producer employment agreement with Frank Mancuso, Jr. entered into in connection with such theatrical motion picture, Frank Mancuso, Jr. was granted a rolling right of first
negotiation to render producing services with regard to future productions based on the film. In October 2002, Mr. Mancuso, Jr. relinquished his first negotiation right pursuant to an agreement with the Company to render producing services in
connection with any future television or other non-theatrical production based on the film. In consideration thereof, he was paid $150,000 in April 2004. Mr. Mancuso, Jr. has certain rights with respect to certain development deals which in the
aggregate are immaterial.



The Company entered into a license
arrangement in December 2004 with Capital Entertainment Enterprises with respect to certain episodes of three library television series (My Mother the Car and two Flipper series) pursuant to which the Company
has granted to Capital the right to distribute such series in DVD in return for Capitals commitments to fund the costs of clearance and re-mastering of the programs for DVD release, to use the Company as its sub-distributor and to pay the
Company a guaranteed royalty. Mr. Winterstern, a member of the Board of Directors of the Company, is a principal of Capital Entertainment Enterprises. No royalties have as yet accrued or been paid.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 12Segment Information



The Company applies the disclosure provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. The Companys business units have been aggregated into four reportable operating segments: feature films, television programming, cable channels and other (see Note 1). The Company sold its equity interest in the Bravo cable
channel on December 5, 2002 and sold its equity interest in the remaining Cable Channels on July 18, 2003 (see Note 4). The factors for determining the reportable segments were based on the distinct nature of their operations. They are managed as
separate business units because each requires and is responsible for executing a unique business strategy. Income or losses of industry segments and geographic areas, other than those accounted for under the equity method, exclude interest income,
interest expense, goodwill amortization, income taxes and other unallocated corporate expenses. Identifiable assets are those assets used in the operations of the segments.



In 2002, upon adoption of SFAS No. 142, the Company has allocated goodwill of $516,706,000 to its operating segments
($475,201,000 to feature films and $41,505,000 to television programming). In prior years, goodwill was included in corporate assets and not allocated to segments. Other corporate assets consist of cash and certain corporate receivables.



112



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summarized financial information concerning the Companys reportable segments is shown in the
following tables (in thousands):



|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|--------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                  |  | Year Ended December 31, |          
|                                  |  | 2004                    |           |   | 2003 |   |           | 2002 | 
|Revenues:                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Feature films                     |  | $                       | 1,438,640 |   |      | $ | 1,651,870 |      |  | $ | 1,416,947 |  
|Television programming            |  |                         | 240,530   |   |      |   | 189,997   |      |  |   | 171,220   |  
|Cable channels                    |  |                         | 48,656    |   |      |   | 60,098    |      |  |   | 113,066   |  
|Other                             |  |                         | 39,427    |   |      |   | 37,820    |      |  |   | 64,393    |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Subtotal                          |  |                         | 1,767,253 |   |      |   | 1,939,785 |      |  |   | 1,765,626 |  
|Less: unconsolidated companies    |  |                         | (42,449   | ) |      |   | (56,758   | )    |  |   | (111,524  | )
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Consolidated revenues             |  | $                       | 1,724,804 |   |      | $ | 1,883,027 |      |  | $ | 1,654,102 |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Segment Income (Loss):            |  |                         |           |   |      |   |           |      |  |   |           |  
|Feature films                     |  | $                       | 148,736   |   |      | $ | 107,922   |      |  | $ | (40,052   | )
|Television programming            |  |                         | 52,309    |   |      |   | 24,869    |      |  |   | 4,902     |  
|Cable channels                    |  |                         | (4,184    | ) |      |   | (177      | )    |  |   | 12,850    |  
|Other                             |  |                         | 25,875    |   |      |   | 23,521    |      |  |   | 40,047    |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Subtotal                          |  |                         | 222,736   |   |      |   | 156,135   |      |  |   | 17,747    |  
|Less: unconsolidated companies    |  |                         | 4,846     |   |      |   | (310      | )    |  |   | (13,561   | )
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Consolidated segment income       |  | $                       | 227,582   |   |      | $ | 155,825   |      |  | $ | 4,186     |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Identifiable Assets:              |  |                         |           |   |      |   |           |      |  |   |           |  
|Feature films                     |  | $                       | 2,556,874 |   |      | $ | 2,595,706 |      |  | $ | 2,640,294 |  
|Television programming            |  |                         | 413,345   |   |      |   | 405,140   |      |  |   | 369,723   |  
|Cable channels                    |  |                         | 22,470    |   |      |   | 24,702    |      |  |   | 620,644   |  
|Other                             |  |                         | 3,381     |   |      |   | 4,389     |      |  |   | 12,349    |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Consolidated segment assets       |  | $                       | 2,996,070 |   |      | $ | 3,029,937 |      |  | $ | 3,643,010 |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Capital Expenditures:             |  |                         |           |   |      |   |           |      |  |   |           |  
|Feature films                     |  | $                       | 13,303    |   |      | $ | 23,717    |      |  | $ | 20,141    |  
|Television programming            |  |                         | 2,151     |   |      |   | 3,702     |      |  |   | 2,820     |  
|Other                             |  |                         | 17        |   |      |   | 40        |      |  |   | 94        |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Consolidated capital expenditures |  | $                       | 15,471    |   |      | $ | 27,459    |      |  | $ | 23,055    |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Depreciation Expense:             |  |                         |           |   |      |   |           |      |  |   |           |  
|Feature films                     |  | $                       | 13,024    |   |      | $ | 14,942    |      |  | $ | 17,880    |  
|Television programming            |  |                         | 2,106     |   |      |   | 2,332     |      |  |   | 2,504     |  
|Cable channels                    |  |                         | 2,340     |   |      |   | 3,288     |      |  |   | 5,174     |  
|Other                             |  |                         | 17        |   |      |   | 25        |      |  |   | 83        |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Subtotal                          |  |                         | 17,487    |   |      |   | 20,588    |      |  |   | 25,641    |  
|Less: unconsolidated companies    |  |                         | (2,340    | ) |      |   | (3,288    | )    |  |   | (5,174    | )
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  
|Consolidated segment depreciation |  | $                       | 15,147    |   |      | $ | 17,300    |      |  | $ | 20,467    |  
|                                  |  |                         |           |   |      |   |           |      |  |   |           |  



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table presents the details of other operating segment income:



|                            |  |                         |        |      |   |        |  |   |       
|--------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                            |  | Year Ended December 31,
|                            |  | 2004                    |        | 2003 |   | 2002  
|Licensing and merchandising |  | $                       | 7,172  |      | $ | 7,927  |  | $ | 7,754 
|Interactive media           |  |                         | 4,392  |      |   | 6,498  |  |   | 9,859 
|Music                       |  |                         | 9,946  |      |   | 7,066  |  |   | 8,175 
|Other                       |  |                         | 4,365  |      |   | 2,030  |  |   | 14,259
|                            |  |                         |        |      |   |        |  |   |       
|                            |  | $                       | 25,875 |      | $ | 23,521 |  | $ | 40,047
|                            |  |                         |        |      |   |        |  |   |       



The following is a
reconciliation of reportable segment income to loss from operations before (benefit) provision for income taxes:



|                                                                 |  |                         |          |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                 |  | Year Ended December 31, |         
|                                                                 |  | 2004                    |          |   | 2003 |   |          | 2002 | 
|Segment income                                                   |  | $                       | 227,582  |   |      | $ | 155,825  |      |  | $ | 4,186    |  
|General and administrative expenses                              |  |                         | (178,105 | ) |      |   | (139,643 | )    |  |   | (84,857  | )
|Depreciation                                                     |  |                         | (15,147  | ) |      |   | (17,300  | )    |  |   | (20,467  | )
|                                                                 |  |                         |          |   |      |   |          |      |  |   |          |  
|Operating income (loss)                                          |  |                         | 34,330   |   |      |   | (1,118   | )    |  |   | (101,138 | )
|Write-down on investment in cable channels                       |  |                         |         |   |      |   | (93,059  | )    |  |   |         |  
|Gain on sale of equity interest in cable channel                 |  |                         |         |   |      |   |         |      |  |   | 32,514   |  
|Equity in net earnings (losses) of affiliates                    |  |                         | (4,847   | ) |      |   | 310      |      |  |   | 13,561   |  
|Interest expense, net of amounts capitalized                     |  |                         | (63,601  | ) |      |   | (60,229  | )    |  |   | (79,929  | )
|Interest and other income, net                                   |  |                         | 8,411    |   |      |   | 16,148   |      |  |   | 7,432    |  
|Other non-recurring costs                                        |  |                         | (7,026   | ) |      |   | (5,099   | )    |  |   |         |  
|                                                                 |  |                         |          |   |      |   |          |      |  |   |          |  
|Loss from operations before (benefit) provision for income taxes |  | $                       | (32,733  | ) |      | $ | (143,047 | )    |  | $ | (127,560 | )
|                                                                 |  |                         |          |   |      |   |          |      |  |   |          |  



The following is a
reconciliation of reportable segment assets to consolidated total assets:



|                                             |  |              |           |      |   |           |  |   |          
|-------------------------------------------- |  | ------------ | --------- | ---- | - | --------- |  | - | ---------
|                                             |  | December 31,
|                                             |  | 2004         |           | 2003 |   | 2002     
|Total assets for reportable segments         |  | $            | 2,996,070 |      | $ | 3,029,937 |  | $ | 3,643,010
|Other unallocated amounts (principally cash) |  |              | 287,731   |      |   | 76,634    |  |   | 625,964  
|                                             |  |              |           |      |   |           |  |   |          
|Consolidated total assets                    |  | $            | 3,283,801 |      | $ | 3,106,571 |  | $ | 4,268,974
|                                             |  |              |           |      |   |           |  |   |          



The Companys
foreign activities are principally motion picture and television production and distribution in territories outside of the United States and Canada. Foreign long-term assets of subsidiaries operating in foreign countries are not material in relation
to consolidated net assets. Revenues earned by territory were as follows:



|                         |  |                         |           |      |   |           |  |   |          
|------------------------ |  | ----------------------- | --------- | ---- | - | --------- |  | - | ---------
|                         |  | Year Ended December 31,
|                         |  | 2004                    |           | 2003 |   | 2002     
|United States and Canada |  | $                       | 1,045,934 |      | $ | 1,193,066 |  | $ | 1,101,624
|Europe                   |  |                         | 483,403   |      |   | 491,878   |  |   | 366,918  
|Asia and Australia       |  |                         | 147,609   |      |   | 144,668   |  |   | 123,415  
|Other                    |  |                         | 47,858    |      |   | 53,415    |  |   | 62,145   
|                         |  |                         |           |      |   |           |  |   |          
|                         |  | $                       | 1,724,804 |      | $ | 1,883,027 |  | $ | 1,654,102
|                         |  |                         |           |      |   |           |  |   |          



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 13Commitments and Contingencies



Leases.    The Company has operating leases for offices and equipment. Certain property leases
include provisions for increases over base year rents as well as for escalation clauses for maintenance and other building operations. Rent expense was approximately $30,493,000, $26,402,000 and $20,511,000 for the years ended December 31, 2004,
2003 and 2002, respectively.



Employment
Agreements.    The Company has employment agreements with various principal officers and employees. The agreements provide for minimum salary levels as well as, in some cases, bonuses.



Creative Talent Agreements.    The Company has
entered into contractual agreements for creative talent related to future film production. Such amounts are scheduled to be paid through 2007.



Future minimum annual commitments under bank and other debt agreements, non-cancelable operating leases, employment agreements, creative talent agreements
and letters of credit as of December 31, 2003 are as follows (in thousands):



|                           |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |           |  |   |          
|-------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | --------- |  | - | ---------
|                           |  | 2005 |         | 2006 |   | 2007    |  | 2008 |        | 2009 |   | Thereafter |  | Total
|Bank and other debt        |  | $    | 64,000  |      | $ | 64,000  |  | $    | 64,000 |      | $ | 64,000     |  | $     | 64,000 |  | $ | 1,664,000 |  | $ | 1,984,000
|Operating leases           |  |      | 28,216  |      |   | 29,128  |  |      | 30,049 |      |   | 30,700     |  |       | 31,043 |  |   | 231,294   |  |   | 380,430  
|Employment agreements      |  |      | 55,419  |      |   | 31,185  |  |      | 5,030  |      |   |           |  |       |       |  |   |          |  |   | 91,634   
|Creative talent agreements |  |      | 71,353  |      |   | 12,440  |  |      | 38     |      |   |           |  |       |       |  |   |          |  |   | 83,831   
|Letters of credit          |  |      | 20,123  |      |   |        |  |      |       |      |   |           |  |       |       |  |   |          |  |   | 20,123   
|                           |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |           |  |   |          
|Total                      |  | $    | 239,111 |      | $ | 136,753 |  | $    | 99,117 |      | $ | 94,700     |  | $     | 95,043 |  | $ | 1,895,294 |  | $ | 2,560,018
|                           |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |           |  |   |          



Litigation.    The Company, together with other major companies in the filmed entertainment industry, has been subject to numerous antitrust suits brought by various motion picture exhibitors, producers and
others. In addition, various legal proceedings involving alleged breaches of contract, antitrust violations, copyright infringement and other claims are now pending, which the Company considers routine to its business activities.



The Company has provided an accrual for pending litigation as of December 31,
2004 in accordance with SFAS No. 5, Accounting for Contingencies. In the opinion of Company management, any liability under pending litigation is not expected to be material in relation to the Companys financial condition or
results of operations.



Contractual
Commitments.    Effective February 1, 2000, the Company entered into an International Home Video Subdistribution Services Agreement between Metro-Goldwyn-Mayer Home Entertainment LLC (MGMHE) and Twentieth Century
Fox Home Entertainment, Inc. (Fox Home Entertainment), pursuant to which Fox Home Entertainment provides distribution services for the Companys films in the international home video market. On June 24, 2003, MGMHE gave notice to
Fox Home Entertainment of its intent to terminate the agreement as of January 31, 2004 as permitted under the agreement. Effective February 1, 2004, MGMHE and Fox Home Entertainment have entered into an amended agreement (the Amended
Agreement) under which Fox Home Entertainment will continue to perform sub-distribution services in certain territories. All termination payments required under the Amended Agreement were paid by the Company during the year ended December 31,
2004. Under the terms of the Amended Agreement, the Company pays Fox Home Entertainment a distribution fee based on gross receipts, as defined.



Effective November 1, 2000, the Company entered into an International Theatrical Distribution Services Agreement with Twentieth Century Fox Film
Corporation (Fox) for distribution of the Companys film



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



releases in international theatrical and non-theatrical markets in territories in which the Company owns or controls the right to perform distribution
services. Under the terms of the agreement, the Company pays Fox a distribution fee based on gross film rentals.



Effective February 1, 2004, the Company amended the International Theatrical Distribution Services Agreement with Fox. The amended agreement eliminated
the distribution by Fox in the international non-theatrical markets and changed the expiration date of the agreement to the earlier of July 31, 2006 or the expiration or earlier termination of the International Home Video Subdistribution Services
Agreement, as amended.



Note 14Supplementary Cash Flow Information



The Company paid interest, net of capitalized interest,
of $51,660,000, $53,732,000 and $63,211,000 during the years ended December 31, 2004, 2003 and 2002, respectively. The Company paid income taxes of $10,707,000, $14,662,000 and $13,237,000 during the years ended December 31, 2004, 2003 and 2002,
respectively.



During the years ended December 31, 2004 and
2003, property and equipment additions include non-cash additions for tenant improvements of $313,000 and $17,082,000 paid by the landlords of new office facilities leased in Los Angeles, California. A corresponding liability has been established
and is being amortized over the life of the lease as a reduction of rent expense.



During the year ended December 31, 2002, the Company contributed 1,406,753 shares of common stock aggregating $27,616,000 to participants of the Senior Management Bonus Plan (see Note 8).



Note 15Quarterly Financial Data (Unaudited)



Certain quarterly information is presented below (in thousands):



|                                             |  |              |         |   |               |   |          |              |  |   |               |   |  |   |         |  
|-------------------------------------------- |  | ------------ | ------- | - | ------------- | - | -------- | ------------ |  | - | ------------- | - |  | - | ------- | -
|                                             |  | FirstQuarter |         |   | SecondQuarter |   |          | ThirdQuarter |  |   | FourthQuarter |  
|2004:                                        |  |              |         |   |               |   |          |              |  |   |               |   |  |   |         |  
|Revenues                                     |  | $            | 463,996 |   |               | $ | 406,107  |              |  | $ | 401,292       |   |  | $ | 453,409 |  
|Operating income (loss)                      |  | $            | (16,816 | ) |               | $ | 4,241    |              |  | $ | (3,527        | ) |  | $ | 50,432  |  
|Interest expense, net of amounts capitalized |  | $            | (1,087  | ) |               | $ | (20,752  | )            |  | $ | (19,876       | ) |  | $ | (21,886 | )
|Net income (loss)                            |  | $            | (21,270 | ) |               | $ | (19,666  | )            |  | $ | (26,727       | ) |  | $ | 38,452  |  
|Basic and diluted income (loss) per share    |  | $            | (0.09   | ) |               | $ | (0.08    | )            |  | $ | (0.11         | ) |  | $ | 0.16    |  
|                                             |  |              |         |  
|2003:                                        |  |              |         |   |               |   |          |              |  |   |               |   |  |   |         |  
|Revenues                                     |  | $            | 395,191 |   |               | $ | 487,702  |              |  | $ | 457,051       |   |  | $ | 543,083 |  
|Operating income (loss)                      |  | $            | (39,055 | ) |               | $ | (18,487  | )            |  | $ | (13,383       | ) |  | $ | 69,807  |  
|Interest expense, net of amounts capitalized |  | $            | (17,949 | ) |               | $ | (18,863  | )            |  | $ | (14,744       | ) |  | $ | (8,673  | )
|Net income (loss)                            |  | $            | (55,822 | ) |               | $ | (133,579 | )            |  | $ | (32,613       | ) |  | $ | 60,253  |  
|Basic and diluted income (loss) per share    |  | $            | (0.22   | ) |               | $ | (0.55    | )            |  | $ | (0.13         | ) |  | $ | 0.25    |  
|                                             |  |              |         |  
|2002:                                        |  |              |         |   |               |   |          |              |  |   |               |   |  |   |         |  
|Revenues                                     |  | $            | 315,128 |   |               | $ | 336,923  |              |  | $ | 381,156       |   |  | $ | 620,895 |  
|Operating income (loss)                      |  | $            | (66,398 | ) |               | $ | (99,253  | )            |  | $ | 23,732        |   |  | $ | 40,781  |  
|Interest expense, net of amounts capitalized |  | $            | (16,095 | ) |               | $ | (26,530  | )            |  | $ | (18,107       | ) |  | $ | (19,197 | )
|Net income (loss)                            |  | $            | (90,792 | ) |               | $ | (121,809 | )            |  | $ | 11,695        |   |  | $ | 58,659  |  
|Basic and diluted income (loss) per share    |  | $            | (0.37   | ) |               | $ | (0.48    | )            |  | $ | 0.05          |   |  | $ | 0.24    |  



116



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 16Agreement and Plan of Merger



On September 23, 2004, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with LOC
Acquisition Company, a Delaware corporation owned by a consortium including Sony Corporation of America (Sony), Comcast Studio Investments, Inc., and affiliates of Providence Equity Partners Inc., Texas Pacific Group and DLJ Merchant
Banking Partners. Under the Merger Agreement, the consortium would acquire the Company for $12.00 in cash per share of common stock of the Company plus the assumption of the Companys debt. Completion of the merger is subject to various
regulatory approvals and customary closing conditions. JP Morgan Chase and Credit Suisse First Boston have committed to provide the consortium with up to $4.25 billion of senior debt financing. The consortiums obligation to acquire the Company
is conditioned upon consummation of the debt financing on the terms set forth in the commitment letters delivered by JP Morgan Chase and Credit Suisse First Boston or substitute financing which, if the debt financing commitments become unavailable,
the consortium is obligated to use its reasonable best efforts to obtain. Tracinda Corporation and 250 Rodeo, holders of approximately 69 percent of the outstanding common stock of the Company, have entered into an agreement with LOC Acquisition
Company pursuant to which, among other things and subject to certain exceptions, Tracinda Corporation and 250 Rodeo agree to vote in favor of the transaction. On December 17, 2004, the Companys stockholders approved the merger at a special
meeting. In connection with the Merger Agreement, Tracinda and 250 Rodeo voted all of their shares of MGM common stock in favor of the merger.



In connection with the Merger Agreement, the Company and Sony entered into a deposit agreement (the Deposit Agreement), dated as of September
13, 2004, as amended, pursuant to which Sony paid a $150,000,000 deposit to the Company. In addition, in connection with the Merger Agreement, the Company entered into an Indemnity Agreement with Tracinda Corporation, 250 Rodeo and Mr. Kerkorian
pursuant to which the Company will indemnify Tracinda Corporation, 250 Rodeo and Mr. Kerkorian against certain liabilities relating to the transactions contemplated by the Merger Agreement.



Under the Deposit Agreement, the Company must return the deposit to Sony at
the effective time of the merger. Otherwise, the deposit is nonrefundable unless (1) the Merger Agreement is terminated under circumstances where the Company is required to pay a termination fee to LOC Acquisition Company; provided that if the
Merger Agreement is terminated by LOC Acquisition Company because (a) the Companys Board withdraws, or modifies in a manner adverse to LOC Acquisition Company, its recommendation that the Companys stockholders adopt the merger agreement
or recommends, approves or adopts an alternative takeover proposal, or (b) the Company fails to include in the proxy statement relating to the merger (or any amendment) the recommendation of the Companys Board that the Companys
stockholders vote in favor of the merger, or (c) a third party commences a tender or exchange offer for the Company and the Companys Board does not recommend rejection of the offer within ten business days or (d) the Companys Board
approves or recommends an alternative takeover proposal or approves or recommends that its stockholders tender their shares in any tender or exchange offer, the deposit is only refundable if the Company enters into a binding agreement with a third
party with respect to an alternative takeover proposal within nine months of termination of the Merger Agreement; or (2) a court has determined that there has been material adverse effect with respect to the Company.



In addition, if LOC Acquisition Company terminates the Merger Agreement
because the Company has breached any of its covenants such that the conditions to closing cannot be satisfied and there is a final binding judgment of a court that the Company willfully and materially breached the Merger Agreement (as to which all
rights of appeal or other avenues of review have been exhausted or lapsed), then the amount of the deposit may be taken into account in determining any damages resulting from the Companys willful and material breach.



In addition, in connection with the Merger Agreement, the Company entered
into an Indemnity Agreement with Tracinda, 250 Rodeo and Mr. Kerkorian pursuant to which it will indemnify Tracinda, 250 Rodeo and Mr. Kerkorian against certain liabilities relating to the transactions contemplated by the Merger Agreement.



117



---

METRO-GOLDWYN-MAYER INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The 2004 Credit Facility provides that certain change of control transactions, including a
transaction such as the pending merger with LOC Acquisition Company, constitute an event of default resulting in acceleration of the loans and termination of the revolving credit facility. In connection with the closing of the merger, the 2004
Credit Facility will be replaced and superseded by debt financing arranged by the consortium.



The Merger Agreement is presently expected to close shortly after the end of the first quarter of 2005. However, there can be no assurance that any of the conditions to the merger, including the conditions within the
control of the Company, will be satisfied or that the merger will be completed.



Although the Company has no reason to believe that the merger will not be consummated, the pendency of a merger involving a motion picture studio tends to create uncertainty in the entertainment business community. As
a result, it has been more difficult for the Company to attract development projects, attach talent to projects, commence productions, and implement distribution initiatives in the home video and television sales markets during the progress of
merger discussions and the executory period of the Merger Agreement. Accordingly, in the event that the merger should fail to be consummated, there may be a gap or reduction in the number of motion picture releases for a period of time following
termination of the Merger Agreement until the Company can reinvigorate its development, production and distribution activities. In addition, the Company could face a loss of personnel or a decline in morale if the merger should fail to be
consummated. Such occurrences could be expected to have, at least temporarily, a significant adverse effect upon the Companys business. In the event that, as a result of termination of the Merger Agreement, the Company retains Sonys
$150,000,000 million deposit, these adverse effects would be mitigated but there is no guarantee that the deposit alone would be sufficient to mitigate the entire negative effect of non-consummation of the merger.



118



---

Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders

Metro-Goldwyn-Mayer Inc.



We have audited, in accordance with the standards of the Public Accounting Oversight Board (United States), the consolidated balance sheets
of Metro-Goldwyn-Mayer Inc. (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31,
2004, and our report dated February 14, 2005 expressed an unqualified opinion thereon (included elsewhere in this Form 10-K). Our audits also included the financial statement schedules listed in Item 15(a) of this Form 10-K. These schedules are the
responsibility of the Companys management. Our responsibility is to express an opinion based on our audits.



In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.



Ernst & Young LLP



Los Angeles, California

February 14, 2005



119



---

METRO-GOLDWYN-MAYER INC.

(PARENT ONLY)



SCHEDULE I:    FINANCIAL INFORMATION OF REGRISTRANT



BALANCE SHEETS

(in thousands, except share data)



|                                                                                       |  |                  |            |   |                  |   |            |  
|-------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                                                       |  | December 31,2004 |            |   | December 31,2003 |  
|ASSETS                                                                                 |  |                  |            |   |                  |   |            |  
|                                                                                       |  |                 
|Investments and advances to affiliates                                                 |  | $                | 322,311    |   |                  | $ | 2,328,371  |  
|                                                                                       |  |                  |            |   |                  |   |            |  
|                                                                                       |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                   |  |                  |            |   |                  |   |            |  
|                                                                                       |  |                 
|Liabilities                                                                            |  | $                |           |   |                  | $ |           |  
|                                                                                       |  |                 
|Commitments and contingencies                                                          |  |                  |            |   |                  |   |            |  
|                                                                                       |  |                 
|Stockholders equity:                                                                  |  |                  |            |   |                  |   |            |  
|Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued             |  |                  |           |   |                  |   |           |  
|Common stock, $.01 par value, 500,000,000 shares authorized, 251,960,505 shares issued |  |                  | 2,520      |   |                  |   | 2,520      |  
|Additional paid-in capital                                                             |  |                  | 2,058,827  |   |                  |   | 3,915,777  |  
|Deficit                                                                                |  |                  | (1,536,784 | ) |                  |   | (1,507,573 | )
|Accumulated other comprehensive income                                                 |  |                  | 13,464     |   |                  |   | 2,046      |  
|Less: treasury stock, at cost, 13,729,671 shares and 7,347,530 shares                  |  |                  | (215,716   | ) |                  |   | (84,399    | )
|                                                                                       |  |                  |            |   |                  |   |            |  
|Total stockholders equity                                                             |  |                  | 322,311    |   |                  |   | 2,328,371  |  
|                                                                                       |  |                  |            |   |                  |   |            |  
|                                                                                       |  | $                | 322,311    |   |                  | $ | 2,328,371  |  
|                                                                                       |  |                  |            |   |                  |   |            |  





The accompanying Notes to Financial Statements are an integral part of these statements.



120



---

METRO-GOLDWYN-MAYER INC.

(PARENT ONLY)



STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)



|                                                      |  |                         |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                      |  | Year Ended December 31, |            
|                                                      |  | 2004                    |             |   | 2003 |   |             | 2002 | 
|Revenues                                              |  | $                       |            |   |      | $ |            |      |  | $ |            |  
|Other (income) expense:                               |  |                         |             |   |      |   |             |      |  |   |             |  
|Other non-recurring costs                             |  |                         | 7,026       |   |      |   | 5,099       |      |  |   |            |  
|Other expenses                                        |  |                         |            |   |      |   | 1,538       |      |  |   |            |  
|Equity in net losses of subsidiaries                  |  |                         | 22,338      |   |      |   | 155,499     |      |  |   | 142,247     |  
|Intercompany interest income                          |  |                         | (153        | ) |      |   | (375        | )    |  |   |            |  
|                                                      |  |                         |             |   |      |   |             |      |  |   |             |  
|Total other expense                                   |  |                         | 29,211      |   |      |   | 161,761     |      |  |   | 142,247     |  
|                                                      |  |                         |             |   |      |   |             |      |  |   |             |  
|Net loss                                              |  | $                       | (29,211     | ) |      | $ | (161,761    | )    |  | $ | (142,247    | )
|                                                      |  |                         |             |   |      |   |             |      |  |   |             |  
|Loss per share:                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|Basic and diluted                                     |  | $                       | (0.12       | ) |      | $ | (0.66       | )    |  | $ | (0.57       | )
|                                                      |  |                         |             |   |      |   |             |      |  |   |             |  
|Weighted average number of common shares outstanding: |  |                         |             |   |      |   |             |      |  |   |             |  
|Basic and diluted                                     |  |                         | 237,243,202 |   |      |   | 245,584,705 |      |  |   | 248,355,556 |  
|                                                      |  |                         |             |   |      |   |             |      |  |   |             |  







The accompanying Notes to Financial Statements are an integral part of these
statements.



121



---

METRO-GOLDWYN-MAYER INC.

(PARENT ONLY)



STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share data)



|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------- |  | --------------- |  | ------------ | - | ------------------- | ----------- | -------- | ------- | ----- |  | -------------------------- | ---------- | - | ------------------------------------- | - | ---------- | ------------------ |  | - | ------------------------ | - |  | - | ------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                              |  | Preferred Stock |  | Common Stock |   | AddlPaid-inCapital |             |          | Deficit |       |  | Compre-hensiveIncome(Loss) |            |   | Accum.OtherCompre-hensiveIncome(Loss) |   |            | Less:TreasuryStock |  |   | TotalStockholdersEquity |  
|                                                              |  | No. ofShares    |  | ParValue     |   | No. ofShares        |             | ParValue |         |       |  |                            |            |  
|Balance December 31, 2001                                     |  |                |  | $            |  |                     | 239,629,500 |          | $       | 2,396 |  | $                          | 3,717,767  |   |                                       | $ | (1,203,565 | )                  |  | $ |                         |   |  | $ | (27,116 | ) |  | $ |         |   |  | $ | 2,489,482  |  
|Common stock issued to outside parties, net                   |  |                |  |              |  |                     | 10,550,000  |          |         | 106   |  |                            | 164,665    |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | 164,771    |  
|Acquisition of treasury stock, at cost                        |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (32,709  | ) |  |   | (32,709    | )
|Contribution of treasury stock to deferred compensation plan  |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (7,608   | ) |  |   | (7,608     | )
|Common stock issued to directors, officers and employees, net |  |                |  |              |  |                     | 1,781,005   |          |         | 18    |  |                            | 32,491     |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   | 1,513    |   |  |   | 34,022     |  
|Comprehensive income (loss):                                  |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Net loss                                                      |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   | (142,247   | )                  |  |   | (142,247                 | ) |  |   |        |   |  |   |         |   |  |   | (142,247   | )
|Unrealized gain on derivative instruments                     |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 13,195                   |   |  |   | 13,195  |   |  |   |         |   |  |   | 13,195     |  
|Unrealized loss on securities                                 |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | (585                     | ) |  |   | (585    | ) |  |   |         |   |  |   | (585       | )
|Change in unfunded pension obligation                         |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | (3,994                   | ) |  |   | (3,994  | ) |  |   |         |   |  |   | (3,994     | )
|Foreign currency translation adjustments                      |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 139                      |   |  |   | 139     |   |  |   |         |   |  |   | 139        |  
|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Comprehensive loss                                            |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | (133,492                 | ) |  |   |         |   |  |   |          |   |  |   |            |  
|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Balance December 31, 2002                                     |  |                |  |              |  |                     | 251,960,505 |          |         | 2,520 |  |                            | 3,914,923  |   |                                       |   | (1,345,812 | )                  |  |   |                         |   |  |   | (18,361 | ) |  |   | (38,804  | ) |  |   | 2,514,466  |  
|Acquisition of treasury stock, at cost                        |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (49,785  | ) |  |   | (49,785    | )
|Common stock issued to directors, officers and employees, net |  |                |  |              |  |                     |            |          |         |      |  |                            | 854        |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   | 4,190    |   |  |   | 5,044      |  
|Comprehensive income (loss):                                  |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Net loss                                                      |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   | (161,761   | )                  |  |   | (161,761                 | ) |  |   |        |   |  |   |         |   |  |   | (161,761   | )
|Unrealized gain on derivative instruments                     |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 16,629                   |   |  |   | 16,629  |   |  |   |         |   |  |   | 16,629     |  
|Unrealized loss on securities                                 |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 1,303                    |   |  |   | 1,303   |   |  |   |         |   |  |   | 1,303      |  
|Change in unfunded pension obligation                         |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | (356                     | ) |  |   | (356    | ) |  |   |         |   |  |   | (356       | )
|Foreign currency translation adjustments                      |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 2,831                    |   |  |   | 2,831   |   |  |   |         |   |  |   | 2,831      |  
|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Comprehensive loss                                            |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | (141,354                 | ) |  |   |         |   |  |   |          |   |  |   |            |  
|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Balance December 31, 2003                                     |  |                |  |              |  |                     | 251,960,505 |          |         | 2,520 |  |                            | 3,915,777  |   |                                       |   | (1,507,573 | )                  |  |   |                         |   |  |   | 2,046   |   |  |   | (84,399  | ) |  |   | 2,328,371  |  
|Payment of stockholder dividend                               |  |                |  |              |  |                     |            |          |         |      |  |                            | (1,892,983 | ) |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | (1,892,983 | )
|Acquisition of treasury stock, at cost                        |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   | (181,370 | ) |  |   | (181,370   | )
|Common stock issued to directors, officers and employees, net |  |                |  |              |  |                     |            |          |         |      |  |                            | 1,419      |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   | 50,053   |   |  |   | 51,472     |  
|Adoption of SFAS No. 123                                      |  |                |  |              |  |                     |            |          |         |      |  |                            | 3,823      |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | 3,823      |  
|Stock-based employee compensation                             |  |                |  |              |  |                     |            |          |         |      |  |                            | 30,791     |   |                                       |   |           |                    |  |   |                         |   |  |   |        |   |  |   |         |   |  |   | 30,791     |  
|Comprehensive income (loss):                                  |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Net loss                                                      |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   | (29,211    | )                  |  |   | (29,211                  | ) |  |   |        |   |  |   |         |   |  |   | (29,211    | )
|Unrealized gain on derivative instruments                     |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | (2,770                   | ) |  |   | (2,770  | ) |  |   |         |   |  |   | (2,770     | )
|Unrealized loss on securities                                 |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 805                      |   |  |   | 805     |   |  |   |         |   |  |   | 805        |  
|Change in unfunded pension obligation                         |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 4,350                    |   |  |   | 4,350   |   |  |   |         |   |  |   | 4,350      |  
|Foreign currency translation adjustments                      |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | 9,033                    |   |  |   | 9,033   |   |  |   |         |   |  |   | 9,033      |  
|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Comprehensive loss                                            |  |                |  |              |  |                     |            |          |         |      |  |                            |           |   |                                       |   |           |                    |  |   | (17,793                  | ) |  |   |         |   |  |   |          |   |  |   |            |  
|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  
|Balance December 31, 2004                                     |  |                |  | $            |  |                     | 251,960,505 |          | $       | 2,520 |  | $                          | 2,058,827  |   |                                       | $ | (1,536,784 | )                  |  | $ |                         |   |  | $ | 13,464  |   |  | $ | (215,716 | ) |  | $ | 322,311    |  
|                                                              |  |                 |  |              |   |                     |             |          |         |       |  |                            |            |   |                                       |   |            |                    |  |   |                          |   |  |   |         |   |  |   |          |   |  |   |            |  

The accompanying Notes to Financial Statements are an integral part of these statements.



122



---

METRO-GOLDWYN-MAYER INC.

(PARENT ONLY)



STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                  |  | Year Ended December 31, |           
|                                                                                                  |  | 2004                    |            |   | 2003 |   |          | 2002 | 
|Operating activities:                                                                             |  |                         |            |   |      |   |          |      |  |   |          |  
|Net loss                                                                                          |  | $                       | (29,211    | ) |      | $ | (161,761 | )    |  | $ | (142,247 | )
|Adjustments to reconcile net income from operations to net cash provided by operating activities: |  |                         |            |   |      |   |          |      |  |   |          |  
|Other non-recurring costs                                                                         |  |                         | 7,026      |   |      |   | 5,099    |      |  |   |         |  
|Other expenses                                                                                    |  |                         |           |   |      |   | 1,538    |      |  |   |         |  
|Losses on equity investments, net                                                                 |  |                         | 22,338     |   |      |   | 155,499  |      |  |   | 142,247  |  
|Intercompany interest income                                                                      |  |                         | (153       | ) |      |   | (375     | )    |  |   |         |  
|                                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash from operating activities                                                                |  |                         |           |   |      |   |         |      |  |   |         |  
|                                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Financing activities:                                                                             |  |                         |            |   |      |   |          |      |  |   |          |  
|Dividend paid                                                                                     |  |                         | (1,892,983 | ) |      |   |         |      |  |   |         |  
|Net proceeds from issuance of equity securities to outside parties                                |  |                         |           |   |      |   |         |      |  |   | 164,771  |  
|Net proceeds from issuance of equity securities to related parties                                |  |                         | 43,128     |   |      |   | 121      |      |  |   | 2,154    |  
|Acquisition of treasury stock                                                                     |  |                         | (181,370   | ) |      |   | (49,785  | )    |  |   | (32,709  | )
|Financing costs and other                                                                         |  |                         | (19,394    | ) |      |   | (767     | )    |  |   |         |  
|Net intercompany advances                                                                         |  |                         | 157,636    |   |      |   | 50,431   |      |  |   | (134,216 | )
|                                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash from financing activities                                                                |  |                         |           |   |      |   |         |      |  |   |         |  
|                                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Net change in cash and cash equivalents                                                           |  |                         |           |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at beginning of the year                                                |  |                         |           |   |      |   |         |      |  |   |         |  
|                                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of the year                                                      |  | $                       |           |   |      | $ |         |      |  | $ |         |  
|                                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  





The accompanying Notes to Financial Statements are an integral part of these statements.



123



---

METRO-GOLDWYN-MAYER INC.

(PARENT ONLY)



NOTES TO FINANCIAL STATEMENTS

December 31, 2004



Note 1Basis of Presentation and Comprehensive Income (Loss)



Basis of Presentation.    The accompanying
financial statements include the accounts of Metro-Goldwyn-Mayer Inc (MGM, or the Company) presented on a separate company (parent only) basis. MGM is a Delaware corporation formed on July 10, 1996 specifically to acquire MGM
Studios, and is majority owned by an investor group comprised of Kirk Kerkorian, Tracinda Corporation and a corporation that is principally owned by Tracinda Corporation, and certain current and former executive officers of the Company. The
acquisition of MGM Studios by MGM was completed on October 10, 1996, at which time MGM commenced principal operations. MGM acquired Orion Pictures Corporation and its majority owned subsidiaries on July 10, 1997.



Comprehensive Income (Loss).    The Company
computes comprehensive income (loss) pursuant to SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in financial
statements and thereby reports a measure of all changes in equity of an enterprise that result from transactions and other economic events other than transactions with owners. Total comprehensive income (loss) for the Company includes net income
(loss) and other comprehensive income (loss) items, including unrealized gain (loss) on derivative instruments, unrealized gain (loss) on securities, changes in unfunded pension plan obligations and cumulative foreign currency translation
adjustments. Components of other comprehensive income (loss), net of related income tax effect, are shown below (in thousands):



|                                                    |  |                         |         |   |      |   |          |      |  |   |          |  
|--------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                    |  | Year Ended December 31, |        
|                                                    |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Net loss                                            |  | $                       | (29,211 | ) |      | $ | (161,761 | )    |  | $ | (142,247 | )
|Other comprehensive income (loss):                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Unrealized gain (loss) on derivative instruments    |  |                         | (2,770  | ) |      |   | 16,629   |      |  |   | 13,195   |  
|Unrealized gain (loss) on securities                |  |                         | 805     |   |      |   | 1,303    |      |  |   | (585     | )
|Change in unfunded pension plan obligation          |  |                         | 4,350   |   |      |   | (356     | )    |  |   | (3,994   | )
|Cumulative foreign currency translation adjustments |  |                         | 9,033   |   |      |   | 2,831    |      |  |   | 139      |  
|                                                    |  |                         |         |   |      |   |          |      |  |   |          |  
|Total comprehensive loss                            |  | $                       | (17,793 | ) |      | $ | (141,354 | )    |  | $ | (133,492 | )
|                                                    |  |                         |         |   |      |   |          |      |  |   |          |  



Components of
accumulated other comprehensive income (loss) are shown below (in thousands):



|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  
|---------------------------- |  | -------------------------------------------- | ------- | - | --------------------------------- | - | ----- | ------------------------------ |  | - | -------------------------------- | - | ------------------------------------------ | - | ------ |  | - | ------- | -
|                             |  | UnrealizedGain (Loss)onDerivativeInstruments |         |   | UnrealizedGain(Loss) onSecurities |   |       | UnfundedPension PlanObligation |  |   | CumulativeTranslationAdjustments |   | AccumulatedOtherComprehensiveIncome (Loss) |  
|Balance at December 31, 2002 |  | $                                            | (13,859 | ) |                                   | $ | (782  | )                              |  | $ | (3,994                           | ) |                                            | $ | 274    |  | $ | (18,361 | )
|Current year change          |  |                                              | 16,629  |   |                                   |   | 1,303 |                                |  |   | (356                             | ) |                                            |   | 2,831  |  |   | 20,407  |  
|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  
|Balance at December 31, 2003 |  |                                              | 2,770   |   |                                   |   | 521   |                                |  |   | (4,350                           | ) |                                            |   | 3,105  |  |   | 2,046   |  
|Current year change          |  |                                              | (2,770  | ) |                                   |   | 805   |                                |  |   | 4,350                            |   |                                            |   | 9,033  |  |   | 11,418  |  
|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  
|Balance at December 31, 2004 |  | $                                            |        |   |                                   | $ | 1,326 |                                |  | $ |                                 |   |                                            | $ | 12,138 |  | $ | 13,464  |  
|                             |  |                                              |         |   |                                   |   |       |                                |  |   |                                  |   |                                            |   |        |  |   |         |  



124



---

METRO-GOLDWYN-MAYER INC.

(PARENT ONLY)



NOTES TO FINANCIAL STATEMENTS



Note 2Bank Debt



On April 26, 2004, MGM Studios entered into a fourth amended and restated credit facility with a syndicate of banks
aggregating $2.4 billion (the 2004 Credit Facility). Proceeds from the loans under the 2004 Credit Facility were used to finance the payment of a $1.89 billion special one-time cash dividend to stockholders on May 17, 2004, to refinance
loans existing under the previous credit facility and for general corporate purposes.



For additional information regarding the Registrants borrowings under debt agreements and other borrowings, see Note 6 to the Consolidated Financial Statements.



Note 3Loan to MGM Studios



On October 27, 2003, MGM loaned MGM Studios $50,000,000 in the form of a
promissory note bearing interest at 3.00 percent over the Adjusted LIBOR rate, as defined (4.12 percent at December 31, 2003). The promissory note was repaid in full on January 27, 2004.



125



---

Metro-Goldwyn-Mayer Inc.



Schedule IIValuation And Qualifying Accounts And Reserves

(In thousands)



|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|---------------------------------------------------------------------------- |  | -------------------------- | ------ | ---------------------------- | ------ | ---------- | ------- | - | -------------------- | - | ------
|                                                                             |  |                            |        | Additions                    |        |            |         |   |                     
|                                                                             |  | Balance atBeginningof Year |        | Charged toCosts and Expenses |        | Deductions |         |   | Balanceat End ofYear
|                                                                             |  |                            |        |                             
|Year Ended December 31, 2004                                                 |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for allowances and doubtful accounts                                 |  | $                          | 46,671 |                              | 16,257 |            | (33,093 | ) |                      | $ | 29,835
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for home video inventory obsolescence, shrinkage and reduplication   |  | $                          | 17,512 |                              | 2,740  |            | (7,801  | ) |                      | $ | 12,451
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for severance and other costs under corporate restructuring programs |  | $                          | 5,922  |                              |       |            | (5,858  | ) |                      | $ | 64    
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Year Ended December 31, 2003                                                 |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for allowances and doubtful accounts                                 |  | $                          | 40,980 |                              | 8,535  |            | (2,844  | ) |                      | $ | 46,671
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for home video inventory obsolescence, shrinkage and reduplication   |  | $                          | 17,347 |                              | 2,762  |            | (2,597  | ) |                      | $ | 17,512
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for severance and other costs under corporate restructuring programs |  | $                          | 3,290  |                              | 5,258  |            | (2,626  | ) |                      | $ | 5,922 
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Year Ended December 31, 2002:                                                |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for allowances and doubtful accounts                                 |  | $                          | 26,173 |                              | 21,205 |            | (6,398  | ) |                      | $ | 40,980
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for home video inventory obsolescence, shrinkage and reduplication   |  | $                          | 14,326 |                              | 3,791  |            | (770    | ) |                      | $ | 17,347
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       
|                                                                             |  |                            |        |                             
|Reserve for severance and other costs under corporate restructuring programs |  | $                          | 29,204 |                              | 4,274  |            | (30,188 | ) |                      | $ | 3,290 
|                                                                             |  |                            |        |                              |        |            |         |   |                      |   |       



126



---

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Document Description                                                                                                                                                                                                                              
|              | 
|2.1(21)(22)   |  | Agreement and Plan of Merger dated September 23, 2004, between the Company and LOC Acquisition Company                                                                                                                                            
|              | 
|3.1(2)        |  | Amended and Restated Certificate of Incorporation of the Company                                                                                                                                                                                  
|              | 
|3.2(7)        |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company                                                                                                                                                  
|              | 
|3.3(2)        |  | Amended and Restated Bylaws of the Company                                                                                                                                                                                                        
|              | 
|10.1(2)       |  | Amended and Restated Credit Agreement, dated as of October 15, 1997, among the Company, MGM Studios, Orion, certain lenders, Morgan
Guaranty Trust Company of New York (Morgan), as agent and Bank of America (B of A), as syndication agent**
|              | 
|10.2(19)      |  | Restatement IV of Credit Agreement, dated as of April 26, 2004, among MGM Studios, the Lenders and L/C Issuers and Bank of America, as
agent **                                                                                                   
|              | 
|10.3(2)       |  | Form of Modification and Cancellation Agreement, dated as of November 5, 1997                                                                                                                                                                     
|              | 
|10.4(2)       |  | Amended and Restated 1996 Stock Incentive Plan dated as of November 11, 1997 and form of related Stock Option
Agreement*                                                                                                                          
|              | 
|10.5(7)       |  | Amendment No. 1 to Amended and Restated 1996 Stock Incentive Plan*                                                                                                                                                                                
|              | 
|10.6(6)       |  | Form of Executive Option Exchange Agreement*                                                                                                                                                                                                      
|              | 
|10.7(13)      |  | Form of Director Stock Option Agreement Pursuant to the Amended and Restated 1996 Stock Incentive Plan*                                                                                                                                           
|              | 
|10.8(2)       |  | Senior Management Bonus Plan dated as of November 11, 1997 and form of related Bonus Interest Agreement*                                                                                                                                          
|              | 
|10.9(6)       |  | Bonus Interest Amendment*                                                                                                                                                                                                                         
|              | 
|10.10(10)     |  | Form of 2000 Employee Incentive Plan*                                                                                                                                                                                                             
|              | 
|10.11(2)      |  | Amended and Restated Employment Agreement of Frank G. Mancuso dated as of August 4, 1997                                                                                                                                                          
|              | 
|10.12(9)      |  | Consulting Agreement of Frank G. Mancuso dated as of August 12, 1999                                                                                                                                                                              
|              | 
|10.13(16)     |  | Employment Agreement of William A. Jones dated as of October 10, 2003*                                                                                                                                                                            
|              | 
|10.14(17)     |  | Employment Agreement of Daniel J. Taylor dated as of March 15, 2003*                                                                                                                                                                              
|              | 
|10.15(8)      |  | Employment Agreement of Christopher J. McGurk dated as of April 28, 1999*                                                                                                                                                                         
|              | 
|10.16(8)      |  | Letter Agreement between the Company and Christopher J. McGurk dated April 28, 1999*                                                                                                                                                              
|              | 
|10.17(15)     |  | Amendment to Employment Agreement of Christopher J. McGurk dated March 25, 2002*                                                                                                                                                                  
|              | 
|10.18(8)      |  | Employment Agreement of Alex Yemenidjian dated as of April 28, 1999*                                                                                                                                                                              
|              | 
|10.19(15)     |  | Amendment to Employment Agreement of Alex Yemenidjian dated March 25, 2002*                                                                                                                                                                       
|              | 
|10.20(17)     |  | Employment Agreement of Jay Rakow dated as of March 15, 2003*                                                                                                                                                                                     
|              | 
|10.21(11)     |  | Employment Agreement of Michael R. Gleason dated August 22, 2000                                                                                                                                                                                  
|              | 
|10.22(2)      |  | Indemnification Agreement dated as of October 10, 1996Frank G. Mancuso                                                                                                                                                                           
|              | 
|10.23(2)      |  | Indemnification Agreement dated as of October 10, 1996William A. Jones*                                                                                                                                                                          
|              | 
|10.24(2)      |  | Indemnification Agreement dated as of October 10, 1996James D. Aljian                                                                                                                                                                            
|              | 
|10.25(2)      |  | Indemnification Agreement dated as of October 10, 1996Michael R. Gleason                                                                                                                                                                         



127



---

|              |  |                                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Document Description                                                                                                             
|              | 
|10.26(2)      |  | Indemnification Agreement dated as of October 10, 1996Kirk Kerkorian                                                            
|              | 
|10.27(2)      |  | Indemnification Agreement dated as of October 10, 1996Jerome B. York                                                            
|              | 
|10.28(3)      |  | Indemnification Agreement dated as of November 7, 1997Alex Yemenidjian*                                                         
|              | 
|10.29(5)      |  | Indemnification Agreement dated as of June 15, 1998Daniel J. Taylor*                                                            
|              | 
|10.30(6)      |  | Indemnification Agreement dated as of November 12, 1998Alexander M. Haig, Jr.                                                   
|              | 
|10.31(6)      |  | Indemnification Agreement dated as of November 12, 1998Willie D. Davis                                                          
|              | 
|10.32(8)      |  | Indemnification Agreement dated as of April 28, 1999Christopher J. McGurk*                                                      
|              | 
|10.33(11)     |  | Indemnification Agreement dated as of August 2, 2000Jay Rakow*                                                                  
|              | 
|10.34(11)     |  | Indemnification Agreement dated as of September 7, 2000Priscilla Presley                                                        
|              | 
|10.35(14)     |  | Indemnification Agreement dated as of February 12, 2001Henry Winterstern                                                        
|              | 
|10.36(18)     |  | Indemnification Agreement dated as of May 14, 2003A. N. Mosich                                                                  
|              | 
|10.37(2)      |  | Form of Amended and Restated Shareholders Agreement dated as of August 4, 1997                                                   
|              | 
|10.38(5)      |  | Form of Waiver and Amendment No. 1 to Amended and Restated Shareholders Agreement dated as of August 8, 1998                     
|              | 
|10.39(5)      |  | Form of Amendment No. 2 to Amended and Restated Shareholders Agreement dated September 1, 1998                                   
|              | 
|10.40(6)      |  | Form of Waiver and Amendment No. 3 to Amended and Restated Shareholders Agreement                                                
|              | 
|10.41(2)      |  | Form of Amended and Restated Stock Option Agreement between the Company and Celsus Financial Corp                                
|              | 
|10.42(2)      |  | Form of Inducement Agreement dated as of November 5, 1997                                                                        
|              | 
|10.43(2)      |  | Form of Investment Agreement dated November 12, 1997 between the Company and Tracinda                                            
|              | 
|10.44(4)      |  | 1998 Non-Employee Director Stock Plan*                                                                                           
|              | 
|10.45(1)      |  | Amended and Restated 2000 Employee Incentive Plan*                                                                               
|              | 
|10.46(20)     |  | Deposit Agreement dated September 13, 2004, between the Company and Sony Corporation of America                                  
|              | 
|10.47(21)     |  | Amendment No. 1 to Deposit Agreement dated September 13, 2004, between the Company and Sony Corporation of America               
|              | 
|10.48(21)(22) |  | Indemnity Agreement dated September 23, 2004 among the Company, Tracinda, 250 Rodeo, Inc. and Kirk Kerkorian                     
|              | 
|10.49(22)     |  | Voting and Support Agreement dated as of September 23, 2004, by and between Tracinda, 250 Rodeo, Inc. and LOC Acquisition
Company
|              | 
|21(1)         |  | List of Subsidiaries of Metro-Goldwyn-Mayer Inc.                                                                                 
|              | 
|23(1)         |  | Consent of Independent Public Auditors                                                                                           
|              | 
|31.1(1)       |  | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                   
|              | 
|31.2(1)       |  | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                   
|              | 
|32.1(1)       |  | Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002    
|              | 
|32.2(1)       |  | Certification of CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002    

---

|* |  | Management contract or compensatory plan.
|- |  | -----------------------------------------

|** |  | Filed without Schedules.
|-- |  | ------------------------



128



---

|(1) |  | Filed herewith.
|--- |  | ---------------

|(2) |  | Filed as an exhibit to the Companys Registration Statement on Form S-1, as amended (File No. 333-35411) and incorporated herein by reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Filed as an exhibit to the Companys Form 10-K for the fiscal year ended December 31, 1997 (File No. 001-13481) and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Filed as an exhibit to the Companys Form S-8 (File No. 333-52953) and incorporated herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------

|(5) |  | Filed as an exhibit to the Companys Registration Statement on Form S-1, as amended (File No. 333-60723) and incorporated herein by reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Filed as an exhibit to the Companys Form 10-K for the fiscal year ended December 31, 1998 (File No. 001-13481) and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Filed as an exhibit to the Companys Registration on Form S-8 (File No. 333-83823) and incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

|(8) |  | Filed as an exhibit to the Companys Registration Statement on Form S-3 (File No. 333-82775) and incorporated herein by reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter ended September 30, 1999 (File No. 001-13481) and incorporated herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Filed as an appendix to the Companys Proxy Statement for the annual meeting held on May 4, 2000 and incorporated herein by reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter ended September 30, 2000 (File No. 001-13481) and incorporated herein by reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter ended June 30, 2001 (File No. 001-13481) and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Filed as an exhibit to the Companys Form 10-K for the fiscal year ended December 31, 2001 (File No. 001-13481) and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter ended March 31, 2002 (File No. 001-13481) and incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter ended June 30, 2002 (File No. 001-13481) and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Filed as an exhibit to the Companys 10-K for the year ended December 31, 2003.
|---- |  | -------------------------------------------------------------------------------

|(17) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter dated March 31, 2003.
|---- |  | ------------------------------------------------------------------------------------

|(18) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter dated June 30, 2003.
|---- |  | -----------------------------------------------------------------------------------

|(19) |  | Filed as an exhibit to the Companys Form 10-Q for the quarter dated June 30, 2004.
|---- |  | -----------------------------------------------------------------------------------

|(20) |  | Filed as an exhibit to the Companys Form 8-K dated September 13, 2004.
|---- |  | -----------------------------------------------------------------------

|(21) |  | Filed as an exhibit to the Companys Form 8-K dated September 23, 2004.
|---- |  | -----------------------------------------------------------------------

|(22) |  | Filed as an appendix to the Companys Proxy Statement for the Special Meeting of Stockholders held on December 17, 2004.
|---- |  | ------------------------------------------------------------------------------------------------------------------------



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