<PAGE>

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

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                  FORM 10-K/A
                                AMENDMENT NO. 1

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

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 2001

                          Commission File No. 1-13481

                           METRO-GOLDWYN-MAYER INC.
            (Exact name of registrant as specified in its charter)

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


<TABLE>
<S>                                            <C>
                  Delaware                                       95-4605850
        (State or other jurisdiction                          (I.R.S. Employer
      of incorporation or organization)                     Identification No.)
</TABLE>

<TABLE>
<S>                                            <C>
   2500 Broadway Street, Santa Monica, CA                          90404
  (Address of principal executive offices)                       (Zip Code)
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                           Name of each exchange
             Title of each class                            on which registered
             -------------------                           ---------------------
<S>                                            <C>
        Common Stock, par value $0.01                     New York Stock Exchange
</TABLE>

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

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

  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
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 February 6, 2002 was $856,005,439.

  The number of shares of the Registrant's common stock outstanding as of
February 6, 2002 was 240,707,584.
<PAGE>

                                EXPLANATORY NOTE

  The purpose of this amendment is to supplement Item 14(a) of Part IV.

                                       2
<PAGE>

                                    PART IV

Item 14. 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/A at pages 53
    to 99.

    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/A at pages 100
    to 107.

    3. Exhibits

      The exhibits listed in the accompanying Exhibit Index on pages 108 to
    110 are filed as part of this Form 10-K/A.

  (b) Reports on Form 8-K

    There were no reports on Form 8-K filed during the quarter ended December
  31, 2001.

                                       3
<PAGE>

                                  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.

March 28, 2002

                                          METRO-GOLDWYN-MAYER INC.

                                                  /s/ Daniel J. Taylor
                                          By: _________________________________
                                                      Daniel J. Taylor
                                              Senior Executive Vice President
                                                            and
                                                  Chief Financial Officer


                                       4
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants..................................  53

Consolidated Balance Sheets as of December 31, 2001 and 2000..............  54

Consolidated Statements of Operations for the Years Ended December 31,
 2001, 2000 and 1999......................................................  55

Consolidated Statements of Stockholders' Equity for the Years Ended
 December 31, 2001, 2000 and 1999.........................................  56

Consolidated Statements of Cash Flows for the Years Ended December 31,
 2001, 2000 and 1999......................................................  57

Notes to Consolidated Financial Statements................................  58

Financial Statements of Acquired Companies

Independent Auditors' Report..............................................  83

Combined Balance Sheets as of December 31, 2001 and 2000..................  84

Combined Statements of Income for the Years Ended December 31, 2001, 2000
 and 1999.................................................................  85

Combined Statements of Partners' Capital (Deficiency) for the Years Ended
 December 31, 2001, 2000 and 1999.........................................  86

Combined Statements of Cash Flows for the Years Ended December 31, 2001,
 2000 and 1999............................................................  87

Notes to Combined Financial Statements....................................  88

Financial Statement Schedules

Report of Independent Public Accountants.................................. 100

Schedule I: Financial Information of Registrant........................... 101

Schedule II: Valuation and Qualifying Accounts and Reserves............... 107
</TABLE>

                                       52
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Metro-Goldwyn-Mayer Inc.:

  We have audited the accompanying consolidated balance sheets of Metro-
Goldwyn-Mayer Inc. (a Delaware corporation) and subsidiaries (the "Company")
as of December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metro-
Goldwyn-Mayer Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.

  As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2001, the Company changed its method of accounting for film and
television costs and its accounting for derivative instruments and hedging
activities.

Arthur Andersen LLP

Los Angeles, California
February 4, 2002

                                      53
<PAGE>

                         PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                            METRO-GOLDWYN-MAYER INC.

                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                      December 31,  December 31,
                                                          2001          2000
                                                      ------------  ------------
<S>                                                   <C>           <C>
                       ASSETS
                       ------

Cash and cash equivalents............................ $     2,698   $    77,140
Accounts and contracts receivable (net of allowance
 for doubtful accounts of $26,173 and $22,947,
 respectively).......................................     458,010       416,084
Film and television costs, net.......................   2,035,277     2,422,799
Investments in and advances to affiliates............     845,042        12,403
Property and equipment, net..........................      38,837        47,071
Excess of cost over net assets of acquired
 businesses, net.....................................     516,706       531,440
Other assets.........................................      26,594        41,253
                                                      -----------   -----------
                                                      $ 3,923,164   $ 3,548,190
                                                      ===========   ===========

        LIABILITIES AND STOCKHOLDERS' EQUITY
        ------------------------------------

Liabilities:
  Bank and other debt................................ $   836,186   $   709,952
  Accounts payable and accrued liabilities...........     198,520       168,144
  Accrued participants' share........................     243,836       217,231
  Income taxes payable...............................      31,865        34,056
  Advances and deferred revenues.....................      82,156        92,137
  Other liabilities..................................      41,119        16,983
                                                      -----------   -----------
    Total liabilities................................   1,433,682     1,238,503
                                                      -----------   -----------
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, 239,629,500 and 207,217,585 shares
   issued and outstanding............................       2,396         2,072
  Additional paid-in capital.........................   3,717,767     3,072,611
  Deficit............................................  (1,203,565)     (765,507)
  Accumulated other comprehensive income (loss)......     (27,116)          511
                                                      -----------   -----------
    Total stockholders' equity.......................   2,489,482     2,309,687
                                                      -----------   -----------
                                                      $ 3,923,164   $ 3,548,190
                                                      ===========   ===========
</TABLE>

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

                                       54
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                          -------------------------------------
                                             2001         2000         1999
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
Revenues................................  $ 1,387,531  $ 1,237,447  $ 1,142,433
Expenses:
  Operating.............................      766,330      771,811      957,754
  Selling, general and administrative...      585,255      339,458      291,176
  Severance and related costs
   (recoveries).........................          --        (3,715)      76,158
  Contract termination fee..............          --           --       225,000
  Depreciation and non-film
   amortization.........................       32,952       28,648       24,454
                                          -----------  -----------  -----------
    Total expenses......................    1,384,537    1,136,202    1,574,542
                                          -----------  -----------  -----------
Operating income (loss).................        2,994      101,245     (432,109)
Other income (expense):
  Equity in net earnings (losses) of
   affiliates...........................       (2,421)       1,953       (6,325)
  Interest expense, net of amounts
   capitalized..........................      (51,494)     (51,425)     (86,445)
  Interest and other income, net........        9,478       12,706        3,770
                                          -----------  -----------  -----------
    Total other expenses................      (44,437)     (36,766)     (89,000)
                                          -----------  -----------  -----------
Income (loss) from operations before
 provision for income taxes.............      (41,443)      64,479     (521,109)
Income tax provision....................      (14,297)     (13,480)      (9,801)
                                          -----------  -----------  -----------
Net income (loss) before cumulative
 effect of accounting change............      (55,740)      50,999     (530,910)
Cumulative effect of accounting change..     (382,318)         --           --
                                          -----------  -----------  -----------
Net income (loss).......................  $  (438,058) $    50,999  $  (530,910)
                                          ===========  ===========  ===========
Income (loss) per share:
  Basic
    Net income (loss) before cumulative
     effect of accounting change........  $     (0.24) $      0.25  $     (3.36)
    Cumulative effect of accounting
     change.............................        (1.65)         --           --
                                          -----------  -----------  -----------
    Net income (loss)...................  $     (1.89) $      0.25  $     (3.36)
                                          ===========  ===========  ===========
  Diluted
    Net income (loss) before cumulative
     effect of accounting change........  $     (0.24) $      0.24  $     (3.36)
    Cumulative effect of accounting
     change.............................        (1.65)         --           --
                                          -----------  -----------  -----------
    Net income (loss)...................  $     (1.89) $      0.24  $     (3.36)
                                          ===========  ===========  ===========
Weighted average number of common shares
 outstanding:
  Basic.................................  232,082,403  204,797,589  158,015,955
  Diluted...............................  232,082,403  210,313,274  158,015,955
</TABLE>

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

                                       55
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                             Accum.
                    Preferred Stock       Common Stock                            Compre-    Other
                   ------------------  ------------------   Add'l     Retained    hensive   Compre-    Less:        Total
                     No. of      Par     No. of     Par    Paid-in    Earnings     Income   hensive   Treasury  Stockholders'
                     Shares     Value    Shares    Value   Capital    (Deficit)    (Loss)    Income    Stock       Equity
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  --------  -------------
<S>                <C>          <C>    <C>         <C>    <C>        <C>          <C>       <C>       <C>       <C>
Balance December
 31, 1998........          --   $ --   150,856,424 $1,509 $2,203,490 $  (285,596) $    --   $    254  $   --     $1,919,657
Acquisition of
 treasury stock,
 at cost.........          --     --           --     --         --          --        --        --    (2,040)       (2,040)
Common stock
 issued in 1999
 rights offering,
 net.............          --     --    49,714,554    497    714,741         --        --        --       --        715,238
Common stock
 issued to
 directors,
 officers and
 employees, net..          --     --       848,353      8     11,408         --        --        --     2,036        13,452
Amortization of
 deferred stock
 compensation....          --     --           --     --       1,365         --        --        --       --          1,365
Comprehensive
 income (loss):
 Net loss........          --     --           --     --         --     (530,910) (530,910)      --       --       (530,910)
 Foreign currency
  translation
  adjustment.....          --     --           --     --         --          --         62        62      --             62
                                                                                  --------
 Comprehensive
  loss...........          --     --           --     --         --          --   (530,848)      --       --            --
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  -------    ----------
Balance December
 31, 1999........          --     --   201,419,331  2,014  2,931,004    (816,506)      --        316       (4)    2,116,824
Common stock
 issued to
 outside parties,
 net.............          --     --     5,363,800     54    133,330         --        --        --       --        133,384
Common stock
 issued to
 directors,
 officers and
 employees, net..          --     --       434,454      4      8,277         --        --        --         4         8,285
Comprehensive
 income (loss):
 Net income......          --     --           --     --         --       50,999    50,999       --       --         50,999
 Foreign currency
  translation
  adjustment.....          --     --           --     --         --          --        152       152      --            152
 Unrealized gains
  on securities..          --     --           --     --         --          --         43        43      --             43
                                                                                  --------
 Comprehensive
  income.........          --     --           --     --         --          --     51,194       --       --            --
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  -------    ----------
Balance December
 31, 2000........          --     --   207,217,585  2,072  3,072,611    (765,507)      --        511      --      2,309,687
Preferred stock
 issued to
 Tracinda, net...   15,715,667    157          --     --     324,843         --        --        --       --        325,000
Conversion of
 preferred stock
 into common
 stock...........  (15,715,667)  (157)  15,715,667    157        --          --        --        --       --            --
Common stock
 issued to
 outside parties,
 net.............          --     --    16,080,590    161    310,478         --        --        --       --        310,639
Common stock
 issued to
 directors,
 officers and
 employees, net..          --     --       615,658      6      9,835         --        --        --       --          9,841
Comprehensive
 income (loss):
 Net loss........          --     --           --     --         --     (438,058) (438,058)      --       --       (438,058)
 Cumulative
  effect of
  accounting
  change.........          --     --           --     --         --          --        469       469      --            469
 Unrealized loss
  on derivative
  instruments....          --     --           --     --         --          --    (27,523)  (27,523)     --        (27,523)
 Unrealized loss
  on securities..          --     --           --     --         --          --       (240)     (240)     --           (240)
 Foreign currency
  translation
  adjustments....          --     --           --     --         --          --       (333)     (333)     --           (333)
                                                                                  --------
 Comprehensive
  loss...........          --     --           --     --         --          --   (465,685)      --       --            --
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  -------    ----------
Balance December
 31, 2001........          --   $ --   239,629,500 $2,396 $3,717,767 $(1,203,565) $    --   $(27,116) $   --     $2,489,482
                   ===========  =====  =========== ====== ========== ===========  ========  ========  =======    ==========
</TABLE>

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

                                       56
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                               -------------------------------
                                                 2001       2000       1999
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Operating activities:
  Net income (loss)..........................  $(438,058) $  50,999  $(530,910)
  Adjustments to reconcile net income (loss)
   to net cash provided by (used in)
   operating activities:
   Cumulative effect of accounting change....    382,318        --         --
   Additions to film costs, net..............   (391,633)  (810,956)  (624,599)
   Amortization of film and television costs
    and participants' share..................    548,742    665,148    853,411
   Depreciation and amortization of property
    and equipment............................     18,218     13,913      9,601
   Amortization of goodwill and deferred
    financing costs..........................     21,439     20,994     20,742
   Amortization of deferred executive
    compensation.............................        --         --       1,365
   Change in fair value of financial
    instruments..............................       (292)       --         --
   Stock contributions to employees,
    directors and employee savings plan......      2,773      3,432      7,175
   Provision for bad debt and other reserves.      1,442      3,545      3,425
   Loss on sale of marketable equity
    securities...............................        --       1,265        --
   (Gains) losses on equity investments, net.      2,421     (1,953)       757
   (Increase) decrease in accounts and
    contracts receivable and other assets....    (35,739)    36,589    (73,245)
   Decrease in accounts payable, accrued and
    other liabilities, accrued participants'
    share and taxes..........................    (97,983)  (152,518)   (10,770)
   Decrease in advances and deferred
    revenues.................................     (9,981)   (20,052)   (18,944)
   Foreign currency exchange loss............        148      7,135      2,115
                                               ---------  ---------  ---------
   Net cash provided by (used in) operating
    activities...............................      3,815   (182,459)  (359,877)
                                               ---------  ---------  ---------
Investing activities:
  Investments in and advances to affiliates..   (834,882)    (1,247)    (6,126)
  Acquisition of PFE Libraries...............        --         --    (236,201)
  Purchases of available-for-sale securities.        --    (152,819)       --
  Sales of available-for-sale securities.....        --     148,081        --
  Additions to property and equipment........     (9,905)   (12,259)   (14,883)
                                               ---------  ---------  ---------
  Net cash used in investing activities......   (844,787)   (18,244)  (257,210)
                                               ---------  ---------  ---------
Financing activities:
  Net proceeds from issuance of preferred
   stock to Tracinda.........................    325,000        --         --
  Net proceeds from issuance of equity
   securities to outside parties.............    310,639    133,384     73,184
  Net proceeds from issuance of equity
   securities to related parties.............      7,068      4,849    646,291
  Additions to borrowed funds................    159,000     54,000    872,172
  Repayments of borrowed funds...............    (34,766)   (63,121)  (876,420)
  Financing costs and other..................        --      (3,267)       --
                                               ---------  ---------  ---------
  Net cash provided by financing activities..    766,941    125,845    715,227
                                               ---------  ---------  ---------
Net change in cash and cash equivalents from
 operating, investing and financing
 activities..................................    (74,031)   (74,858)    98,140
Net decrease in cash due to foreign currency
 fluctuations................................       (411)      (215)      (766)
                                               ---------  ---------  ---------
Net change in cash and cash equivalents......    (74,442)   (75,073)    97,374
Cash and cash equivalents at beginning of the
 year........................................     77,140    152,213     54,839
                                               ---------  ---------  ---------
Cash and cash equivalents at end of the year.  $   2,698  $  77,140  $ 152,213
                                               =========  =========  =========
</TABLE>


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

                                       57
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 2001

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 ("MGM Studios") and Orion
Pictures Corporation and its majority owned subsidiaries ("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 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 ("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 current presentation. For the year ended December 31, 2001,
exploitation costs are included in selling, general and administrative
expenses. In prior years, the amortization of these costs are included in
operating expenses, as these amounts were previously capitalized and amortized
as part of film costs. See "New Accounting Pronouncements."

  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. Additionally, the Company holds equity interests in
four domestic cable channels as well as 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 13). Operating units included in the
other operating segment include licensing and merchandising, 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. 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. The theatrical success of a
motion picture is a very important factor in generating revenues from such
motion picture in other media.

  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 5). All significant intercompany balances and transactions
have been eliminated.

                                      58
<PAGE>

                           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. Included in other assets at December 31, 2001 and 2000 is
approximately $4,127,000 and $7,680,000, respectively, of cash restricted by
various escrow agreements. The Company has reclassified a $25,312,000 bank
overdraft to accounts payable at December 31, 2001. The carrying value of the
Company's cash equivalents approximated cost at each balance sheet date.

  Marketable Securities. 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 a separate
component of stockholders' equity. The Company has no investments in
marketable securities as of December 31, 2001.

  Revenue Recognition. All 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
video 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
video 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 available to the licensee for
telecast. Payments received in advance of availability are classified as
deferred revenue until all SOP 00-2 revenue recognition requirements have been
met. As of December 31, 2001, 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 licensing agreements are discounted
to present value in accordance with Accounting Principles Board ("APB")
Opinion No. 21, "Interest on Receivables and Payables."

  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 being expensed as incurred. Theatrical print costs are being
amortized over the periods of theatrical release of the respective
territories. Under accounting rules in effect for periods prior to January 1,
2001, such costs were capitalized as a part of film costs and amortized over
the life of the film using the individual film forecast method.

  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.

  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 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.

                                      59
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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. When property is sold or otherwise disposed of, the cost and
related accumulated depreciation 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. The excess cost of acquisition over the fair market values of
identifiable net assets acquired (goodwill) is amortized over an estimated
useful life of 40 years using the straight-line method. As of December 31,
2001, the Company accounts for goodwill under Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. The carrying value of existing assets is reviewed when
events or changes in circumstances indicate that an impairment test is
necessary in order to determine if an impairment has occurred. 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 (licensing and
merchandising, music and interactive operations). When factors indicate that
such assets should be evaluated for possible impairment, the Company estimates
the future cash flows expected to result from the use of the assets and their
eventual disposition, and compares the amounts to the carrying value of the
assets to determine if an impairment loss has occurred. If an impairment
exists, the amount of such impairment is calculated based on the estimated
fair value of the asset. Accumulated amortization of goodwill was $71,037,000
and $56,303,000 as of December 31, 2001 and 2000, respectively. See "New
Accounting Pronouncements."

  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.

  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 process
are included as a component of the accumulated other comprehensive income
balance 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 2.50
percent (approximately five percent and nine percent at December 31, 2001 and
2000, respectively), which approximates the Company's current effective
borrowing rates, in accordance with APB Opinion No. 21.

  The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate risks. The Company enters 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 allow the Company to raise long-term
borrowings at floating rates and effectively swap them into fixed rates that
are 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

                                      60
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount. Additionally, in certain instances, we enter into foreign
currency exchange forward 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. See "New Accounting
Pronouncements."

  Accounts and Contracts Receivable. At December 31, 2001, accounts and
contracts receivable aggregated $484,183,000 (before allowance for doubtful
accounts), of which approximately $350,885,000 is due within one year and
$294,529,000 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, 2001 and 2000, there were no customers
accounting for greater than ten percent of the Company's accounts and
contracts receivable.

  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 earnings or loss per share was 232,082,403,
204,797,589 and 158,015,955 in the years ended December 31, 2001, 2000 and
1999, respectively. Dilutive securities of 5,515,685 related to stock options
have been included in the calculation of diluted EPS for the year ended
December 31, 2000. Dilutive securities of 3,248,176 and 2,220,972 are not
included in the calculation of diluted EPS in the years ending December 31,
2001 and 1999, respectively, because they are antidilutive.

  Comprehensive Income (Loss). The Company computes comprehensive income
pursuant to SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income
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 items, including unrealized loss on derivative
instruments, unrealized gain (loss) on securities and cumulative foreign
currency translation adjustments. Components of other comprehensive income
(loss) are shown below (in thousands):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                  ----------------------------
                                                    2001      2000     1999
                                                  ---------  ------- ---------
   <S>                                            <C>        <C>     <C>
   Net income (loss)............................. $(438,058) $50,999 $(530,910)
   Other comprehensive income (loss):
     Cumulative effect of accounting change for
      derivative instruments.....................       469      --        --
     Unrealized loss on derivative instruments...   (27,523)     --        --
     Unrealized gain (loss) on securities........      (240)      43       --
   Cumulative foreign currency translation
    adjustments..................................      (333)     152        62
                                                  ---------  ------- ---------
       Total comprehensive income (loss)......... $(465,685) $51,194 $(530,848)
                                                  =========  ======= =========
</TABLE>

                                      61
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                            Unrealized                             Accumulated
                              loss on    Unrealized   Cumulative      other
                            derivative   gain (loss)  translation comprehensive
                            instruments on securities adjustments income (loss)
                            ----------- ------------- ----------- -------------
<S>                         <C>         <C>           <C>         <C>
Balance at December 31,
 1999......................  $    --        $ --         $ 316      $    316
Current year change........       --           43          152           195
                             --------       -----        -----      --------
Balance at December 31,
 2000......................       --           43          468           511
Cumulative effect of
 accounting change.........       469         --           --            469
Current year change........   (27,523)       (240)        (333)      (28,096)
                             --------       -----        -----      --------
Balance at December 31,
 2001......................  $(27,054)      $(197)       $ 135      $(27,116)
                             ========       =====        =====      ========
</TABLE>

  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 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 139, "Rescission of FASB Statement
No. 53 and Amendments to FASB Statements No. 63, 89 and 121," which, effective
for financial statements for fiscal years beginning after December 15, 2000,
rescinds SFAS No. 53, "Financial Reporting by Producers and Distributors of
Motion Picture Films." The companies that were previously subject to the
requirements of SFAS No. 53 now follow the guidance in SOP 00-2 issued in June
2000. SOP 00-2 establishes new accounting and reporting standards for all
producers and distributors that own or hold the rights to distribute or
exploit films. SOP 00-2 provides that the cumulative effect of changes in
accounting principles caused by its adoption should be included in the
determination of net income in conformity with APB Opinion No. 20, "Accounting
Changes." The Company adopted SOP 00-2 on January 1, 2001 and recorded a one-
time, non-cash cumulative effect charge to earnings of $382,318,000, primarily
to reduce the carrying value of its film and television costs. The new rules
also require that advertising costs be expensed as incurred as opposed to the
old rules which generally allowed advertising costs to be capitalized as part
of film costs and amortized using the individual film forecast method. Due to
the significant advertising costs incurred in the early stages of a film's
release, the Company anticipates that the new rules will significantly impact
its results of operations for the foreseeable future. Additionally, under SFAS
No. 53, the Company classified additions to film costs as an investing
activity in the Statements of Cash Flows. In accordance with SOP 00-2, the
Company now classifies additions to film costs as an operating activity. For
comparative purposes, the Company has revised its December 31, 2000 and 1999
Statements of Cash Flows to conform to this presentation in the current year.

  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-- Deferral of the Effective
Date of FASB Statement No. 133," and by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an Amendment of FASB
No. 133." This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
contracts, and for hedging activities. The Company adopted SFAS No. 133 on
January 1, 2001 and recorded a one-time, non-cash cumulative effect adjustment
to stockholders' equity and other comprehensive income (loss) of $469,000. The
adoption of SFAS No. 133 has not materially impacted the Company's results of
operations.

                                      62
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
statement has eliminated the flexibility to account for some mergers and
acquisitions as pooling of interests, and effective as of July 1, 2001, all
business combinations are to be accounted for using the purchase method. The
Company adopted SFAS No. 141 as of July 1, 2001, and the impact of such
adoption did not have a material adverse impact on the Company's financial
statements.

  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. The Company will
adopt SFAS No. 142 beginning January 1, 2002, and upon adoption the Company
does not currently anticipate any impairment of goodwill and other intangible
assets already included in the financial statements. 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 (licensing and
merchandising, music and interactive operations). The Company expects to
receive future benefits from goodwill and other intangible assets over an
indefinite period of time, and as such plans to forego all related
amortization expense, which totaled $14,734,000 for the years ended December
31, 2001 and 2000, and $14,853,000 for the year ended December 31, 1999. Since
the Company is recording their equity in net earnings of the Cable Channels
(see Note 5) on a one-quarter lag, amortization of the excess of the cost over
the net assets of the Cable Channels acquired ($19,050,000 for the six months
ended September 30, 2001) will not be included in the calculation of the
Company's equity in the net earnings in this investment beginning April 1,
2002.

  In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The purpose of this statement is to
develop consistent accounting of asset retirement obligations and related
costs in the financial statements and provide more information about future
cash outflows, leverage and liquidity regarding retirement obligations and the
gross investment in long-lived assets. This statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
The Company will implement SFAS No. 143 on January 1, 2003. The impact of such
adoption is not anticipated to have a material effect on the Company's
financial statements.

  In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). This Statement also amends Accounting Research Board
No. 51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for subsidiaries for which control is likely to be temporary.
The Company will adopt SFAS No. 144 beginning January 1, 2002. The impact of
such adoption is not anticipated to have a material effect on the Company's
financial statements.

Note 2--Restructuring and Other Charges

  Restructuring and Other Charges. In June 1999, the Company incurred certain
restructuring and other charges, in association with a change in senior
management and a corresponding review of the Company's operations, aggregating
$214,559,000, including (i) a $129,388,000 reserve for pre-release film cost
write-downs and certain other charges regarding a re-evaluation of film
properties in various stages of development and

                                      63
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

production, which has been included as a charge in operating expenses, and
(ii) $85,171,000 of severance and other related costs, of which $9,013,000 has
been classified in selling, general and administrative expenses, 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, 2001, the Company has utilized all $129,388,000 of the
pre-release film cost write-down reserves and has paid $54,844,000 of the
severance and related costs. On January 1, 2002, subject to an agreement with
a former senior executive of the Company (see Note 9), $13,049,000 of the
severance and related costs were converted into 658,526 shares of the Common
Stock of the Company.

Note 3--WHV Contract Settlement

  On March 12, 1999, the Company agreed to accelerate the expiration of the
right of Warner Home Video ("WHV") to distribute the Company's product in the
home video marketplace under an agreement executed in 1990 (the "WHV
Agreement"). In consideration for the early expiration of the WHV Agreement,
the Company paid WHV $225,000,000 in 1999. The parties restructured the terms
of the WHV Agreement, which functioned as an interim distribution agreement
(the "Transitional Video Agreement"), under which WHV distributed certain of
the Company's product in the home video marketplace. Additionally, the Company
reconveyed to Turner Entertainment Co., Inc. ("Turner"), an affiliate of WHV,
the right that the Company had to distribute in the home video markets
worldwide until June 2001, 2,950 Turner titles that had been serviced under
the WHV Agreement. The Transitional Video Agreement expired on January 31,
2000, at which time the Company commenced distribution of its home video
product in the domestic market. The Company contracted with Twentieth Century
Fox Home Entertainment, Inc. to distribute its home video product
internationally beginning on February 1, 2000. The Company recorded a pre-tax
contract termination charge for the year ended December 31, 1999 of
$225,000,000 for costs in connection with the early expiration of WHV's rights
under the WHV Agreement.

                                      64
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 4--Film and Television Costs

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

<TABLE>
<CAPTION>
                                                    December 31,  December 31,
                                                        2001          2000
                                                    ------------  ------------
   <S>                                              <C>           <C>
   Theatrical productions:
     Released...................................... $ 3,515,842    $ 3,396,540
     Less: accumulated amortization................  (2,117,116)    (1,779,647)
                                                    -----------   ------------
     Released, net.................................   1,398,726      1,616,893
     Completed not released........................      99,142         74,665
     In production.................................     242,621        393,615
     In development................................      31,931         21,407
                                                    -----------   ------------
       Subtotal: theatrical productions............   1,772,420      2,106,580
                                                    -----------   ------------
   Television programming:
     Released......................................     861,826        786,574
     Less: accumulated amortization................    (626,686)      (498,005)
                                                    -----------   ------------
     Released, net.................................     235,140        288,569
     In production.................................      25,968         24,988
     In development................................       1,749          2,662
                                                    -----------   ------------
       Subtotal: television programming............     262,857        316,219
                                                    -----------   ------------
                                                    $ 2,035,277    $ 2,422,799
                                                    ===========   ============
</TABLE>

  Interest costs capitalized to theatrical productions were $23,466,000,
$15,453,000 and $15,845,000 during the years ended December 31, 2001, 2000 and
1999, respectively.

  Based on the Company's estimates of projected gross revenues as of December
31, 2001, approximately 20 percent of completed film costs are expected to be
amortized over the next twelve months, and approximately $140,000,000 of
accrued participants' share as of December 31, 2001 will be paid in the next
twelve 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, 2004, and 80 percent will be amortized by December 31,
2006. For acquired film libraries, approximately $1.13 billion of net film
costs as of December 31, 2001 remain to be amortized under the individual film
forecast method over an average remaining life of 15.3 years.

Note 5--Investments In and Advances to Affiliates

  Investments are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           2001         2000
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Domestic cable channels............................   $822,502     $    --
   Foreign cable channels.............................     15,351       12,253
   Joint venture......................................      7,039          --
   Others.............................................        150          150
                                                         --------     --------
                                                         $845,042     $ 12,403
                                                         ========     ========
</TABLE>


                                      65
<PAGE>

                           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 Channel, Bravo, the Independent Film Channel and
WE: Women's Entertainment (formerly Romance Classics), collectively referred
to as the "Cable Channels." These partnerships were wholly-owned by Rainbow
Media Holdings, Inc., a 74 percent subsidiary of Cablevision Systems
Corporation ("Rainbow Media"). 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 9), which provided aggregate
net proceeds of approximately $635,600,000, and borrowings under the Company's
credit facilities. Based upon currently available information and upon certain
assumptions that management of the Company believes are reasonable, the
Company's determination of the difference between the Company's 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") is
approximately $762,000,000.

  The Company is accounting 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 is recording 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 is reporting its interest in
the Cable Channels on a one-quarter lag. Summarized financial information for
the Cable Channels as of and for the period from the acquisition date to
September 30, 2001 were as follows (in thousands):

<TABLE>
     <S>                                                               <C>
     Current assets................................................... $373,934
                                                                       ========
     Non-current assets............................................... $428,188
                                                                       ========
     Current liabilities.............................................. $113,921
                                                                       ========
     Non-current liabilities.......................................... $251,815
                                                                       ========
     Revenues, net.................................................... $214,343
                                                                       ========
     Operating income................................................. $ 73,887
                                                                       ========
</TABLE>

  In the year ended December 31, 2001, the Company's share of the Cable
Channels' net operating results was a loss of $2,845,000, including
amortization of intangible assets of $19,050,000.

  While the Company is not involved in the day-to-day operations of the Cable
Channels, the Company's approval is required before either partnership may:
(i) declare bankruptcy or begin or consent to any reorganization or assignment
for the benefit of creditors; (ii) enter into any new transaction with a
related party; (iii) make any non-proportionate distributions; (iv) amend the
partnership governing documents; or (v) change its tax structure.

  The Company has the right to participate on a pro rata basis in any sale to
a third party by Rainbow Media of its partnership interests, and Rainbow Media
can require the Company to participate in any such sale. If a third party
invests in either partnership, the Company's interest and that of Rainbow
Media will be diluted on a pro rata basis. Neither the Company nor Rainbow
Media will be required to make additional capital contributions to the
partnerships. However, if Rainbow Media makes an additional capital
contribution and the Company does not, the Company's interest in the
partnerships will be diluted accordingly. If the partnerships fail to attain
certain financial projections provided to the Company by Rainbow Media for the
years 2002 through 2005, inclusive,

                                      66
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the Company will be entitled, 30 days after receipt of partnership financial
statements for 2005, to require Rainbow Media to acquire the Company's
partnership interests for fair market value, as determined pursuant to the
agreement. The Company formed a wholly-owned subsidiary, MGM Networks U.S.
Inc., which made the above-described investment, serves as a general partner
of the applicable Rainbow Media companies and is the MGM entity which holds
the aforesaid partnership interests and rights attendant thereto.

  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 $24,000,000, of which the Company had funded
approximately $22,500,000 as of December 31, 2001. The Company's share of MGM
Latin America's start-up losses in the years ended December 31, 2001, 2000 and
1999 were $1,592,000, $3,388,000 and $6,952,000, 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 profits aggregating $3,476,000, $5,341,000 and
$627,000 in the years ended December 31, 2001, 2000 and 1999, respectively.

  Joint Venture. 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 has funded $7,485,000 for its equity
interest and its share of operating expenses of the joint venture as of
December 31, 2001. The Company financed its investment through borrowings
under its credit facilities. The Company is committed to fund its share of the
operating expenses of the joint venture, as required. The Company is
accounting for its interest in the joint venture under the equity method. In
the year ended December 31, 2001, the Company recognized a net loss of
$446,000 for its share in the results of the joint venture.

  Other Investments. Until November 1, 2000, distribution in foreign
theatrical and certain pay television markets was performed by United
International Pictures ("UIP"), in which the Company had a one-third interest.
The Company included in its financial statements the revenues and related
costs associated with its films distributed by UIP. The distribution fees paid
to UIP by the Company are included in film and television production and
distribution expense. Due to timing differences there are no taxable earnings
and, therefore, there is no tax provision on undistributed earnings. Due to
the termination of the distribution arrangements with UIP on November 1, 2000,
there were no earnings in UIP realized in the year ended December 31, 2000.
The Company's share of the net earnings in UIP in the year ended December 31,
1999 were $5,568,000.

  On November 1, 2000, the Company contracted with Twentieth Century Fox Film
Corporation ("Fox") for distribution of the Company's film releases in
international theatrical and non-theatrical markets in territories in which
the Company owns or controls the right to perform distribution services in
such territories. Under the terms of the agreement, the Company pays Fox a
distribution fee based on gross film rentals. The Company has the option to
terminate the agreement on January 31, 2003 for a fee ranging from $10,000,000
to $15,000,000, which includes any distribution fees owed to Fox for the year
prior to the termination date.

                                      67
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 6--Property and Equipment

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

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           2001         2000
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Leasehold improvements.............................   $ 28,081     $ 25,877
   Furniture, fixtures and equipment..................     68,115       60,414
                                                         --------     --------
                                                           96,196       86,291
   Less accumulated depreciation and amortization.....    (57,359)     (39,220)
                                                         --------     --------
                                                         $ 38,837     $ 47,071
                                                         ========     ========
</TABLE>

Note 7--Bank and Other Debt

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

<TABLE>
<CAPTION>
                                                      December 31, December 31,
                                                          2001         2000
                                                      ------------ ------------
   <S>                                                <C>          <C>
   Revolving Facility................................  $ 159,000     $    --
   Term Loans........................................    668,500      700,000
   Capitalized lease obligations and other
    borrowings.......................................      8,686        9,952
                                                       ---------     --------
                                                       $ 836,186     $709,952
                                                       =========     ========
</TABLE>

  On October 15, 1997, the Company entered into an amended and restated credit
facility with a syndicate of banks aggregating $1.3 billion (the "Amended
Credit Facility") consisting of a six year $600,000,000 revolving credit
facility (the "Revolving Facility"), a $400,000,000 seven and one-half year
term loan ("Tranche A Loan") and a $300,000,000 eight and one-half year term
loan ("Tranche B Loan") (collectively, the "Term Loans"). The Amended Credit
Facility was subsequently amended and restated on July 21, 2000, with less
restrictive operating and financial covenants. The Amended Credit Facility
contains provisions allowing, with the consent of the requisite lenders and
subject to syndication thereof, for an additional $200,000,000 tranche,
raising the potential amount of Amended Credit Facility to $1.5 billion. The
Revolving Facility and the Tranche A Loan bear interest at 2.50 percent over
the adjusted LIBOR rate, as defined (4.37 percent at December 31, 2001). The
Tranche B Loan bears interest at 2.75 percent over the Adjusted LIBOR rate
(4.63 percent at December 31, 2001). Scheduled amortization of the Term Loans
under the Amended Credit Facility is $73,000,000 in 2002, $103,000,000 in
2003, $103,000,000 in 2004 and $103,000,000 in 2005, with the remaining
balance due at maturity. The Revolving Facility matures on September 30, 2003,
subject to extension under certain conditions.

  The Company's borrowings under the Amended Credit Facility are secured by
substantially all the assets of the Company. The Amended Credit Facility
contains various covenants including limitations on dividends, capital
expenditures and indebtedness, and the maintenance of certain financial
ratios. The Amended Credit Facility limits the amount of the investment in the
Company which may be made by MGM Studios and Orion in the form of loans or
advances, or purchases of capital stock of the Company, up to a maximum
aggregate amount of $500,000,000. As of December 31, 2001, there are no
outstanding loans or advances to the Company by such subsidiaries, nor have
such subsidiaries purchased any capital stock of the Company. Restricted net
assets of MGM Studios and Orion at December 31, 2001 are approximately $2.0
billion. As of December 31, 2001, the Company was in compliance with all
applicable covenants.


                                      68
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Lease and other borrowings. Capitalized lease and other borrowings relate
principally to contractual liabilities and computer equipment financing at
interest rates ranging from approximately ten to eleven percent.

  Maturity schedule. See Note 14 for maturity schedule for credit facilities,
lease and other borrowings as of December 31, 2001.

Note 8--Financial Instruments

  The Company is exposed to the impact of interest rate changes as a result of
its variable rate long-term debt. The Amended Credit Facility requires that
the Company maintain interest rate swap agreements (the "Swap Agreements") or
other appropriate hedging arrangements to convert to fixed rate or otherwise
limit the floating interest rate risk on at least 66 2/3% of the Term Loans
outstanding through July 2003. Accordingly, the Company has entered into
several Swap Agreements whereby the Company agrees 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. The Swap Agreements expire in July 2003. Based on scheduled loan
amortization, the Company will be in compliance with the Amended Credit
Facility's hedge provisions through that time.

  The Company has entered into three year fixed interest rate Swap Agreements
in relation to a portion of the Amended Credit Facility for a notional value
of $595,000,000 at an average rate of approximately 5.90 percent, which expire
in various times no later than July 2003. The Company adopted SFAS No. 133 on
January 1, 2001 and recorded a one-time, non-cash cumulative effect adjustment
to stockholders' equity and other comprehensive income (loss) of $469,000. At
December 31, 2001, the Company would be required to pay approximately
$26,145,000 if all such Swap Agreements were terminated, and this amount has
been included in other liabilities and other comprehensive income (loss)
during the year ended December 31, 2001.

  Additionally, because approximately 25 percent of the Company's revenues are
denominated, and the Company incurs certain operating and production costs in
foreign currencies, the Company is subject to market risks resulting from
fluctuations in foreign currency exchange rates. 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, 2001, the Company would be required to pay
approximately $858,000 if all such foreign currency forward contracts were
terminated, and this amount has been included in other comprehensive income
(loss) during the year ended December 31, 2001.

Note 9--Stockholders' Equity

  1999 Rights Offering. On October 15, 1999, the Company issued to its
stockholders of record of the Common Stock, at no charge to such holders,
transferable subscription rights (the "Rights") to subscribe for an aggregate
of 49,714,554 shares (the "Shares") of the Common Stock for $14.50 per share
(the "1999 Subscription Price") (the "1999 Rights Offering"). Holders of the
Common Stock received 0.328 Rights for each share of the Common Stock held as
of October 15, 1999. Rights holders were allowed to purchase one share of the
Common Stock at the 1999 Subscription Price for each whole Right held. Rights
holders who exercised their Rights also had the opportunity to purchase
additional Shares at the 1999 Subscription Price pursuant to an
Oversubscription Privilege, as defined. The Rights pursuant to the 1999 Rights
Offering expired on November 8, 1999. The 1999 Rights Offering was fully
subscribed (including shares issued pursuant to the Oversubscription
Privilege), and the Company issued the Shares for total net proceeds of
$715,238,000 (gross proceeds of $720,861,000 less applicable fees and expenses
of $5,623,000). The net proceeds from the 1999

                                      69
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Rights Offering were used to repay in full the amounts outstanding under a
bridge loan and the Revolving Facility, with the balance retained as cash for
general operating purposes.

  Private Placements. On May 26, 2000, pursuant to a Form S-3 shelf
registration statement (the "Shelf Registration Statement") filed with the
Securities and Exchange Commission, the Company completed the sale of
4,890,000 shares of the Common Stock at $25 per share to various third party
investors for aggregate net proceeds of $121,539,000. On August 15, 2000, the
Company, pursuant to the Shelf Registration Statement, issued an additional
473,800 shares of the Common Stock at $25 per share to third party investors
for aggregate net proceeds of $11,845,000.

  In February and March 2001, pursuant to the Shelf Registration Statement,
the Company issued 16,080,590 shares of the Common Stock for aggregate net
proceeds of $310,639,000. On April 2, 2001, the Company used the net proceeds
from these sales to partially finance its investment in the Cable Channels
(see Note 5).

  Sale of Preferred Stock to Tracinda. On February 7, 2001, the Company sold
15,715,667 shares of Series B preferred stock ("Preferred Stock") to Tracinda
for net proceeds of $325,000,000. On April 2, 2001, the Company used the net
proceeds of this sale to partially finance its investment in the Cable
Channels. On May 2, 2001, upon approval of the stockholders of the Company,
the Preferred Stock was converted into 15,715,667 shares of the Common Stock
of the Company. Tracinda currently beneficially owns approximately 81 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 30,000,000 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 were as follows:

<TABLE>
<CAPTION>
                          December 31, 2001    December 31, 2000    December 31, 1999
                         -------------------- -------------------- --------------------
                                     Weighted             Weighted             Weighted
                                     Average              Average              Average
                                     Exercise             Exercise             Exercise
                           Shares     Price     Shares     Price     Shares     Price
                         ----------  -------- ----------  -------- ----------  --------
<S>                      <C>         <C>      <C>         <C>      <C>         <C>
Options outstanding at
 beginning of year...... 23,675,034   $21.01  21,396,307   $20.52   7,712,611   $17.25
Granted.................  3,423,100   $18.05   3,116,082   $22.92  16,198,950   $22.17
Exercised...............   (468,905)  $14.80    (330,802)  $14.66    (218,421)  $14.83
Cancelled or expired.... (1,465,811)  $28.66    (506,553)  $16.08  (2,296,833)  $15.60
                         ----------   ------  ----------   ------  ----------   ------
Options outstanding at
 end of year............ 25,163,418   $20.30  23,675,034   $21.01  21,396,307   $20.52
                         ==========   ======  ==========   ======  ==========   ======
Options exercisable at
 end of year............ 12,427,343   $19.83   9,457,039   $19.86   3,619,361   $15.77
                         ==========   ======  ==========   ======  ==========   ======
</TABLE>

  In 1999 Tracinda exercised 156,251 options, not included in the 1996
Incentive Plan, at an exercise price of $6.41 per share. Additionally, Celsus
Financial Corporation, an entity wholly-owned by a director of the Company,
holds 177,814 options (as adjusted) at an exercise price of $5.63 per share
(as adjusted). These options expire on October 10, 2002, and are fully vested
and exercisable.

                                      70
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following table summarizes information about the outstanding options as
of December 31, 2001 under the 1996 Incentive Plan:

<TABLE>
<CAPTION>
                                                                      Weighted
                                                                       Average
                                                         Outstanding  Remaining
                                                          Number of  Contractual
     Exercise price                                        Options      Life
     --------------                                      ----------- -----------
     <S>                                                 <C>         <C>
     $11.38.............................................    121,640     6.96
     $14.90............................................. 11,478,473     6.66
     $15.19-$19.94......................................  3,874,630     9.18
     $20.00-$26.63......................................  3,088,675     8.24
     $30.00.............................................  6,600,000     7.35
                                                         ----------
                                                         25,163,418
                                                         ==========
</TABLE>

  The Company applies APB Opinion No. 25, "Accounting For Stock Issued to
Employees," and related interpretations in accounting for its plan. Had
compensation cost for the plan been determined consistent with FASB Statement
No. 123, the Company's net income (loss) would have been the following pro
forma amounts (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                  ----------------------------
                                                    2001      2000     1999
                                                  ---------  ------- ---------
   <S>                                            <C>        <C>     <C>
   Net income (loss):
     As reported................................. $(438,058) $50,999 $(530,910)
     Pro forma................................... $(479,245) $16,721 $(547,304)
   Basic earnings (loss) per share:
     As reported................................. $   (1.89) $  0.25 $   (3.36)
     Pro forma................................... $   (2.06) $  0.08 $   (3.46)
   Diluted earnings (loss) per share:
     As reported................................. $   (1.89) $  0.24 $   (3.36)
     Pro forma................................... $   (2.06) $  0.08 $   (3.46)
</TABLE>

  The fair value of each option grant was estimated using the Black-Scholes
model based on the following assumptions: the weighted average fair value of
stock options granted in the year ended December 31, 2001, 2000 and 1999 was
$9.26, $12.54 and $8.03, respectively. The dividend yield was 0 percent in all
periods, and expected volatility was 53.5 percent, 56.3 percent and 59.5
percent for the years ended December 31, 2001, 2000 and 1999, respectively.
Also, the calculation uses a weighted average expected life of 5.0 years in
each year, and a weighted average assumed risk-free interest rate of 4.6
percent, 6.2 percent and 5.6 percent for the years ended December 31, 2001,
2000 and 1999, respectively.

  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 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

                                      71
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

  As of October 23, 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, on or about January 1, 2002, in
lieu of cash amount otherwise payable with respect to the December 31, 2001
Determination Date, shares of the Common Stock of the Company, as determined
by dividing such cash amount by the fair market value of the Common Stock (as
defined). The shares of the Common Stock issued in accordance with the
agreements will be deferred pursuant to the Amended and Restated MGM Deferred
Compensation Plan and will not be 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, as of November 21,
2001, the Company entered into a similar agreement with a former executive who
also holds bonus interests under the Senior Management Bonus Plan. The shares
of the Common Stock issued to such former executive in accordance with the
aforementioned agreement are intended to be sold on the open market in
accordance with a trading plan that complies with the Securities Exchange Act
of 1934, as amended.

  At December 31, 2001, there were 2,293,634 Bonus Interests outstanding, of
which 2,272,449 were vested.

  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 were repriced to $14.90 and became fully vested and
exercisable. These options are being accounted for as a variable option grant.

  The Company has expensed $4,371,000, $2,650,000 and $25,328,000 for
obligations under these plans for the years ended December 31, 2001, 2000 and
1999, respectively, of which $25,328,000 is included in restructuring and
other charges related to employees terminated in 1999. At December 31, 2001,
the Company has accrued $45,814,000 for these obligations, of which
$40,104,000 is payable in 1,393,599 shares of the Common Stock of the Company,
of which 1,042,466 shares were issued in January 2002, and $5,710,000 is
payable in cash in April 2002.

  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: (a) 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 certain and may be
based on such objective business criteria as the Committee may determine,
including film performance and EBITDA, among others; (b) 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 (c) 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

                                      72
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of such goals (subject to the exercise of the negative discretion discussed
above). The Company has expensed $13,335,000 and $14,000,000 for obligations
under this plan for the years ended December 31, 2001 and 2000, respectively.

  Additionally, the Company issued a stock bonus to certain employees
aggregating $2,154,000 and $1,235,000 in the years ended December 31, 2000 and
1999, respectively.

Note 10--Income Taxes

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

<TABLE>
<CAPTION>
                                                        December 31, December 31
                                                            2001        2000
                                                        ------------ -----------
   <S>                                                  <C>          <C>
   Current.............................................   $31,865      $34,056
   Deferred............................................       --           --
                                                          -------      -------
                                                          $31,865      $34,056
                                                          =======      =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                        December 31, December 31
                                                            2001        2000
                                                        ------------ -----------
   <S>                                                  <C>          <C>
   Deferred tax assets:
     Film and television costs.........................  $ 289,621    $ 250,768
     Participations and residuals payable..............     28,924       24,923
     Reserves and investments..........................     61,897       56,949
     Net miscellaneous tax assets......................     48,281       43,691
     Operating loss carryforwards......................    161,122      123,225
                                                         ---------    ---------
       Subtotal, gross deferred tax assets.............    589,845      499,556
     Valuation allowance...............................   (372,542)    (396,362)
                                                         ---------    ---------
       Total deferred tax assets.......................    217,303      103,194
                                                         ---------    ---------
   Deferred tax liabilities:
     Film revenue......................................    (48,498)     (69,166)
     Purchased film costs..............................    (23,794)     (26,529)
     Goodwill..........................................     (9,839)      (7,499)
     Acquired partnership interests....................   (135,172)         --
                                                         ---------    ---------
       Total deferred tax liabilities..................   (217,303)    (103,194)
                                                         ---------    ---------
   Net deferred tax liability..........................  $     --     $     --
                                                         =========    =========
</TABLE>

  At December 31, 2001, the Company and its subsidiaries for U.S. federal
income tax purposes had a net operating loss carryforward of $413,134,000,
which expires in various years between 2011 and 2021. Under U.S. tax rules
enacted in 1997, net operating losses generated in tax years beginning before
August 6, 1997 may be carried forward for 15 years while losses generated in
subsequent tax years may be carried forward 20 years. Presently, there are no
limitations on the use of these carryforwards.

  At December 31, 2001, the Company has determined that deferred tax assets in
the amount of $372,542,000 do not satisfy the recognition criteria set forth
in SFAS No. 109, "Accounting for Income Taxes." Accordingly, a valuation
allowance has been recorded by the Company for this amount.

                                      73
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                 -----------------------------
                                                   2001      2000      1999
                                                 --------  --------  ---------
   <S>                                           <C>       <C>       <C>
   Current taxes:
     Foreign taxes.............................. $ 14,297  $ 12,480  $   9,801
     Federal and state taxes....................      --      1,000        --
   Deferred taxes:
     Federal and state taxes....................   23,820   (27,734)  (140,584)
     Adjustment for change in valuation
      allowance.................................  (23,820)   27,734    140,584
                                                 --------  --------  ---------
   Total tax provision.......................... $ 14,297  $ 13,480  $   9,801
                                                 ========  ========  =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                  -----------------------------
                                                   2001       2000       1999
                                                  -------    -------    -------
   <S>                                            <C>        <C>        <C>
   Federal tax rate on pre-tax book income
    (loss).......................................     (35)%       35 %      (35)%
   Goodwill and other permanent differences......       1          9          1
   Foreign taxes, net of available federal tax
    benefit......................................       2         14          2
   Loss carryforward and other tax attributes
    (benefited) not benefited....................      35        (37)        34
                                                  -------    -------    -------
   Effective tax rate............................       3 %       21 %        2 %
                                                  =======    =======    =======
</TABLE>

  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 11--Retirement Plans

  The Company has a non-contributory retirement plan (the "Basic 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, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits," which revised employers'
disclosures about pension and post-retirement benefit plans.

                                      74
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  As of December 31, 2000, the Company has amended the Basic Plan to cease
benefit accruals. This amendment resulted in a curtailment, the effect of
which has been presented in the following tables. Reconciliation of the funded
status of the plans and the amounts included in the Company's consolidated
balance sheets are as follows (in thousands):

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           2001         2000
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Projected benefit obligations:
     Beginning obligations...........................    $14,542      $13,840
     Service cost....................................        --         1,459
     Interest cost...................................      1,072        1,230
     Actuarial loss .................................        465        1,282
     Curtailments....................................        --        (2,770)
     Benefits paid...................................       (366)        (499)
                                                         -------      -------
       Ending obligations............................    $15,713      $14,542
                                                         =======      =======
   Fair value of plan assets (primarily debt
    securities):
     Beginning fair value............................    $14,688      $13,640
     Actual return on plan assets....................       (174)         313
     Employer contributions..........................        617        1,234
     Benefits paid...................................       (366)        (499)
                                                         -------      -------
       Ending fair value.............................    $14,765      $14,688
                                                         =======      =======
   Funded status of the plans:
     Projected benefit obligations...................    $15,713      $14,542
     Plan assets at fair value.......................     14,765       14,688
                                                         -------      -------
     Projected benefit obligations in excess of (less
      than) plan assets..............................       (948)         146
     Unrecognized net asset as of beginning of year..        (81)        (100)
     Unrecognized net (gain) loss....................      2,095       (1,214)
     Unrecognized prior service credit...............       (107)        (121)
     Effect of curtailment...........................        --         1,588
                                                         -------      -------
       Net balance sheet asset.......................    $   959      $   299
                                                         =======      =======

  Key assumptions used in the actuarial computations were as follows:

   Discount rate.....................................       7.25%        7.50%
                                                         =======      =======
   Long-term rate of return on assets................       7.25%        7.25%
                                                         =======      =======
   Rate of increase in future compensation levels....        N/A         5.00%
                                                         =======      =======
</TABLE>

  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.

                                      75
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Pension cost includes the following components (in thousands):

<TABLE>
<CAPTION>
                                                        Year Ended December
                                                                31,
                                                       ------------------------
                                                        2001     2000     1999
                                                       -------  -------  ------
   <S>                                                 <C>      <C>      <C>
   Service cost....................................... $   --   $ 1,459  $1,681
   Interest cost on projected benefit obligation......   1,072    1,230   1,070
   Expected return on plan assets.....................  (1,080)  (1,210)   (857)
   Net amortization and deferral......................     (34)     (34)     43
   Recognized curtailment gain........................     --    (1,588)    --
                                                       -------  -------  ------
       Net periodic pension (benefit) cost............ $   (42) $  (143) $1,937
                                                       =======  =======  ======
</TABLE>

  A significant number of the Company's production employees are covered by
union sponsored, collectively bargained multi-employer pension plans. The
Company contributed approximately $11,541,000, $11,577,000 and $6,884,000,
respectively, for such plans for the years ended December 31, 2001, 2000 and
1999. Information from the plans' administrators is not sufficient to permit
the Company to determine its share of unfunded vested benefits, if any.

  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 $2,653,000, $1,285,000 and $1,350,000, respectively,
to the Savings Plan in the years ended December 31, 2001, 2000 and 1999.

Note 12--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
consideration of this further grant of rights, MGM MIRAGE paid the Company
$1,000,000 in each of the years ended December 31, 2001 and 2000. 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 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.
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'

                                      76
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

notice. During the years ended December 31, 2001, 2000 and 1999, the Company
recognized licensing and royalty revenues of $9,000, $6,000 and $17,000,
respectively.

  In July 2001, the Company entered into an agreement with Grand Hotel for the
licensing of the MGM logo on slot machines for one year, with two one-year
options to renew. The Company recognized licensing revenue of $200,000 during
the year ended December 31, 2001 with respect to this agreement.

  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, 2001, 2000 and 1999, the aggregate of the payments made to
MGM MIRAGE and/or Tracinda for such charters were approximately $271,000,
$98,000 and $149,000, respectively.

  From time to time, the Company reserves hotel rooms from MGM MIRAGE for use
by key exhibitors. For the year ended December 31, 2001, the aggregate amount
paid by the Company for such rooms was approximately $32,000.

  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
$3,249,000, $3,273,000 and $3,261,000 during the years ended December 31,
2001, 2000 and 1999, 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. During the year ended December 31,
2001, the Company recognized revenues of $6,158,000 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
$24,107,000, $23,861,000 and $12,072,000 during the years ended December 31,
2001, 2000 and 1999, respectively.

  The Company had an exclusive producer overhead arrangement with FGM
Entertainment for the services of Frank Mancuso, Jr., the son of the Company's
former Chairman of the Board and Chief Executive Officer, which was terminated
on August 2, 1999. FGM Entertainment, a company wholly owned by Mr. Mancuso,
Jr., received $400,000 each year, subject to five to ten percent annual
increases, for overhead expenses, as well as a development fund and a
production fund to pay for the costs of developing and producing projects.
Pursuant to this arrangement, the Company paid Mr. Mancuso, Jr. approximately
$1,043,000 during the year ended December 31, 1999. Pursuant to the
termination agreement, the Company's obligation to fund overhead ceased, Mr.
Mancuso Jr. acquired a feature film produced by the Company for $3,000,000,
and Mr. Mancuso Jr. obtained the right to acquire certain projects developed
by him pursuant to a turnaround arrangement.

                                      77
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In December 1999, the Company agreed to provide a production company owned
by Mr. Coppola, a director of the Company and a member of the Company's
Executive Committee, certain office space and office furnishings/equipment at
no charge for a two-year period, as consideration for creative services
provided by Mr. Coppola in connection with certain of the Company's film
product.

  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 and
Canada of lower budget theatrical motion pictures to be produced by Zoetrope
over a three-year period. Under the agreement, the Company has 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 will 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 has agreed to spend a minimum
of between approximately $1,000,000 to $2,250,000 per qualifying picture in
marketing and release costs.

Note 13--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).
Due to the significant acquisitions of cable channels in 2001, the Company has
separated cable channels as a reportable operating segment, and reclassified
such amounts from the other operating segment in prior years. 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.
Corporate assets consist of cash, certain corporate receivables and
intangibles. Summarized financial information concerning the Company's
reportable segments is shown in the following tables (in thousands):

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                             ----------------------------------
                                                2001        2000        1999
                                             ----------  ----------  ----------
<S>                                          <C>         <C>         <C>
Revenues
  Feature films............................. $1,217,969  $1,058,296  $  888,303
  Television programs.......................    137,967     139,229     205,719
  Cable channels............................     77,674      32,744      15,205
  Other.....................................     31,595      39,922      48,411
                                             ----------  ----------  ----------
    Subtotal................................  1,465,205   1,270,191   1,157,638
  Less: unconsolidated companies............    (77,674)    (32,744)    (15,205)
                                             ----------  ----------  ----------
  Consolidated revenues..................... $1,387,531  $1,237,447  $1,142,433
                                             ==========  ==========  ==========
</TABLE>


                                      78
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                            ----------------------------------
                                               2001        2000        1999
                                            ----------  ----------  ----------
<S>                                         <C>         <C>         <C>
Segment Income (Loss)
  Feature films............................ $  101,842  $  200,478  $  (77,590)
  Television programs......................     12,715      (2,649)     27,602
  Cable channels...........................     (2,421)      1,953      (6,325)
  Other....................................     14,081      17,768      26,006
                                            ----------  ----------  ----------
    Subtotal...............................    126,217     217,550     (30,307)
  Less: unconsolidated companies...........      2,421      (1,953)      6,325
                                            ----------  ----------  ----------
  Consolidated segment income (loss)....... $  128,638  $  215,597  $  (23,982)
                                            ==========  ==========  ==========

Identifiable Assets
  Feature films............................ $2,183,488  $2,479,639  $2,255,693
  Television programs......................    334,886     401,776     423,204
  Cable channels...........................    845,042      12,403       9,203
  Other....................................      9,857      14,772      18,104
                                            ----------  ----------  ----------
  Consolidated segment assets.............. $3,373,273  $2,908,590  $2,706,204
                                            ==========  ==========  ==========

Capital Expenditures
  Feature films............................ $    8,554  $   10,493  $   12,691
  Television programs......................      1,312       1,700       2,102
  Other....................................         39          66          90
                                            ----------  ----------  ----------
  Consolidated capital expenditures........ $    9,905  $   12,259  $   14,883
                                            ==========  ==========  ==========

Depreciation Expense
  Feature films............................ $   15,733  $   11,909  $    8,187
  Television programs......................      2,414       1,930       1,356
  Cable channels...........................      1,115         311         296
  Other....................................         71          74          58
                                            ----------  ----------  ----------
  Subtotal.................................     19,333      14,224       9,897
  Less: unconsolidated companies...........     (1,115)       (311)       (296)
                                            ----------  ----------  ----------
  Consolidated segment depreciation........ $   18,218  $   13,913  $    9,601
                                            ==========  ==========  ==========

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

<CAPTION>
                                                Year Ended December 31,
                                            ----------------------------------
                                               2001        2000        1999
                                            ----------  ----------  ----------
<S>                                         <C>         <C>         <C>
Licensing and merchandising................ $    6,460  $    5,666  $    4,763
Interactive media..........................      3,586       9,381       1,309
Music......................................      7,593       6,111       7,202
Other......................................     (3,558)     (3,390)     12,732
                                            ----------  ----------  ----------
                                            $   14,081  $   17,768  $   26,006
                                            ==========  ==========  ==========
</TABLE>

                                       79
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                  -----------------------------
                                                    2001      2000      1999
                                                  --------  --------  ---------
   <S>                                            <C>       <C>       <C>
   Segment income (loss)........................  $128,638  $215,597  $ (23,982)
   General and administrative expenses..........   (92,692)  (89,419)   (82,515)
   Severance and related (costs) recoveries.....       --      3,715    (76,158)
   Contract termination fee.....................       --        --    (225,000)
   Depreciation and non-film amortization.......   (32,952)  (28,648)   (24,454)
                                                  --------  --------  ---------
     Operating income (loss)....................     2,994   101,245   (432,109)
   Equity in net earnings (losses) of
    affiliates..................................    (2,421)    1,953     (6,325)
   Interest expense, net of amounts capitalized.   (51,494)  (51,425)   (86,445)
   Interest and other income, net...............     9,478    12,706      3,770
                                                  --------  --------  ---------
     Income (loss) from operations before
      provision for income taxes................  $(41,443) $ 64,479  $(521,109)
                                                  ========  ========  =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                               --------------------------------
                                                  2001       2000       1999
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Total assets for reportable segments....... $3,373,273 $2,908,590 $2,706,204
   Goodwill not allocated to segments.........    516,706    531,440    546,173
   Other unallocated amounts .................     33,185    108,160    171,984
                                               ---------- ---------- ----------
     Consolidated total assets................ $3,923,164 $3,548,190 $3,424,361
                                               ========== ========== ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                               --------------------------------
                                                  2001       2000       1999
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   United States and Canada................... $  872,056 $  669,158 $  648,857
   Europe.....................................    364,663    372,308    338,811
   Asia and Australia.........................     97,925    138,672    106,965
   Other......................................     52,887     57,309     47,800
                                               ---------- ---------- ----------
                                               $1,387,531 $1,237,447 $1,142,433
                                               ========== ========== ==========
</TABLE>

Note 14--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 $18,499,000, $17,264,000 and $16,528,000 for the
years ended December 31, 2001, 2000 and 1999, 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.


                                      80
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  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 2004.

  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, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       There-
                           2002     2003     2004     2005     2006    after     Total
                         -------- -------- -------- -------- -------- -------- ----------
<S>                      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Bank and other debt..... $234,331 $108,689 $103,666 $103,000 $286,500 $    --  $  836,186
Operating leases........   10,976   14,826   16,394   16,455   17,042  238,931    314,624
Employment agreements...   36,485   24,852    9,484       18        2      --      70,841
Creative talent
 agreements.............   21,761    3,956      688      --       --       --      26,405
Letters of credit.......   20,038       90      --       --       --       --      20,128
                         -------- -------- -------- -------- -------- -------- ----------
Total................... $323,591 $152,413 $130,232 $119,473 $303,544 $238,931 $1,268,184
                         ======== ======== ======== ======== ======== ======== ==========
</TABLE>

  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, 2001 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.

Note 15--Supplementary Cash Flow Information

  The Company paid interest, net of capitalized interest, of $43,833,000,
$43,936,000 and $74,054,000 during the years ended December 31, 2001, 2000 and
1999, respectively. The Company paid income taxes of $14,751,000, $12,829,000
and $13,037,000 during the years ended December 31, 2001, 2000 and 1999,
respectively.

  During the year ended December 31, 2000, the Company issued to certain
employees a stock grant of 47,300 shares of common stock valued at $2,154,000.
During the year ended December 31, 1999, the Company issued to certain
employees a stock grant of 42,300 shares of common stock valued at $1,235,000.

  Net cash provided by operating activities for the year ended December 31,
1999 reflects a $225,000,000 payment to WHV representing the consideration
paid by the Company for the early expiration of the WHV Agreement (see Note
3).

                                      81
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 16--Quarterly Financial Data (Unaudited)

  Certain quarterly information is presented below (in thousands):

<TABLE>
<CAPTION>
                                       First     Second     Third     Fourth
                                      Quarter    Quarter   Quarter   Quarter
                                     ---------  ---------  --------  --------
<S>                                  <C>        <C>        <C>       <C>
2001:
Revenues............................ $ 343,896  $ 274,859  $393,310  $375,466
Operating income (loss)............. $  (9,321) $ (43,946) $    969  $ 55,292
Interest expense, net of amounts
 capitalized........................ $  (9,453) $ (13,475) $(14,287) $(14,279)
Cumulative effect of accounting
 change............................. $(382,318) $     --   $    --   $    --
Net income (loss)................... $(399,839) $ (61,305) $(15,975) $ 39,061
Basic and diluted income (loss) per
 share, before cumulative effect of
 accounting change.................. $   (0.08) $   (0.26) $  (0.07) $   0.16
Basic and diluted income (loss) per
 share.............................. $   (1.86) $   (0.26) $  (0.07) $   0.16

2000:
Revenues............................ $ 338,995  $ 294,486  $311,777  $292,189
Operating income.................... $  19,917  $  18,169  $ 36,669  $ 28,443
Interest expense, net of amounts
 capitalized........................ $ (14,893) $ (14,722) $(12,583) $ (9,227)
Net income.......................... $   5,215  $   6,294  $ 27,115  $ 12,375
Basic and diluted income per share.. $     .03  $     .03  $    .13  $    .06

1999:
Revenues............................ $ 258,643  $ 212,274  $299,310  $372,206
Operating income (loss)............. $(286,163) $(227,463) $ 34,378  $ 40,814
Interest expense, net of amounts
 capitalized........................ $ (19,019) $ (22,219) $(22,807) $(22,400)
Net income (loss)................... $(306,621) $(249,807) $ 10,344  $ 15,174
Basic and diluted income (loss) per
 share.............................. $   (2.03) $   (1.65) $    .07  $    .08
</TABLE>

  The Company adopted SOP 00-2 on January 1, 2001 and recorded a one-time,
non-cash cumulative effect charge to earnings of $382,318,000, primarily to
reduce the carrying value of its film and television costs (see Note 1).

  The Company regularly reviews, and revises when necessary, its total revenue
estimates on an individual title basis. These revisions can result in
significant quarter-by-quarter fluctuations in film write-downs and
amortization. The results of operations for the fourth quarter of 2001 were
positively impacted by reduced film amortization rates due to a significant
increase in digital video disc revenues and new television licensing
agreements. The favorable impact of these items was partially offset by
advertising costs incurred for unreleased film product as of December 31,
2001, which in 2001 are required to be expensed under the new accounting
rules. The net favorable impact of these items on our operating income in the
fourth quarter of 2001 aggregated approximately $12,504,000.

                                      82
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Partners
American Movie Classics Company and Bravo Company:

  We have audited the accompanying combined balance sheets of American Movie
Classics Company (a general partnership) and subsidiaries and Bravo Company (a
general partnership) and subsidiaries (collectively, the "Partnerships"), as
of December 31, 2001 and 2000, and the related combined statements of income,
partners' capital (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 2001. These combined financial statements
are the responsibility of the Partnerships' management. Our responsibility is
to express an opinion on these combined financial statements based on our
audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Partnerships at December 31, 2001 and 2000, and the combined results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

/s/ KPMG LLP

March 11, 2002
Melville, New York

                                      83
<PAGE>

                AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                         BRAVO COMPANY AND SUBSIDIARIES

                             (General Partnerships)

                            COMBINED BALANCE SHEETS

                           DECEMBER 31, 2001 and 2000
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 2001     2000
                           ASSETS                              -------- --------
<S>                                                            <C>      <C>
Current assets:
  Cash.......................................................  $ 49,740 $     28
  Trade accounts receivable (less allowance for doubtful
   accounts of $5,289 and $3,227)............................    83,574   56,106
  Trade accounts receivable-affiliates, net of allowance for
   doubtful accounts.........................................     1,028   17,420
  Other receivables-affiliates, net of allowance for doubtful
   accounts..................................................    76,625    5,904
  Note receivable............................................        --    4,000
  Prepaid expenses and other current assets..................     8,387    5,955
  Current feature film inventory, net........................    71,077   61,017
                                                               -------- --------
    Total current assets.....................................   290,431  150,430
Long-term feature film inventory, net........................   338,751  278,502
Plant and equipment, net.....................................    25,854   28,490
Deferred carriage fees, net..................................   158,328   18,914
Deferred costs, net of accumulated amortization of $3,131 and
 $2,095......................................................     1,152    2,629
Intangible assets, net of accumulated amortization of
 $111,250 and $96,210........................................    39,165   54,205
                                                               -------- --------
                                                               $853,681 $533,170
                                                               ======== ========

<CAPTION>
            LIABILITIES AND PARTNERS' DEFICIENCY
<S>                                                            <C>      <C>
Current liabilities:
  Accounts payable...........................................  $ 24,398 $ 37,131
  Accrued payroll and related costs..........................    14,707    8,079
  Other accrued expenses.....................................    10,530   14,289
  Accounts payable-affiliates, net...........................     7,720   17,744
  Feature film rights payable, current.......................    57,115   50,946
  Deferred carriage fees payable.............................    13,306    7,081
  Bank debt, current.........................................        --   31,322
  Capital lease obligations, current.........................     4,415    3,961
                                                               -------- --------
    Total current liabilities................................   132,191  170,553
Bank debt, long-term.........................................        --  328,000
Feature film rights payable, long-term.......................   250,352  197,021
Capital lease obligations, long-term.........................    12,829   17,008
                                                               -------- --------
    Total liabilities........................................   395,372  712,582
Commitments and contingencies
Partners' capital (deficiency)...............................   458,309 (179,412)
                                                               -------- --------
                                                               $853,681 $533,170
                                                               ======== ========
</TABLE>

            See accompanying notes to combined financial statements.

                                       84
<PAGE>

                AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                         BRAVO COMPANY AND SUBSIDIARIES

                             (General Partnerships)

                         COMBINED STATEMENTS OF INCOME

                  YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                    2001      2000      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenues, net (including affiliate amounts of
 $89,853, $68,708, and $62,570).................. $435,129  $362,366  $297,251
                                                  --------  --------  --------
Operating expenses:
  Technical and operating (including affiliate
   amounts of $14,931, $13,728, and $12,854).....  156,923   125,816   120,279
  Selling, general and administrative (including
   affiliate amounts of $27,411, $38,744, and
   $30,411)......................................  132,694   143,278   112,287
  Depreciation and amortization..................   22,462    25,244    27,700
                                                  --------  --------  --------
                                                   312,079   294,338   260,266
                                                  --------  --------  --------
  Operating income...............................  123,050    68,028    36,985
                                                  --------  --------  --------
Other income (expense):
  Interest expense, net..........................   (4,056)  (30,324)  (21,352)
  Gain on sale of programming division...........       --     5,716        --
  Miscellaneous, net.............................       86      (206)     (210)
  Write-off of deferred financing costs..........   (1,053)       --    (1,413)
                                                  --------  --------  --------
                                                   (5,023)   (24,814)  (22,975)
                                                  --------  --------  --------
Net income....................................... $118,027  $ 43,214  $ 14,010
                                                  ========  ========  ========
</TABLE>



            See accompanying notes to combined financial statements.

                                       85
<PAGE>

                AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                         BRAVO COMPANY AND SUBSIDIARIES

                             (General Partnerships)

             COMBINED STATEMENTS OF PARTNERS' CAPITAL (DEFICIENCY)

                  YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  RMH        MGM       Total
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Balance, December 31, 1998.................... $ (60,924) $      --  $ (60,924)
  Contributions...............................    10,495         --     10,495
  Net income..................................    14,010         --     14,010
  Distributions...............................  (125,000)        --   (125,000)
                                               ---------  ---------  ---------
Balance, December 31, 1999....................  (161,419)        --   (161,419)
  Contributions...............................    12,785         --     12,785
  Net income..................................    43,214         --     43,214
  Distributions...............................   (73,992)        --    (73,992)
                                               ---------  ---------  ---------
Balance, December 31, 2000....................  (179,412)        --   (179,412)
  Contributions...............................    21,299         --     21,299
  Acquisition of partnership interests........        --    825,000    825,000
  Net income..................................   100,191     17,836    118,027
  Adjustment of partnership capital...........   751,174   (751,174)        --
  Distributions...............................  (326,605)        --   (326,605)
                                               ---------  ---------  ---------
Balance, December 31, 2001.................... $ 366,647  $  91,662  $ 458,309
                                               =========  =========  =========
</TABLE>



            See accompanying notes to combined financial statements.

                                       86
<PAGE>

                AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                         BRAVO COMPANY AND SUBSIDIARIES

                             (General Partnerships)

                       COMBINED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                   2001       2000      1999
                                                 ---------  --------  ---------
<S>                                              <C>        <C>       <C>
Cash flows from operating activities:
 Net income..................................... $ 118,027  $ 43,214  $  14,010
 Adjustments to reconcile net income to net cash
  (used in) provided by operating activities:
  Depreciation and amortization.................    22,462    25,244     27,700
  CSC stock appreciation rights and other
   incentive plan (benefit) expense allocations.    (9,162)   12,785     10,495
  Amortization of feature film inventory........    69,329    53,398     42,936
  Amortization of deferred carriage fees........     5,923     6,849      4,606
  Amortization and write-off of deferred costs..     1,477       675      1,922
  Gain on sale of programming division..........        --    (5,716)        --
  Changes in assets and liabilities, net of
   effect of disposition:
   Trade accounts receivable, net...............   (27,468)  (17,101)   (10,839)
   Trade accounts receivable-affiliates, net....    16,392    (4,812)    (1,231)
   Other receivables-affiliates, net............     5,804    (5,832)       270
   Prepaid expenses and other current assets....    (3,829)   (4,781)     3,520
   Feature film inventory.......................  (140,009)  (66,510)  (113,050)
   Deferred carriage fees.......................  (145,337)   (4,435)   (24,362)
   Accounts payable and accrued expenses........    (8,465)     (177)     4,120
   Accounts payable-affiliates, net.............    (5,576)   (1,986)     6,945
   Deferred carriage fees payable...............     6,225     3,694      3,387
   Feature film rights payable..................    59,650   (15,420)    52,173
                                                 ---------  --------  ---------
    Net cash (used in) provided by operating
     activities.................................   (34,557)   19,089     22,602
                                                 ---------  --------  ---------
Cash flows (used in) provided by investing
 activities:
 Capital expenditures...........................    (4,588)   (3,695)    (5,088)
 Loan to affiliate..............................   (74,630)       --         --
 Net proceeds from sale of programming division.     4,000     8,828         --
                                                 ---------  --------  ---------
    Net cash (used in) provided by investing
     activities.................................   (75,218)    5,133     (5,088)
                                                 ---------  --------  ---------
Cash flows provided by (used in) financing
 activities:
 Proceeds from bank debt........................   425,000   114,225    383,208
 Repayment of bank debt.........................  (784,322)  (64,359)  (269,292)
 Acquisition of partnership interests...........   825,000        --         --
 Distributions to partners, net.................  (302,195)  (70,000)  (125,000)
 Principal payments on capital lease obligation.    (3,996)   (4,133)    (3,732)
 Financing costs on bank debt...................        --        (9)    (2,715)
                                                 ---------  --------  ---------
    Net cash provided by (used in) financing
     activities.................................   159,487   (24,276)   (17,531)
                                                 ---------  --------  ---------
Net increase (decrease) in cash.................    49,712       (54)       (17)
Cash at beginning of year.......................        28        82         99
                                                 ---------  --------  ---------
Cash at end of year............................. $  49,740  $     28  $      82
                                                 =========  ========  =========
</TABLE>

            See accompanying notes to combined financial statements.

                                       87
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

                    NOTES TO COMBINED FINANCIAL STATEMENTS
                            (dollars in thousands)

1. Summary of Significant Accounting Policies

 Description of Business

  American Movie Classics Company ("AMCC") and Bravo Company ("Bravo") are
general partnerships organized as of January 1, 1987, and January 1, 1980,
respectively, under the provisions of New York State Partnership Law. AMCC and
subsidiaries and Bravo and subsidiaries (collectively, the "Partnerships") are
operated as an integral part of Rainbow Media Holdings, Inc. ("RMH"). RMH is a
77.1% owned indirect subsidiary of Cablevision Systems Corporation ("CSC").

  The Partnerships produce, market and distribute the American Movie Classics
("AMC"), WE: Women's Entertainment (formerly Romance Classics) ("WE"), Bravo
and Independent Film Channel services to the pay television industry located
throughout the United States. Accordingly, the Partnerships consider
themselves to be operating in a single industry segment.

  On January 4, 2001, Bravo assigned its interests in certain developmental
subsidiaries, including IFC Productions, LLC, Next Wave Films, LLC, IFC
Theatres, LLC and IFC Films, LLC (collectively the "Assigned Entities") to
RMH. Bravo accounted for this transaction as a capital contribution from RMH
as the then net book value of the Assigned Entities was a net liability. On
April 2, 2001, a subsidiary of Metro-Goldwyn-Mayer, Inc. ("MGM") acquired a
20% interest in AMCC and Bravo as they existed on such date for $825 million.
All revenues and expenses subsequent to this date are allocated 80% to RMH and
20% to MGM except for certain stock-related incentive plans as described in
footnote 6.

 Principles of Combination and Basis of Presentation

  The accompanying combined financial statements include the accounts of AMCC
and its wholly-owned subsidiaries and the accounts of Bravo and its wholly-
owned subsidiaries. These combined financial statements of AMCC and Bravo have
been prepared to reflect those entities in which MGM holds a minority
interest. All significant intercompany transactions and balances are
eliminated in combination.

 Revenue Recognition

  The Partnerships recognize subscriber revenue when programming services are
provided to cable television systems or other pay television operators.
Advertising revenue is recognized when commercials are telecast.

 Costs of Revenue

  Costs of revenue related to sales of programming services including, but not
limited to, license fees, amortization of deferred carriage costs and
production costs, are classified as "technical and operating" expenses in the
accompanying statements of income.

 Advertising Expenses

  Advertising costs are charged to expense when incurred. Advertising costs
were $58,954, $61,074 and $42,939 for the years ended December 31, 2001, 2000
and 1999, respectively.

                                      88
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


 Feature Film Inventory

  Rights to feature film inventory acquired under license agreements along
with the related obligations are recorded at the contract value when a license
agreement is executed or the license period has begun. Costs are amortized on
the straight-line basis over the respective license periods throughout the
contract term. Feature film inventory is stated at the lower of cost less
accumulated amortization or net realizable value. Estimated future revenues
and planned airings are reviewed regularly and write-downs to net realizable
value are made as required. Estimates of total gross revenues can change due
to a variety of factors, including the level of advertising rates and
subscriber fees. Accordingly, revenue estimates are reviewed periodically and
amortization is adjusted as necessary. Film telecast rights to be amortized
within one year are classified as current assets while contract amounts
payable within one year are classified as current liabilities. License periods
generally range from one to five years. Perpetual television exhibition rights
acquired under certain purchase agreements were recorded at the present value
of the obligations (with the remainder recorded as imputed interest) and were
being amortized over a period of eighteen years. On December 14, 2000, the
perpetual television exhibition rights purchase agreements were assigned to
RMH. The assignment of the net book value of the assets and the related
obligations of $3,992 was recorded as a partner distribution.

  Amounts payable subsequent to December 31, 2001, relating to feature film
telecast rights, which are reflected on the accompanying combined balance
sheet, amount to $57,115 in 2002, $57,553 in 2003, $58,159 in 2004, $41,481 in
2005, $32,460 in 2006 and $60,699 thereafter. During 1999, the Partnerships
reduced feature film inventory and rights payable by approximately $27,000 in
connection with an amendment to an existing film license agreement (see Note
6).

 Plant and Equipment

  Plant and equipment are stated at cost. Equipment under capital leases is
stated at the present value of minimum lease payments. Depreciation on plant
and equipment is calculated on the straight-line basis over the estimated
useful lives of the assets or, with respect to equipment under capital leases
and leasehold improvements, amortized over the shorter of the lease term or
the assets' useful lives.

 Deferred Carriage Fees

  Deferred carriage fees primarily represent payments to multiple systems
operators to guarantee carriage of the Partnerships' programming services and
are amortized to technical and operating expense over the period of the
related guarantee (3 to 11 years).

 Deferred Costs

  Deferred costs consist of costs incurred to obtain debt (deferred financing
costs) and costs that represent prepayments to secure transponder space on a
satellite (deferred transmission costs). Deferred financing costs are
amortized into interest expense over the life of the related debt. Deferred
transmission costs are amortized to technical expense over the projected life
(12 years) of the satellite.

 Intangible Assets

  Intangible assets established in connection with the acquisition of
interests in the Partnerships in 1994 and 1995 consist of affiliation
agreements, feature film intangibles and excess costs over fair value of net
assets acquired. Affiliation agreements represent the value assigned to
agreements with cable systems to carry the AMC

                                      89
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

service, and are amortized over a 10-year period on the straight-line basis.
Feature film intangibles represent the value assigned to agreements with film
distributors for the rights to exhibit films on the AMC service, and are
amortized over a 6-year period on the straight-line basis. Feature film
intangibles were fully amortized during 2000. Excess costs over fair value of
net assets acquired are being amortized over a 10-year period on the straight-
line basis.

 Income Taxes

  AMCC and Bravo operate as general partnerships; accordingly, their taxable
income or loss is included in the tax returns of the individual partners, and
the Partnerships make no provision for income taxes.

 Supplemental Cash Flow Information

  During the years ended December 31, 2001, 2000 and 1999, the Partnerships
paid cash interest expense of $10,609, $31,116, and $20,785, respectively. In
connection with the January 4, 2001 assignment of certain subsidiaries to RMH,
the Partnerships had non-cash operating and financing activities of ($17,462)
representing the net liabilities of the assigned entities and the offsetting
contribution of capital. Also during 2001, the Partnerships had non-cash
financing activities that included a net capital distribution of $11,411. In
addition, for each of the years ended December 31, 2001, 2000 and 1999, the
Partnerships recorded non-cash operating and financing activities related to
the recognition of CSC Stock Appreciation Rights ("CSC SAR Plan") and other
incentive plans expense (benefit) allocations of ($9,162), $12,785 and
$10,495, respectively. Proceeds from the sale of the Partnerships' Bravo Latin
America ("BLA") division during 2000 included $4,000 in the form of a note
receivable (see Note 2), which was collected in 2001. In 2000, the
Partnerships had non-cash operating and financing activities of $3,992 related
to the assignment of the net book value of film assets and the related
obligation, which was recorded as a distribution of capital.

 Use of Estimates

  The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates. Such estimates include, but are not limited to, provisions
for doubtful accounts receivable and the net realizable value of feature film
inventory.

 Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

  The Partnerships account for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to estimated future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.

                                      90
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


 Commitments and Contingencies

  Liabilities for loss contingencies, arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment
can be reasonably estimated.

 Impact of New Accounting Standards

  In January 2001, the Partnerships adopted Statement of Financial Accounting
Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended by SFAS 138, which was effective for
all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
comprehensive standards for the recognition and measurement of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The adoption of SFAS No. 133 did not
have a material effect on the Partnerships' combined results of operations or
financial position.

  In June 2001, the FASB issued SFAS No. 141, Business Combinations, ("SFAS
No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 and establishes
criteria that intangible assets acquired in a business combination must meet
to be recognized and reported separately from goodwill.

  SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but, instead, tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121") and subsequently, SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" after its
adoption.

  The Partnerships adopted the provisions of SFAS No. 141 as of July 1, 2001,
which had no effect on the combined financial position or results of
operations of the Partnerships. SFAS No. 142 will be effective for the
Partnerships on January 1, 2002 at which time the Partnerships will be
required to reassess the useful lives and residual values of all intangible
assets acquired in purchase business combinations and make necessary
amortization period adjustments by the end of the first interim period after
adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Partnerships will be required to test
the intangible asset for impairment in accordance with the provisions of SFAS
No. 142. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period. Amortization expense related to goodwill was $496 for
each of the years in the three-year period ended December 31, 2001,
respectively. Because of the extensive effort needed to comply with adopting
SFAS No. 142, it is not practicable to reasonably estimate the impact of
adopting this Statement on the Partnerships' combined financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.

  In August, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which
supercedes both SFAS No. 121 and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions"

                                      91
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

("APB 30"), for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS No. 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. SFAS No. 144 requires companies
to separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. The Partnerships are required to adopt SFAS No. 144 on
January 1, 2002. Management does not expect the adoption of SFAS No. 144 for
long-lived assets held for use to have a material impact on the Partnerships'
combined financial statements because the impairment assessment under SFAS No.
144 is largely unchanged from SFAS No. 121.

  In November 2001, the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force ("EITF") issued EITF No. 01-09, "Accounting for the
Consideration Given by a Vendor to a Customer or a Reseller of the Vendors'
Products." This EITF, among other things, codified the issues and examples of
EITF No. 00-25, "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products." EITF No. 01-09 stipulates the
criteria to be met in determining the financial statement classification of
customer incentives (which includes deferred carriage fees) as either a
reduction of revenue or an operating expense. As required, effective January
1, 2002, the Partnerships will generally reclassify the amortization of its
deferred carriage fees as a reduction to revenue, net. All comparative periods
will be restated. Based upon historical pro forma information, management
believes that revenues, net, when restated for the years ended 2001, 2000 and
1999 could be reduced by up to 4%. The amortization of deferred carriage fees
shown on the balance sheet is currently included in technical and operating
expenses and would correspondingly be reduced such that operating income and
net income would not be affected.

 Reclassifications

  Certain reclassifications have been made to the prior year combined
financial statements to conform to the current year presentation.

2. Disposition

  On October 31, 2000 the Partnerships completed the sale of its BLA division
for gross proceeds of $13,496, of which $4,000 was in the form of a note
receivable. The note receivable, bearing interest at 8.5%, was paid in full in
January 2001. In conjunction with the sale, the Partnerships entered into an
agreement to cancel both its capital and operating leases on transponders
covering this geographic region in 2001. As a result of these cancellations,
during 2000, the Partnerships recognized a loss of approximately $2,686,
representing lease termination penalties of $2,562 and periodic rental
payments for the period the transponders will not be used. Total payments due
for these leases of $3,182, which were paid in full in 2001, were included in
accrued expenses in the accompanying combined balance sheet at December 31,
2000. For the year ended December 31, 2000, after adjusting for the cost of
the net assets sold and for the expenses associated with the divestiture,
including accrued employee termination benefits of approximately $700 for
eight employees, the Partnerships realized a gain of approximately $5,716.

                                      92
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


3. Plant and Equipment

  Plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                  December 31,
                                                 ----------------    Estimated
                                                  2001     2000    useful lives
                                                 -------  -------  -------------
   <S>                                           <C>      <C>      <C>
   Program, service and test equipment.......... $16,970  $13,908   5 to 8 years
   Origination equipment........................  34,230   33,950  8 to 12 years
   Furniture and fixtures.......................   7,560    6,157   5 to 8 years
   Leasehold improvements.......................   3,137    3,134  Life of lease
                                                 -------  -------
                                                  61,897   57,149
   Accumulated depreciation and amortization.... (36,043) (28,659)
                                                 -------  -------
                                                 $25,854  $28,490
                                                 =======  =======
</TABLE>

4. Intangible Assets

  Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2001    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Affiliation agreements, net of accumulated amortization of
    $107,855 and $93,311....................................... $37,591 $52,135
   Excess costs over fair value of net assets acquired, net of
    accumulated amortization of $3,395 and $2,899..............   1,574   2,070
                                                                ------- -------
                                                                $39,165 $54,205
                                                                ======= =======
</TABLE>

5. Bank Debt

  AMCC has a Credit Agreement that matures on March 31, 2006 and consisted of
a term loan and a revolving loan with available borrowings of $225,000 and
$200,000, respectively. On April 2, 2001, all outstanding debt was repaid and
the term loan was cancelled. The terms of the revolving loan remain unchanged.
Borrowings under the Credit Agreement bear interest at varying rates based
upon the banks' Base Rate or Eurodollar Rate plus a spread which varies,
depending on the ratio of debt to cash flow, as defined. As of December 31,
2001, no amounts are outstanding under the revolving loan.

  On November 8, 1999, AMCC entered into an interest rate cap agreement with
CSC on a notional amount of $105,000, which was to mature on May 13, 2002
whereby AMCC's LIBOR interest rate was capped at 7.0% through May 8, 2001 and
7.5% from May 8, 2001 through May 13, 2002, in exchange for an upfront payment
of $441. AMCC entered into this interest rate cap agreement to hedge against
interest rate risk, as required by its Credit Agreement, and therefore had
accounted for these agreements as hedges of floating rate debt, whereby
interest expense was recorded using the revised rate, with any fees or other
payments amortized as yield adjustments. On April 2, 2001, the interest rate
cap agreement was cancelled as all outstanding debt under the Credit Agreement
was repaid. The loss of approximately $182 realized in conjunction with the
cancellation of the interest rate cap agreement was recorded as a component of
the write-off of deferred financing costs in the Partnerships' combined
statement of income for the year ended December 31, 2001.

                                      93
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


  At December 31, 2000, the weighted-average interest rate on bank
indebtedness approximated 7.9%. The revolving loan does not start to reduce
until June 30, 2004. On December 31, 2000, $225,000 was outstanding under the
term loan and $130,000 was outstanding under the revolving loan. As of
December 31, 2001, no amounts were outstanding under the Credit Agreement.
Unrestricted and undrawn funds under the Credit Agreement at December 31, 2001
and 2000 amounted to $200,000 and $70,000, respectively.

  Substantially all of the assets of AMCC have been pledged to secure the
borrowings under the Credit Agreement. The Credit Agreement contains various
restrictive covenants with which AMCC was in compliance at December 31, 2001.
AMCC must pay an annual commitment fee of 0.625% on the aggregate unborrowed
balance of the revolving loan, which was $1,013 and $469, at December 31, 2001
and 2000, respectively.

6. Allocations and Related-Party Transactions

 Other Receivables--Affiliates

  Other receivables--affiliates includes loans made by the Partnerships to a
subsidiary of RMH. Such loans are due on the earlier of demand by the
Partnerships or March 1, 2002 and bear interest at a rate of LIBOR plus 3% per
annum. On February 28, 2002, these loans were amended to extend the due dates
to the earlier of demand by the Partnerships or April 30, 2002.

 Allocations

  The combined financial statements of the Partnerships reflect the
application of certain allocation policies of CSC and RMH, which are
summarized below. Management believes that these allocations have been made on
a reasonable basis. However, it is not practicable to determine whether the
allocated amounts represent amounts that might have been incurred on a stand-
alone basis, as there is no company-specific or comparable industry benchmarks
with which to make such estimates. Explanations of the composition and the
amounts of the more significant allocations are described below.

 Corporate General and Administrative Costs

  General and administrative costs, including costs of maintaining corporate
headquarters, facilities and common support functions (such as human
resources, legal, finance, accounting, tax, audit, treasury, strategy
planning, information technology, creative and production services, etc.) have
been allocated by CSC and RMH generally based upon specific usage measured by
proportionate headcount or square footage. In addition, certain allocations
are also based on revenues or expenses of the Partnerships in relation to
consolidated CSC or consolidated RMH. The remaining overhead, principally
salaries of corporate executives, is allocated based on management's estimate
of the level of effort expended on each business unit based on historical
trends. Such costs allocated to the Partnerships amounted to $23,286, $18,260
and $14,239 for the years ended December 31, 2001, 2000 and 1999,
respectively, and have been included in selling, general and administrative
expenses.

 Related-Party Transactions

  As described below, the Partnerships provide services to and receives
services from affiliates of CSC and RMH. As many of these transactions are
conducted between subsidiaries under common control of CSC, amounts charged
for these services have not necessarily been based upon arm's length
negotiations. However, it is not practicable to determine whether the amounts
charged represent amounts that might have been incurred on a stand-alone basis
for the Partnerships.

                                      94
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


  The Partnerships distribute programming to the pay television industry under
contracts called affiliation agreements. Revenues earned under affiliation
agreements with companies owned by or affiliated with CSC for the years ended
December 31, 2001, 2000 and 1999 were approximately $88,868, $68,255 and
$62,570, respectively.

  RMH pays the Partnerships for advertising revenue earned in connection with
an agreement between RMH and a third party entered into during 2000. Such
revenues were $583 and $453 for the year ended December 31, 2001 and 2000,
respectively. In addition, during 2001, the Partnerships earned $402 for
advertising revenue earned from subsidiaries of RMH.

  Rainbow Network Communications ("RNC"), an affiliate of the Partnerships,
provides certain transmission and production services to the Partnerships. The
Partnerships were charged approximately $13,309, $12,106 and $11,773 in 2001,
2000 and 1999, respectively, for these services. The Partnerships have entered
into agreements that allow RNC to continue providing these services to the
Partnerships through 2006. Future cash payments required under these
agreements amount to $8,310 in 2002, $8,717 in 2003, $9,151 in 2004, $3,522 in
2005 and $3,671 in 2006.

  CSC and the Partnerships may enter into agreements with third party service
providers in which the amounts paid by CSC or the Partnerships may differ from
the amounts that CSC or the Partnerships would otherwise pay if such
arrangements were on an arm's-length basis. These arrangements are in return
for the service provider's or its affiliate's agreement to make payments or
provide services to CSC or the Partnerships on a basis more or less favorable
than either CSC or the Partnerships would otherwise obtain. Where the
Partnerships have received the benefits of CSC's negotiations in the form of
increased affiliation payments or discounted license fees, CSC charges the
Partnerships the amount of the benefit. In one such agreement, the
Partnerships have recorded charges from CSC relating to increased affiliation
payments amounting to $14,000 in 2001, 2000 and 1999, which has been reflected
as a reduction of the Partnerships' affiliation revenue. In another such
agreement, CSC entered into an affiliation agreement with a provider that
resulted in higher rates per subscriber charged to CSC than those under a
previous agreement. As part of the negotiations, the service provider agreed
to amend the existing film license agreement with the Partnerships with both
reduced license fees and a revised list of film titles licensed. Since the
Partnerships received the benefit of CSC's negotiations in the form of
discounted license fees, CSC charged the Partnerships $10,000, which was
treated as a cost to acquire the rights to the revised list of film titles and
was classified as feature film inventory. Amortization of this charge over the
remaining license period has been reflected as increased film licensing costs
of $1,622 in 2001 and 2000, and $1,081 in 1999, respectively, which has been
included in technical and operating expenses.

  Under contractual agreements, CSC provides certain management services to
the Partnerships. These agreements provide for payment, in addition to expense
reimbursement, of an aggregate fee of 3.5% of AMCC's gross revenues, as
defined. The agreements are automatically renewable every five years at the
option of CSC. Pursuant to the terms of these agreements, the Partnerships
were charged management fees of $9,207, $7,699 and $6,832 in 2001, 2000 and
1999, respectively.

  During 1999, the Partnerships provided certain administrative, creative and
production services to various affiliates. The affiliates were charged $1,155
for these services, which was recorded as a reduction to operating expenses.

  CSC allocates to the Partnerships its proportionate share of expenses or
benefits related to the CSC SAR Plan and other incentive plans. For the years
ended December 31, 2001, 2000 and 1999, the Partnerships

                                      95
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

recorded a net (benefit) expense of approximately ($5,082), $12,785 and
$10,495, respectively, for its proportionate share of the CSC SAR Plan and
other incentive plans (benefit) expense. Such amounts are recorded as
administrative expenses in the accompanying combined statements of income.

  Liabilities related to the grants under the CSC SAR Plan are funded by RMH
and are reflected as either capital contributions from or (distributions to)
RMH in the combined financial statements of the Partnerships. The other
partner in the Partnerships does not share in the charge or benefit associated
with the CSC SAR Plan. The other incentive plans are funded by both partners
and liabilities of $4,080 related to these plans are reflected as accrued
payroll and related costs at December 31, 2001.

7. Benefit Plans

  CSC sponsors a cash balance pension plan and a 401(k) savings plan and
during 2001, CSC sponsored an excess savings and excess cash balance plan, in
which the Partnerships and its subsidiaries participate. In connection with
the cash balance plan and excess cash plan, CSC charges the Partnerships for
credits made into an account established for each participant. Such credits
are based upon a percentage of eligible base pay and a market-based rate of
return. The Partnerships also makes matching contributions for a portion of
employee voluntary contributions to the 401(k) savings plan and the excess
savings plan. Total expense related to these plans was approximately $1,499,
$552 and $507 for the years ended December 31, 2001, 2000 and 1999,
respectively. The Partnerships does not provide post retirement benefits for
any of its employees.

8. Leases

  The Partnerships lease transponder space on several satellites and certain
facilities under operating lease agreements that expire at various dates
through 2006. Rent expense for operating leases amounted to approximately
$4,336, $4,096 and $2,994 for the years ended December 31, 2001, 2000 and
1999, respectively. The following is a schedule of future minimum lease
payments for operating leases as of December 31, 2001:

<TABLE>
<CAPTION>
   Year ending December 31,
   ------------------------
   <S>                                                                  <C>
     2002.............................................................. $ 2,557
     2003..............................................................   2,134
     2004..............................................................   2,137
     2005                                                                 1,903
     2006                                                                 1,800
     Thereafter........................................................      --
                                                                        -------
   Total minimum lease payments........................................ $10,531
                                                                        =======
</TABLE>

  The Partnerships lease transponder space on satellites under capital leases
that expire at various dates through 2006. At December 31, 2001 and 2000, the
gross amount of equipment and related accumulated amortization recorded under
capital leases was as follows:

<TABLE>
<CAPTION>
                                                                2001     2000
                                                               -------  -------
   <S>                                                         <C>      <C>
   Origination equipment...................................... $33,499  $33,218
   Accumulated amortization................................... (19,644) (15,680)
                                                               -------  -------
                                                               $13,855  $17,538
                                                               =======  =======
</TABLE>

                                      96
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


  Future minimum capital lease payments as of December 31, 2001 are:

<TABLE>
<CAPTION>
   Year ending December 31,
   ------------------------
   <S>                                                                   <C>
     2002............................................................... $ 5,940
     2003...............................................................   5,940
     2004...............................................................   5,580
     2005...............................................................   1,620
     2006...............................................................   1,620
     Thereafter.........................................................      --
                                                                         -------
   Total minimum lease payments.........................................  20,700
   Less amount representing interest (10%)..............................   3,456
                                                                         -------
   Present value of net minimum capital lease payments..................  17,244
   Less current installments............................................   4,415
                                                                         -------
   Obligations under capital leases, excluding current installments..... $12,829
                                                                         =======
</TABLE>

9. Commitments and Contingencies

  The Partnerships have entered into various contracts with RMH subsidiaries
to license films for pay television programming and to provide certain
transmission and production services to the Partnerships. Maximum future cash
payments required under these contracts as of December 31, 2001 are as
follows:

<TABLE>
<CAPTION>
   Year ending December 31,
   ------------------------
   <S>                                                                   <C>
     2002............................................................... $17,450
     2003...............................................................  17,957
     2004...............................................................  18,391
     2005...............................................................  12,887
     2006...............................................................   4,786
     Thereafter.........................................................   1,440
                                                                         -------
                                                                         $72,911
                                                                         =======
</TABLE>

  During 2001, the Partnerships secured carriage commitments with certain
multiple system operators under long-term affiliation agreements, in exchange
for which the Partnerships agreed to make payments when certain launch
thresholds are met conditioned upon continued carriage. The Partnerships are
contingently liable through 2003 for payments of up to $12,850, which will be
used by the operators to provide various marketing and promotional support for
the Partnerships.

  Broadcast Music, Inc. ("BMI"), an organization which licenses the
performance of the musical compositions of its affiliated composers, authors
and publishers, has alleged that the Partnerships need a license to exhibit
programs containing musical compositions in BMI's catalog and that continued
use requires a license. In June 1992, the Partnerships and BMI entered into a
written license agreement covering the period January 1, 1990 through June 30,
1993, pursuant to which BMI agreed to an interim fee of 0.3% of net revenues.
This agreement was extended several times and is currently extended on a
month-to-month basis, terminable by either party on thirty days prior written
notice.

                                      97
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


  BMI agreed to treat as final all payments made by the Partnerships for the
period commencing on the launch date of each service and ending June 30, 1992.
However, commencing with July 1, 1992, the license fees payable by the
Partnerships are subject to retroactive adjustment either at such time as the
Federal Rate Court reaches a final determination or the parties reach final
agreement.

  On November 4, 1997, the Partnerships requested a license from BMI covering
public performances of music by WE and its affiliated distributors from the
date of launch of WE. BMI, in response, had indicated that WE is licensed as
of the date of that correspondence at an interim fee equaling 0.3% of WE's net
revenues. That interim fee is subject to retroactive adjustment in the same
manner as pertains to the license arrangements with BMI for the AMC service.
BMI has indicated that it is willing to discuss an appropriate retroactive
license fee back to the date of launch. Those discussions have not yet
concluded.

  The American Society of Composers, Authors and Publishers ("ASCAP"), another
organization which licenses the performance of the musical compositions of its
members, has also alleged that the Partnerships need a license to exhibit
programs containing musical compositions in its catalog and that continued use
requires a license. The subject of the fees to be paid to ASCAP and the manner
in which they will be paid has been submitted to a Federal Rate Court in New
York and is still pending. By submitting the matter to the Federal Rate Court,
the Partnerships have been licensed by ASCAP for periods subsequent to March
6, 1989, at an interim fee of 0.3% of net revenues per year. The interim fee
is subject to retroactive adjustment when the Federal Rate Court reaches a
final decision. In addition, ASCAP has sought payments for license fees for
part or all of the period from January 1, 1986 to March 6, 1989.

  On November 4, 1997, the Partnerships requested from ASCAP a license
covering the use of public performances of ASCAP music by WE and its
affiliated distributors from the launch date of that service. ASCAP has agreed
to license WE on an interim basis at the rate of 0.3% of WE's net revenues.
That interim fee is subject to retroactive adjustment in the same manner as
pertains to the license arrangements with ASCAP for the AMC service.

  In addition, the Partnerships are a party to various lawsuits arising out of
the ordinary conduct of its business.

  Management believes that the settlement of the above matters will not have a
material adverse effect on the financial position of the Partnerships.

10. Concentrations of Credit Risk

  During 2001, the Partnerships had two customers that collectively accounted
for 30% of net revenues. During 2000 and 1999, the Partnerships had three
customers that collectively accounted for approximately 40% of net revenues in
each year. At December 31, 2001 and 2000, the Partnerships had five customers
and three customers totaling approximately 62% and 42% of the Partnerships'
net trade receivable balances including those due from affiliates,
respectively, which exposes the Partnerships to a concentration of credit
risk.

11. Disclosures about the Fair Value of Financial Instruments

  Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect these estimates.

                                      98
<PAGE>

               AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES
                                      AND
                        BRAVO COMPANY AND SUBSIDIARIES
                            (General Partnerships)

              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)


  Cash, Trade Accounts Receivable, Trade Accounts Receivable-Affiliates, Other
Receivables-Affiliates, Accounts Payable, Accrued Expenses, Accounts Payable-
Affiliates

  The carrying amount approximates fair value due to the short-term maturity
of these instruments.

 Bank Debt

  The estimated fair value of the Partnerships' bank debt approximates its
carrying value based on current rates offered to the Partnerships for
instruments of the same remaining maturity.

 Interest Rate Cap Agreement

  At December 31, 2000, the fair value of the outstanding cap agreement was
$840 (net receivable position). Fair value was obtained from a dealer quote.
This value represents the estimated amount the Partnerships would receive to
terminate the agreement, taking into consideration current interest rates and
the current creditworthiness of the counterparty. As discussed in footnote 5,
this agreement was cancelled on April 2, 2001 when all of the outstanding debt
under the Credit Agreement was repaid.

                                      99
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Metro-Goldwyn-Mayer Inc.:

  We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of Metro-Goldwyn-Mayer Inc.
included in this Report on Form 10-K and have issued our report thereon dated
February 4, 2002. Our report on the financial statements includes an
explanatory paragraph with respect to the change in method of accounting for
film and television costs and for derivative instruments and hedging
activities in 2001 as discussed in Note 1 to the financial statements. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedules are the responsibility
of the Company's management and are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial
statements taken as a whole.

Arthur Andersen LLP

Los Angeles, California
February 4, 2002

                                      100
<PAGE>

                SCHEDULE I: FINANCIAL INFORMATION OF REGISTRANT

                            METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                                 BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                      December 31,  December 31,
                                                          2001          2000
                                                      ------------  ------------
<S>                                                   <C>           <C>
                       ASSETS
                       ------

Investments and advances to affiliates............... $ 2,489,482    $2,309,687
                                                      ===========    ==========

        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, 239,629,500 and 207,217,585 shares
   issued and outstanding............................       2,396         2,072
  Additional paid-in capital.........................   3,717,767     3,072,611
  Deficit............................................  (1,203,565)     (765,507)
  Accumulated other comprehensive income (loss)......     (27,116)          511
                                                      -----------    ----------
    Total stockholders' equity.......................   2,489,482     2,309,687
                                                      -----------    ----------
                                                      $ 2,489,482    $2,309,687
                                                      ===========    ==========
</TABLE>



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

                                      101
<PAGE>

                            METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                            STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                        -------------------------------------
                                           2001         2000         1999
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
Revenues............................... $       --   $       --   $       --
Expenses:
  Equity in net (profit) losses of
   subsidiaries........................     438,058      (50,999)     530,910
                                        -----------  -----------  -----------
    Total expenses.....................     438,058      (50,999)     530,910
                                        -----------  -----------  -----------
Net income (loss)...................... $  (438,058) $    50,999  $  (530,910)
                                        ===========  ===========  ===========
Income (loss) per share:
  Basic................................ $     (1.89) $      0.25  $     (3.36)
                                        ===========  ===========  ===========
  Diluted.............................. $     (1.89) $      0.24  $     (3.36)
                                        ===========  ===========  ===========
Weighted average number of common
 shares outstanding:
  Basic................................ 232,082,403  204,797,589  158,015,955
  Diluted.............................. 232,082,403  210,313,274  158,015,955
</TABLE>



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

                                      102
<PAGE>

                            METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (in thousands, except share data)
<TABLE>
<CAPTION>
                                                                                             Accum.
                    Preferred Stock       Common Stock                            Compre-    Other
                   ------------------  ------------------   Add'l     Retained    hensive   Compre-    Less:        Total
                     No. of      Par     No. of     Par    Paid-in    Earnings     Income   hensive   Treasury  Stockholders'
                     Shares     Value    Shares    Value   Capital    (Deficit)    (Loss)    Income    Stock       Equity
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  --------  -------------
<S>                <C>          <C>    <C>         <C>    <C>        <C>          <C>       <C>       <C>       <C>
Balance December
 31, 1998........          --   $ --   150,856,424 $1,509 $2,203,490 $  (285,596) $    --   $    254  $   --     $1,919,657
Acquisition of
 treasury stock,
 at cost.........          --     --           --     --         --          --        --        --    (2,040)       (2,040)
Common stock
 issued in 1999
 rights offering,
 net.............          --     --    49,714,554    497    714,741         --        --        --       --        715,238
Common stock
 issued to
 directors,
 officers and
 employees, net..          --     --       848,353      8     11,408         --        --        --     2,036        13,452
Amortization of
 deferred stock
 compensation....          --     --           --     --       1,365         --        --        --       --          1,365
Comprehensive
 income (loss):
 Net loss........          --     --           --     --         --     (530,910) (530,910)      --       --       (530,910)
 Foreign currency
  translation
  adjustment.....          --     --           --     --         --          --         62        62      --             62
                                                                                  --------
 Comprehensive
  loss...........          --     --           --     --         --          --   (530,848)      --       --            --
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  -------    ----------
Balance December
 31, 1999........          --     --   201,419,331  2,014  2,931,004    (816,506)      --        316       (4)    2,116,824
Common stock
 issued to
 outside parties,
 net.............          --     --     5,363,800     54    133,330         --        --        --       --        133,384
Common stock
 issued to
 directors,
 officers and
 employees, net..          --     --       434,454      4      8,277         --        --        --         4         8,285
Comprehensive
 income (loss):
 Net income......          --     --           --     --         --       50,999    50,999       --       --         50,999
 Foreign currency
  translation
  adjustment.....          --     --           --     --         --          --        152       152      --            152
 Unrealized gains
  on securities..          --     --           --     --         --          --         43        43      --             43
                                                                                  --------
 Comprehensive
  income.........          --     --           --     --         --          --     51,194       --       --            --
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  -------    ----------
Balance December
 31, 2000........          --     --   207,217,585  2,072  3,072,611    (765,507)      --   $    511  $   --     $2,309,687
Preferred stock
 issued to
 Tracinda, net...   15,715,667    157          --     --     324,843         --        --        --       --        325,000
Conversion of
 preferred stock
 into common
 stock...........  (15,715,667)  (157)  15,715,667    157        --          --        --        --       --            --
Common stock
 issued to
 outside parties,
 net.............          --     --    16,080,590    161    310,478         --        --        --       --        310,639
Common stock
 issued to
 directors,
 officers and
 employees, net..          --     --       615,658      6      9,835         --        --        --       --          9,841
Comprehensive
 income (loss):
 Net loss........          --     --           --     --         --     (438,058) (438,058)      --       --       (438,058)
 Cumulative
  effect of
  accounting
  change.........          --     --           --     --         --          --        469       469      --            469
 Unrealized loss
  on derivative
  instruments....          --     --           --     --         --          --    (27,523)  (27,523)     --        (27,523)
 Unrealized loss
  on securities..          --     --           --     --         --          --       (240)     (240)     --           (240)
 Foreign currency
  translation
  adjustments....          --     --           --     --         --          --       (333)     (333)     --           (333)
                                                                                  --------
 Comprehensive
  loss...........          --     --           --     --         --          --   (465,685)      --       --            --
                   -----------  -----  ----------- ------ ---------- -----------  --------  --------  -------    ----------
Balance December
 31, 2001........          --   $ --   239,629,500 $2,396 $3,717,767 $(1,203,565) $    --   $(27,116) $   --     $2,489,482
                   ===========  =====  =========== ====== ========== ===========  ========  ========  =======    ==========
</TABLE>

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

                                      103
<PAGE>

                            METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                               -------------------------------
                                                 2001       2000       1999
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Operating activities:
  Net income (loss)........................... $(438,058) $  50,999  $(530,910)
  Adjustments to reconcile net income from
   operations to net cash used by operating
   activities:
    (Profit) losses on equity investments,
     net......................................   438,058    (50,999)   530,910
                                               ---------  ---------  ---------
    Net cash from operating activities........       --         --         --
                                               ---------  ---------  ---------
Financing activities:
  Proceeds from issuance of preferred stock to
   Tracinda...................................   325,000        --         --
  Proceeds from issuance of equity securities
   to outside parties.........................   310,766    133,384     73,184
  Proceeds from issuance of equity securities
   to related parties.........................     6,941      4,849    646,291
  Net intercompany advances...................  (642,707)  (138,233)  (719,475)
                                               ---------  ---------  ---------
    Net cash from financing activities........       --         --         --
                                               ---------  ---------  ---------
Net change in cash and cash equivalents.......       --         --         --
Cash and cash equivalents at beginning of
 period.......................................       --         --         --
                                               ---------  ---------  ---------
Cash and cash equivalents at end of the
 period....................................... $     --   $     --   $     --
                                               =========  =========  =========
</TABLE>


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

                                      104
<PAGE>

                           METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                         NOTES TO FINANCIAL STATEMENTS

                               December 31, 2001

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 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
pursuant to SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income
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 earnings (loss) and other
comprehensive income items, including unrealized loss on derivative
instruments, unrealized loss on securities and cumulative foreign currency
translation adjustments. Components of other comprehensive income (loss) are
shown below (in thousands):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                  ----------------------------
                                                    2001      2000     1999
                                                  ---------  ------- ---------
   <S>                                            <C>        <C>     <C>
   Net income (loss)............................. $(438,058) $50,999 $(530,910)
   Other comprehensive income (loss):
     Cumulative effect of accounting change for
      derivative instruments.....................       469      --        --
     Unrealized loss on derivative instruments...   (27,523)     --        --
     Unrealized gain (loss) on securities........      (240)      43       --
   Cumulative foreign currency translation
    adjustments..................................      (333)     152        62
                                                  ---------  ------- ---------
       Total comprehensive income (loss)......... $(465,685) $51,194 $(530,848)
                                                  =========  ======= =========
</TABLE>

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

<TABLE>
<CAPTION>
                            Unrealized                              Accumulated
                              loss on     Unrealized   Cumulative      other
                            derivative  gain (loss) on translation comprehensive
                            instruments   securities   adjustments income (loss)
                            ----------- -------------- ----------- -------------
   <S>                      <C>         <C>            <C>         <C>
   Balance at December 31,
    1999...................  $    --        $ --          $ 316      $    316
   Current year change.....       --           43           152           195
                             --------       -----         -----      --------
   Balance at December 31,
    2000...................       --           43           468           511
   Cumulative effect of
    accounting change......       469         --            --            469
   Current year change.....   (27,523)       (240)         (333)      (28,096)
                             --------       -----         -----      --------
   Balance at December 31,
    2001...................  $(27,054)      $(197)        $ 135      $(27,116)
                             ========       =====         =====      ========
</TABLE>


                                      105
<PAGE>

                           METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


Note 2--Bank Debt

  On October 15, 1997, MGM Studios entered into an amended and restated credit
facility with a syndicate of banks aggregating $1.3 billion (the "Amended
Credit Facility"). Concurrent with the Amended Credit Facility, MGM Studios
repaid $739,653,000 of bank debt and accrued interest on behalf of the
Company. For additional information regarding the Registrant's borrowings
under debt agreements and other borrowings, see Note 7 to the Consolidated
Financial Statements.

                                      106
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

          SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (In thousands)

<TABLE>
<CAPTION>
                                          Additions
                                     ----------------------
                          Balance at Charged to                         Balance
                          Beginning  Costs and                          at End
                          of Period   Expenses     Acquired Deductions of Period
                          ---------- ----------    -------- ---------- ---------
<S>                       <C>        <C>           <C>      <C>        <C>
Year Ended December 31,
 2001:
  Reserve for allowances
   and doubtful accounts.  $22,947      1,442         --        1,784   $26,173
                           =======                                      =======
  Reserve for home
   entertainment
   inventory
   obsolescence,
   shrinkage and
   reduplication.........  $ 8,920      5,406         --          --    $14,326
                           =======                                      =======
  Reserve for severance
   and other costs under
   corporate
   restructuring program.  $26,715      4,109         --       (1,620)  $29,204
                           =======                                      =======
  Reserve for contract
   termination costs.....  $ 2,000        --          --       (2,000)  $   --
                           =======                                      =======
Year Ended December 31,
 2000:
  Reserve for allowances
   and doubtful accounts.  $20,985      3,545         --       (1,583)  $22,947
                           =======                                      =======
  Reserve for home
   entertainment
   inventory
   obsolescence,
   shrinkage and
   reduplication.........  $ 6,795      8,920         --       (6,795)  $ 8,920
                           =======                                      =======
  Reserve for severance
   and other costs under
   corporate
   restructuring program.  $32,912      1,285         --       (7,482)  $26,715
                           =======                                      =======
  Reserve for contract
   termination costs.....  $32,100     (5,000)(1)     --      (25,100)  $ 2,000
                           =======                                      =======
  Reserve for pre-release
   film inventory........  $69,629        --          --      (69,629)  $   --
                           =======                                      =======
Year Ended December 31,
 1999:
  Reserve for allowances
   and doubtful accounts.  $23,220      3,425       5,125     (10,785)  $20,985
                           =======                                      =======
  Reserve for home
   entertainment
   inventory
   obsolescence,
   shrinkage and
   reduplication.........  $   --       6,800         --           (5)  $ 6,795
                           =======                                      =======
  Reserve for severance
   and other costs under
   corporate
   restructuring program.  $ 3,810     48,958         --      (19,856)  $32,912
                           =======                                      =======
  Reserve for contract
   termination costs.....  $   --     257,100         --     (225,000)  $32,100
                           =======                                      =======
  Reserve for pre-release
   film inventory........  $   --     129,388         --      (59,759)  $69,629
                           =======                                      =======
</TABLE>
--------
(1) Includes $5,000 recovery of prior year reserves for contract termination
    costs.


                                      107
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
  Number                           Document Description
  -------                          --------------------
 <C>       <S>
  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(5)   Amendment I to Amended and Restated Credit Agreement, dated as of
            March 30, 1998, among the Company, MGM Studios, Orion, certain
            lenders, Morgan, as agent and B of A, as syndication agent
 10.3(5)   Amendment II and Waiver I to Amended and Restated Credit Agreement;
            Amendment I to Amended and Restated Holdings Agreement dated as of
            September 9, 1998, among the Company, MGM Studios, Orion, certain
            lenders, Morgan, as agent and B of A, as syndication agent
 10.4(8)   Amendment III and Waiver I to Amended and Restated Credit Agreement;
            Amendment II to Amended and Restated Holdings Agreement dated as of
            April 30, 1999, among the Company, MGM Studios, Orion, certain
            lenders, Morgan, as agent and B of A, as syndication agent
 10.5(12)  Second Amended and Restated Credit Agreement, dated as of July 21,
            2000, among MGM Studios, Orion, B of A, as agent, certain lenders
            and certain L/C issuers**
 10.6(2)   Form of Modification and Cancellation Agreement, dated as of
            November 5, 1997
 10.7(2)   Amended and Restated 1996 Stock Incentive Plan dated as of November
            11, 1997 and form of related Stock Option Agreement*
 10.8(7)   Amendment No. 1 to Amended and Restated 1996 Stock Incentive Plan*
 10.9(6)   Form of Executive Option Exchange Agreement*
 10.10(15) Form of Director Stock Option Agreement Pursuant to the Amended and
            Restated 1996 Stock Incentive Plan*
 10.11(2)  Senior Management Bonus Plan dated as of November 11, 1997 and form
            of related Bonus Interest Agreement*
 10.12(6)  Bonus Interest Amendment*
 10.13(11) Form of 2000 Employee Incentive Plan*
 10.14(2)  Amended and Restated Employment Agreement of Frank G. Mancuso dated
            as of August 4, 1997
 10.15(10) Consulting Agreement of Frank G. Mancuso dated as of August 12, 1999
 10.16(2)  Employment Agreement of William A. Jones dated as of October 10,
            1996*
 10.17(13) Amendment to Employment Agreement of William A. Jones dated as of
            July 16, 1999*
 10.18(5)  Employment Agreement of Daniel J. Taylor dated as of August 1, 1997*
 10.19(5)  Amendment to Employment Agreement of Daniel J. Taylor dated as of
            June 15, 1998*
 10.20(13) Amendment to Employment Agreement of Daniel J. Taylor dated as of
            November 1, 2000*
 10.21(9)  Employment Agreement of Christopher J. McGurk dated as of April 28,
            1999*
 10.22(9)  Letter Agreement between the Company and Christopher J. McGurk dated
            April 28, 1999*
 10.23(9)  Employment Agreement of Alex Yemenidjian dated as of April 28, 1999*
</TABLE>

                                      108
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
  Number                           Document Description
  -------                          --------------------
 <C>       <S>
 10.24(12) Employment Agreement of Jay Rakow dated as of August 7, 2000*
 10.25(12) Addendum to Employment Agreement of Jay Rakow dated as of August 7,
            2000*
 10.26(12) Employment Agreement of Michael R. Gleason dated August 22, 2000
 10.27(2)  Indemnification Agreement dated as of October 10, 1996--Frank G.
            Mancuso
 10.28(2)  Indemnification Agreement dated as of October 10, 1996--William A.
            Jones
 10.29(2)  Indemnification Agreement dated as of October 10, 1996--James D.
            Aljian
 10.30(2)  Indemnification Agreement dated as of October 10, 1996-- Michael R.
            Gleason
 10.31(2)  Indemnification Agreement dated as of October 10, 1996--Kirk
            Kerkorian
 10.32(2)  Indemnification Agreement dated as of October 10, 1996--Jerome B.
            York
 10.33(3)  Indemnification Agreement dated as of November 7, 1997--Alex
            Yemenidjian
 10.34(3)  Indemnification Agreement dated as of January 28, 1998--Francis Ford
            Coppola
 10.35(5)  Indemnification Agreement dated as of June 15, 1998--Daniel J.
            Taylor
 10.36(6)  Indemnification Agreement dated as of November 12, 1998--Alexander
            M. Haig, Jr.
 10.37(6)  Indemnification Agreement dated as of November 12, 1998--Willie D.
            Davis
 10.38(9)  Indemnification Agreement dated as of April 28, 1999--Christopher J.
            McGurk
 10.39(12) Indemnification Agreement dated as of August 2, 2000--Jay Rakow
 10.40(12) Indemnification Agreement dated as of September 7, 2000--Priscilla
            Presley
 10.41(16) Indemnification Agreement dated as of February 12, 2001--Henry
            Winterstern
 10.42(2)  Form of Amended and Restated Shareholders Agreement dated as of
            August 4, 1997
 10.43(5)  Form of Waiver and Amendment No. 1 to Amended and Restated
            Shareholders Agreement dated as of August 8, 1998
 10.44(5)  Form of Amendment No. 2 to Amended and Restated Shareholders
            Agreement dated September 1, 1998
 10.45(6)  Form of Waiver and Amendment No. 3 to Amended and Restated
            Shareholders Agreement
 10.46(2)  Form of Amended and Restated Stock Option Agreement between the
            Company and Celsus Financial Corp.
 10.47(2)  Form of Inducement Agreement dated as of November 5, 1997
 10.48(2)  Form of Investment Agreement dated November 12, 1997 between the
            Company and Tracinda
 10.49(4)  1998 Non-Employee Director Stock Plan*
 10.50(14) Agreement between Metro-Goldwyn-Mayer Inc. and Rainbow Media
            Holdings Inc. dated January 31, 2001
 10.51(1)  Bonus Payment Agreement effective as of November 21, 2001--Frank G.
            Mancuso*
 10.52(1)  Bonus Payment Agreement entered into as of October 23, 2001--William
            A. Jones*
 21(16)    List of Subsidiaries of Metro-Goldwyn-Mayer Inc.
 23(1)     Consent of Independent Public Accountants
</TABLE>

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

 ** Filed without Schedules.

 (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.


                                      109
<PAGE>

 (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 Form 10-Q for the quarter ended June
     30, 1999 (File No. 001-13481) and incorporated herein by reference.

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

(10) 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.

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

(12) 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.

(13) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
     December 31, 2000 (File No. 001-13481) and incorporated herein by
     reference.

(14) Filed as an exhibit to the Company's Form 8-K dated January 31, 2001
     (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, 2001 (File No. 001-13481) and incorporated herein by reference.

(16) Filed as an exhibit to the Company's 10-K for the fiscal year ended
     December 31, 2001 (FileNo. 001-13481) and incorporated herein by
     reference.

                                      110