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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 2001

                          Commission File No. 1-13481

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

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<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.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Certain portions of Registrant's proxy statement for the annual meeting to
be held on May 6, 2002 (the "Proxy Statement"), to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III of this Form 10-K.

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                                    PART I

Item 1. Business

General

  Metro-Goldwyn-Mayer Inc., ("MGM"), is a premier global entertainment content
company. We develop, produce and distribute theatrical motion pictures and
television programs, and we intend to create and own interests in branded
cable and satellite programming channels. See "Note 12 to Consolidated
Financial Statements." Our principal subsidiaries are Metro-Goldwyn-Mayer
Studios Inc., United Artists Corporation, United Artists Films Inc. and Orion
Pictures Corporation. We are one of only seven major film and television
studios worldwide. Our library contains over 4,000 theatrically released
feature film titles and over l0,200 television episodes and is the largest
collection of post-1948 feature films in the world. Films in our library have
won over 200 Academy Awards, including Best Picture Awards for Annie Hall, The
Apartment, The Best Years of Our Lives, Dances With Wolves, Hamlet, In the
Heat of the Night, Marty, Midnight Cowboy, Platoon, Rain Man, Rocky, The
Silence of the Lambs, Tom Jones and West Side Story. Our library also includes
21 titles in the James Bond film franchise, five titles in the Rocky film
franchise and nine titles in the Pink Panther film franchise.

  MGM was incorporated in Delaware on July 10, 1996. Our executive offices are
located at 2500 Broadway Street, Santa Monica, California 90404. Our telephone
number is (310) 449-3000.

Background of the Company

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

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

  In November 1997, we completed an initial public offering, whereby we issued
and sold 9,000,000 new shares of common stock, $.01 par value per share, at a
price per share of $20, less an underwriting discount, for net proceeds (after
expenses of the initial public offering) of $165.0 million. Concurrently with
the consummation of the initial public offering, Tracinda purchased directly
from us, at a purchase price of $18.85 per share (equal to the per share price
to the public in the initial public offering, less the underwriting discount),
3,978,780 shares of the common stock for an aggregate purchase price of $75.0
million.

  In September 1998, Tracinda and a Delaware corporation that is principally
owned by Tracinda, which we refer to collectively as the "Tracinda Group,"
purchased 16,208,463 shares of the common stock from Seven Network,
representing all of our capital stock held by Seven Network, for a price per
share of $24 and an aggregate purchase price of $389.0 million.

  In November 1998, we completed a rights offering, whereby we issued and sold
84,848,485 new shares of the common stock at a subscription price of $8.25 per
share for net proceeds (after expenses of the rights offering) of $696.5
million. After giving effect to the completion of the 1998 rights offering and
the exercise of the subscription rights distributed in connection therewith,
the Tracinda Group continued to beneficially own approximately 89.5 percent of
our outstanding common stock.

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

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

  In November 1999, we completed a rights offering, whereby we issued and sold
49,714,554 new shares of the common stock at a subscription price of $14.50
per share for net proceeds (after expenses of the rights offering) of
approximately $715.0 million. After giving effect to the completion of the
1999 rights offering and the exercise of the subscription rights distributed
in connection therewith, the Tracinda Group continued to beneficially own
approximately 89.0 percent of our outstanding common stock.

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

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

Recent Developments

  Cable Investment. In April 2001, we invested $825.0 million 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). These partnerships were wholly-
owned by Rainbow Media, which is 74 percent owned by Cablevision Systems
Corporation and 26 percent owned by NBC. The proceeds of our $825.0 million
investment were used as follows: (1) $365.0 million was used to repay bank
debt of the partnerships; (2) $295.5 million was used to repay intercompany
loans from Cablevision and its affiliates; and (3) $164.5 million was added to
the working capital of the partnerships.

  While we are not involved in the day-to-day operations of the cable
channels, our approval is required before either partnership may: (1) declare
bankruptcy or begin or consent to any reorganization or assignment for the
benefit of creditors; (2) enter into any new transaction with a related party;
(3) make any non-proportionate distributions; (4) amend the partnership
governing documents; or (5) change its tax structure.

  We have 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 us to participate in any such sale. If a third party invests in either
partnership, our interest and that of Rainbow Media will be diluted on a pro
rata basis. Neither we nor Rainbow Media will be required to make additional
capital contributions to the partnerships. However, if Rainbow Media makes an
additional capital contribution and we do not, our interest in the
partnerships will be diluted accordingly. If the partnerships fail to attain
certain financial projections provided to us by Rainbow Media for the years
2002 through 2005, inclusive, we will be entitled, 30 days after receipt of
partnership financial statements for 2005, to require Rainbow Media to acquire
our partnership interests for fair market value at the time, as determined
pursuant to the agreement. We formed a wholly-owned subsidiary, MGM Networks
U.S. Inc., which made the above-described investment, and is the MGM entity
which holds the aforesaid general partnership interests and rights attendant
thereto.

  In February and March 2001, pursuant to our shelf registration statement, we
sold 16,080,590 shares of common stock to unaffiliated investors in private
placements for aggregate net proceeds of $310.6 million. In

                                       3
<PAGE>

addition, we sold 15,715,667 shares of our Series B preferred stock to
Tracinda for $325.0 million. We used the net proceeds of this sale to help
finance our cable channel investment. The preferred stock does not bear
dividends but has a liquidation preference of $0.01 per share. The preferred
stock became convertible, at the option of the holder, into common stock on a
share-for-share basis upon stockholder approval of the issuance of the common
stock to Tracinda on May 2, 2001, at which time the preferred stock was
converted into approximately 15,715,667 shares of common stock. Tracinda had a
demand registration right for the common stock it received upon conversion of
the preferred stock. The Tracinda Group currently beneficially owns
approximately 81 percent of our outstanding common stock.

  Joint Venture. In August 2001, through our wholly-owned subsidiary MGM On
Demand Inc., we 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. We funded $7.5 million for our equity interest and our
share of operating expenses of the joint venture as of December 31, 2001. We
financed our investment through borrowings under our credit facilities. We are
committed to fund our share of the joint venture's operating expenses, as
required.

The Motion Picture and Television Industry

  Motion Pictures--General. The motion picture industry consists of two
principal activities: production and distribution. Production involves the
development, financing and production of feature-length motion pictures.
Distribution involves the promotion and exploitation of motion pictures
throughout the world in a variety of media, including theatrical exhibition,
home entertainment, television and other ancillary markets. The U.S. motion
picture industry can be divided into major studios and independent companies,
with the major studios dominating the industry in the number of theatrical
releases. In addition to us (including MGM Studios, MGM Pictures, UA Films and
Orion), the major studios as defined by the Motion Picture Association of
America are The Walt Disney Company (including Buena Vista, Touchstone and
Miramax Films), Paramount Pictures Corporation, Sony Pictures Entertainment,
Inc. (including Columbia Pictures), Twentieth Century Fox Film Corp.,
Universal Studios, Inc., and Warner Bros. (including Turner, New Line Cinema
and Castle Rock Entertainment). The major studios are typically large
diversified corporations that have strong relationships with creative talent,
exhibitors and others involved in the entertainment industry and have global
film production and distribution capabilities.

  Historically, the major studios have produced and distributed the majority
of high grossing theatrical motion pictures released annually in the United
States. Over the past eleven years, the number of feature-length motion
pictures released by the major studios has increased from 158 in 1990 (39.9
percent of the total) to 251 in 2001 (42.5 percent of the total). In addition,
most of the studios have created or accumulated substantial and valuable
motion picture libraries that generate significant revenues. These revenues
can provide the major studios with a stable source of earnings that partially
offsets the variations in the financial performance of their current motion
picture releases and other aspects of their motion picture operations.

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

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

                                       4
<PAGE>

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

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

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

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

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

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

  Television production can generally be divided into two distinct markets:
network production (i.e., television shows for ABC, CBS, NBC, Fox, UPN and The
WB) and non-network production (i.e., made-for-cable and first-run
syndication). The economics of the two types of television production are
different. In network production, a network generally orders approximately six
to 13 initial episodes of each new series for a license fee equal to a
percentage of the program's cost. The balance of the production cost can only
be recouped through international sales and syndication if a series is
successful and generally remains unrecouped for at least four years. In the
non-network production or first-run syndication business, a producer seeking
to launch a new series

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commits to produce a minimum number of episodes if the producer can "clear"
the series by selling to individual television stations in sufficient markets
throughout the country (generally comprising at least 70 percent of U.S.
television households). Once produced, the episodes are immediately available
for licensing to international broadcasters as well. This approach generally
involves a lower production cost risk and earlier return on investment than
the network production business; however, non-network programming generally
reduces the potential total return on investment as compared to successful
network production. See "--Production--Television Production."

  Television Distribution. The U.S. television market is served by network
affiliated stations, independent stations and cable systems, although the
number of independent stations has decreased as many formerly independent
stations have become affiliated with new networks in recent years. During
"prime time" hours, network affiliates primarily broadcast programming
produced for the network. In non-prime time, network affiliates telecast
network programming, off-network programming, first-run programming
(programming produced for distribution on a syndicated basis) and programming
produced by the local stations themselves. Independent television stations and
cable networks, during both prime and non-prime time, produce their own
programs and telecast off-network programs or first-run programs acquired from
independent producers or syndicators. Syndicators generally are companies that
sell to independent television stations and network affiliates programming
produced or acquired by the syndicator for distribution.

Business Strategy

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

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

  .  Producing new motion pictures and television episodes;

  .  Aggressively marketing and repackaging our library's titles;

  .  Developing new distribution channels;

  .  Capitalizing on developments in technology;

  .  Further penetrating emerging international markets; and

  .  Incentivizing our employees to drive growth in sales of our library's
     titles.

  Create Branded Cable and Satellite Programming Channels. We believe we can
create significant value by utilizing our library and current production to
establish MGM branded cable and satellite channels. We have been actively
exploring strategic alternatives to gain carriage for our proposed channels.

  Increase Film and Television Production While Improving Our Risk Profile. We
intend to increase production in a financially disciplined manner by:

  .  Tightly monitoring development and production expenditures;

  .  Involving members of senior management from all areas of our company in
     the greenlighting process for films;

  .  Aggressively seeking production agreements and/or co-financing partners
     for our pictures and television product;

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

  .  Increasing our focus on the production of commercially successful motion
     pictures; and

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

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  We have, for example:

  .  Entered into an agreement with Miramax Films pursuant to which we will
     jointly produce, finance and distribute up to eight motion pictures,
     relying on our film library as a prominent source of material;

  .  Entered into a "first look" co-financing agreement with Hyde Park
     Entertainment (David Hoberman and Ashok Amritraj);

  .  Entered into a "first look" producing/directing agreement with Lion Rock
     Productions (John Woo and Terence Chang);

  .  Entered into a "first look" co-financing agreement with Mosaic;

  .  Repositioned UA as a specialty film unit now known as UA Films, which is
     involved in production, sales and acquisitions of specialized motion
     pictures; and

  .  Entered into a split-rights agreement for specialized motion pictures
     with American Zoetrope (Francis Ford Coppola).

  We intend to produce or co-produce and distribute six to ten motion pictures
annually through MGM Pictures across a variety of genres. Through UA Films, we
also intend to distribute annually an additional ten to 15 specialty motion
pictures that will have substantially lower average costs and will be produced
mainly by third parties.

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

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

  We plan to increase distribution revenues by:

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

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

  .  Distributing motion pictures produced by others; and

  .  Taking advantage of new distribution platforms.

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

  Streamline Operations. We have taken steps to make our operating process
more efficient by:

  .  Consolidating overhead across the MGM Pictures and UA production units;
     and

  .  Consolidating and centralizing operating and corporate functions.

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  We believe that MGM should, through business combinations or other strategic
alternatives, either grow into or become part of a larger, vertically
integrated organization, in order to maximize the value of MGM's assets. To
that end, MGM has been regularly evaluating business combination opportunities
and other strategic alternatives as opportunities arise, and intends to
continue to do so. As of the date hereof, no agreements regarding a
transaction of such nature have been reached and there can be no assurance
that MGM will decide to enter into any such transaction. In addition, business
combinations and other strategic alternatives involve numerous risks,
including diversion of management's attention away from our operating
activities. We cannot assure you that we will not encounter unanticipated
problems or liabilities with respect to any business combinations that have
been or may be completed by MGM, nor can we assure you that the anticipated
benefits of any such transactions will be achieved.

Film and Television Library

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

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

  Our library also includes over 10,200 episodes from television series
previously broadcast on prime-time network television, cable or in first-run
syndication, including episodes of The Addams Family, American Gladiators, Bat
Masterson, Cagney & Lacey, Fame, Green Acres, Highway Patrol, In the Heat of
the Night, Mr. Ed, The Patty Duke Show, Pink Panther, Sea Hunt and
thirtysomething. The television programs in our library have won, among
others, 109 Emmy awards and 17 Golden Globe awards.

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

  We will continue to implement the strategy of developing new projects from
existing library assets. Our library represents a readily-available, "market
tested" source of development ideas. For example, in 1999 we had success with
the remake of The Thomas Crown Affair and in 1995 we had success with The
Birdcage, a remake of La Cage aux Folles. Rollerball is an upcoming example of
this strategy. Furthermore, we have successfully expanded the valuable film
franchises within our library, most notably the James Bond franchise, with the
commercial success of GoldenEye in 1995, Tomorrow Never Dies in 1997 and The
World Is Not Enough in 1999. In addition, we have commenced principal
photography on a new James Bond feature, the twentieth film in the series, to
be released in late 2002. Additionally, we have successfully developed
television series based on library motion pictures such as: Poltergeist: The
Legacy based on Poltergeist; Stargate SG-1 based on Stargate; and All Dogs Go
to Heaven, based on the movie of the same name. We also have produced a remake
of Twelve Angry Men and Inherit The Wind as made-for-television movies for
Showtime Networks Inc.

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  We, together with Danjaq LLC, are the sole owners of all of the James Bond
motion pictures. Nineteen James Bond motion pictures in our library are
produced and distributed pursuant to a series of agreements with Danjaq. The
motion pictures are produced by Danjaq, and we have the right to approve all
key elements of the pictures, such as the selection of the director and the
leading actors. The copyright in each of the motion pictures is owned jointly
by MGM and Danjaq. Generally, we have the right to distribute each of the
pictures in all media worldwide in perpetuity or for a term of 15 years. Where
our distribution rights are not perpetual, the rights revert to joint control
by MGM and Danjaq after expiration of the distribution term. Danjaq controls
certain merchandising rights with respect to the pictures, and we are entitled
to receive a portion of the revenues from Danjaq's merchandising licenses.
Additionally, we control all the marketing rights and the music from The
Living Daylights (1987) and all subsequent pictures. All other rights relating
to the pictures are controlled jointly by MGM and Danjaq. The agreements
contain certain restrictions on the sale or licensing by MGM of any of our
rights in the pictures.

  With two recent acquisitions, our library now contains every James Bond
motion picture ever made, and we are the only studio to hold such rights. In
1998, we acquired the rights to Never Say Never Again, produced by Warner
Bros. and Taliafilms and, in 1999, we acquired the distribution rights to
Casino Royale, produced by Columbia and Famous Artists Productions (a
subsidiary of MGM). See "Item 3. Legal Proceedings."

  We seek aggressively to market and distribute titles in our film library in
existing pay and free television, home video and other markets worldwide. We
believe that the size of our library allows us to minimize the over-
exploitation of any title and therefore better preserve the ongoing value of
our library by actively managing the rotation of titles through such markets.
As of December 31, 2001, approximately 83 percent of the theatrical motion
picture titles and approximately 94 percent of the television title episodes
in our library have been exploited.

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

  We have differing types of rights to the various titles in our library. In
some cases, we own the title outright, with the right to exploit the title in
all media and territories for an unlimited time. In other cases, the title may
be owned by a third party and we may have obtained the right to distribute the
title in certain media and territories for a limited term. Even if we own a
title, we may have granted rights to exploit the title in certain media and
territories to others. As of December 31, 2001, we owned outright, or had been
granted rights in perpetuity to, approximately 67 percent of the titles in our
library. Our rights in the other library titles are limited in time and,
pursuant to the terms of the existing arrangements, the rights granted to us
expire, with respect to approximately six percent of the library over the next
two years (i.e. through the end of 2003), with respect to another
approximately 23 percent over the seven years thereafter (from 2004 to 2011),
and with respect to another approximately seven percent thereafter (from 2011
on). We have generally been able to renew such rights on acceptable terms;
however, no assurances can be made that we will continue to be able to do so
in the future. In accordance with industry practice, for purposes of
calculating the size of the library, we include any title that we have the
right to distribute in any territory in any media for any term.

  Due to certain long-term pre-paid licenses entered into before 1993 by prior
management, we do not expect to receive significant revenue with respect to
substantial portions of our library from domestic free and certain major
international television markets for the next several years. As of December
31, 2001, the titles included in these licenses represent a cross-section of
the titles in the library, including substantially all of the pre-1990 MGM and
UA titles, which have been licensed in one or more of the U.S., France and
Spain, and approximately 51 percent (some are starting to expire) of the Orion
and PolyGram titles, which have been licensed in one or more of France, Spain,
Germany and the United Kingdom. See "--Distribution--Television Distribution."
We expect to benefit as certain rights to the library that have been
previously licensed to others revert to us over time. See "--Distribution."

                                       9
<PAGE>

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

Production

 Motion Picture Production

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

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

  MGM Pictures' strategy is to both increase creative diversity and mitigate
financial risk in connection with motion picture production. We expect to
enhance creative diversity by employing the production alliance strategy
discussed above and by entering into selective production agreements with
successful established producers such as Lion Rock Productions (John Woo and
Terence Chang), Mosaic (Chuck Roven) and Hyde Park Entertainment (David
Hoberman and Ashok Amritraj). As an example of this strategy, in July 1999, we
entered into an agreement with Miramax Films pursuant to which MGM and Miramax
will jointly produce, finance and distribute up to eight motion pictures,
relying on our film library as a prominent source of material. Initial titles
identified for potential production under this agreement include Cold
Mountain, based on the best-selling novel, contributed by us, and the remake
of the comedy classic Harvey, contributed by Miramax. Miramax will develop the
films under this agreement, which MGM and Miramax will jointly finance. Half
of these films will be released domestically by each partner, with the other
providing international distribution.

  We also intend to seek to spread the financial risk inherent in motion
picture production, as well as increase the breadth of our release slate, by
entering into co-production and/or co-financing arrangements such as our
agreement with Miramax. Similarly, in April 1999, we entered into an enhanced
co-production agreement with Universal. Pursuant to that agreement, we
acquired the rights to distribute Josie and the Pussycats internationally,
with Universal being responsible for domestic distribution. We share the
production's costs and receipts from the picture equally except for certain
ancillary rights. In addition, under a separate co-production agreement, we
co-produced with Universal the feature film Hannibal (a sequel to The Silence
of the Lambs) which we distributed in the domestic marketplace, with Universal
being responsible for international distribution. We shared the production
costs for Hannibal evenly with Universal, and the receipts from the picture
will also be divided evenly between us and Universal. In December 2001, as a
result of certain disputes with Universal over the enhanced co-production
agreement, certain issues relating to the acquisition of the Polygram
libraries, and the rights to the forthcoming feature film Red Dragon (based
upon a novel by the author of The Silence of the

                                      10
<PAGE>

Lambs and Hannibal), MGM Pictures and Universal entered into a settlement
terminating their overall co-production agreement approximately four months
prior to its scheduled expiration. Pursuant to the settlement, among other
terms, MGM Pictures will receive a participation in the gross receipts of Red
Dragon, MGM Pictures will have the right to enter into a co-production
agreement with Universal for any subsequent productions containing elements or
any character from the novels or motion pictures Red Dragon, The Silence of
the Lambs or Hannibal, and Universal will have the right to enter into a co-
production agreement with MGM for any studio sequel to The Silence of the
Lambs produced by MGM.

  We have established UA Films as a filmmaker-oriented studio, based in New
York, which will release approximately ten to 15 motion pictures each year.
These motion pictures will be produced or co-produced by UA Films or acquired
through negative pickups or other distribution arrangements and will include
some motion pictures in a variety of genres generally involving producers and
directors, writers or other talent who typically work outside of the studio
system as well as lower budget films from established filmmakers. Our
investment in such pictures is expected to be significantly less than our
investment for pictures produced through MGM Pictures. We believe that this
strategy of releasing specialty motion pictures will add greater diversity to
our release slate and enhance the library both through the addition of new
film product and the building of relationships with up-and-coming producers
and directors, writers and other talent. As an example of this strategy, in
March 2000, we entered into an agreement with filmmaker Francis Ford Coppola's
production company, American Zoetrope, for the financing and distribution in
the U.S. and Canada of up to ten lower-budget motion pictures to be produced
by Zoetrope for UA Films over a three-year period. Under the agreement, we
have a "first-look" on such projects developed by Zoetrope. See "Item 13.
Certain Relationships and Related Transactions."

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

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

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

                                      11
<PAGE>

  The following table details our tentative 2002 domestic theatrical release
schedule:

                                Release Schedule

<TABLE>
<CAPTION>
                           Approximate
          Title           Release Date          Summary              Principal Actors
          -----           ------------          -------              ----------------
<S>                       <C>           <C>                      <C>
Rollerball (MGM)........  February 2002 In a futuristic, non-    Chris Klein, LL Cool J,
                                        violent society, a       Rebecca Romjin-Stamos,
                                        brutal sport called      Jean Reno
                                        Rollerball serves as the
                                        means of competition
                                        between global
                                        conglomerates.

Hart's War (MGM)........  February 2002 A former law student     Bruce Willis, Colin
                                        risks his life in order  Farrell
                                        to defend a black man
                                        charged with killing a
                                        racist American in a
                                        German P.O.W. camp
                                        during World War II.

No Such Thing (aka         March 2002   When a news crew sent to Sarah Polley, Robert
 Monster) (UA)..........                investigate a foul-      Burke, Helen Mirren,
                                        mouthed deadly Monster   Julie Christie
                                        disappears, a guileless
                                        young woman dispatched
                                        to follow up on the
                                        story befriends the
                                        Monster and becomes his
                                        only hope in ending his
                                        life of misery.

Killing Me Softly (MGM).   Spring 2002  An American woman in     Heather Graham, Joseph
                                        London marries a         Fiennes, Natasha
                                        domineering mountain     McElhone
                                        climber after a torrid
                                        affair, only to suspect
                                        him of murdering
                                        previous lovers.

Deuces Wild (UA)........   April 2002   In 1956 Brooklyn, guns   Stephen Dorff , Brad
                                        and inter-gang romance   Renfro, Fairuza Balk,
                                        complicate the Deuces    Matt Dillon, Balthazar
                                        Wild gang's struggle to  Getty, Frankie Muniz,
                                        keep a drug-dealing      Johnny Knoxville, Drea
                                        rival gang off their     de Matteo
                                        turf.

CQ (UA).................    May 2002    After the misfortune of  Jeremy Davies, Giancarlo
                                        two directors provides a Giannini, Jason
                                        young filmmaker with his Schwartzman
                                        big break to direct a
                                        feature film, the young
                                        man finds his identity
                                        and discovers his
                                        talents through the
                                        roughshod process of
                                        making the film.

Igby Goes Down (UA).....    May 2002    A privileged teenager in Kieran Culkin, Susan
                                        a dysfunctional family   Sarandon, Ryan
                                        struggles with hostility Phillippe, Bill Pullman,
                                        towards his older        Claire Danes, Jeff
                                        brother and mother.      Goldblum, Amanda Peet

Windtalkers (MGM).......    June 2002   The story of an Anglo GI Nicolas Cage, Christian
                                        assigned to protect a    Slater, Adam Beach
                                        Navajo whose inscrutable
                                        native language is used
                                        as code in radio
                                        transmissions to
                                        confound the Japanese
                                        during World War II.

The Crocodile Hunter:       June 2002   The Crocodile Hunter,    Steve Irwin, Terri Irwin
 Collison Course (MGM)..                Steve Irwin, saves a
                                        croc from poachers, who
                                        are actually special
                                        agents that have been
                                        sent to retrieve a top
                                        secret U.S. satellite
                                        beacon that the croc has
                                        swallowed.

24 Hour Party People        June 2002   The rise and fall of     Steve Coogan, Paddy
 (UA)...................                Factory Records under    Considine, Danny
                                        the aegis of visionary,  Cunningham, Sean Harris
                                        idealist and business
                                        disaster Tony Wilson.
</TABLE>

                                       12
<PAGE>

<TABLE>
<CAPTION>
                          Approximate
          Title           Release Date          Summary              Principal Actors
          -----           ------------          -------              ----------------
<S>                      <C>            <C>                      <C>
Barbershop (MGM)........   July 2002    A $50,000 reward offer   Ice Cube
                                        for information about a
                                        recent heist sends a
                                        barber shop on the South
                                        Side of Chicago into a
                                        spin as the barbers try
                                        to figure out clues to
                                        the crime by the
                                        haircuts they gave that
                                        day.

Pumpkin (UA)............   July 2002    A sorority girl through  Christina Ricci, Hank
                                        and through falls in     Harris, Brenda Blethyn,
                                        love with the 19 year-   Dominique Swain
                                        old mentally disabled
                                        boy she is mentoring for
                                        the Special Olympics
                                        and, for the first time
                                        in her life, comes to
                                        terms with imperfection
                                        in her world.

A Guy Thing (MGM).......  August 2002   When a groom-to-be wakes Jason Lee, Julia Stiles,
                                        up the morning after his Selma Blair, James
                                        bachelor party in bed    Brolin
                                        with a stripper, he
                                        presumes he must have
                                        cheated on his fiancee.
                                        Guilt leads him to try
                                        to cover it up in the
                                        week before the wedding;
                                        high jinks ensue.

Dark Blue (UA).......... September 2002 A grizzled veteran of    Kurt Russell, Scott
                                        the elite and corrupt    Speedman, Ving Rhames,
                                        SIS wing of the LAPD     Brendan Gleason, Kurupt,
                                        investigates a brutal    Master P
                                        multiple murder in the
                                        tense LA atmosphere
                                        leading up to the Rodney
                                        King riots.

City of Ghosts (UA).....   Fall 2002    A scam artist travels to Matt Dillon, James Caan,
                                        Cambodia, anxious to     Stellan Skarsgard,
                                        collect what he's owed   Nathasha McElhone,
                                        from his criminal        Gerard Depardieu,
                                        mentor; when he arrives, Takeshi Kitano
                                        however, he quickly
                                        discovers that he's in
                                        over his head...with
                                        potentially deadly
                                        consequences.

Assassination Tango        Fall 2002    A very competent but     Robert Duvall, Ruben
 (UA)...................                aging New York hit-man   Blades, Frankie Gio,
                                        takes on his last case   Kathy Baker
                                        in Argentina, where he
                                        revels in the tango
                                        cafes of his dreams.
                                        However, the promise of
                                        an easy hit turns on
                                        him, and he must use all
                                        of his resources to
                                        return to New York and
                                        the woman he loves.

All or Nothing (UA).....   Fall 2002    Family drama set in      Marion Bailey, Helen
                                        London council flats.    Coker, James Corden,
                                                                 Paul Jesson, Sam Kelly,
                                                                 Lesley Manville, Ruth
                                                                 Sheen, Timothy Spall

Personal Velocity (UA)..   Fall 2002    Three personal stories   Kyra Sedgwick, Parker
                                        about women escaping     Posey, Fairuza Balk
                                        their restrictive
                                        relationships with men.

Bond 20 (MGM)...........  Winter 2002   Much anticipated 20th    Pierce Brosnan, Halle
                                        installment of the       Berry, John Cleese, Judy
                                        continuing adventures of Dench
                                        James Bond.

Evelyn (UA).............  Winter 2002   After his wife leaves    Pierce Brosnan, Aidan
                                        him, a dedicated father  Quinn, Stephen Rea,
                                        loses custody of his     Julianna Margulies
                                        beloved children to the
                                        state; he resolves to
                                        fight against antiquated
                                        custody laws and takes
                                        his case to court.
</TABLE>

                                       13
<PAGE>

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

 Television Production

  We have in the past engaged in the development and production of episodic
television series, mini-series and movies for distribution on domestic and
international television networks, local independent and network-affiliated
television stations, pay television networks, basic cable networks and home
video. Since the re-establishment of our television series production
operations in 1994, we have obtained commitments for approximately 1,308 hours
of television programming, of which approximately five percent remained to be
aired as of December 31, 2001.

  From 1994 through 2000, we focused primarily on the development and
production of series for the first-run syndication market, which involves a
lower production investment risk, and movies and mini-series for both network
and off-network broadcasters. As part of our strategy, in 1994 we entered into
a programming arrangement with Showtime whereby we provided television series
and movies for premiere on Showtime. Showtime agreed to license from us
exclusive U.S. pay television rights to the following television series:
(a) 132 hours (six seasons) of The Outer Limits (winner of the Cable Ace award
for Best Dramatic Series in 1995 and 1996), all of which have been aired as of
December 31, 2001; (b) 66 episodes (three seasons) of Poltergeist: The Legacy,
all of which have been aired as of December 31, 2001; and (c) 110 episodes
(five seasons) of Stargate SG-1, of which ten episodes remained to be aired as
of December 31, 2001. We have no further commitments from Showtime with
respect to these series. Following their initial exhibition cycle on Showtime,
we exploit these programs further in other markets. In this respect, we
entered into a license agreement with Sci-Fi Channel for the exclusive
domestic basic cable exhibition rights of The Outer Limits, Poltergeist: The
Legacy and Stargate SG-I. Additionally, we produced 22 new episodes of
Poltergeist for USA/Sci Fi, of which no episodes remained to be aired as of
December 31, 2001, 22 new episodes of The Outer Limits for USA/Sci Fi, of
which no episodes remained to be aired as of December 31, 2001, and we will be
producing 22 new episodes of Stargate SG-1 for USA/Sci Fi, all of which
episodes will be aired in 2002.

  The programming agreement with Showtime also includes a commitment by
Showtime to license eight made-for-television movies from us, two of which
remained to be produced as of December 31, 2001. One of these movies, Dirty
Pictures, recently won the Golden Globe award for "Best Mini-Series or Motion
Picture Made for Television," giving Showtime its first ever victory in that
category. In addition, Showtime has committed to licensing three new one-hour,
20-episode series, the first of which is Jeremiah, a one-hour action series,
which we are currently producing. All episodes of Jeremiah will be aired in
2002. The remaining two series commitments remain to be produced as of
December 31, 2001.

  As the risks involved in the first-run syndication business have increased
significantly in recent years with the advent of mass vertical integration,
the resulting consolidation in the marketplace, and the recent downturn in the
economy and advertising market, we are evaluating production of series for
network and basic cable television in order to remain viable in this
increasingly competitive marketplace. Although this typically requires greater
deficit financing while offering the potential for greater financial return,
we intend to pursue joint ventures, co-productions and other partnering
arrangements for some of our future series in order to minimize the up-front
capital investment and limit our financial risk.

  Our rich film library provides us with a vast resource for developing
television production. Much of our past success has resulted from transforming
such library product into successful television franchises, such as In the
Heat of the Night, Stargate SG-1 and The Outer Limits. Currently, we are
developing the following projects, among others: Dirty Rotten Scoundrels, a
one-hour series adaptation of our 1989 feature film, for USA Network; Legally
Blonde, a half hour series adaptation of our recent hit feature film for ABC;
Fame, a one-hour series

                                      14
<PAGE>

adaptation of our feature film, for ABC and The Thomas Crown Affairs, a one-
hour adaptation of our popular feature film, for NBC.

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

Distribution

 Theatrical Distribution

  General. The initial step in the release of a motion picture is the booking
of engagements with theatrical exhibitors. The exhibitors retain a portion of
admissions paid at the box office, which generally includes a fixed amount per
week, as well as a percentage of the gross receipts that escalates over time.
A studio's or other producer's (or third party distributor's) share is
generally approximately 50 percent of gross box office receipts, although that
percentage has generally decreased in recent years and varies depending upon
factors such as market competition and the overall performance of the film.

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

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

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

  On October 31, 2000, we closed a transaction with UIP and the other UIP
partners (Paramount Pictures International B.V. and Universal Studios
International B.V.), pursuant to which we finalized our exit from UIP and
arranged for an orderly transition from UIP of certain of our product that was
in its international theatrical and non-theatrical distribution cycle.

  Co-Production and Distribution Agreements. In addition to producing motion
pictures independently, we enter into co-production agreements, such as those
with Miramax and Universal, split rights deals and similar arrangements under
which we retain certain distribution rights with respect to a picture and
share the cost of production with a partner that obtains other rights. While
such agreements limit our risk relating to a motion picture's performance as
they reduce our production costs, such agreements also limit profitability. We
also acquire rights to distribute films through negative pickup arrangements
under which we acquire a completed motion picture, or certain rights therein,
from a third party. Under co-production agreements, split rights deals or
negative pickup arrangements, we may be committed to spend specified amounts
for prints and advertising. Additionally, we occasionally enter into "rent-a-
system" arrangements under which we provide distribution

                                      15
<PAGE>

services to an independent film company for a percentage distribution fee.
Under rent-a-system arrangements, the independent film company generally is
responsible for all print and advertising costs. These types of arrangements
may be entered into before, during or after production of a particular motion
picture.

  Theatrical Marketing. Our theatrical marketing department consists of five
functional groups: research, media planning, advertising, promotion and
publicity. The objective of the marketing department is to maximize each
motion picture's commercial potential by designing and implementing a
marketing campaign tailored to appeal to the picture's most receptive
audience. The marketing process begins with research before a motion picture
is completed. The research department determines, through audience screenings
and focus groups, a motion picture's appeal to its most likely target
audience. The marketing group begins to develop marketing materials well in
advance of a motion picture's scheduled theatrical release. The marketing
campaign generally begins six months before release with the circulation of
teaser trailers, posters and exhibitor advertising materials. The campaign
becomes more aggressive two to three months before release as full-length
trailers are released in theaters and additional materials are sent to
exhibitors. Finally, a national media campaign is launched four to five weeks
before opening day. This media campaign generally involves advertising a
picture's release on national television, including network prime time and
syndication markets, national cable and radio and in magazines, newspapers and
specific target markets. In addition, public appearances, such as television
talk shows, are arranged for a picture's stars in order to promote the film.
The entire process is managed by our in-house staff, although outside agencies
are frequently retained to provide certain creative services.

 Home Video Distribution

  Our marketing and distribution strategy in the home video market
domestically and internationally is to (a) market our motion picture and
television titles in cohesive promotions, (b) create branded product lines,
(c) adapt to a maturing home video rental market and a growing DVD market and
(d) release new motion pictures into the home entertainment market at the time
of the year that we believe will generate the most sales without diminishing
revenues from other markets. In addition to organizing our VHS and DVD product
into branded collections, we have launched an integrated sales and marketing
branding initiative designed to create awareness for MGM catalog product and
to drive store traffic to dedicated displays in key customer outlets. Under
the "MGM Means Great Movies" umbrella message, the general advertising,
retailer-specific advertising, and all in-store signage for the MGM dedicated
sections are combined to create awareness and demand for MGM catalog titles
and to help consumers find them in stores. Additionally, in connection with
new films which we release into the market, we often release related library
films, or groups of library films, in order to increase sales of both the
library films and new releases. An example is the release of Silence of the
Lambs conducted in connection with the February 2001 theatrical release of
Hannibal. We intend to continue this strategy of packaging groups of films or
film franchises and releasing them in connection with the releases of our most
highly visible new films.

  MGM Home Entertainment Inc. manages the marketing and distribution of both
current feature motion pictures and library product of MGM Studios and Orion
and their subsidiaries in the home video and other home entertainment markets.

  In June 1999, we entered into an agreement with Fox pursuant to which Fox
will provide distribution services for our films in the international home
video market. This distribution arrangement became effective on February 1,
2000. Although Fox is servicing international home video distribution
activities on our behalf, we have reserved broad powers to direct and control
the handling of our home video product.

  From 2000 to 2001, we increased our annual worldwide home video gross
revenue from feature films from $538.2 million to $584.5 million. We believe
that this increase is in part a result of more effective and efficient
marketing, the distribution of more current product, the distribution of more
titles due to the Orion and PolyGram acquisitions, the renegotiation of key
vendor relationships, a reorganization of our distribution infrastructure and
the emergence of DVD and e-commerce sales.

                                      16
<PAGE>

  In 2001, we focused on developing strong retail relationships and programs
that have increased our in-store presence. This presence has increased our
exposure to the end-consumer at retail and has had a positive impact on sales.
Furthermore, our retailers have recognized our successful sales and
distribution effort. In 2001, we were awarded the Vendor of the Year from Best
Buy, Vendor of the Year from Transworld, and Studio of the Year from Border's.

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

  We intend to capitalize on growing distribution formats such as DVD, a high-
quality mass-produced delivery system for video and audio data. We believe
that we have positioned ourselves to benefit from the rapid market growth of
the DVD format. The DVD hardware installed base in the United States grew from
over one million households at the beginning of 1999 to a base of 25.0 million
households by the end of 2001. We believe that this rapid growth, combined
with the strong desire among new DVD owners to create new film collections,
will continue to be a source of incremental profitability for us in the near
future. Our DVD sales have increased from $224.0 million in 2000 to $388.1
million in 2001, an increase of approximately 73%. The increase in DVD sales
was partially offset by a drop in videocassette format sales, resulting in an
approximate nine percent increase in worldwide home video sales. We intend to
continue rapid expansion of our DVD library product into 2002.

  We also intend to capitalize on emerging distribution technologies such as
video-on-demand, a technology that gives consumers the ability to order and
view a feature film or other property. As an example, in 2001, we entered into
a video-on-demand joint venture with four other major studios to distribute
our properties via video-on-demand platforms.

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

 Television Distribution

  General. We generally license our current theatrical motion pictures for pay
television through output agreements pursuant to which films not yet produced
are pre-licensed for a specified fee paid on delivery. We believe that output
agreements with international distributors with recognized expertise are
beneficial as they assure that a significant advance will be received for a
given territory and that a prominent distributor with recognized distribution
and marketing capabilities will distribute the picture in such territory.

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

  Domestic Pay Television. We have a theatrical motion picture output
agreement with Showtime requiring our future theatrical motion pictures to air
on Showtime's pay television network. We have extended the output term of the
agreement with Showtime. The new output term covers pictures theatrically
released in the U.S.

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commencing January 1, 2000 and continuing until the earlier of December 31,
2008 or the delivery of 270 pictures under the agreement. The license fees for
each picture are generally determined according to a formula based on U.S.
theatrical rentals of such picture.

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

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

  In connection with the acquisition of MGM/UA by Pathe in November 1990, MGM-
Pathe licensed the domestic free television rights to a substantial portion of
its library (the UA library and the post-1986 MGM/UA titles in theatrical
release at the time, constituting approximately 850 titles) and selected
television programs to Turner for a period of ten years beginning from the
availability of each such product in that market. The license excludes motion
pictures released theatrically beginning in 1987. With respect to most of the
motion pictures and television programming covered by the Turner license, the
domestic free television rights revert to us between 2002 and 2005. We expect
to receive relatively little revenue from the licensing of the product covered
by the agreement with Turner in the domestic free television market until such
product reverts to us. We believe that, due to the significant increases in
licensing fees for domestic television since 1990, the expiration of the
Turner license and our subsequent ability to freely license the library in
this market, together with our ability to utilize these titles on MGM branded
cable and satellite channels, will generate incremental revenue for us. See
"--Film and Television Library."

  Our new strategy involves windowing theatrical product between cable and/or
broadcast networks. This year we licensed multiple windows for at least 14
theatrical titles to various broadcast and cable networks. We have entered
into agreements with USA Cable and CBS Entertainment for license of the titles
Hannibal and Silence of the Lambs. In these innovative deals, USA and CBS will
have alternating exhibition windows for the titles that are expected to begin
in late 2003 and run through late 2008. In addition, on some other titles we
have created added value by splitting rights with three broadcasters. For
example, Legally Blonde was licensed by Fox, Comedy Central and Turner.

  In 2001, we entered into an agreement with the United Paramount Network
(UPN) to supply one film per week to the network, which film is broadcast in
its Saturday daytime slot. We sell the network advertising within the films in
a revenue sharing arrangement with UPN.

  We have increased the distribution of our library product in the free
television syndication market. We sold three new packages, including Lion
Legacy I, which has cleared 80 percent of U.S. television homes (including
sales to Tribune Broadcasting).

  Domestic Cable Television Investment. We entered into an agreement, dated
January 31, 2001, with Cablevision Systems Corporation, Rainbow Media
Holdings, Inc. and four of Rainbow's subsidiaries. Pursuant to the terms of
the agreement, we made an investment aggregating $825.0 million in two general
partnerships owned by Rainbow. As a result, we acquired a 20 percent interest
in each of these partnerships effective in April 2001. The partnerships own
and operate the cable television channels American Movie Classics, Bravo, the
Independent Film Channel and WE: Women's Entertainment (formerly known as
Romance Classics). See "--Recent Developments." In addition, we have entered
into licensing agreements with Rainbow Media, licensing theatrical and
television motion pictures to them.

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  Network Television. In 2000, we concluded an agreement with ABC for it to
license thirteen of the James Bond films in our library for a two-year
exhibition term. ABC also has an option to license a fourteenth James Bond
film.

  International Pay and Free Television. We currently distribute our motion
pictures and television product through pay television licenses in over 90
territories. We have output agreements with licensees in major territories,
including Germany, France, the United Kingdom, Spain, Japan, Latin America and
Brazil. In 2001, we received $99.3 million in revenue from international pay
television distribution, accounting for 7.2 percent of our total revenue for
the year.

  We currently distribute our motion pictures and television product through
free television licenses in over 100 territories. In 2001, we received $207.7
million in revenues under these agreements, accounting for 15.0 percent of our
total revenues for the year. These license arrangements typically provide
licensees with the right to exhibit the licensed motion pictures on television
for a specific number of airings over a period of three to seven years.

  However, in connection with the acquisition of MGM/UA by Pathe in November
1990, MGM-Pathe entered into long-term licenses of pay and free television
rights for theatrical and television movies and, in some cases, television
series in its library at that time with United Communications (France) and
F.O.R.T.A. (Spain). A similar agreement had been entered into in 1984 with
Degeto Film (Germany). Substantially all of the license fees under these long-
term licenses have already been paid to us, and therefore, we do not expect to
receive significant revenue from these licenses in future periods. With
respect to most of the motion pictures licensed to United Communications, the
rights granted currently revert to us through 2003. The James Bond features
were excluded from such license. With respect to most of the motion pictures
licensed to F.O.R.T.A., the vast majority of free television rights have
reverted to us. The distribution rights to the motion pictures and television
series licensed under the original Degeto agreement were scheduled to return
to us incrementally through 2010. In January 2000, however, we amended the
Degeto agreement to reclaim non-exclusive pay television rights in Germany to
the approximately 425 titles subject to the license, effective January 1,
2000, and to extend Degeto's now non-exclusive license period on a majority of
such licensed titles by approximately 18 months. This recent agreement with
Degeto now provides us with an opportunity to generate incremental revenue in
Germany's pay television market. See "--Film and Television Library."

  Additionally, Orion entered into certain long-term licenses covering a
significant number of its library motion pictures in the international free
and pay television markets. Orion had already received substantially all of
the license fees under these licenses, prior to our acquisition of Orion, and
therefore, we do not expect significant revenue from these licenses in future
periods. Orion also licensed titles to Capitol Film and TV International
(Germany), Compagnie Luxembourgeoise de Telediffusion (France), British Sky
Broadcasting (the United Kingdom), Film Finance Group, Inc. and Principal
Network Limited (Italy), Mitsubishi Corporation (Japan) and Televisio de
Catalunya, S.A. (Spain). The distribution rights granted to Capitol Film and
TV International revert to Orion in 2025. The distribution rights granted to
Compagnie Luxembourgeoise de Telediffusion revert to Orion between 2009 and
2019. The distribution rights granted to British Sky Broadcasting currently
are reverting to Orion, with such reversion being complete in 2002. The
distribution rights granted to Film Finance Group, Inc. and Principal Network
Limited revert to Orion through 2012. The distribution rights granted to
Televisio de Catalunya, S.A. currently are reverting to Orion, with such
reversion being complete in 2010. We believe that, due to the importance of
France, Spain, the United Kingdom and Italy and the significant increases in
licensing fees for television in these markets since 1990, the expiration of
these licenses and our subsequent ability to freely license our library in
these markets could create substantial incremental revenue.

  The MGM/UA and Orion licenses discussed above (in "--Domestic Free
Television" and "--International Pay and Free Television") cover a cross-
section of the motion pictures in our library. Although we exploit the
remaining titles in the library in these markets, they do not generate
significant revenues.

  In addition to licensing packages of films, we hold equity positions ranging
from approximately five percent to 25 percent in joint ventures such as LAPTV,
Telecine, Star Channel and Movie Network Channels, which are

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emerging international premium film television networks broadcasting in
different territories around the world. We have entered into license
agreements with respect to each of LAPTV, Telecine, Star Channel and Movie
Network Channels, licensing theatrical and television motion pictures to each
of the ventures.

  In 2001, we entered into an innovative, multi-year alliance with NBC
Enterprises & Syndication under which we will provide distribution services
for all NBC Studios programming across all territories outside of North
America. We will handle the sales and distribution of all of NBC's current and
future programming, including the prime-time series Will & Grace, Providence,
Profiler, Three Sisters, Passions and the new drama series Crossing Jordan.
Also included in the pact is a complete library component, made-for-television
movies, mini-series, specials, and the highly watched TNBC (Teen NBC)
offerings.

  In 2001, we negotiated the early return of 52 titles under license to
Capitol Film & TV International for German-speaking Europe, which gives us the
opportunity to receive additional incremental license fees for the titles.

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

  In May 1998, MGM and an indirect subsidiary of United International Holdings
combined our respective Latin American cable programming businesses into a
joint venture to form MGM Networks Latin America. Under the terms of the joint
venture, we acquired a 50 percent equity interest in the venture by
contributing our branded Brazilian channel, which began operations in December
1997. In turn, UIH contributed its 100 percent interest in United Family
Communications, which produces and distributes Casa Club TV to satellite and
cable television distributors throughout Latin America and Brazil, for a 50
percent interest in the joint venture. We share equally in the profits of the
venture. We have a license agreement with MGM Networks Latin America,
licensing certain motion pictures and trademarks to the venture. The joint
venture is based in Coral Gables, Florida. MGM Latin America and MGM Brazil
are general entertainment channels programmed by the joint venture primarily
with our theatrical and television product. Casa Club TV is a lifestyle
channel offering home and garden, food and other lifestyle programming. As of
December 31, 2001, MGM Networks Latin America distributed its signals to
approximately 14.5 million homes in 17 countries throughout Latin America.

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

  In August 2000, we entered into an agreement with Zee TV (India) to launch a
Zee/MGM branded library movie service in India (and its surrounding
territories; Pakistan, Bangladesh, Nepal, Sri Lanka and Maldives). Upon the
completion of certain conditions, we will own a 30 percent equity interest in
the venture, which was launched on November 1, 2000. Zee/MGM is broadcast as a
pay cable channel in India as part of a channel package distributed by Zee. We
will receive license fees for the MGM programming and a branding fee for the
channel's use of the MGM brand.

  In December 2000, we entered into an agreement with Tel-Ad to launch a movie
service in Turkey. The channel in Turkey launched on January 1, 2001, and we
hold a 35 percent equity interest. The service is broadcast on Digiturk's
digital satellite platform. We receive license fees for the programming as
well as a branding fee for the channel's use of the MGM brand. We have
recognized no revenue to date.

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<PAGE>

  In 2001, we entered into a deal with Sky New Zealand whereby Sky agreed to
carry a movie channel showcasing our film library in New Zealand. The channel
launched in April 2001 and is broadcast on Sky's digital basic tier. We own
100% of the channel.

  In 2001, we entered into a deal with the Orbit Satellite Television and
Radio Network to launch a digital, 24-hour MGM-branded movie channel in the
Middle East. The channel is expected to launch in March 2002, and will
initially be available on Orbit's premium channel tier via a digital satellite
feed across the Middle East. We will own 100% of the channel.

Trademarks and Consumer Products

  We own a portfolio of over 2,100 trademark registrations around the world
for such venerable trademarks as METRO-GOLDWYN-MAYER, MGM, the MGM Lion Logo,
UNITED ARTISTS, UA, ORION, CANNON, and variations thereof, as well as
trademarks, and characters, such as THE PINK PANTHER and ROCKY, associated
with motion pictures and television series we produced and/or distributed. In
2001, we realized over $20.2 million in revenue from the licensing of these
trademarks.

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

  In February 1980, our predecessor-in-interest granted to a predecessor-in-
interest of MGM MIRAGE an exclusive open-ended royalty-free license to use the
trademark MGM, as well as certain stylized lion depictions, in its resort
hotel and/or gaming businesses and other businesses not related to filmed
entertainment. This license was amended in 1998. In June 2000, the license was
further amended to allow MGM MIRAGE to use the trademark MGM in combination
with the trademark MIRAGE to the same extent that it was permitted theretofore
to use the MGM Grand trademark. In consideration of this further grant of
rights, MGM MIRAGE has agreed to pay an annual license fee of $1.0 million.
MGM MIRAGE paid us $1.0 million (in advance) in June 2000 and $1.0 million in
June 2001. Subsequent annual payments are due on each anniversary date
thereafter.

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

  In July 2001, we entered into an agreement with MGM Grand Hotel LLC for the
licensing of the MGM logo on slot machines for one year, with two one-year
options to renew. See "Item 13. Certain Relationships and Related
Transactions."

Competition

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

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<PAGE>

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

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

  The entertainment industry in general, and the motion picture and television
industry in particular, are continuing to undergo significant changes,
primarily due to technological developments. Due to this rapid growth of
technology, shifting consumer tastes and the popularity and availability of
other forms of entertainment, it is impossible to predict the overall effect
these factors will have on the potential revenue and profitability of feature-
length motion pictures and television programming.

Employees and Labor Matters

  As of December 31, 2001, we had approximately 1,050 full-time and part-time
regular employees in our worldwide operations. Of that total, approximately 90
were primarily engaged in production and development, approximately 400 were
primarily engaged in sales, marketing and distribution and approximately 570
were primarily engaged in management and administration. Approximately 180 of
our employees are currently covered by employment contracts. We also hire
additional employees on a picture-by-picture basis in connection with the
production of our motion pictures and television programming. The salaries of
these additional employees, as well as portions of the salaries of certain
full-time employees who provide direct production services, are typically
allocated to the capitalized cost of the related motion pictures or television
programming. We believe that our employee and labor relations are good.

  Approximately 22 of our current employees (and many of the employees or
independent contractors that we hire on a project-by-project basis) are
represented under industry-wide collective bargaining agreements with various
unions, including the Writers Guild of America, the Directors Guild of
America, the Screen Actors Guild, and the International Alliance of Theatrical
Stage Employees. The motion picture and television programs produced by MGM
Studios and the other major U.S. studios generally employ actors, writers and
directors who are members of the Screen Actors Guild, Writers Guild of America
and Directors Guild of America pursuant to industry-wide collective bargaining
agreements. The collective bargaining agreement with Writers Guild of America
was successfully renegotiated and became effective beginning May 2, 2001 for a
term of three years. Negotiations regarding the collective bargaining
agreement with Screen Actors Guild were successfully completed on July 3,
2001, and the agreement was ratified effective as of July 1, 2001 for a term
of three years. The Directors Guild of America collective bargaining agreement
was successfully renegotiated and ratification is expected. When ratified, it
will have a term of three years from July 1, 2002. Many productions also
employ members of a number of other unions, including without limitation the
International Alliance of Theatrical and Stage Employees and Teamsters. A
strike by one or more of the unions that provide personnel essential to the
production of motion pictures or television programs could delay or halt our
ongoing production activities. Such a halt or delay, depending on the length
of time involved, could cause delay or interruption in our release of new
motion pictures and television programs and thereby could adversely affect our
cash flow and revenues. Our revenues from motion pictures and television
programs in our library should not be affected and may partially offset the
effects of a strike to the extent, if any, that television exhibitors buy more
library product to compensate for interruption in their first-run programming.

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<PAGE>

Regulation

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

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

  On June 1, 1999, former President Clinton asked the Department of Justice
and the Federal Trade Commission ("FTC") to study the extent to which the
video game, music and movie industries market violent content to children and
whether those industries are abiding by their own voluntary rating systems and
regulations. On January 3, 2000, we, along with the other major studios,
received a request for information from the FTC in connection with the study.
On or about September 11, 2000, the FTC issued a "Report on the Marketing of
Violent Entertainment to Children" (the "FTC Report"). The FTC Report was
critical of what it alleged to be the marketing and promotion of violent
entertainment content to children and teenagers by the motion picture, music
recording, and computer and video game industries. On September 27, 2000, all
of the MPAA member companies, of which we are one, agreed voluntarily to a
series of initiatives designed to avoid inappropriately specifically targeting
children under 17 in the advertising and marketing of films rated R for
violence. A substantial number of our films are rated R and it is not known
whether or to what extent the initiatives could affect the performance of such
films.

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  Also on September 27, 2000, representatives of the MPAA member companies,
including the Vice Chairman and Chief Operating Officer of MGM, appeared
before the Senate Commerce Committee, which is charged with oversight of the
FTC, to discuss the FTC Report and the MPAA initiatives. The Commerce
Committee has indicated that it intends to monitor compliance by the MPAA
companies with the initiatives, and the Committee and certain of its members
have followed up with several additional requests for information to which the
member companies have responded. In January 2001, the Senate Commerce
Committee formally asked the FTC to conduct two follow-up reports in the
Spring and Fall of 2001. These reports acknowledged that the studios have
essentially complied with the initiatives. See "Item 3. Legal Proceedings."

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

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

  On December 8, 2000, the Federal Court of Canada in Ottawa, Ontario, issued
an Order directed to eighteen distributors (purporting to include one of our
subsidiaries) and twenty-three exhibitors, requesting them to produce certain
information relating to theatrical distribution and exhibition. The Court
issued the Order upon application of the Commissioner of Competition in
connection with the Commissioner's civil investigation into allegations that
certain exhibitors and distributors have entered into arrangements, or have
conducted the distribution and exhibition of motion pictures in an
anticompetitive manner. We have complied with the Order. See "Item 3. Legal
Proceedings."

  By letter dated November 15, 2001, we received a request from the Department
of Justice for a voluntary production of information and documents relating to
our video-on-demand joint venture with four other major studios. We are
complying with that request.

Item 2. Properties

  We lease approximately 368,000 square feet of office space, as well as
related parking and storage facilities, for our corporate headquarters in
Santa Monica, California under several leases which generally expire in May
2003. We also lease approximately 27,000 square feet in New York City for our
East Coast publicity, marketing and theatrical and television distribution
offices under a lease that expires in June 2004. Additionally, we lease
approximately 35,000 square feet of office space in Los Angeles, California,
which has been used by Orion, under a lease that expires in January 2004. The
current monthly rent for the above properties is approximately $1.3 million in
the aggregate (in addition to taxes, insurance and certain expenses paid by
us). In November 2000, we entered into a definitive agreement to lease up to
approximately 344,248 square feet of office space for a 15-year period
beginning in May 2003 in a building under construction in Century City and to
be known as MGM Tower. We subleased to third parties the office space used by
Orion prior to its acquisition by us. In addition, we maintain small home
entertainment and domestic theatrical and television distribution branches in
various locations in the United States and Canada and have small international
television distribution offices in London and Sydney. Our current monthly rent
for the warehouse and storage facilities that house, among other things, our
film and video inventory, records, furniture and artwork, is approximately
$585,000. We also lease studio facilities and stages from unaffiliated parties
on an as-needed basis in connection with the production of specific motion
picture and television projects.

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Item 3. Legal Proceedings

  On November 17, 1997, MGM and Danjaq filed an action entitled Danjaq, LLC,
et al. v. Sony Corporation, Kevin McClory, et al. in federal court in Los
Angeles (Case No. 97-8414ER (Mcx)) relating to a press release issued by Sony
Pictures announcing plans to produce a series of new James Bond feature films
based on alleged rights that Sony had acquired from Kevin McClory. Mr. McClory
had been a producer of Thunderball. On July 29, 1998, the court preliminarily
enjoined Sony Pictures and the other defendants from the production,
preparation, distribution, advertising or other exploitation in the United
States of a James Bond motion picture in any medium and from using the "James
Bond" and the "James Bond 007" trademarks in the United States. On March 29,
1999, MGM and Danjaq entered into a settlement agreement with Sony Pictures
and related parties that provided for a payment by the Sony parties and an
agreement by the Sony parties which effectively makes permanent the court's
July 1998 preliminary injunction. Under the terms of a separate agreement
entered into on March 29, 1999, MGM and Danjaq acquired from Columbia all of
Columbia's rights to Casino Royale and the Sony parties agreed to broaden the
contractual prohibition regarding making or distributing James Bond films and
the James Bond trademarks, as described above, throughout the world. Mr.
McClory did not participate in the settlement and retained a counterclaim
against MGM and Danjaq for copyright infringement. The trial with Mr. McClory
commenced on March 28, 2000. On that date, the judge bifurcated the case to
hear MGM's and Danjaq's laches defense before commencing the jury trial on Mr.
McClory's counterclaim. The judge issued his ruling on this defense on March
31, 2000, finding that Mr. McClory's claim was barred by laches as a matter of
law, and dismissed the entire case with prejudice. On May 2, 2000, Mr. McClory
appealed the court's decision. On August 27, 2001, the Ninth Circuit Court of
Appeals upheld the District Court's dismissal of the case. On September 16,
2001, Mr. McClory filed a petition for rehearing. On December 19, 2001 the
Ninth Circuit Court of Appeals denied the petition for rehearing.

  The background of Mr. McClory's claims is as follows. Prior to 1959, Ian
Fleming authored a number of novels depicting the adventures of James Bond,
and commencing in 1959, Mr. Fleming and Kevin McClory collaborated on the
development of certain plot lines and treatments and a script entitled
Thunderball, featuring the James Bond character. Mr. Fleming thereafter wrote
a novel of the same name. In 1961, Mr. McClory commenced litigation against
Mr. Fleming with regard to the script, the novel and certain related rights.
In 1962, prior to the settlement of the Fleming-McClory litigation, Mr.
Fleming effectively granted to a predecessor-in-interest of Danjaq the
exclusive worldwide rights to, among other things, make films based on Mr.
Fleming's existing or future James Bond novels (other than Thunderball or
Casino Royale) and to create original screenplays about the adventures of
James Bond not based on Mr. Fleming's James Bond novels. This agreement
further provides that the film rights to the Thunderball novel that were the
subject of the Fleming-McClory litigation would also be transferred to
Danjaq's predecessor to the extent Mr. Fleming was permitted to transfer such
rights following completion of the litigation.

  The Fleming-McClory litigation was resolved in 1963 by a settlement among
Mr. Fleming, Mr. McClory and the other parties to the litigation in which Mr.
McClory acknowledged that Mr. Fleming was the creator and proprietor of the
James Bond character. Pursuant to that settlement, Mr. McClory was, in effect,
given the film rights in the Thunderball documents and scripts attached to the
settlement agreement, the rights to reproduce any part of Mr. Fleming's
Thunderball novel in a film and to exhibit any such film in any manner
whatsoever and the rights to use the James Bond character in the film
Thunderball. We believe these rights, at most, gave Mr. McClory the right to
make films of the story in the novel Thunderball (i.e. a "remake" of
Thunderball). UA and Danjaq produced the film Thunderball with Kevin McClory
in 1965. Mr. McClory has at various times since 1963 taken the position that
he has broader rights to use the James Bond character than simply remake
Thunderball, but since 1965 he has only made the 1983 film Never Say Never
Again, which Mr. McClory claimed was a remake of the film Thunderball. MGM has
since obtained the rights to Never Say Never Again.

  We believe that Mr. McClory's purported remake rights in Thunderball lapsed
under U.S. law. However, even if Mr. McClory retained such rights, we believe
that another remake of Thunderball by Mr. McClory would not have a material
adverse effect on our business or results of operations. However, a
determination that Mr. McClory has broader rights to produce or exploit other
films, television programs or other similar programs

                                      25
<PAGE>

that are based, in whole or in part, on the James Bond character or that he
has a right to any of the profits from the James Bond films that Danjaq and
MGM have produced could have a material adverse effect on our business and
results of operations.

  On June 1, 1999, former President Clinton asked the Department of Justice
and the Federal Trade Commission to study the extent to which the video game,
music and movie industries market violent content to children and whether
those industries are abiding by their own voluntary rating systems and
regulations. We, along with the other major studios voluntarily cooperated
with the Federal Trade Commission's request for information in connection with
the study. In September 2000, the FTC issued its report. In response we and
the other major studios agreed to a 12-point initiative put forward by the
MPAA, concerning the marketing of films rated "R" for violence. In September
2000, we and the other major studios sent representatives to testify before
the Senate Commerce Committee, to explain our commitment to the new marketing
initiatives, which we have been implementing and the Committee and certain of
its members have followed up with several additional requests for information
to which the member companies have responded. In January 2001, the Senate
Commerce Committee formally asked the FTC to conduct two follow-up reports in
the Spring and Fall of 2001. Those reports acknowledged that the studios have
essentially complied with the 12-point initiative. See "Item 1. Regulation."

  On January 19, 2000, a complaint was filed naming Metro-Goldwyn-Mayer Home
Entertainment Inc. as a defendant in a matter entitled Ronald Cleveland d/b/a
Lone Star Videotronics, et al., v. Viacom Inc., et al. (Case No. 99CA0783-EP).
The case was filed as a putative class action in the United States District
Court for the Western District of Texas San Antonio Division, but on March 16,
2001, the Court denied plaintiffs' motion to certify a class. Viacom Inc.,
Paramount Home Video, Inc., Buena Vista Home Entertainment, Inc., Time Warner
Entertainment Company, L.P. d/b/a Warner Home Video, Columbia Tri-Star Home
Video, Inc., Universal Studios Home Video, Inc., and Twentieth Century Fox
Home Entertainment, Inc. are also named as defendants in the action, which was
originally filed against them on July 21, 1999. The plaintiffs claim that the
defendant studios conspired with each other and with Blockbuster Inc. with
respect to their home video rental distribution arrangements to discriminate
illegally against independent video retailers in favor of Blockbuster in
violation of the Sherman Antitrust Act, the California Cartwright Act, the
California Unfair Practices Act, and the California Unfair Competition
Statute. The trial presently is set to begin on June 10, 2002.

  On April 16, 2001, over two hundred video retailers, including plaintiffs in
the Cleveland case noted above, sued Sumner Redstone, Viacom Inc., Blockbuster
Inc., and several studio Home Entertainment entities, including Metro-Goldwyn-
Mayer Home Entertainment Inc., in Superior Court in Los Angeles, California,
in a matter entitled John Merchant d/b/a 49'er Video, et al v. Redstone, et
al. (Case No. BC 244270). The case is styled as a representative action, as
well as an individual action, and also was originally styled as a putative
class action. On January 9, 2002, the Court denied plaintiffs' motion to
certify a class. The plaintiffs claim that defendants conspired with each
other and Blockbuster Inc. with respect to their home video rental
distribution arrangements to discriminate illegally against independent video
retails in favor of Blockbuster in violation of the California Cartwright Act,
the California Unfair Practice Act, and the California Unfair Competition
Statute. We deny the material allegations of both complaints and will defend
ourselves vigorously against plaintiffs' claims.

  On January 26, 2000, American International Specialty Lines Insurance
Company, or AISLIC, one of our insurers, filed an action entitled American
International Specialty Lines Insurance Company v. Metro-Goldwyn-Mayer Inc.,
Danjaq, LLC et al. in Los Angeles Superior Court (Case No. BC 223707) seeking
to rescind our primary errors and omissions policy for a recent three-year
coverage period. AISLIC alternatively seeks a declaration that no coverage
exists under the policy for certain claims tendered to AISLIC pursuant to the
policy. AISLIC alleges that information pertinent to certain claims tendered
by us to AISLIC was omitted from our application for insurance. On April 10,
2000, MGM filed a cross-complaint against AISLIC, and its parent corporation,
American International Group, Inc., for breach of the duty of good faith and
fair dealing and breach of contract. AISLIC subsequently cross-complained for
breach of contract and fraud. Danjaq also has filed a cross-complaint against
AISLIC and AIG.

                                      26
<PAGE>

  On July 14, 2000, another of MGM's insurers, Fireman's Fund, filed suit
against AISLIC and AIG for equitable contribution, equitable indemnity and
subrogation, and against MGM and Danjaq for reimbursement, allocation and
declaratory relief, arising from the same circumstances as the AISLIC v. MGM
suit. On September 27, 2000, the Court issued an order deeming Fireman's Fund
Insurance Co. v. AIG, et al. (Case No. BC 233429) related to AISLIC v. MGM,
with both matters to be handled by the same judge. The cases were subsequently
transferred as "complex" litigation.

  On August 7, 2001, the Court issued an order granting MGM's motion for
summary adjudication with respect to the rescission issue, ruling that
AISLIC's purported rescission of the policy was and is invalid as a matter of
law. AISLIC's subsequent petition to the appellate court, filed September 19,
2001, was denied. On October 9, 2001, AISLIC filed a petition for review and
immediate stay with the California Supreme Court. Pending the decision of the
California Supreme Court, the trial court has set a trial date of August 20,
2002 for whatever issues remain in the case at that time.

  On October 9, 2000, MGM Studios was served with the complaint in Citizens
for Fair Treatment v. Time Warner Entertainment, et al. (Case No. 063137), an
industry-wide action brought by a public interest organization, which claims
that the seven major studios and New Line Cinema have violated California laws
prohibiting deceptive, unfair and unlawful business practices by allegedly
marketing "R" rated films to children under 17 years of age. The basis for the
complaint is the findings of the Federal Trade Commission's September 2000
report concerning studio marketing practices. The complaint seeks restitution
and disgorgement of all monies attributable to the alleged wrong-doing, as
well as an injunction restraining and enjoining defendants from targeting and
marketing R-rated films to children under 17. The studios, including MGM,
filed demurrers to the complaint and, alternatively, motions to strike the
complaint, based on our contention that the studios' actions about which
plaintiff complains constitute speech that is protected by the United States
and California constitutions. On February 20, 2001, the trial court denied the
studios' motions to dismiss and, alternatively, to strike the complaint. The
studios, including MGM, appealed the denial of their motions to strike, and
filed petitions for writ of mandate challenging the denial of their demurrers.
On April 13, 2001, the court of appeal denied the studios' petitions for a
writ of mandate and the California Supreme Court subsequently declined review
of that decision. The studios' appeals of the denial of their motions to
strike are still pending. We deny the material allegations of the complaint,
and we will defend ourselves vigorously against plaintiffs' claims.

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

  On December 8, 2000, the Federal Court of Canada in Ottawa, Ontario, issued
an Order directed to eighteen distributors (purporting to include one of our
subsidiaries) and twenty-three exhibitors, requesting them to produce certain
information relating to theatrical distribution and exhibition. The Court
issued the Order upon application of the Commissioner of Competition in
connection with the Commissioner's civil investigation into allegations that
certain exhibitors and distributors have entered into arrangements, or have
conducted the distribution and exhibition of motion pictures, in an
anticompetitive manner. We have complied with the Order. See "Item 1.
Regulation."

  On July 3, 2001, MGM and eight of its subsidiaries were served with a
complaint in Brian Rector, Citizens for Truth in Movie Advertising ("CTMA"),
et al. v. Metro-Goldwyn-Mayer Inc., et al. (L.A.S.C. Case No. BC253405), which
is a class action lawsuit alleging deceptive and unfair business practices,
fraudulent concealment, fraudulent inducement, false and misleading
advertising, and claims under the Consumers Legal Remedies Act arising from
the studio's use of reviewer quotes in film advertisements without disclosing
that the reviewers allegedly received things of value from the studio in
connection with press junkets and publicity efforts. The same plaintiffs
simultaneously sued nine other major studios in identical but separate class
action

                                      27
<PAGE>

lawsuits. On September 28, 2001, the plaintiffs amended their complaints to
include claims based on allegations that studios use reviewer quotes out of
context and include in "trailers" scenes that are not included in the
associated films, thus constituting false and misleading advertising. The
complaints against the studios seek restitution and disgorgement of all monies
attributable to the alleged wrongdoing, as well as compensatory and punitive
damages and an injunction requiring the studios to make certain disclosures in
their advertising. The studios filed demurrers and motions to strike the
complaint. On January 24, 2002, the court granted the studios' motions to
strike the complaint pursuant to the California SLAPP statute. The time to
appeal that decision has not yet expired and we do not know if plaintiffs will
appeal. We deny any wrongdoing or unlawful activity, and we will defend
ourselves vigorously against plaintiffs' claims.

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

Item 4. Submission of Matters to a Vote of Securityholders

  None

Executive Officers of the Company

  Alex Yemenidjian, age 46, has been Chairman of the Board and Chief Executive
Officer since April 1999 and has been a director since November 1997. Mr.
Yemenidjian has served as a director of MGM Grand, Inc. (now known as "MGM
MIRAGE") since 1989. Mr. Yemenidjian served as the President of MGM Grand,
Inc. from July 1995 through December 1999. Mr. Yemenidjian has also served MGM
Grand, Inc. in other capacities during such period, including as Chief
Operating Officer from June 1995 until April 1999 and as Chief Financial
Officer from May 1994 to January 1998. In addition, Mr. Yemenidjian served as
an executive of Tracinda from January 1990 to January 1997 and from February
1999 to April 1999.

  Christopher J. McGurk, age 45, has been Vice Chairman of the Board and Chief
Operating Officer since April 1999. From November 1996 until joining MGM, Mr.
McGurk served in executive capacities with Universal Pictures, a division of
Universal Studios, most recently as President and Chief Operating Officer.
Prior to joining Universal, Mr. McGurk spent eight years at The Walt Disney
Company, including as President, Motion Pictures Group, Walt Disney Studios
from 1994 to 1996 and as Executive Vice President and Chief Financial Officer
from 1990 to 1994.

  William A. Jones, age 60, has been Senior Executive Vice President and
Secretary since June 1997 and, prior thereto, served as Executive Vice
President--Corporate Affairs and Secretary since January 1995. Mr. Jones
served as Executive Vice President, General Counsel and Secretary from May
1991 to January 1995 and as General Counsel and Secretary of our predecessors
since 1983. Mr. Jones was a director of MGM-Pathe from June 1991 to January
1992.

  Daniel J. Taylor, age 45, has been Senior Executive Vice President and Chief
Financial Officer since June 1998 and, prior thereto, was Executive Vice
President--Corporate Finance since August 1997. From May 1991 to July 1997,
Mr. Taylor served as an executive of Tracinda. Prior thereto, Mr. Taylor
served as Vice President--Taxes and in various other capacities at our
predecessor from 1985 to May 1991.

  Jay Rakow, age 49, has been Senior Executive Vice President and General
Counsel since August 2000. From 1989 to l993 and from l996 to 2000, Mr. Rakow
was a partner in the law firm of Christensen, Miller, Fink, Jacobs, Glaser,
Weil & Shapiro, LLP. From 1993 to 1996, Mr. Rakow took a leave from the firm
to become Senior Vice President and General Counsel of Paramount Pictures
Corporation. Prior to 1989 Mr. Rakow was with the law firm of Wyman, Bautzer,
Christensen, Kuchel & Silbert.

                                      28
<PAGE>

                                    PART II

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

  Our common stock is listed with, and trades on, the New York Stock Exchange
under the symbol "MGM." On February 6, 2002, the closing sale price per share
of our common stock on the NYSE, as reported by the Dow Jones News Retrieval,
was $19.25. The following table sets forth the high and low closing sale
prices of the common stock on the NYSE, as reported by the Dow Jones News
Retrieval, for our two most recent fiscal years.

<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ ------
   <S>                                                             <C>    <C>
   2001
   Fourth Quarter................................................. $21.90 $15.81
   Third Quarter..................................................  22.47  13.86
   Second Quarter.................................................  22.93  15.76
   First Quarter..................................................  21.77  15.35

   2000
   Fourth Quarter................................................. $22.81 $14.94
   Third Quarter..................................................  26.50  22.00
   Second Quarter.................................................  30.38  23.94
   First Quarter..................................................  28.06  21.69
</TABLE>

  As of February 6, 2002, there were 240,707,584 shares issued and outstanding
and in excess of 2,000 beneficial holders of our common stock, including
individual participants in security position listings.

  We have not paid any dividends to date on the common stock and currently
intend to retain any earnings to provide funds for the operation and expansion
of our business and for the servicing and repayment of indebtedness.
Therefore, we do not intend to pay cash dividends on our common stock for the
foreseeable future. Furthermore, as a holding company with no independent
operations, our ability to pay cash dividends will be dependent upon the
receipt of dividends or other payments from our subsidiaries. In addition, our
principal credit facility contains certain covenants which, among other
things, restrict the payment of dividends by us. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." Any
determination to pay cash dividends on the common stock in the future will be
at the sole discretion of our Board of Directors.

                                      29
<PAGE>

Item 6. Selected Consolidated Financial Data

  Our selected consolidated financial data presented below have been derived
from our audited consolidated financial statements. Our audited consolidated
financial statements for the years ended December 31, 1997, 1998, 1999, 2000
and 2001 were audited by Arthur Andersen LLP, independent public accountants.
Certain reclassifications have been made to amounts reported in prior periods
to conform with current presentation.

<TABLE>
<CAPTION>
                                           Year Ended December 31,
                          -------------------------------------------------------------
                           1997(1)       1998       1999(2)       2000        2001(3)
                          ----------  ----------  -----------  -----------  -----------
                               (in thousands, except share and per share data)
<S>                       <C>         <C>         <C>          <C>          <C>
Statements of Operations
 Data:
Revenues................  $  831,302  $1,240,723  $ 1,142,433  $ 1,237,447  $ 1,387,531
Expenses:
 Operating..............     590,874     938,694      957,754      771,811      766,330
 Selling, general and
  administrative........     275,301     324,298      291,176      339,458      585,255
 Severance and related
  costs (recoveries)....         --       13,182       76,158       (3,715)         --
 Contract termination
  fee...................         --          --       225,000          --           --
 Depreciation and non-
  film amortization.....      18,013      22,853       24,454       28,648       32,952
                          ----------  ----------  -----------  -----------  -----------
                             884,188   1,299,027    1,574,542    1,136,202    1,384,537
Operating income (loss).     (52,886)    (58,304)    (432,109)     101,245        2,994
Equity in net earnings
 (losses) of affiliates.     (14,225)    (12,536)      (6,325)       1,953       (2,421)
Interest expense, net of
 amounts capitalized....     (53,105)    (80,611)     (86,445)     (51,425)     (51,494)
Interest and other
 income, net............       2,447       3,984        3,770       12,706        9,478
                          ----------  ----------  -----------  -----------  -----------
Income (loss) from
 operations before
 provision for income
 taxes..................    (117,769)   (147,467)    (521,109)      64,479      (41,443)
Income tax provision....     (10,345)    (10,181)      (9,801)     (13,480)     (14,297)
                          ----------  ----------  -----------  -----------  -----------
Net income (loss) before
 cumulative effect of
 accounting change......    (128,114)   (157,648)    (530,910)      50,999      (55,740)
Cumulative effect of
 accounting change......         --          --           --           --      (382,318)
                          ----------  ----------  -----------  -----------  -----------
Net income (loss).......  $ (128,114) $ (157,648) $  (530,910) $    50,999  $  (438,058)
                          ==========  ==========  ===========  ===========  ===========
Earnings (loss) per
 share:
 Basic
   Net income (loss)
    before cumulative
    effect of accounting
    change..............  $    (4.47) $    (2.08) $     (3.36) $      0.25  $     (0.24)
   Cumulative effect of
    accounting change...         --          --           --           --         (1.65)
                          ----------  ----------  -----------  -----------  -----------
   Net income (loss)....  $    (4.47) $    (2.08) $     (3.36) $      0.25  $     (1.89)
                          ==========  ==========  ===========  ===========  ===========
 Diluted
   Net income (loss)
    before cumulative
    effect of accounting
    change..............  $    (4.47) $    (2.08) $     (3.36) $      0.24  $     (0.24)
   Cumulative effect of
    accounting change...         --          --           --           --   $     (1.65)
                          ----------  ----------  -----------  -----------  -----------
   Net income (loss)....  $    (4.47) $    (2.08) $     (3.36) $      0.24  $     (1.89)
                          ==========  ==========  ===========  ===========  ===========
Weighted average number
 of common shares
 outstanding
 Basic..................  28,634,362  75,816,326  158,015,955  204,797,589  232,082,403
 Diluted................  28,634,362  75,816,326  158,015,955  210,313,274  232,082,403
Other Operating
 Data(unaudited):
Cash flow provided by
 (used) operating
 activities.............  $ (457,904) $ (437,728) $  (359,877) $  (182,459)       3,815
Cash flow used in
 investing activities...    (582,452)    (32,651)    (257,210)     (18,244)    (844,787)
Cash flow provided by
 financing activities...   1,028,784     521,566      715,227      125,845      766,941
EBITDA (unaudited)(4)...     (34,873)    (35,451)    (407,655)     129,893       35,946
Capital expenditures....       9,555      14,005       14,883       12,259        9,905
Depreciation expense....       6,783       8,564        9,601       13,913       18,218
Balance Sheet Data:
Cash and cash
 equivalents............  $    3,978  $   54,839  $   152,213  $    77,140  $     2,698
Film and television
 costs, net.............   1,867,126   2,076,663    2,164,458    2,422,799    2,035,277
Total assets............   2,822,654   3,158,978    3,424,361    3,548,190    3,923,164
Bank and other debt.....     890,508     720,574      719,438      709,952      836,186
Stockholders' equity....   1,378,555   1,919,657    2,116,824    2,309,687    2,489,482
</TABLE>

                                      30
<PAGE>

--------
(1) Reflects the consolidated balance sheet and results of operations of the
    combined entity resulting from the acquisition of Orion in July 1997.

(2) Reflects the effect of the $225.0 million contract termination settlement
    with Warner Home Video and $214.6 million of restructuring and other
    charges for the year ended December 31, 1999.

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

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

                                      31
<PAGE>

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

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

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

General

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

 Recent Developments

  Cable Investment. On April 2, 2001, we invested $825.0 million 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). These partnerships were wholly-
owned by Rainbow Media Holdings, Inc., a 74 percent subsidiary of Cablevision
Systems Corporation. The proceeds of the $825.0 million investment were used
as follows: (i) $365.0 million was used to repay bank debt of the
partnerships; (ii) $295.5 million was used to repay intercompany loans from
Cablevision and its affiliates; and (iii) $164.5 million was added to the
working capital of the partnerships. We financed the investment through the
sale of equity securities and borrowings under our credit facilities. See
"Liquidity and Capital Resources." Based upon currently available information
and upon certain assumptions that management believes are reasonable, our
determination of the difference between our cost basis in our investment in
the cable channels and our share of the underlying equity in net assets is
approximately $762 million.

  We are accounting for our investment in the cable channels in accordance
with Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." Pursuant to the requirements of
this pronouncement, we are recording our 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, we will be reporting our interest in the
cable channels on a one quarter lag. In 2001, our share of the cable channels'
net operating results was a loss of $2.8 million, including amortization of
intangible assets of $19.1 million.

  While we are not involved in the day-to-day operations of the cable
channels, our 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.

  We have 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 us to participate in any such sale. If a third party invests in either
partnership, our interest and that of Rainbow Media will be diluted on a pro
rata basis. Neither we nor Rainbow Media will be required to make additional
capital contributions to the partnerships. However, if Rainbow Media makes an
additional capital contribution and we do not, our interest in the
partnerships will be diluted accordingly. If the partnerships fail to attain
certain financial projections provided to us by Rainbow

                                      32
<PAGE>

Media for the years 2002 through 2005, inclusive, we will be entitled, 30 days
after receipt of partnership financial statements for 2005, to require Rainbow
Media to acquire our partnership interests for fair market value, as
determined pursuant to the agreement. We formed a wholly-owned subsidiary, MGM
Networks U.S. Inc., which made the above-described investment, serves as
general partner of the applicable Rainbow Media companies and is the MGM
entity which holds the aforesaid partnership interests and rights attendant
thereto.

  Joint Venture. On August 13, 2001, a 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. We have
funded approximately $7.5 million for our equity interest and our share of the
operating expenses of the joint venture as of December 31, 2001. We financed
our investment through borrowings under our credit facilities. We are
accounting for our interest in the joint venture under the equity method. In
2001, we recognized a net loss of $446,000 for our share in the results of the
joint venture.

Sources of Revenue

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

  Our feature films are exploited through a series of sequential domestic and
international distribution channels, typically beginning with theatrical
exhibition. Thereafter, feature films are first made available for home video
generally six months after theatrical release; for pay television, one year
after theatrical release; and for syndication, approximately three to five
years after theatrical release. Our television programming is produced for
initial broadcast on either pay, syndicated or network television in the
United States, followed by international territories and, in some cases,
worldwide video markets.

  We distribute our motion picture and television productions in foreign
countries and, in recent years, have derived approximately 40 percent of our
revenues from foreign sources. Approximately 25 percent of our revenues are
denominated in foreign currencies. In addition, we incur certain operating and
production costs in foreign currencies. As a result, fluctuations in foreign
currency exchange rates can adversely affect our business, results of
operations and cash flows. We, in certain instances, enter into foreign
currency exchange contracts in order to reduce exposure to changes in foreign
currency exchange rates that affect the value of our firm commitments and
certain anticipated foreign currency cash flows. These contracts generally
mature within one year. We do not enter into foreign currency contracts for
speculative purposes. Realized gains and losses on contracts that hedge
anticipated future cash flows were not material in any of the periods
presented herein. We had no significant foreign currency exchange contracts
relating to foreign currency denominated revenues outstanding at December 31,
2001. See "Item 7A. Quantitative and Qualitative Disclosures about Market
Risk."

Cost Structure

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

  Distribution expenses consist primarily of the costs of advertising and
preparing release prints. The costs of advertising associated with a major
domestic theatrical motion picture release are significant and typically

                                      33
<PAGE>

involve national and target market media campaigns, as well as public
appearances of a film's stars. These advertising costs are separate from the
advertising costs associated with other domestic distribution channels and the
international market.

  The major studios generally fund production costs from cash flow generated
by motion picture and related distribution activities or bank and other
financing methods. Over the past decade, expenses in the motion picture
industry have increased rapidly as a result of increased production costs and
distribution expenses. See "Item 1. Business--The Motion Picture and
Television Industry, Motion Picture Production." Additionally, each of the
major studios must fund substantial overhead costs, consisting primarily of
salaries and related costs of the production, distribution and administrative
staffs, as well as facilities costs and other recurring overhead.

  Collective Bargaining Agreements. The motion picture and television programs
produced by MGM Studios, and the other major studios in the United States,
generally employ actors, writers and directors who are members of the Screen
Actors Guild, Writers Guild of America, and Directors Guild of America,
pursuant to industry-wide collective bargaining agreements. The collective
bargaining agreement with Writers Guild of America was successfully
renegotiated and became effective beginning May 2, 2001 for a term of three
years. Negotiations regarding the collective bargaining agreement with Screen
Actors Guild were successfully completed on July 3, 2001 and the agreement was
ratified effective as of July 1, 2001, for a term of three years. The
Directors Guild of America collective bargaining agreement was successfully
renegotiated and ratification is expected. When ratified, it will have a term
of three years from July 1, 2002. Many productions also employ members of a
number of other unions, including without limitation the International
Alliance of Theatrical and Stage Employees and Teamsters. A strike by one or
more of the unions that provide personnel essential to the production of
motion pictures or television programs could delay or halt our ongoing
production activities. Such a halt or delay, depending on the length of time
involved, could cause delay or interruption in our release of new motion
pictures and television programs and thereby could adversely affect our cash
flow and revenues. Our revenues from motion pictures and television programs
in our library should not be affected and may partially offset the effects of
a strike to the extent, if any, that television exhibitors buy more library
product to compensate for interruption in their first-run programming.

  Accounting for Motion Picture and Television Costs. In accordance with
accounting principles generally accepted in the United States and industry
practice (see "Industry Accounting Practices"), we amortize the costs of
production, including capitalized interest and overhead, as well as
participations and talent residuals, for feature films and television
programming using the individual-film-forecast method under which such costs
are amortized for each film or television program in the ratio that revenue
earned in the current period for such title bears to management's estimate of
the total revenues to be realized from all media and markets for such title.
Effective January 1, 2001, all exploitation costs, including advertising and
marketing costs, are expensed as incurred. Theatrical print costs are
amortized over the periods of theatrical release of the respective
territories.

  Management regularly reviews, and revises when necessary, its total revenue
estimates on a title-by-title basis, which may result in a change in the rate
of amortization and/or a write-down of the film or television asset to
estimated fair value. These revisions can result in significant quarter-to-
quarter and year-to-year fluctuations in film write-downs and amortization. A
typical film or television program recognizes a substantial portion of its
ultimate revenues within the first two years of release. By then, a film has
been exploited in the domestic and international theatrical markets and the
domestic and international home video markets, as well as the domestic and
international pay television and pay-per-view markets, and a television
program has been exploited on network television or in first-run syndication.
A similar portion of the film's or television program's capitalized costs
should be expected to be amortized accordingly, assuming the film or
television program is profitable.

  The commercial potential of individual motion pictures and television
programming varies dramatically, and is not directly correlated with
production or acquisition costs. Therefore, it is difficult to predict or
project a trend of our income or loss. However, the likelihood that we report
losses, particularly in the year of a motion picture's release, is increased
by the industry's method of accounting which requires the immediate
recognition of the entire loss (through increased amortization) in instances
where it is estimated the ultimate revenues of a motion picture or television
program will not recover our capitalized costs. On the other hand, the profit
of a profitable

                                      34
<PAGE>

motion picture or television program must be deferred and recognized over the
entire revenue stream generated by that motion picture or television program.
This method of accounting may also result in significant fluctuations in
reported income or loss, particularly on a quarterly basis, depending on our
release schedule, the timing of advertising campaigns and the relative
performance of individual motion pictures or television programs.

  Industry Accounting Practices. Beginning January 1, 2001 we adopted new
accounting rules (see "New Accounting Pronouncements" below) which require,
among other changes, that exploitation costs, including advertising and
marketing costs, be expensed as incurred. Theatrical print costs are 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. The current practice
dramatically increases the likelihood of reporting losses upon a film's
theatrical release, but will provide for increased returns when a film is
released in the ancillary markets of home video and television, when we incur
a much lower proportion of advertising costs. Additional provisions under the
new accounting rules include changes in revenue recognition and accounting for
development costs and overhead, and reduced amortization periods for film
costs.

  New Accounting Pronouncements. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 139,
"Rescission of FASB 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 Statement of Financial Accounting Standards
No. 53, "Financial Reporting by Producers and Distributors of Motion Picture
Films." The companies that were previously subject to the requirements of
Statement of Financial Accounting Standards No. 53 are following the guidance
in American Institute of Certified Public Accountants Statement of Position
00-2, "Accounting by Producers or Distributors of Films," issued in June 2000.
Statement of Position 00-2 establishes new accounting and reporting standards
for all producers and distributors that own or hold the rights to distribute
or exploit films. Statement of Position 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 Accounting
Principles Board Opinion No. 20, "Accounting Changes." We adopted the
statement of position on January 1, 2001, and recorded a one-time, non-cash
cumulative effect charge to earnings of $382.3 million, primarily to reduce
the carrying value of our 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, we anticipate that the new rules will significantly impact our
results of operations for the foreseeable future. Additionally, under the
prior accounting rules we classified additions to film costs as an investing
activity in the Statement of Cash Flows. In accordance with Statement of
Position 00-2, we now classify additions to film costs as an operating
activity. For comparative purposes, we have reclassified prior period cash
flow statements to conform with the new presentation.

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of Financial Accounting Standards
Board No. 133,"and by Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities-
an Amendment of Financial Accounting Standards Board Statement No. 133," which
is effective for all quarters of fiscal years beginning after June 15, 2000.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. We adopted Statement of Financial
Accounting Standards No. 133 beginning January 1, 2001, and recorded a one-
time, non-cash cumulative effect adjustment in stockholders' equity and other
comprehensive income (loss) of $0.5 million. We do not expect the adoption of
Statement of Financial Accounting Standards No. 133 to materially impact our
results of operations.

  In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations." This
statement has eliminated the flexibility to account for some

                                      35
<PAGE>

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. We adopted SFAS No. 141 as of July 1, 2001, and the impact of such
adoption did not have a material adverse impact on our financial statements.

  In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. We will adopt
Statement of Financial Accounting Standards No. 142 beginning January 1, 2002,
and upon adoption we do not currently anticipate any impairment of goodwill
and other intangible assets already included in the financial statements. We
expect to receive future benefits from previously acquired goodwill and other
intangible assets over an indefinite period of time, and as such plan to
forego all related amortization expense, $14.7 million for the years ended
December 31, 2001 and 2000 and $14.9 million for the year ended December 31,
1999. In addition, due to our one quarter reporting lag related to the cable
channels, we will continue to amortize our cost basis in excess of underlying
equity through March 31, 2002.

  In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. We
will implement Statement of Financial Accounting Standards No. 143 on January
1, 2003. The impact of such adoption is not anticipated to have a material
effect on our financial statements.

  In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 Statement of Financial Accounting Standards 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 Accounting
Principles Board 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. We
will adopt Statement of Financial Accounting Standards No. 144 beginning
January 1, 2002. The impact of such adoption is not anticipated to have a
material effect on our financial statements.

                                      36
<PAGE>

Results of Operations

  The following table sets forth our reported operating results for the years
ended December 31, 2001, 2000 and 1999. Due to the adoption of the new
accounting rules on January 1, 2001 (see "New Accounting Pronouncements"
above), the operating results in 2001 are not comparable to the operating
results in 2000. Additionally, as stated in the financial statements and
related notes thereto, in the year ended December 31, 1999, we incurred
certain restructuring and other charges aggregating $214.6 million related to
changes in senior management, a corresponding review of our operations and
film projects in various stages of development and production, and other
related costs. We also accelerated the expiration of our home video
distribution agreement with Warner Home Video, which resulted in a $225.0
million charge included in operating results in 1999. The operating results in
2000, therefore, are not comparable to the operating results in 1999.

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                            ----------------------------------
                                               2001        2000        1999
                                            ----------  ----------  ----------
                                               (in thousands) (unaudited)
<S>                                         <C>         <C>         <C>
Revenues:
  Feature films............................ $1,217,969  $1,058,296  $  888,303
  Television programs......................    137,967     139,229     205,719
  Other....................................     31,595      39,922      48,411
                                            ----------  ----------  ----------
    Total revenues.........................  1,387,531   1,237,447   1,142,433
                                            ----------  ----------  ----------
Operating income (loss):
  Feature films............................    101,842     200,478     (77,590)
  Television programs......................     12,715      (2,649)     27,602
  Other....................................     14,081      17,768      26,006
  General and administration 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 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) 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)
                                            ==========  ==========  ==========
</TABLE>

  As discussed above, on January 1, 2001 we adopted Statement of Position 00-
2, which established new accounting and reporting standards for all producers
and distributors that own or hold the rights to distribute or exploit films
(see "Industry Accounting Practices"). As a result of the adoption of the new
accounting rules, as of January 1, 2001 we recorded a one-time, non-cash
cumulative effect charge to the consolidated statement of operations of $382.3
million, primarily to reduce the carrying value of our film and television
inventory.

  In the year ended December 31, 2001, our operating income, earnings before
interest, taxes, depreciation and amortization (EBITDA), and net income before
cumulative effect of accounting change were reduced by $62.0 million due to
the implementation of the new accounting rules as compared to the accounting
rules in place in the prior year periods under Statement of Financial
Accounting Standards No. 53. These earnings reductions are solely related to
adopting the new accounting standard and will not impact how we manage our
businesses.


                                      37
<PAGE>

  Unconsolidated companies include our investment in the Rainbow Media Group
cable channels and our investment in an on-demand movie service joint venture
(see "Recent Developments" above), as well as various interests in 14
international cable channels, the majority of which are accounted for under
the equity method. Consolidated and unconsolidated companies' revenues,
operating income (loss) and EBITDA are as follows:

<TABLE>
<CAPTION>
                                                  2001       2000       1999
                                               ---------- ---------- ----------
                                                  (in thousands) (unaudited)
<S>                                            <C>        <C>        <C>
Revenues
  Consolidated companies...................... $1,387,531 $1,237,447 $1,142,433
  Unconsolidated companies....................     77,674     32,744     15,205
                                               ---------- ---------- ----------
    Total..................................... $1,465,205 $1,270,191 $1,157,638
                                               ========== ========== ==========
Operating income (loss)
  Consolidated companies...................... $    2,994 $  101,245 $ (432,109)
  Unconsolidated companies....................        849      4,126     (4,660)
                                               ---------- ---------- ----------
    Total..................................... $    3,843 $  105,371 $ (436,769)
                                               ========== ========== ==========
EBITDA
  Consolidated companies...................... $   35,946 $  129,893 $ (407,655)
  Unconsolidated companies....................     20,021      4,744     (4,066)
                                               ---------- ---------- ----------
    Total..................................... $   55,967 $  134,637 $ (411,721)
                                               ========== ========== ==========
</TABLE>

  As previously discussed under "Industry Accounting Practices" above, on
January 1, 2001 we adopted new accounting rules for motion picture producers
and distributors. Had we been reporting under the accounting rules in place
prior to January 1, 2001, in the year ended December 31, 2001 consolidated
operating income would have been $65.0 million, a decrease of $36.2 million,
or 36 percent, as compared to 2000, and consolidated EBITDA would have been
$98.0 million, a decrease of $31.9 million, or 25 percent, as compared to
2000.

  While management considers EBITDA to be an important measure of comparative
operating performance, it should be considered in addition to, but not as a
substitute for or superior to, operating income, net earnings, cash flow and
other measures of financial performance prepared in accordance with accounting
principles generally accepted in the United States. EBITDA does not reflect
cash available to fund cash requirements, and the items excluded from EBITDA,
such as depreciation and non-film amortization, are significant components in
assessing our financial performance. Other significant uses of cash flows are
required before cash will be available to us, including debt service, taxes
and cash expenditures for various long-term assets. Our calculation of EBITDA
may be different from the calculation used by other companies and, therefore,
comparability may be limited. For purposes of our calculation, unconsolidated
EBITDA includes unconsolidated operating income (loss) and the add-back of
depreciation expense and amortization of intangible assets of $19.2 million
for the year ended December 31, 2001 and $0.6 million for the years ended
December 31, 2000 and 1999, respectively.

  See further details of operating changes under segments discussion below.

 Feature Films

  Consolidated feature films revenues, operating income and EBITDA are as
follows:

<TABLE>
<CAPTION>
                                                   2001       2000      1999
                                                ---------- ---------- --------
                                                  (in thousands) (unaudited)
<S>                                             <C>        <C>        <C>
Revenues....................................... $1,217,969 $1,058,296 $888,303
Operating income (loss) and EBITDA............. $  101,842 $  200,478 $(77,590)
</TABLE>

 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

  Revenues. Feature film revenues increased by $159.7 million, or 15 percent,
to $1,218.0 million in the year ended December 31, 2001 compared to the year
ended December 31, 2000.

  Worldwide theatrical revenues increased by $89.0 million, or 62 percent, to
$232.0 million in 2001, principally due to the successful releases of
Hannibal, Legally Blonde, Heartbreakers, Jeepers Creepers and

                                      38
<PAGE>

Bandits. In 2000, significant worldwide theatrical revenues were generated by
The World Is Not Enough, which was initially released in November 1999, and by
the domestic theatrical releases of Return To Me and Autumn In New York.
Overall, in 2001, we released 11 new feature films domestically and eight new
films internationally. In 2000, we released eight new feature films
domestically and five new films internationally.

  Worldwide home video revenues increased by $46.3 million, or nine percent,
to $584.5 million in 2001. In 2001, we released Hannibal, Legally Blonde,
Heartbreakers, Autumn In New York and Antitrust in the domestic home video
marketplace, as well as the re-release of Silence of the Lambs, When Harry Met
Sally and the Rocky series, among others, on DVD. In 2000, our home video
releases included The World Is Not Enough, The Thomas Crown Affair, Stigmata
and Supernova in worldwide markets. Included in the increase in worldwide home
video revenues was the continued growth in home video sales of film library
product, which increased by 57 percent in 2001. In 2001, DVD sales alone
increased to $388.1 million, or 73 percent, from $224.0 million in 2000. The
increase in DVD sales was partially offset by a drop in videocassette format
sales, resulting in an approximate nine percent increase in worldwide home
video sales. Additionally, home video revenues in 2001 reflected a favorable
settlement with a former subdistributor of our product. Such settlements could
be lower in future periods, as the Company now self-distributes its films
domestically and in certain international markets.

  Worldwide pay television revenues from feature films increased by $10.7
million, or seven percent, to $171.5 million in 2001, principally due to the
delivery of six new films, Autumn In New York, Return To Me, Antitrust, Three
Strikes, Supernova and Things You Can Tell Just By Looking At Her, as well as
a significant new license of library product, to domestic pay television.
Correspondingly, in 2000 we delivered The World Is Not Enough, The Thomas
Crown Affair, Stigmata, The Mod Squad, The Rage: Carrie 2 and Tea With
Mussolini, among others, to domestic pay television. Network television
revenues decreased by $41.6 million, or 95 percent, to $2.3 million in 2001,
principally due to the lack of new films delivered to network television as
compared to the delivery in 2000 of Tomorrow Never Dies as well as a new
licensing arrangement for the James Bond movie series. Worldwide syndicated
television revenues from feature films increased by $55.4 million, or 35
percent, to $212.7 million in 2001, principally due to the licensing of Ronin,
At First Sight, Species 2, The Mod Squad and The Rage: Carrie 2 in domestic
markets, and sales in international markets for The World Is Not Enough,
Tomorrow Never Dies, Ronin and The Man In The Iron Mask, among others.

  Other feature film revenues decreased by $0.2 million, or one percent, to
$15.0 million in 2001.

  Operating Results. Operating income and EBITDA from feature films decreased
by $98.6 million, or 49 percent, to $101.8 in 2001. The decrease in operating
income and EBITDA from feature films reflected the implementation of the new
accounting rules upon the adoption of Statement of Position 00-2 on January 1,
2001, which resulted in $105.9 million of additional theatrical advertising
and print costs expensed in 2001, as well as the disappointing performances of
What's The Worst That Could Happen, Bandits and Josie and the Pussycats.
Partially offsetting the aforementioned decreases in earnings were significant
operating profits generated from the successful theatrical and home video
releases of Hannibal and Legally Blonde, the re-release on home video of
Silence of the Lambs, the successful domestic theatrical release of Jeepers
Creepers, and increased film library sales from various home video promotions,
as well as lower third party distribution expenses.

  Operating results for feature films were also positively impacted in 2001
due to the significant increase in DVD sales and new television licensing
agreements. The growth in the DVD and television markets had a favorable
impact on our film amortization rates in 2001, which was partially offset by
advertising costs incurred for unreleased film product at December 31, 2001,
which are required to be expensed under the new accounting rules. The
aggregate effect of these items resulted in a net favorable impact on our
operating income in 2001 of approximately $9.1 million.

  Operating results in 2000 benefited from prior accounting rules in which
theatrical advertising and print costs were capitalized and amortized under
the income forecast method in accordance with Statement of Financial
Accounting Standards No. 53. Operating results in 2000 also included profits
earned from the worldwide theatrical receipts generated by The World Is Not
Enough, and the home video release of The World Is Not Enough, The Thomas
Crown Affair and Stigmata. Additionally, we had insignificant feature film
write-downs in 2000.

                                      39
<PAGE>

 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

  Revenues. Feature film revenues increased by $170.0 million, or 19 percent,
to $1,058.3 million in the year ended December 31, 2000 compared to the year
ended December 31, 1999.

  Worldwide theatrical revenues decreased by $108.3 million, or 43 percent, to
$143.0 million in 2000, primarily due to fewer releases in 2000 compared to
1999. Overall, in 2000 we released eight feature films in the domestic
theatrical marketplace, four of which were released on a limited distribution
basis, and five new films were released in international markets. Releases in
2000 included Autumn in New York and Return To Me, as well as the continued
release of The World Is Not Enough in worldwide markets. In 1999, we released
11 new feature films domestically and six new films internationally.
Theatrical revenues in 1999 benefited from the successful releases of The
World Is Not Enough, The Thomas Crown Affair and Stigmata.

  Worldwide home video revenues increased by $185.6 million, or 53 percent, to
$538.2 million in 2000. In 2000, home video revenues reflected the release of
the successful films The World Is Not Enough, The Thomas Crown Affair and
Stigmata, as well as new library sales promotions including the James Bond
movie series. In 1999, our domestic home video releases included Ronin, At
First Sight, The Rage: Carrie 2 and The Mod Squad. The continued growth in the
digital video disc ("DVD") market also contributed to the increase in home
video revenues. DVD sales increased to $224.0 million in 2000 from
$79.4 million in 1999.

  Worldwide pay television revenues from feature films increased by $45.2
million, or 39 percent, to $160.9 million in 2000, principally due to the
delivery to domestic pay television of The World Is Not Enough, The Thomas
Crown Affair and Stigmata, which generated significant license fees, as well
as increased revenue from our recently amended licensing agreement with
Showtime Networks Inc. In 1999, we delivered The Man In The Iron Mask, Ronin
and Disturbing Behavior, among others, to domestic pay television, which
generated lower license fees than the films in 2000. Network television
revenues from feature films increased by $33.6 million, or 328 percent, to
$43.9 million in 2000 as we delivered Tomorrow Never Dies to network
television and entered into a new licensing arrangement for additional titles
in the James Bond movie series. There were no comparable films delivered in
1999. Worldwide syndicated television revenues from feature films increased by
$15.5 million, or 11 percent, to $157.2 million in 2000, principally due to
the basic cable delivery of Red Corner and increased library sales in
international markets.

  Other feature film revenues decreased by $1.6 million, or 10 percent, to
$15.1 million in 2000 due to lower third party royalty income collected in the
period.

  Operating Results. Operating income from feature films increased by $278.1
million to $200.5 million in 2000 as compared to an operating loss of $77.6
million in 1999. The increase in operating income reflected the increased
revenues discussed above as well as reduced third-party distribution fees,
principally due to the termination of the Warner Home Video and UIP
distribution arrangements. Additionally, operating results in 1999 reflected
feature film write-downs of $51.4 million and additional reserves of $129.4
million for charges regarding a re-evaluation in June 1999 of several film
projects in various stages of development and production associated with the
changes in our senior management, which resulted in aggregate film-related
charges of $180.8 million. There were no comparable charges in 2000.

 Television Programming

  Consolidated television programming revenues, operating income and EBITDA
are as follows:

<TABLE>
<CAPTION>
                                                      2001     2000      1999
                                                    -------- --------  --------
                                                    (in thousands) (unaudited)
   <S>                                              <C>      <C>       <C>
   Revenues........................................ $137,967 $139,229  $205,719
   Operating income and EBITDA..................... $ 12,715 $ (2,649) $ 27,602
</TABLE>

                                      40
<PAGE>

 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

  Revenues. Television programming revenues decreased by $1.3 million, or one
percent, to $138.0 million in the year ended December 31, 2001 compared to the
year ended December 31, 2000.

  Worldwide pay television revenues decreased by $0.6 million, or three
percent, to $20.1 million in 2001. We had only one series, Stargate SG-1,
airing on domestic pay television in 2001, compared to two series, Outer
Limits and Stargate SG-1, in 2000. Worldwide syndicated television programming
revenues increased by $0.1 million, or one percent, to $102.4 million in 2001,
primarily due to increased library sales in domestic markets than in 2000.
Worldwide home video revenues with respect to television programming decreased
by $0.1 million, or one percent, to $14.5 million in 2001, primarily due to
lower sales of Stargate SG-1 than in 2000.

  Operating Results. Operating income and EBITDA from television programming
increased to $12.7 million in 2001 from a loss of $2.6 million in 2000,
principally due to a favorable settlement of a contractual dispute with a
customer as well as lower programming write-downs than in 2000.

 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

  Revenues. Television programming revenues decreased by $66.5 million, or 32
percent, to $139.2 million in the year ended December 31, 2000 compared to the
year ended December 31, 1999.

  We had no network television revenues for programming in 2000 as compared to
network revenues in 1999 of $10.7 million, when we had The Magnificent Seven
series and two television movies in broadcast on network television. Worldwide
pay television revenues decreased by $0.7 million, or 3 percent, to $20.7
million in 2000, due to the delivery of fewer made-for-television movies in
2000 than in 1999. Additionally, in 1999 we recognized $8.2 million in
consideration for the termination of certain domestic pay television
contractual commitments. There were no such transactions in 2000.

  Worldwide syndicated television programming revenues decreased by $50.3
million, or 33 percent, to $102.3 million in 2000, primarily due to lower
basic cable sales than in 1999, which included significant new sales for the
series The Outer Limits, Poltergeist: The Legacy and In the Heat of the Night.
Worldwide home video revenues with respect to television programming increased
by $2.8 million, or 24 percent, to $14.6 million in 2000, primarily due to the
release of the animated video Tom Sawyer.

  Operating Results. We incurred an operating loss from television programming
of $2.6 million in 2000 as compared to operating income of $27.6 million in
1999. The decrease reflected the reduced revenues discussed above, as well as
increased programming write-downs of $19.1 million in 2000 as compared to
write-downs of $8.5 million in 1999.

 Other Businesses

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

<TABLE>
<CAPTION>
                                                         2001    2000    1999
                                                        ------- ------- -------
                                                            (in thousands)
                                                              (unaudited)
   <S>                                                  <C>     <C>     <C>
   Revenues............................................ $31,595 $39,922 $48,411
   Operating income and EBITDA......................... $14,081 $17,768 $26,006
</TABLE>

 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

  Revenues. Revenues from other businesses decreased by $8.3 million, or 21
percent, to $31.6 million in 2001. Operating results in 2001 included consumer
products revenue of $12.0 million and music soundtrack and

                                      41
<PAGE>

royalty revenue of $10.5 million, as compared to consumer products revenue of
$11.2 million and music soundtrack and royalty revenue of $8.6 million in
2000. Interactive media revenues were $8.0 million in 2001 as compared to
revenues of $14.1 million in 2000, which included revenues realized from the
successful release of the interactive game version of Tomorrow Never Dies. In
2001, we released the interactive game Bond Agent Under Fire. Additionally,
revenues from other businesses in 2001 include the receipt of $1.1 million in
third party audit recoveries and other miscellaneous income as compared to
higher recoveries of $6.0 million in 2000.

  Operating Results. Operating income and EBITDA from other businesses
decreased by $3.7 million, or 21 percent, to $14.1 million in 2001,
principally due to the lower revenues mentioned above which included the
decrease in audit recoveries compared to the prior year period. Expenses for
other businesses include interactive product costs of $4.1 million in 2001 as
compared to $4.4 million of such costs in 2000. Consumer products cost of
sales were $2.6 million in 2001 and $3.0 million in 2000. Overhead costs
related to other businesses aggregated $8.3 million in 2001 and $7.1 million
in 2000. Other expenses aggregated $2.5 million in 2001 and $7.7 million in
2000, which included higher costs associated with the development of our
website, distribution expenses related to music and branded programming
services, as well as foreign currency transaction losses.

 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

  Revenues. Revenues from other businesses decreased by $8.5 million, or 18
percent, to $39.9 million in 2000. Operating results in 2000 included consumer
products revenue of $11.2 million and music soundtrack and royalty revenue of
$8.6 million, as compared to consumer products revenue of $10.7 million and
music soundtrack and royalty revenue of $9.7 million in 1999. Interactive
media revenues increased by $4.3 million, or 44 percent, to $14.1 million in
2000 as compared to 1999, principally related to increased royalties from the
release of the interactive game version of Tomorrow Never Dies. Additionally,
operating results in 2000 included the receipt of $6.0 million in third party
audit recoveries and other miscellaneous income as compared to higher
recoveries of $18.3 million in 1999, which included the settlement of several
significant third party audits.

  Operating Results. Operating income and EBITDA from other businesses
decreased by $8.2 million, or 32 percent, to $17.8 million in 2000 as compared
to 1999. Expenses for other businesses included interactive product costs of
$4.4 million in 2000 as compared to higher development costs of $7.9 million
in 1999. Consumer products cost of sales were $3.0 million in 2000 as compared
to $3.4 million in 1999. Overhead charges for other businesses aggregated $7.1
million in 2000 and $5.0 million in 1999. The increase in overhead charges
principally reflected the expansion of our new businesses related to website
and branded programming services. Other expenses aggregated $7.7 million in
2000 and $6.3 million in 1999.

 Corporate and Other

  General and Administrative Expenses. In 2001, general and administrative
expenses increased by $3.3 million, or four percent, to $92.7 million, as
compared to 2000 primarily due to higher employee incentive plan costs
partially offset by lower headcount, legal and professional fees and other
cost savings. In 2000, general and administration expenses increased by $6.9
million, or eight percent, to $89.4 million, as compared to 1999 primarily due
to a new employee incentive plan implemented in 2000, an increase in an
employee stock grant and lower legal recoveries collected than in 1999,
partially offset by cost savings associated with a company-wide restructuring
in June 1999.

  Severance and Related Costs. As discussed in Note 2 to the Consolidated
Financial Statements, in 1999 we incurred executive severance and other
related charges of $76.2 million attributable to changes in senior management
and the estimated costs of withdrawing from our arrangements with United
International Pictures.

  In 2000, we reduced previously charged reserves by $5.0 million due to a
negotiated settlement with United International Pictures regarding our
withdrawal from the joint venture. Additionally, in June 2000 we incurred
severance and other related charges of $1.3 million associated with the
closure of a foreign sales office.

                                      42
<PAGE>

  Contract Termination Fee. On March 12, 1999, we agreed to accelerate the
expiration of the right of Warner Home Video to distribute our product in the
home video marketplace under an agreement executed in 1990. In consideration
for the early expiration of the Warner Home Video agreement, we paid Warner
Home Video $225.0 million in 1999. The parties restructured the terms of the
Warner Home Video agreement, which functioned as an interim distribution
agreement, under which Warner Home Video distributed certain of our product in
the home video marketplace. Additionally, we reconveyed to Turner
Entertainment Co., Inc., an affiliate of Warner Home Video, the right that we
had to distribute in the home video markets worldwide until June 2001, 2,950
Turner titles that had been serviced under the Warner Home Video agreement.
The transitional video agreement expired on January 31, 2000, at which time we
commenced distribution of our home video product in the domestic market.
Concurrently, we contracted with Fox Entertainment Group, Inc. to distribute
our home video product internationally beginning on February 1, 2000. We
recorded a pre-tax contract termination charge in the year ended December 31,
1999 for $225.0 million for costs in connection with the early expiration of
Warner Home Video's rights under the Warner Home Video agreement.

  Depreciation and Non-Film Amortization. Depreciation and non-film
amortization in 2001 increased by $4.3 million, or 15 percent, to $33.0
million, and in 2000 increased by $4.2 million, or 17 percent, to
$28.6 million, due to increased fixed assets placed in service.

  Equity in Net Earnings of Affiliates. Equity in net earnings of affiliates
include our interest in the Rainbow Media Group cable channels acquired on
April 2, 2001 and our investment in an on-demand movie service joint venture
acquired on August 13, 2001, as well as various interests in 15 international
cable channels. Earnings in the Rainbow Media Group cable channels are being
reported on a one quarter lag. See "Recent Developments" and Note 5 of the
Notes to the Consolidated Financial Statements.

  In 2001, EBITDA from unconsolidated companies was $20.0 million, operating
profits were $0.8 million and net losses were $2.4 million, respectively. In
2001, we benefited from the inclusion of our share of the operating results of
the Rainbow Media Group cable channels, which contributed $15.5 million in
EBITDA. On a net basis, these results were offset by increased amortization of
intangible assets of $19.1 million related to our investment in the cable
channels. In 2000, EBITDA from unconsolidated companies was $4.7 million,
operating income was $4.1 million and net earnings were $2.0 million,
respectively. In 1999, EBITDA from unconsolidated companies was a loss of $4.1
million, operating losses were $4.7 million and net losses were $6.3 million,
which included aggregate start-up losses on our interest in the cable
programming joint venture, MGM Networks Latin America.

  Interest Expense, Net of Amounts Capitalized. Net interest expense in 2001
increased by $0.1 million, or one percent, to $51.5 million, primarily due to
increased borrowings offset by reduced interest rates on our debt and
increased capitalized interest on feature film production. In 2000, net
interest expense decreased by $35.0 million, or 41 percent, to $51.4 million
due to debt repayment associated with proceeds received in November 1999 from
our rights offering, as well as proceeds from new issuances of our common
stock in 2000.

  Interest and Other Income, Net. Interest and other income in 2001 decreased
by $3.2 million, or 25 percent, to $9.5 million, due to lower interest income
earned on our short-term investments, which decreased due to the $825.0
million cash investment in the Rainbow Media Group cable channels on April 2,
2001. In 2000, interest and other income increased by $8.9 million, or 237
percent, to $12.7 million due to interest income earned on our short-term
investments, which increased from retained proceeds from our November 1999
rights offering as well as the May 2000 and August 2000 issuances of our
common stock.

  Income Tax Provision. The provision for income taxes in 2001 increased by
$0.8 million, or six percent, to $14.3 million, and in 2000 increased by $3.7
million, or 38 percent, to $13.5 million, principally due to increased foreign
remittance taxes attributable to international distribution revenues.

                                      43
<PAGE>

Liquidity and Capital Resources

  General. Our operations are capital intensive. In recent years we have
funded our operations primarily from (i) the sale of equity securities, (ii)
bank borrowings and (iii) internally generated funds. During 2001, the net
cash provided by operating activities was $3.8 million, which included
additions to film and television costs of $391.6 million; net cash used in
investing activities was $844.8 million, which included our $825.0 million
investment in the Rainbow Media Group cable channels; and net cash provided by
financing activities (primarily sale of equity securities and bank borrowings)
was $766.9 million.

  Sales of Equity Securities. Historically, sales of our equity securities
have included proceeds from our initial public offering and Tracinda
Corporation's concurrent purchase of our common stock, which were completed in
November 1997, our 1998 rights offering, which was completed in November 1998,
and our 1999 rights offering, which was completed in November 1999.
Additionally, pursuant to a Form S-3 shelf registration statement filed with
the Securities and Exchange Commission, in 2000 we sold of 5,363,800 shares of
our common stock for aggregate net proceeds of $133.4 million.

  In February and March 2001, pursuant to our shelf registration statement, we
sold 16,080,590 shares of common stock for aggregate net proceeds of $310.6
million. Additionally, Tracinda purchased 15,715,667 shares of Series B
preferred stock for net proceeds of $325.0 million. On May 2, 2001, upon
stockholder approval, the Series B preferred stock was converted into
15,715,667 shares of common stock.

  On April 2, 2001, the proceeds of the equity offerings were used to pay a
portion of the $825.0 million cost to acquire a 20 percent interest in two
general partnerships which own and operate four cable channels, American Movie
Channel, Bravo, the Independent Film Channel and WE: Women's Entertainment
(formerly the Romance Classics). These partnerships were wholly-owned by
Rainbow Media Holdings, Inc., a majority-owned subsidiary of Cablevision
Systems Corporation. The acquisition was completed on April 2, 2001. We
obtained the rest of the funds needed for the purchase through borrowings of
$164.5 million under our credit facilities.

  Bank Borrowings. We have a $1.3 billion syndicated credit facility
consisting of (i) a six year $600.0 million revolving credit facility, (ii) a
$400.0 million seven and one-half year term loan and (iii) a $300.0 million
eight and one-half year term loan. As of February 1, 2002, $389.9 million,
including outstanding letters of credit, was available under our credit
facility, which also contains provisions allowing, under certain
circumstances, for an additional $200.0 million tranche.

  Currently, the revolving facility and the $400.0 million term loan bear
interest at 2.50 percent over the Adjusted LIBOR rate, as defined therein
(4.36 percent at February 1, 2002), and the $300.0 million term loan bears
interest at 2.75 percent over the Adjusted LIBOR rate (4.67 percent at
February 1, 2002). We have entered into three-year fixed interest rate swap
contracts in relation to a portion of our credit facility for a notional value
of $595.0 million at an average rate of approximately 5.90 percent, which
expire in July 2003. We have also entered into additional forward interest
rate swap contracts commencing in January 2002 for a notional value of $100.0
million at an average rate of approximately 2.34 percent, which expire in
January 2003.

  Remaining scheduled amortization of the term loans under our credit facility
is as follows: $73.0 million in 2002, $103.0 million in 2003, $103.0 million
in 2004, and $103.0 million in 2005, with the remaining balance due at
maturity. The revolving facility was entered into in October 1997 and matures
on September 30, 2003, subject to extension under certain conditions. We are
currently exploring alternatives regarding the renegotiation of our revolving
facility. There can be no assurances we will be successful in renegotiating
our revolving facility.

  Our credit facility contains various covenants, including limitations on
indebtedness, dividends and capital expenditures, and maintenance of certain
financial ratios. Our credit facility was amended and restated on July 21,
2000, with less restrictive operating and financial covenants. Our credit
facility limits the amount of the investment in MGM which may be made by
Metro-Goldwyn-Mayer Studios Inc. and Orion Pictures Corporation, both of which
are wholly-owned subsidiaries, in the form of loans or advances, or purchases
of capital stock of MGM, up to a maximum aggregate amount of $500.0 million.
As of December 31, 2001, there are no outstanding

                                      44
<PAGE>

loans or advances to MGM by such subsidiaries, nor have such subsidiaries
purchased any capital stock of MGM. Restricted net assets of Metro-Goldwyn-
Mayer Studios Inc. and Orion Pictures Corporation at December 31, 2001 are
approximately $2.0 billion. Although we are in compliance with all terms of
our credit facility, there can be no assurances that we will remain in
compliance with such covenants or other conditions under our credit facility
in the future. We anticipate substantial continued borrowing under our credit
facility.

  Cash Used in Operating Activities. In 2001, cash provided by operating
activities was $3.8 million compared to cash used by operating activities of
$182.5 million in 2000. Included in cash used by operating activities were
additions to film and television costs of $391.6 million in 2001 and $811.0
million in 2000, which included capitalized exploitation costs of $159.3
million in 2000.

  Cash Used in Investing Activities. In 2001, cash used in investing
activities was $844.8 million, which included the $825.0 million investment in
the Rainbow Media Group cable channels, compared to cash used in investing
activities of $18.2 million in 2000.

  Cash Provided by Financing Activities. In 2001, cash provided by financing
activities was $766.9 million, which included $635.8 million in net proceeds
from the sale of our equity securities, $159.0 million of bank borrowings and
$6.9 million for the exercise of stock options, partially offset by net
repayments of borrowed funds of $34.8 million. In 2000, cash provided by
financing activities was $125.8 million, consisting of $133.4 million in net
proceeds from the sale of equity securities and $4.8 million received from the
exercise of stock options, partially offset by $9.1 million in net repayments
of borrowed funds.

  Commitments. 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>

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

  We are obligated to fund 50 percent of the expenses of MGM Networks Latin
America up to a maximum of approximately $24.0 million. We have funded
approximately $23.0 million under such obligation as of December 31, 2001.

  Anticipated Needs. Our current strategy and business plan call for
substantial on-going investments in the production of new feature films and
television programs. Furthermore, we may wish to continue to make investments
in new distribution channels to further exploit our motion picture and
television library. We plan to continue to evaluate the level of such
investments in the context of the capital available to us and changing market
conditions. Currently, we would require additional sources of financing if we
decided to make any additional significant investments in new distribution
channels.

  We believe that the amounts available under the revolving facility and cash
flow from operations will be adequate for us to conduct our operations in
accordance with our business plan for at least the next twelve months. This
belief is based in part on the assumption that our future releases will
perform as planned. Any significant decline in the performance of our films
could adversely impact our cash flows and require us to obtain additional
sources of funds. In addition to the foregoing sources of liquidity, we are
currently considering various film financing alternatives.

                                      45
<PAGE>

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

  We intend to continue to pursue our goal of becoming an integrated global
entertainment content company. In connection with our pursuit of this goal, we
may consider various strategic alternatives, such as business combinations
with companies with strengths complementary to those of ours, other
acquisitions and joint ventures, as opportunities arise. The nature, size and
structure of any such transaction could require us to seek additional
financing.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

  We are exposed to the impact of interest rate changes as a result of our
variable rate long-term debt. Our amended and restated credit agreement
requires that we maintain interest rate 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 term loans outstanding through July
2003. Accordingly, we have entered into several interest rate swap agreements
whereby we agree with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate amounts calculated by
reference to an agreed notional principal amount. The swap agreements expire
in July 2003. Based on scheduled loan amortization, we will be in compliance
with the credit agreement's hedge provisions through that time.

  At December 31, 2001, $73.5 million of our term debt was not hedged.
Additionally, as of February 1, 2002, $90.0 million of our borrowings under
our revolving credit facility are exposed to interest rate risk.

  The following table provides information about our interest rate swaps
outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                                 Amounts scheduled
                                                 for maturity for    Estimated
                                                  the year ending  fair value at
                                                   December 31,    December 31,
                                                       2003            2001
                                                 ----------------- -------------
   <S>                                           <C>               <C>
   Interest Rate Swaps
   Variable to fixed:
     Notional value (in thousands)..............     $595,000        $(26,145)
     Average pay rate...........................        5.897%
     Spot rate..................................        2.083%
</TABLE>

  We have also entered into additional forward interest rate swap contracts
commencing in January 2002 for a notional value of $100.0 million at an
average pay rate of approximately 2.340 percent, which expire in January 2003.
The estimated fair value of these forward interest rate swap contracts at
February 1, 2002 was not material.

                                      46
<PAGE>

  Because approximately 25 percent of our revenues are denominated, and we
incur certain operating and production costs in foreign currencies, we are
subject to market risks resulting from fluctuations in foreign currency
exchange rates. In certain instances, we enter into foreign currency exchange
contracts in order to reduce exposure to changes in foreign currency exchange
rates that affect the value of our firm commitments and certain anticipated
foreign currency cash flows. We currently intend to continue to enter into
such contracts to hedge against future material foreign currency exchange rate
risks. The following table provides information about our foreign currency
forward contracts outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                                Amounts scheduled
                                                for maturity for    Estimated
                                                 the year ending  fair value at
                                                  December 31,    December 31,
                                                      2002            2001
                                                ----------------- -------------
   <S>                                          <C>               <C>
   Foreign Currency Forward Contracts
     Contract amount (in thousands) (receive
      CAD, pay $US)............................      $33,997          $(958)
     Spot rate.................................       1.5940
     Forward rate..............................       1.5472
     Contract amount (in thousands) (receive
      GBP, pay $US)............................      $64,220          $ 100
     Spot rate.................................       1.4545
     Forward rate..............................       1.4448
</TABLE>

  In January 2002, we also entered into additional foreign currency forward
contracts denominated in pound sterling aggregating GBP 7.0 million at an
average rate of 1.4307, which expire in various dates though March 2002. At
February 1, 2002, these foreign currency forward contracts had an estimated
fair value of $(0.2) million.

Item 8. Financial Statements and Supplementary Data

  The Reports of Independent Public Accountants, our Consolidated Financial
Statements and Schedules and Notes thereto appear in a separate section of
this Form 10-K (beginning on page 52 following Part IV). The index to our
Consolidated Financial Statements is included in Item 14.

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

  None

                                      47
<PAGE>

                                   PART III

Item 10. Directors and Executive Officers of Registrant

  The information required by Item 10 is set forth in the Proxy Statement
under the caption "Election of Directors" and incorporated herein by reference
except that the information regarding our executive officers is included in
Part I under the heading "Executive Officers of the Company."

Item 11. Executive Compensation

  The information required by Item 11 is set forth in the Proxy Statement
under the caption "Executive Compensation" and is incorporated herein by this
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The information required by Item 12 is set forth in the Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.

Item 13. Certain Relationships and Related Transactions

  The information required by Item 13 is set forth in the Proxy Statement
under the caption "Certain Relationships and Related Transactions" and is
incorporated herein by this reference.

                                      48
<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 at pages 53 to
    82.

    2. Financial Statement Schedules

      The financial statement schedules listed in the accompanying Index to
    Financial Statements are filed as part of this Form 10-K at pages 83 to
    90.

    3. Exhibits

      The exhibits listed in the accompanying Exhibit Index on pages 91 to
    93 are filed as part of this Form 10-K.

  (b) Reports on Form 8-K

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

                                      49
<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.

February 6, 2002

                                          METRO-GOLDWYN-MAYER INC.

                                                  /s/ Alex Yemenidjian
                                          By: _________________________________
                                                      Alex Yemenidjian
                                                  Chairman of the Board of
                                                       Directors and
                                                  Chief Executive Officer

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signature                           Title                   Date
             ---------                           -----                   ----

<S>                                  <C>                           <C>
      /s/ Alex Yemenidjian           Chairman of the Board of      February 6, 2002
____________________________________  Directors, Chief Executive
          Alex Yemenidjian            Officer and Director

   /s/ Christopher J. McGurk         Vice Chairman, Chief          February 6, 2002
____________________________________  Operating Officer and
       Christopher J. McGurk          Director

        /s/ James Aljian             Director                      February 6, 2002
____________________________________
            James Aljian

    /s/ Francis Ford Coppola         Director                      February 6, 2002
____________________________________
        Francis Ford Coppola

      /s/ Willie D. Davis            Director                      February 6, 2002
____________________________________
          Willie D. Davis

     /s/ Michael R. Gleason          Director                      February 6, 2002
____________________________________
         Michael R. Gleason

   /s/ Alexander M. Haig, Jr.        Director                      February 6, 2002
____________________________________
       Alexander M. Haig, Jr.

       /s/ Kirk Kerkorian            Director                      February 6, 2002
____________________________________
           Kirk Kerkorian

      /s/ Frank G. Mancuso           Director                      February 6, 2002
____________________________________
          Frank G. Mancuso
</TABLE>

                                      50
<PAGE>

<TABLE>
<CAPTION>
             Signature                           Title                   Date
             ---------                           -----                   ----

<S>                                  <C>                           <C>
     /s/ Priscilla Presley           Director                      February 6, 2002
____________________________________
         Priscilla Presley

   /s/ Henry D. Winterstern          Director                      February 6, 2002
____________________________________
        Henry D. Winterstern

       /s/ Jerome B. York            Director                      February 6, 2002
____________________________________
           Jerome B. York

      /s/ Daniel J. Taylor           Senior Executive Vice         February 6, 2002
____________________________________  President and Chief
          Daniel J. Taylor            Financial Officer
</TABLE>

                                       51
<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 Statement Schedules

Report of Independent Public Accountants..................................  83

Schedule I: Financial Information of Registrant...........................  84

Schedule II: Valuation and Qualifying Accounts and Reserves...............  90
</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>

                   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

                                      83
<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.

                                       84
<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.

                                       85
<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.

                                       86
<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.

                                       87
<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>


                                      88
<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.

                                      89
<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.


                                       90
<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>

                                       91
<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(1)  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
 21(1)     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.

 (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.

                                      92
<PAGE>

 (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.

                                      93