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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, 2000

                          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 12, 2001 was $767,926,711.

  The number of shares of the Registrant's common stock outstanding as of
February 12, 2001 was 218,137,488.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Certain portions of Registrant's proxy statement for the annual meeting to
be held on May 2, 2001 (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 10,100 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 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
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 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 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 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 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 2001, we agreed to invest $825 million in four cable channels
owned and operated by Rainbow Media Holdings, Inc. We intend to obtain the
cash for this transaction through sales of our equity securities. As of
February 12, 2001, we had sold approximately 10.7 million additional shares of
common stock to unaffilitated investors in a private placement pursuant to the
registration statement and 15.7 million shares of preferred stock (which will
become convertible into common stock, on a one-for-one basis, upon stockholder
approval) to Tracinda, for total consideration of $545.5 million. See "--
Recent Developments."

Recent Developments

  Cable Investment. On February 1, 2001, MGM agreed to invest $825 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 are
now 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
million investment will be used as follows: (1) $365 million will be used to
repay bank debt of the partnerships; (2) $295.5 million will be used to repay
intercompany loans from Cablevision and its affiliates; and (3) $164.5 million
will be added to the working capital of the partnerships. Our investment is to
be made no later than April 2, 2001.

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

  Sale of Preferred Stock to Tracinda. On February 7, 2001, we sold
approximately 15.7 million shares of our Series B preferred stock to Tracinda
for $325 million. We intend to use the net proceeds of this sale to help

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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 will become 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. Tracinda will have a demand registration right for
the common stock it receives upon conversion of the preferred stock. We expect
to obtain stockholder approval of the issuance of the common stock to Tracinda
at our next annual meeting of stockholders scheduled to be held on May 2,
2001. The Tracinda Group currently beneficially owns approximately 82.2
percent of our outstanding common stock (83.4 percent assuming conversion of
the preferred stock).

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 video, 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 decade, 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 258 in 2000 (42.3 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.

  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.


                                       4
<PAGE>

  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 video 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 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

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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 co-production/co-financing agreement with Universal;

  .  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
     Prods. (John Woo and Terence Chang);

  .  Entered into a "first look" agreement with Seth Jaret;

  .  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 ten to 15 motion pictures
annually through MGM Pictures across a variety of genres. Through UA Films, we
also intend to distribute annually an additional seven to ten 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 or 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 intend to continue to pursue our goal of becoming an integrated global
entertainment content company. In pursuit of this goal, we may consider
various strategic alternatives, such as business combinations with companies
with strengths complementary to 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. Acquisitions and other
strategic alternatives, however, 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 acquisitions that have been or may be completed by MGM or with
the integration of an acquired company's operations with those of MGM, and we
cannot assure you that the anticipated benefits of any acquisitions and
alternatives that have been, or will be, completed by us will be achieved. We
recently entered into an agreement to invest in four cable channels. See "--
Recent Developments."

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 10,100 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, 114 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. 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, 2000, approximately 70 percent of the theatrical motion
picture titles and approximately 67 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, 2000, 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,
with respect to approximately four percent of the library expire over the next
two years (i.e. through the end of 2002), with respect to another
approximately 14 percent over the seven years thereafter (from 2003 to 2010),
and with respect to another approximately 15 percent thereafter (from 2010
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, 2000, 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 40 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 million. Both
production units are supported by centralized marketing, sales, legal,
physical production and distribution functions.

  MGM Pictures plans to distribute approximately ten to 15 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 ten to 15 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 Prods. (John Woo and
Terence Chang), Seth Jaret 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 and our co-production agreement with Universal. In
April 1999, we entered into an agreement with Universal that increased our
commitment under our existing co-production arrangement by up to $100 million
in production expenses, of which $50 million would be available only with
respect to pictures from four significant outside production companies who
have business relationships with Universal. The motion pictures to be co-
produced under the arrangement will be selected over the next two years, but
we may incur the related production expenditures over a longer period of time.
We will distribute 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. There has been some
disagreement between us and Universal with regard to whether certain of the
projects which Universal has submitted to us for consideration under the co-
financing deal qualify for consideration under the terms of the deal; we
expect to engage in further discussions with Universal

                                      10
<PAGE>

to seek resolution of these issues. In addition, we co-produced with Universal
the feature film Hannibal (a sequel to The Silence of the Lambs). Under our
co-production arrangement with Universal, we will distribute the picture in
the domestic marketplace, with Universal being responsible for international
distribution. We share the production costs for Hannibal evenly with
Universal, and the receipts from the picture will also be divided evenly
between us and Universal.

  We have established UA Films as a filmmaker-oriented studio which will
release approximately seven to ten motion pictures each year. These motion
pictures will be produced or co-produced by UA Films or acquired through
negative pickups or other distribution arrangements and will include some
motion pictures in a variety of genres generally involving producers 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 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 2001 domestic theatrical release
schedule:

                                Release Schedule

<TABLE>
<CAPTION>
                          Approximate
          Title           Release Date          Summary              Principal Actors
          -----           ------------          -------              ----------------
<S>                      <C>            <C>                      <C>
Antitrust (MGM).........    Released    A computer programmer's  Ryan Phillipe, Rachel
                                        dream job at a hot       Leigh Cooke, Claire
                                        Silicon Valley firm      Forlani, Tim Robbins
                                        turns nightmarish when
                                        he discovers his boss
                                        has a secret and
                                        ruthless means of
                                        dispatching anti-trust
                                        problems.

Hannibal (MGM)..........    Released    After seven years,       Anthony Hopkins,
                                        Clarice Starling is      Julianne Moore, Ray
                                        reunited with Hannibal   Liotta, Giancarlo
                                        Lecter when a vengeful,  Giannini
                                        wealthy victim of the
                                        infamous killer uses
                                        Clarice to trap him.

Heartbreakers (MGM).....   March 2001   A beautiful mother and   Sigourney Weaver,
                                        daughter con-artist team Jennifer Love Hewitt,
                                        prey on unsuspecting     Gene Hackman, Jason Lee
                                        men, whom the mom
                                        romances, marries and
                                        divorces for big bucks,
                                        until the daughter falls
                                        in love with the latest
                                        sucker.

Ghostworld (UA).........    Undated     Two girl friends spend   Thora Birch, Scarlett
                                        the summer of their      Johannsen, Brad Renfro,
                                        waning adolescence       Steve Buscemi
                                        hanging out and trashing
                                        classmates and pathetic
                                        strangers as they face
                                        the unwelcome prospect
                                        of adulthood and the
                                        uncertain future of
                                        their complicated
                                        relationship.

Born Romantic (UA)......  Spring 2001   Urban drama that follows Craig Ferguson, Jane
                                        three lonely Londoners   Horrocks, Catherine
                                        and their search for     McCormack, Olivia
                                        love set against the     Williams
                                        backdrop of salsa
                                        dancing.

What's the Worst That      June 2001    When an egotistical      Danny DeVito, Martin
 Could Happen? (MGM)....                billionaire steals a $5  Lawrence, John Leguizamo
                                        ring from a professional
                                        thief, the thief makes
                                        it a matter of honor to
                                        steal the ring back, but
                                        doesn't count on
                                        outrageous circumstances
                                        that escalate things out
                                        of control.

Legally Blonde (MGM)....   July 2001    A flashy blonde goes to  Reese Witherspoon, Selma
                                        Stanford Law School to   Blair
                                        win back her boyfriend
                                        and discovers how to use
                                        her brain.

Original Sin (MGM)......  August 2001   A wealthy businessman    Antonio Banderas,
                                        marries a young woman he Angelina Jolie, Thomas
                                        knows only through       Jane
                                        correspondence, then
                                        learns about her
                                        ulterior motives.

Rollerball (MGM)........  August 2001   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.

Jeepers Creepers (UA)... September 2001 After making a horrific  Gina Phillips, Justin
                                        discovery in an old      Long
                                        abandoned church, Trish
                                        and her brother Darry
                                        watch their routine road
                                        trip home turn into a
                                        heartstopping race for
                                        their lives.
</TABLE>


                                       12
<PAGE>

<TABLE>
<CAPTION>
                           Approximate
          Title            Release Date          Summary              Principal Actors
          -----            ------------          -------              ----------------
<S>                       <C>            <C>                      <C>
Killing Me Softly (MGM).  September 2001 An American woman in     Heather Graham, Joseph
                                         London marries a         Fiennes
                                         domineering mountain
                                         climber after a torrid
                                         affair, and later
                                         suspects him of
                                         murdering previous
                                         lovers

Deuces Wild (UA)........    Fall 2001    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
                                         keep a drug-dealing
                                         rival gang off their
                                         turf.

CQ (UA).................    Fall 2001    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.

Monster (UA)............    Fall 2001    When a news crew sent to Sarah Polley, Robert
                                         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.

Pumpkin (UA)............    Fall 2001    A sorority girl through  Christina Ricci, Hank
                                         and through falls in     Harris
                                         love with the 19 year-
                                         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.

Windtalkers (MGM).......  November 2001  The story of an Anglo GI Nicholas 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.

Bandits (MGM)...........  December 2001  Two gentlemen bank       Bruce Willis, Billy Bob
                                         robbers fall in love     Thornton, Cate Blanchett
                                         with their hostage, a
                                         runaway wife who refuses
                                         to choose between them.

Beneath the Banyan Trees  Winter 2001/02 A scam artist travels to Matt Dillon, James Caan,
 (UA)...................                 Cambodia, anxious to     Natasha McElhone &
                                         collect what he's owed   Takeshi Kitano
                                         from his criminal
                                         mentor; when he arrives,
                                         however, he quickly
                                         discovers that he's in
                                         over his head...with
                                         potentially deadly
                                         consequences

Hart's War (MGM)........  Winter 2001/02 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.
</TABLE>

  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."

                                      13
<PAGE>

 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 1,035 hours
of television programming, of which approximately five percent remained to be
aired as of December 31, 2000. Historically, our television activities were
focused on the traditional network production business and made-for-television
movies, and many of the television programs in our library were produced as
network series. However, since the networks have substantially lowered the
license fees as a percentage of the budget for network television programming
in recent years, resulting in significantly larger production investment risks
for the producers of such programming, we altered our television strategy in
1994. See "--The Motion Picture and Television Industry."

  Since 1994, we have focused primarily on the development and production of
series for the first-run syndication business, which involves a lower
production investment risk for us, and movies and mini-series for both network
and off-network broadcasters. Our strategy is designed to (a) minimize up-
front capital investment through the production of series for the first-run
syndication business and through co-production arrangements, (b) minimize
risks associated with large deficit financing by developing product such as
two-hour movies or mini-series that generally offer stable, predictable cash
flows, (c) use valuable library assets such as The Outer Limits, Poltergeist,
Stargate and All Dogs Go to Heaven to develop recognizable products with
enhanced marketability and (d) develop alternative types of programming, such
as animated cartoon strips, talk shows, variety/magazine shows such as
National Enquirer's Uncovered, game shows such as Sex Wars and reality-based
programming such as LAPD--Life on the Beat.

  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, 2000; (b) 66
episodes (three seasons) of Poltergeist: The Legacy all of which have been
aired as of December 31, 2000; and (c) 110 episodes (five seasons) of Stargate
SG-1 of which 30 episodes remained to be aired as of December 31, 2000. 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, 2000, and we are
currently producing 22 new episodes of Outer Limits for USA/Sci Fi. All
episodes will be aired in 2001.

  The programming agreement with Showtime also includes a commitment by
Showtime to license eight made-for-television movies from us, three of which
remained to be produced as of December 31, 2000. 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, all of which remain to be produced as of December 31, 2000.

  In 1998, we obtained a commitment from Paxson Communications to license 88
episodes of Flipper, a one-hour series, which includes a production order for
44 episodes, all of which have been delivered. The series began airing in fall
1998 on Paxson's PAX NET network, comprised principally of owned and operated
stations, which cover in excess of 65 percent of U.S. television households.

  In addition to National Enquirer's Uncovered, which premiered in first-run
syndication in September 1999, and Sex Wars, which premiered in first run
syndication in September 2000, we are currently developing the following: Chat
Room America, a nightly, interactive talk show for network or cable
television; a new American Gladiators series to be financed and distributed
domestically by Tribune; Bull Durham, a one-hour dramatic

                                      14
<PAGE>

adaptation of our 1988 feature film for network or first-run syndication; Sea
Hunt, a one-hour action show based upon our 1960s adventure series; Mystic
Pizza, a one-hour dramatic adaptation of our 1988 feature film for network or
first-run syndication; The Thomas Crown Affairs, a one-hour adaptation of our
popular feature film for network or first-run syndication; Jeremiah, a one-
hour action series for Showtime; and Leap Years, a one-hour dramatic series
for Showtime. We are also currently developing I Want Kandee and Whatever as
potential teen series for network or cable.

  From time to time, we may produce series for network television on a
selective basis, which typically require deficit financing but generally offer
the potential for greater financial return.

  We intend to pursue joint ventures, co-productions and other partnering
arrangements for some of our existing or future series in order to minimize
the up-front capital investment and limit the financial risk to us with
respect to the production of those series.

  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." In
addition, our focus on first-run syndicated television programming is
generally licensed based on a pilot episode that we finance. If an
insufficient number of stations license the programming, our pilot costs will
not be recouped. 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 first-run syndicated 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.

                                      15
<PAGE>

  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 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 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 (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 worldwide re-release of the
James Bond video catalog conducted in connection with the November 1999
theatrical release of The World Is Not Enough. 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.

                                      16
<PAGE>

  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 1990, as part of the acquisition of MGM/UA by Pathe, MGM-Pathe (the
predecessor in interest to MGM Studios), MGM/UA and UA Pictures entered into a
long-term agreement with the predecessor to Warner Home Video, granting to
Warner Home Video certain home video distribution rights with respect to new
motion pictures and the motion picture library of MGM/UA and UA Pictures
throughout the world for a distribution fee expressed as a percentage of
worldwide home video revenues. The Warner Home Video agreement was originally
scheduled to expire in May 2003, with the home video rights of each of the
films still covered by the Warner Home Video agreement at that time reverting
to us five years after the film's initial availability in the U.S. home video
market. In 1999, we entered into an agreement with Warner Home Video and
Turner to accelerate the expiration of the Warner Home Video agreement. Under
this agreement, Warner Home Video completed its distribution of certain of our
product in the home video marketplace on January 31, 2000. As part of this
agreement, (a) we paid Warner Home Video $225.0 million and (b) we reconveyed
as of January 1, 1999 to Warner Home Video our right to distribute in the home
video markets worldwide until June 2001, approximately 2,950 titles from the
Old MGM library, the Turner library and all pre-1949 Warner titles, which
titles had been serviced under the Warner Home Video agreement.

  Even with the Warner Home Video agreement in effect, our home video sales
have increased since 1993. From 1993 to 2000, we increased our annual
worldwide home video gross revenue from feature films by approximately 122
percent, from $243.0 million to $538.2 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.

  We have handled the distribution of our product in the domestic home video
market since February 2000. We believe that the agreement to terminate the
Warner Home Video agreement, our transition to self-distribution in the
domestic market and our international agreement with Fox, as discussed below,
enables us to manage home video distribution in a more cost-effective manner
and further increase sales and profitability. Although we have experienced
video distribution management, we cannot assure you that we will not encounter
unanticipated problems related to the early termination of the Warner Home
Video agreement or the establishment of our own distribution infrastructure,
nor can we assure you that we will realize the anticipated benefits of self-
distribution in the domestic home video marketplace or distribution through
Fox in the international home video marketplace.

  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.

  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 of such agreements in the future. Although we can give you no assurance,
in part because of the recent introduction of these arrangements in the
industry, 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 new distribution technologies and emerging
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 ten million households by the end of 2000.
This rapid growth, combined with the strong desire among new DVD owners to

                                      17
<PAGE>

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
$79.4 million in 1999 to $224.0 million in 2000. We intend to continue rapid
expansion of our DVD library product into 2001. The development and/or
emergence of such distribution technologies, platforms and formats, however,
may create new risks to the Company's ability to protect its 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 various 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. 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.

  Domestic Free Television. We distribute our feature motion pictures to U.S.
and Canadian networks, local television stations in the U.S. and Canada and
basic cable networks. 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 after 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."

  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 will make an investment aggregating $825 million in two
general partnerships

                                      18
<PAGE>

owned by Rainbow. As a result, we will acquire a 20 percent interest in each
of these partnerships. 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."

  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 2000, we received $93.8 million in revenue from international pay
television distribution, accounting for eight 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 2000, we received $165.0
million in revenues under these agreements, accounting for 13 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.


                                      19
<PAGE>

  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 emerging
international premium film satellite 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.

  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 and as of December 31, 2000, are obligated to fund 50 percent of the
joint venture's expenses up to an additional $3.0 million. We have funded
approximately $21.0 million to the venture as of December 31, 2000. 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 MGM theatrical and
television product. Casa Club TV is a lifestyle channel offering home and
garden, food and other lifestyle programming. As of December 31, 2000, MGM
Networks Latin America distributed its signal to approximately 11.5 million
homes in 16 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 is expected to be available on basic cable to more than 80
percent of total television households in Israel in the second quarter of
2001. We will hold a 35 percent equity interest in the channel. We have
entered into a licensing agreement with the channel and will receive 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. MGM shall receive license fees for the programming
as well as a branding fee for the channel's use of the MGM brand.

  We have entered into an agreement with Zee TV (India) to launch an 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 thirty percent equity interest in the
venture, which was launched on November 1, 2000. Zee TV will be broadcast on
basic cable in India as part of a channel package called "Zee Networks." We
will receive license fees for the MGM programming and a branding fee for the
channel's use of the MGM brand.

Trademarks and Consumer Products

  We own the registered trademarks Metro-Goldwyn-Mayer, MGM, United Artists,
the MGM Lion Logo, UA, Orion, Cannon and variations thereof, as well as
trademarks, logos and other representations of characters,

                                      20
<PAGE>

such as The Pink Panther, from motion pictures and television series we
produced or distributed. In 2000, we received $11.2 million in revenue from
the licensing of these trademarks, logos and other representations.

  We believe that the MGM name and the MGM Lion Logo are among the most
recognized in the world, evoking images of classic Hollywood. We believe that
the name and logo represent assets of which the value has been substantially
unrealized in the past. We plan to pursue a focused branded strategy that will
capitalize upon our name and logo and seek licensing opportunities for such
name and logo, as well as our other trademarks, in a range of product
categories and distribution channels.

  In February 1980, our predecessor-in-interest granted to a predecessor-in-
interest to MGM Grand, Inc. an exclusive open-ended royalty-free license,
which was amended in 1992 and further 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. In June 2000, in consideration of the payment to us of
an annual royalty of $1.0 million, 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." In 1986, MGM/UA granted MGM Grand Air, Inc. an
exclusive open-ended royalty-free license to use one of its logos consisting
of a stylized depiction of a lion in MGM Grand Air's airline business. 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."

  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

                                      21
<PAGE>

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, 2000, we had approximately 973 full-time and part-time
regular employees in our worldwide operations. Of that total, approximately 86
were primarily engaged in production and development, approximately 348 were
primarily engaged in sales, marketing and distribution and approximately 539
were primarily engaged in management and administration. Approximately 158 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 21 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, the Writers Guild of
America, and the Directors Guild of America, pursuant to industry-wide
collective bargaining agreements. The collective bargaining agreement with the
Writers Guild of America is due to expire on or about May 1, 2001 and the
collective bargaining agreement with the Screen Actors Guild is due to expire
on or about June 30, 2001. Negotiations to renew those agreements are
underway, and there have been a number of public reports indicating that
strikes by the Writers Guild of America and the Screen Actors Guild are a
possibility in 2001. The Directors Guild of America collective bargaining
agreement expires in mid-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 product in
our library should not be affected and may partially offset the effects of a
strike to the extent, if any, that television exhibitors buy more library
product to compensate for interruption in their first-run programming.

Regulation

  In 1994, the U.S. was unable to reach agreement with its major international
trading partners to include audiovisual works, such as television programs and
motion pictures, under the terms of the World Trade Organization. The failure
to include audiovisual works under GATT allows many countries (including
members of the European Union, which 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

                                      22
<PAGE>

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.

  Article 85(1) of the Treaty of Rome prohibits certain agreements and
concerted practices which prevent, restrict or distort trade within the
European Union. In 1989, after several years of proceedings before the
European Commission, UIP received an exemption from Article 85(1) with respect
to its theatrical distribution activities in the European Union. In connection
with this exemption, UIP gave certain undertakings to the European Commission.
The 1989 exemption expired in 1993, and UIP filed an application seeking
renewal of such exemption. In July 1996, the European Commission conducted
unannounced visits of four of UIP's offices in Europe, interviewing officers
and copying documents. These visits were based on complaints submitted to the
European Commission by third parties, to the effect that UIP was acting in an
anti-competitive manner and was not complying with certain of the undertakings
given by it in connection with receiving the 1989 exemption. In addition, in
January 1998, the Competition Directorate of the Commission of the European
Communities issued a Statement of Objections in response to UIP's renewal
application. The Statement of Objections indicated that, although a final
decision had not been taken, the Commission was of the opinion that the
exemption granted to UIP in 1989 should not be extended and that UIP should be
required to cease operations in the European Union. UIP responded to the
Statement of Objections in May 1998 and a hearing was held before the European
Commission in late September 1998. In July 1999, the European Commission
published an official notice in the Official Journal of the European
Communities stating its intention to take a favorable view of the UIP case,
subject to certain amendments to the various UIP agreements and certain
additional understandings. In September 1999, the European Commission renewed
UIP's exemption. On October 31, 2000, we completed our withdrawal from UIP.
See "--Distribution--Theatrical Distribution."

  On February 2, 1999, the United States Department of Justice (Antitrust
Division), in the course of an antitrust investigation, issued a civil
investigative demand to us, requiring us to produce certain documents and
answer certain interrogatories concerning conduct, activities or proposed
action in the motion picture exhibition industry. We believe that similar
demands were issued to other major studios. We have complied with the civil
investigative demand. See "Item 3. Legal Proceedings."

  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

                                      23
<PAGE>

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.

  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 voluntary 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. 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 retained Canadian counsel. See "Item 3. Legal
Proceedings."

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 42,000 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 $1.4 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 427,000 square feet of office space for a fifteen-year period
beginning in May 2003 in a building to be constructed in Century City and to
be known as MGM Tower. We sublease 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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<PAGE>

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. The parties have submitted briefs to the
appellate court and await the outcome of the appeal.

  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 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 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.

                                      25
<PAGE>

  On February 2, 1999, the United States Department of Justice (Antitrust
Division), in the course of an antitrust investigation, issued a Civil
Investigative Demand to us, requiring us to produce certain information
concerning conduct, activities or proposed action in the motion picture
exhibition industry. We believe that similar demands were issued to other
major studios. We have complied with the civil investigative demand. See "Item
1. Regulation."

  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. 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. 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. We deny the material allegations of the complaint, and we will defend
ourselves vigorously against plaintiffs' claims. The plaintiffs have not yet
quantified their claim for damages, nor has a class been certified.

  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.

  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 deemed "complex" litigation and referred to a new judge who
held an initial status conference on January 16, 2001. The cases are still in
the discovery phase. The parties are currently engaged in discovery and no
trial date has been set.

                                      26
<PAGE>

  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. 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 retained Canadian counsel. See "Item 1.
Regulation."

  In addition, from time to time, we become involved in other litigation
arising in the normal course of business, and we believe that none of such
other litigation as is 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 45, 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 44, 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 59, 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.

                                      27
<PAGE>

  Daniel J. Taylor, age 44, 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 48, 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. 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 12, 2001, the closing sale price per share
of our common stock on the NYSE, as reported by the Dow Jones News Retrieval,
was $20.52. 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>
   2000
   Fourth Quarter........................................... $22 13/16 $14 15/16
   Third Quarter............................................  26 1/2    22
   Second Quarter...........................................  30 3/8    23 15/16
   First Quarter............................................  28 1/16   21 11/16

   1999
   Fourth Quarter........................................... $25 1/8   $15 1/2
   Third Quarter............................................  21 5/8    16 7/8
   Second Quarter...........................................  18 5/8    12 11/16
   First Quarter............................................  13 9/16   10 3/8
</TABLE>

  As of February 12, 2001, there were 218,137,488 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 MGM's 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 and
2000, and the period from October 11 to December 31, 1996, and the audited
consolidated financial statements of MGM Studios (predecessor) for the period
from January 1 to October 10, 1996 were audited by Arthur Andersen LLP,
independent public accountants.
<TABLE>
<CAPTION>
                                                                    Successor
                                                                    ---------
                          Predecessor                               Year Ended December 31,
                          ------------                  --------------------------------------------------
                          January 1 to    October 11 to
                          October 10,     December 31,
                              1996           1996(1)      1997(1)    1998(1)(2)  1999(1)(2)(3) 2000(1)(2)
                          ------------    ------------- -----------  ----------  ------------- -----------
                                                        (in thousands, except share data)
<S>                       <C>             <C>           <C>          <C>         <C>           <C>
Statements of Operations
 Data:
Revenues................   $  912,706      $   228,686  $   831,302  $1,240,723   $ 1,142,433  $ 1,237,447
Expenses:
  Films and television
   production and
   distribution.........      953,820          195,076      799,539   1,191,848     1,172,740    1,019,897
  General and
   administration
   expenses.............       60,056           18,319       87,644      92,244        92,116      103,333
  Severance and related
   costs................          --               --           --       13,182        76,158       (3,715)
  Contract termination
   fee..................          --               --           --          --        225,000          --
  Goodwill amortization.       11,570            1,717       11,230      14,289        14,853       14,734
  Provision for
   impairment...........      563,829 (4)          --           --          --            --           --
                           ----------      -----------  -----------  ----------   -----------  -----------
                            1,589,275          215,112      898,413   1,311,563     1,580,867    1,134,249
Operating income (loss).     (676,569)          13,574      (67,111)    (70,840)     (438,434)     103,198
Interest expense, net of
 amounts capitalized....      (71,375)          (9,875)     (53,105)    (80,611)      (86,445)     (51,425)
Interest and other
 income, net............        3,179              813        2,447       3,984         3,770       12,706
                           ----------      -----------  -----------  ----------   -----------  -----------
Income (loss) before
 provision for income
 taxes..................     (744,765)           4,512     (117,769)   (147,467)     (521,109)      64,479
Income tax provision....         (273)          (4,346)     (10,345)    (10,181)       (9,801)     (13,480)
                           ----------      -----------  -----------  ----------   -----------  -----------
Net income (loss).......   $ (745,038)     $       166  $  (128,114) $ (157,648)  $  (530,910) $    50,999
                           ==========      ===========  ===========  ==========   ===========  ===========
Earnings (loss) per
 share:
  Basic.................                   $      0.01  $     (4.47) $    (2.08)  $     (3.36) $      0.25
  Diluted...............                   $      0.00  $     (4.47) $    (2.08)  $     (3.36) $      0.24
Weighted average number
 of common shares
 outstanding
  Basic.................                    16,692,217   28,634,362  75,816,326   158,015,955  204,797,589
  Diluted...............                    37,796,672   28,634,362  75,816,326   158,015,955  210,313,274


Other Operating Data
 (unaudited):
Cash flow from operating
 activities.............   $  343,137      $    61,328  $   245,318  $  433,543   $   264,722  $   628,497
Cash flow used in
 investing activities...     (380,142)      (1,390,861)  (1,285,674)   (903,922)     (881,809)    (829,200)
Cash flow from financing
 activities.............       44,852        1,345,394    1,028,784     521,566       715,227      125,845
EBITDA (unaudited)(5)...      (87,289)          16,709      (49,098)    (47,987)     (413,980)     131,846
Capital expenditures....        6,901            2,079        9,555      14,005        14,883       12,259
Depreciation expense....        4,645            1,418        6,783       8,564         9,601       13,913

Balance Sheet Data:
Cash and cash
 equivalents............   $   24,717      $    16,381  $     3,978  $   54,839   $   152,213  $    77,140
Film and television
 costs, net.............    1,006,402        1,099,201    1,867,126   2,076,663     2,164,458    2,422,799
Total assets............    1,744,234        1,774,668    2,822,654   3,158,978     3,424,361    3,548,190
Bank and other debt.....    1,229,499          444,427      890,508     720,574       719,438      709,952
Stockholders' equity....          --           903,122    1,378,555   1,919,657     2,116,824    2,309,687
Cash dividends..........        3,995              --           --          --            --           --
</TABLE>


                                      30
<PAGE>

--------
(1) Reflects the consolidated balance sheet and results of operations of the
    combined entity resulting from our acquisition of MGM Studios.

(2) Reflects the consolidated balance sheet and results of operations of the
    combined entity resulting from the acquisition of Orion.

(3) 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.

(4) The proceeds from the sale of MGM Studios were insufficient to recover the
    net asset value of MGM Studios on the date of the disposition by
    Consortium de Realisation. Accordingly, MGM Studios recorded a provision
    for impairment of intangible assets of $563.8 million.

(5) "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

  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. See
"Item 1. Business."

Sources of Revenue

  The principal sources of motion picture industry revenue are the domestic
and international distribution of motion pictures, including theatrical
exhibition, home video 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
outstanding at December 31, 2000. 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
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.

                                      32
<PAGE>

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

  Collective Bargaining Agreements. 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 is due to expire on or about May 1,
2001 and the collective bargaining agreement with Screen Actors Guild is due
to expire on or about June 30, 2001. Negotiations to renew those agreements
are underway, and there have been a number of public reports indicating that
strikes by Writers Guild of America and Screen Actors Guild are a possibility
in 2001. The Directors Guild of America collective bargaining agreement
expires in mid-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.

  Participations and Residuals. In connection with the production and
distribution of a motion picture, major studios generally grant contractual
rights to actors, directors, screenwriters, producers and other creative and
financial contributors to share in the gross receipts or contractually defined
net profits from a particular motion picture. Except for the most sought-after
talent, these third-party participations are generally payable after all
distribution fees, marketing expenses, direct production costs and financing
costs are fully recouped.

  Major studios also typically incur obligations to pay residuals to various
guilds and unions including the Writers Guild of America, the Directors Guild
of America, and the Screen Actors Guild. The residual payments are made on a
picture-by-picture basis with respect to the exploitation of a motion picture
in markets other than the primary intended markets for such picture and are
calculated as a percentage of the gross revenues derived from the exploitation
of the picture in these ancillary markets.

  Our cost structure for motion pictures generally follows the industry
structure described above. For a discussion of television programming cost
structure, see "Item 1. Business--The Motion Picture and Television Industry."

Industry Accounting Practices

  Revenue Recognition. Revenues from theatrical distribution of feature motion
pictures are recognized on the dates of exhibition. Revenues from home video
distribution, together with related costs, are recognized in the period in
which the product is available (assuming it has been shipped) for sale at the
retail level. Under revenue sharing arrangements, we also participate in
consumer rental revenues generated in the home video market by rental
establishments. Revenues from television distribution are recognized when the
motion picture or television program is available to the licensee for
broadcast.

  Accounting for Motion Picture and Television Costs. In accordance with
accounting principles generally accepted in the United States and industry
practice, we amortize film and television programming costs 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. Management regularly
reviews, and revises when

                                      33
<PAGE>

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 net realizable value. These revisions can result in
significant quarter-to-quarter 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 costs. In addition, upon adoption of American
Institute of Certified Public Accountants Statement of Position 00-2,
"Accounting by Producers or Distributors of Films," in 2001, the Company will
be required to expense film advertising costs as incurred as opposed to
capitalizing these costs and amortizing these costs as part of film costs as
was prior practice. On the other hand, the profit of a profitable motion
picture or television program must be deferred and recognized over the entire
revenue stream generated by that motion picture or television program. This
method of accounting may also result in significant fluctuations in reported
income or loss, particularly on a quarterly basis, depending on our release
schedule and the relative performance of individual motion pictures or
television programs. For films we released since January 1994 which resulted
in feature film write-downs in the period of initial release, subsequent
performance as it relates to this group of films has not resulted in
additional material write-downs.

  In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 139, which, effective for financial
statements for fiscal years beginning after December 15, 2000, rescinds
Statement of Financial Accounting Standards No. 53. The companies that were
previously subject to the requirements of Statement of Financial Accounting
Standards No. 53 shall now follow 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 beginning January 1, 2001 and will reflect the results of this change
in our 2001 first quarter results. Based on our estimates at this time, the
effect of adopting Statement of Position 00-2 as of January 1, 2001 will
result in a one-time, non-cash cumulative effect charge to earnings of
approximately $375 million to $400 million, primarily to reduce the carrying
value of our film inventory. The new rules also require that advertising costs
be expensed as incurred as opposed to the old rules which allowed advertising
costs to be capitalized as part of film costs and amortized using the film
forecast model. 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.

  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, "Deferral of the Effective Date of Financial Accounting
Standards Board No. 133, Accounting for Derivative Instruments and Hedging
Activities," 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

                                      34
<PAGE>

for hedging activities. We intend to adopt Statement of Financial Accounting
Standards No. 133 beginning January 1, 2001. We do not expect the adoption of
this statement to materially impact our results of operations.

  Effective January 1, 2000, we adopted the Securities and Exchange Commission
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." The accounting bulletin provides guidance on the recognition,
presentation and disclosure of revenue in financial statements, including
certain criteria for gross versus net recording of sales transactions. The
adoption of Staff Accounting Bulletin No. 101 did not materially impact our
results of operations.

  We adopted the Emerging Issues Task Force Issue No. 00-02, "Accounting For
Web Site Development Costs" in 2000. The issuance provides guidance on
accounting for costs incurred to develop a web site. The adoption of the
issuance did not have a material impact on our financial statements.

                                      35
<PAGE>

Results of Operations

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

  The following table sets forth our operating results for the years ended
December 31, 2000 and 1999. 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. Additionally, in 1999 we accelerated the expiration of the Warner Home
Video agreement, which resulted in a $225.0 million charge included in
operating results for the year ended December 31, 1999. The operating results
in 2000, therefore, are not comparable to the operating results in 1999.

<TABLE>
<CAPTION>
                                                             Year Ended
                                                            December 31,
                                                        ----------------------
                                                           2000        1999
                                                        ----------  ----------
                                                           (in thousands)
<S>                                                     <C>         <C>
Revenues:
  Feature films........................................ $1,058,296  $  888,303
  Television programs..................................    139,229     205,719
  Other................................................     39,922      48,411
                                                        ----------  ----------
    Total revenues..................................... $1,237,447  $1,142,433
                                                        ==========  ==========
Operating income (loss):
  Feature films........................................ $  200,478  $  (77,590)
  Television programs..................................     (2,649)     27,602
  Other................................................     19,721      19,681
  General and administration expenses..................   (103,333)    (92,116)
  Severance and related costs..........................      3,715     (76,158)
  Contract termination fee.............................        --     (225,000)
  Goodwill amortization................................    (14,734)    (14,853)
                                                        ----------  ----------
Operating income (loss)................................    103,198    (438,434)
Interest expense, net of amounts capitalized...........    (51,425)    (86,445)
Interest and other income, net.........................     12,706       3,770
                                                        ----------  ----------
Income (loss) before provision for income taxes........     64,479    (521,109)
Income tax provision...................................    (13,480)     (9,801)
                                                        ----------  ----------
Net income (loss)...................................... $   50,999  $ (530,910)
                                                        ==========  ==========
</TABLE>

  Feature Films. 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.

                                      36
<PAGE>

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 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. Television programming revenues decreased by $66.5
million, or 32 percent, to $139.2 million in 2000. 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.

  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. Other revenues included distribution of consumer products,
interactive media and branded programming services, as well as music
soundtrack and royalty income and third party audit recoveries. Operating
profit from other businesses increased by $0.1 million, or 1 percent, to $19.7
million in 2000 as compared to 1999. 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

                                      37
<PAGE>

royalties from the release of the interactive game version of Tomorrow Never
Dies. In 2000, we recognized $2.0 million in profits from our equity
investments, which included our interest in various international television
channels. In 1999, we incurred aggregate start-up losses of $6.3 million on
our equity investments, including our interest in the cable programming joint
venture, MGM Networks Latin America. 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.

  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. Other expenses reflected costs to develop our
new website, distribution expenses related to music and branded programming
services, as well as foreign currency transaction losses.

  General and Administration Expenses. General and administration expenses
increased by $11.2 million, or 12 percent, to $103.3 million in 2000,
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.

  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.

  Interest Expense, Net of Amounts Capitalized. Net interest expense decreased
by $35.0 million, or 41 percent, to $51.4 million in 2000 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. Interest and other income increased by $8.9
million, or 237 percent, to $12.7 million in 2000 due to interest income
earned on our short-term investments, which have increased from retained
proceeds from our November 1999 rights offering as well as the May 2000 and
August 2000 issuances of our common stock.

                                      38
<PAGE>

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

 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

  The following table sets forth our operating results for the years ended
December 31, 1999 and 1998. As stated in the financial statements and related
notes thereto, in June 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. Additionally, in March
1999 we accelerated the expiration of the Warner Home Video agreement, which
resulted in a $225.0 million charge included in operating results for the year
ended December 31, 1999. The operating results in 1999, therefore, are not
comparable to the operating results in 1998.

<TABLE>
<CAPTION>
                                                             Year Ended
                                                            December 31,
                                                        ----------------------
                                                           1999        1998
                                                        ----------  ----------
                                                           (in thousands)
<S>                                                     <C>         <C>
Revenues:
  Feature films........................................ $  888,303  $1,005,747
  Television programs..................................    205,719     197,759
  Other................................................     48,411      37,217
                                                        ----------  ----------
    Total revenues..................................... $1,142,433  $1,240,723
                                                        ==========  ==========
Operating income (loss):
  Feature films........................................ $  (77,590) $   39,748
  Television programs..................................     27,602      12,885
  Other................................................     19,681      (3,758)
  General and administration expenses..................    (92,116)    (92,244)
  Severance and related costs..........................    (76,158)    (13,182)
  Contract termination fee.............................   (225,000)        --
  Goodwill amortization................................    (14,853)    (14,289)
                                                        ----------  ----------
Operating loss.........................................   (438,434)    (70,840)
Interest expense, net of amounts capitalized...........    (86,445)    (80,611)
Interest and other income, net.........................      3,770       3,984
                                                        ----------  ----------
Loss before provision for income taxes.................   (521,109)   (147,467)
Income tax provision...................................     (9,801)    (10,181)
                                                        ----------  ----------
Net loss............................................... $ (530,910) $ (157,648)
                                                        ==========  ==========
</TABLE>

  Feature Films. Feature film revenues decreased by $117.4 million, or 12
percent, to $888.3 million in the year ended December 31, 1999 compared to the
year ended December 31, 1998.

  Worldwide theatrical revenues increased by $9.1 million, or 4 percent, to
$251.3 million in 1999 primarily due to the significant worldwide theatrical
revenues earned by The World Is Not Enough, The Thomas Crown Affair and
Stigmata, which were released during the year. In comparison, in 1998 we
benefited from the strong worldwide theatrical performance of The Man In The
Iron Mask, as well as the release in international markets of Tomorrow Never
Dies. Overall, in 1999 we released 11 new feature films domestically and six
new films internationally, and in 1998 we released 12 new films domestically
and four new films internationally.

  Worldwide home video revenues decreased by $138.6 million, or 28 percent, to
$352.6 million in 1999, principally due to the expiration of the Warner Home
Video agreement, which resulted in the termination of our distribution
arrangements with Turner Entertainment Co. effective January 1, 1999. In 1998,
we generated

                                      39
<PAGE>

$134.3 million in gross revenues from its distribution of the Turner product,
including the re-release of Gone With The Wind. In 1999 our home video
releases included Ronin, At First Sight, The Rage: Carrie 2, Disturbing
Behavior and The Mod Squad, as compared to our releases in 1998 of Tomorrow
Never Dies and The Man In The Iron Mask, as well as Red Corner, Species 2 and
Hoodlum. Partially offsetting the decrease in Turner product revenues
discussed above were increased DVD, which grew to $79.4 million in 1999 from
$29.8 million in 1998.

  Worldwide pay television revenues from feature films increased by $19.1
million, or 20 percent, to $115.6 million in 1999 due to the release in the
domestic pay television marketplace of The Man In The Iron Mask, Ronin,
Species 2, At First Sight, Disturbing Behavior and Dirty Work, as compared to
the release of fewer films in 1998, which included Tomorrow Never Dies, Red
Corner and Hoodlum. Network television revenues from feature films decreased
by $35.0 million, or 77 percent, to $10.3 million in 1999. In 1999, we
delivered four new films to network television as compared to nine films
delivered in 1998, which included substantial license fees for GoldenEye, Get
Shorty and The Birdcage. Worldwide syndicated television revenues from feature
films increased by $20.5 million, or 17 percent, to $141.7 million in 1999,
principally due to the release in international markets of Tomorrow Never
Dies, The Birdcage, GoldenEye and Get Shorty. There were no comparably
performing releases in international syndication markets in 1998.

  Other feature film revenues increased by $7.3 million, or 78 percent, to
$16.7 million in 1999 due to higher third party royalty and miscellaneous
income collected in the period.

  We recognized an operating loss from feature films of $77.6 million in 1999
as compared to a profit of $39.7 million in 1998. Operating results in 1999
reflected the decreased revenues discussed above, as well as 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 as compared to lower film write-downs in 1998 of $80.0 million.
Partially offsetting the increased film-related charges were profits realized
from the 1999 releases The World Is Not Enough, The Thomas Crown Affair,
Stigmata and Tea With Mussolini. Correspondingly, in 1998 profits were
realized from the successful worldwide performances of Tomorrow Never Dies and
The Man In The Iron Mask.

  Television Programming. Television programming revenues increased by $7.9
million, or 4 percent, to $205.7 million in 1999. Network television revenues
decreased by $20.6 million, or 66 percent, to $10.7 million, principally due
to the delivery of fewer episodes of The Magnificent Seven and the release of
only one television movie in 1999, as compared to higher license fees earned
on the delivery of the television mini-series Creature, additional episodes of
The Magnificent Seven and one television movie in 1998. Worldwide pay
television revenues decreased by $0.7 million, or 2 percent, to $29.6 million
in 1999 due to one fewer series in broadcast on domestic pay television than
in 1998, partially offset by consideration received for the termination of
certain contractual commitments. We may generate lower pay television revenues
in future periods due to a reduction in the number of production commitments
for television series.

  Worldwide syndicated television programming revenues increased by $50.7
million, or 50 percent, to $152.6 million in 1999, primarily due to the
syndication of new series Stargate SG-1, National Enquirer and Flipper, as
well as additional years of the The Outer Limits and Poltergeist, and the
licensing in the domestic basic cable market of Outer Limits, Poltergeist,
Dead Man's Gun and In The Heat Of The Night. Worldwide home video revenues
with respect to television programming decreased by $10.9 million, or 48
percent, to $11.8 million in 1999, primarily due to the release of fewer
television movies in 1999 and the release in 1998 of the animated videos An
All Dogs Christmas Carol and Secret of Nimh 2. There were no comparable
releases on home video in 1999. In 1998 we also benefited from a third party
payment of $7.5 million for the rights to create new episodes of Hollywood
Squares. There were no such receipts in 1999.

  Operating income from television programming increased by $14.7 million, or
114 percent, to $27.6 million in 1999, reflecting the increased revenues
discussed above and lower programming write-downs.

                                      40
<PAGE>

  Other. Other revenues include distribution of consumer products, interactive
media and branded programming services, as well as music soundtrack and
royalty income and third party audit recoveries. We recognized an operating
profit from other businesses of $19.7 million in 1999 as compared to a loss of
$3.8 million in 1998. Operating results in 1999 include consumer products
revenue of $10.7 million and music soundtrack and royalty revenue of $9.7
million, as compared to consumer products revenue of $10.3 million and music
soundtrack and royalty revenue of $6.6 million in 1998. Interactive media
revenues were $9.8 million in 1999, which included the release of the
interactive game version of Tomorrow Never Dies, as compared to $7.6 million
in 1998, which included the release of the interactive game version of
WarGames. Additionally, operating results in 1999 include the receipt of $13.9
million in third party audit recoveries as compared to audit recoveries of
$1.1 million in 1998. Other revenues in 1998 included a $10.0 million payment
received in association with the sale of a portion of our investment in a
Japanese pay television channel.

  Expenses for other businesses include interactive product costs of $7.9
million in 1999 as compared to $16.5 million in 1998, which costs related to
increased development spending in the prior year. Consumer products cost of
sales were $3.4 million in 1999 as compared to $5.6 million in 1998, when we
incurred certain start-up expenses associated with a newly launched catalogue
business. In addition, operating expenses for other businesses in 1999
included aggregate losses of $6.3 million on our equity investments, including
our interest in the newly launched cable programming joint venture, MGM
Networks Latin America, as compared to $12.5 million for such start-up losses
in 1998. Overhead charges for other businesses aggregated $5.0 million in 1999
and $6.7 million in 1998. The decrease in overhead charges principally
reflected reduced spending in our consumer products and interactive divisions.
Bad debt and other expenses aggregated $5.5 million in 1999 with no comparable
charges in 1998.

  General and Administration Expenses. General and administration expenses
decreased by $0.01 million to $92.1 million in 1999, primarily due to certain
cost savings in 1999 associated with corporate restructuring programs
initiated in the second quarter of 1999 and the third quarter of 1998,
partially offset by increased senior management and employee incentive
compensation and litigation costs. See also "Severance and Related Costs"
below.

  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. Correspondingly, in 1998 a corporate restructuring
program resulted in severance charges of $13.2 million.

  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.

  Interest Expense, Net of Amounts Capitalized. Net interest expense increased
by $5.8 million, or 7 percent, to $86.4 million in 1999 due to additional
borrowings for operating and production activities, as well as the financing
of the PolyGram library acquisition in January 1999 and the Warner Home Video
agreement termination settlement (see above), partially offset by debt
repayment associated with proceeds received in November 1999 from our 1999
rights offering and in November 1998 from our 1998 rights offering.

                                      41
<PAGE>

  Income Tax Provision. The income tax provision of $9.8 million in 1999 and
$10.2 million in 1998 primarily reflect foreign remittance taxes attributable
to international distribution revenues.

EBITDA

  While management considers earnings before interest, taxes, depreciation and
non-film amortization ("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 generally
accepted accounting principles. 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.

  The following table sets forth EBITDA for the years ended December 31, 2000,
1999 and 1998:

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                         -------------------------------------
                                            2000          1999         1998
                                         ----------  -------------- ----------
                                                     (In thousands)
<S>                                      <C>         <C>            <C>
Revenues:
  Feature films......................... $1,058,296    $  888,303   $1,005,747
  Television programs...................    139,229       205,719      197,759
  Other.................................     39,922        48,411       37,217
                                         ----------    ----------   ----------
    Total revenues...................... $1,237,447    $1,142,433   $1,240,723
                                         ==========    ==========   ==========
EBITDA:
  Feature films......................... $  200,478    $  (77,590)  $   39,748
  Television programs...................     (2,649)       27,602       12,885
  Other.................................     19,721        19,681       (3,758)
  General and administration expenses...    (89,419)      (82,515)     (83,680)
  Severance and related costs
   (recoveries).........................      3,715       (76,158)     (13,182)
  Contract termination fee..............        --       (225,000)         --
                                         ----------    ----------   ----------
  EBITDA................................    131,846      (413,980)     (47,987)
Depreciation and non-film amortization..    (28,648)      (24,454)     (22,853)
                                         ----------    ----------   ----------
Operating income (loss).................    103,198      (438,434)     (70,840)
Interest expense, net of amounts
 capitalized............................    (51,425)      (86,445)     (80,611)
Interest and other income, net..........     12,706         3,770        3,984
                                         ----------    ----------   ----------
Income (loss) before provision for
 income taxes...........................     64,479      (521,109)    (147,467)
Income tax provision....................    (13,480)       (9,801)     (10,181)
                                         ----------    ----------   ----------
Net income (loss)....................... $   50,999    $ (530,910)  $ (157,648)
                                         ==========    ==========   ==========
</TABLE>

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 the year ended
December 31, 2000, the net cash provided by operating activities was $628.5
million; net cash used in investing activities (primarily additions to film
and television costs) was $829.2 million; and net cash provided by financing
activities (primarily sale of equity securities) was $125.8 million.

  Sales of Equity Securities. Sales of equity securities included proceeds
from our initial public offering and Tracinda Corporation's concurrent
purchase of our common stock, which were completed in November 1997,

                                      42
<PAGE>

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 5,363,800 shares of
our common stock for aggregate net proceeds of $133.4 million. The proceeds
are being used for general operating purposes.

  In February 2001, pursuant to our shelf registration statement, we sold
10,660,590 shares of common stock for gross proceeds of $220.5 million.
Additionally, Tracinda purchased 15,715,667 shares of Series B preferred stock
for gross proceeds of $325.0 million. The Series B preferred stock is non-
voting, has a liquidation preference of $.01 per share and will become
convertible on a 1:1 basis into shares of common stock at the option of the
holder upon shareholder approval. No dividends accrue or are payable with
respect to the Series B preferred stock.

  The proceeds will be used to pay a portion of the $825 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 Romance Classics). These
partnerships are now wholly-owned by Rainbow Media, a majority-owned
subsidiary of Cablevision Systems Corporation. The acquisition is expected to
be completed in April 2001. We intend to obtain the rest of the funds needed
through sales of equity securities. See "Background of the Company" and
"Recent Developments."

  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. We used a portion of the proceeds from our
1999 rights offering to repay all amounts then outstanding under the revolving
facility. As of February 1, 2001, $576.2 million was available (including
outstanding letters of credit) 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 2.25 percent over the Adjusted LIBOR rate, as defined therein
(7.64 percent at February 1, 2001), and the $300.0 million term loan bears
interest at 2.50 percent over the Adjusted LIBOR rate (7.89 percent at
February 1, 2001). 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 $575.0 million at an average rate of approximately 7.82 percent, which
expire at various times no later than July 2003. We have also entered into
additional forward interest rate swaps contracts commencing in 2001 for a
notional value of $325.0 million at an average rate of approximately 8.71
percent, which expire on July 2003.

  Scheduled amortization of the term loans under our credit facility commences
with $33.0 million in 2001, $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.

  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. As of December
31, 2000, we were in compliance with all applicable covenants. 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 Provided by Operating Activities. In the year ended December 31, 2000,
cash provided by operating activities was $628.5 million compared to cash
provided by operating activities of $264.7 million in the year ended December
31, 1999. Cash provided by operating activities in 1999 was reduced by a
$225.0 million payment to Warner Home Video in consideration for the early
expiration of the Warner Home Video agreement.

                                      43
<PAGE>

  Cash Used in Investing Activities. In the year ended December 31, 2000, cash
used in investing activities was $829.2 million, which included $811.0 million
expended for film and television costs and other investing activities of $18.2
million. In the year ended December 31, 1999, cash used in investing
activities was $881.8 million, which included the acquisition of the PolyGram
N.V. libraries, containing over 1,300 feature films, for $235.0 million, plus
acquisition related costs of approximately $1.2 million, and film and
television costs of $624.6 million, as well as other investing activities of
$21.0 million.

  Cash Provided by Financing Activities. In the year ended December 31, 2000,
cash provided by financing activities was $125.8 million, which included
$133.4 million in net proceeds from the sale of our common stock and $4.8
million for the exercise of stock options, partially offset by net repayments
of borrowed funds of $9.1 million and financing fees of $3.3 million. In the
year ended December 31, 1999, cash provided by financing activities was $715.2
million, consisting of $719.5 million in net proceeds from the sale of our
common stock and exercise of stock options, partially offset by net repayments
of borrowed funds of $4.2 million.

  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.

  We incurred approximately $3.0 million of additional costs in the year ended
December 31, 2000 in connection with the integration of the PolyGram N.V.
libraries and our transition to home video self-distribution in the U.S. and
Canadian markets. We do not expect our obligations for property and equipment
expenditures, including the purchase of computer systems and equipment and
other improvements, to exceed $35.0 million per year.

  In connection with our termination of the Warner Home Video agreement, we
anticipate that the worldwide home video distribution rights reconveyed to
Turner Entertainment Co., Inc. will decrease our cash flow by approximately
$10.0 million per year through June 2001.

  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 $21.0 million under such obligation as of December 31, 2000.

  As a result of the change in senior management, we did not commence
production as anticipated under our business plan. Therefore, we released a
reduced number of major films in 2000, which may adversely impact cash flows
and results of operations at least through 2001. However, as opportunities
arise, we will pursue the purchase of feature films from third parties that
may be released during this period.

  We believe that the remaining proceeds from our 1999 rights offering as well
as the proceeds from the sale of our common stock in 2000, together with
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. In
addition to the foregoing sources of liquidity, we are currently considering
various film financing alternatives.

  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.

                                      44
<PAGE>

  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 have only limited involvement in derivative financial instruments and do
not use them for trading purposes. Certain amounts borrowed under our credit
facility are at variable interest rates and we are thus subject to market risk
resulting from interest rate fluctuations. We enter into interest rate swaps
in part to alter interest rate exposures. Interest rate swaps allow us to
raise long-term borrowings at floating rates and effectively swap them into
fixed rates that are lower than those available to us if fixed-rate borrowings
were made directly. Under interest rate swaps, 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 following table provides information about our interest rate swaps
outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                           Amounts scheduled
                                           for maturity for
                                            the year ending
                                             December 31,       Estimated fair
                                           ------------------      value at
                                             2000      2001    December 31, 2000
                                           --------  --------  -----------------
<S>                                        <C>       <C>       <C>
Interest Rate Swaps
Variable to fixed:
  Notional value (in thousands)........... $450,000  $125,000       $ 3,132
  Average pay rate........................    5.394%    5.700%
  Average receive rate....................    6.719%    6.760%
</TABLE>

  We have also entered into additional forward interest rate swap contracts
commencing in 2001 for a notional value of $325.0 million at an average pay
rate of approximately 6.208 percent, which expire in July 2003. At December
31, 2000, these forward contracts had an estimated fair value of $(2.7)
million.

  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. We had no foreign currency exchange contracts outstanding at December
31, 2000.

Item 8. Financial Statements and Supplementary Data

  The Report of Independent Public Accountants, our Consolidated Financial
Statements and Notes thereto appear in a separate section of this Form 10-K
(beginning on page 51 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

                                      45
<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.

                                      46
<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 51 to
    76.

    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 77 to
    83.

    3. Exhibits

      The exhibits listed in the accompanying Exhibit Index on pages 84 to
    86 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, 2000.

                                      47
<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 12, 2001

                                          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 12, 2001
____________________________________  Directors, Chief Executive
          Alex Yemenidjian            Officer and Director

   /s/ Christopher J. McGurk         Vice Chairman, Chief          February 12, 2001
____________________________________  Operating Officer and
       Christopher J. McGurk          Director

        /s/ James Aljian             Director                      February 12, 2001
____________________________________
            James Aljian

    /s/ Francis Ford Coppola         Director                      February 12, 2001
____________________________________
        Francis Ford Coppola

      /s/ Willie D. Davis            Director                      February 12, 2001
____________________________________
          Willie D. Davis

     /s/ Michael R. Gleason          Director                      February 12, 2001
____________________________________
         Michael R. Gleason

   /s/ Alexander M. Haig, Jr.        Director                      February 12, 2001
____________________________________
       Alexander M. Haig, Jr.

       /s/ Kirk Kerkorian            Director                      February 12, 2001
____________________________________
           Kirk Kerkorian

      /s/ Frank G. Mancuso           Director                      February 12, 2001
____________________________________
          Frank G. Mancuso
</TABLE>

                                      48
<PAGE>

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

<S>                                  <C>                           <C>
     /s/ Priscilla Presley           Director                      February 12, 2001
____________________________________
         Priscilla Presley

       /s/ Jerome B. York            Director                      February 12, 2001
____________________________________
           Jerome B. York

      /s/ Daniel J. Taylor           Senior Executive Vice         February 12, 2001
____________________________________  President and Chief
          Daniel J. Taylor            Financial Officer
</TABLE>

                                       49
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants..................................  51

Consolidated Balance Sheets as of December 31, 2000 and 1999..............  52

Consolidated Statements of Operations and Comprehensive Income (Loss) for
 the Years Ended December 31, 2000, 1999 and 1998.........................  53

Consolidated Statements of Stockholders' Equity for the Years Ended
 December 31, 2000, 1999 and 1998.........................................  54

Consolidated Statements of Cash Flows for the Years Ended December 31,
 2000, 1999 and 1998......................................................  55

Notes to Consolidated Financial Statements................................  56

Financial Statement Schedules

Report of Independent Public Accountants..................................  77

Schedule I: Financial Information of Registrant...........................  78

Schedule II: Valuation and Qualifying Accounts and Reserves...............  83
</TABLE>

                                       50
<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, 2000 and 1999, and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.

Arthur Andersen LLP

Los Angeles, California
February 8, 2001

                                      51
<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,
                                                          2000         1999
                                                      ------------ ------------
<S>                                                   <C>          <C>
                       ASSETS
                       ------
Cash and cash equivalents............................  $   77,140   $  152,213
Accounts and contracts receivable (net of allowance
 for doubtful accounts of $22,947 and $20,985,
 respectively).......................................     416,084      452,914
Film and television costs, net.......................   2,422,799    2,164,458
Investments in and advances to affiliates............      12,403       15,207
Property and equipment, net..........................      47,071       48,203
Excess of cost over net assets of acquired
 businesses, net.....................................     531,440      546,173
Other assets.........................................      41,253       45,193
                                                       ----------   ----------
                                                       $3,548,190   $3,424,361
                                                       ==========   ==========

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

Liabilities:
  Bank and other debt................................  $  709,952   $  719,438
  Accounts payable and accrued liabilities...........     168,144      189,904
  Accrued participants' share........................     217,231      237,102
  Income taxes payable...............................      34,056       31,619
  Advances and deferred revenues.....................      92,137      112,189
  Other liabilities..................................      16,983       17,285
                                                       ----------   ----------
    Total liabilities................................   1,238,503    1,307,537
                                                       ----------   ----------

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, 207,217,585 and 201,419,331 shares
   issued............................................       2,072        2,014
  Additional paid-in capital.........................   3,072,611    2,931,004
  Deficit............................................    (765,507)    (816,506)
  Accumulated other comprehensive income.............         511          316
  Less: treasury stock, at cost......................         --            (4)
                                                       ----------   ----------
    Total stockholders' equity.......................   2,309,687    2,116,824
                                                       ----------   ----------
                                                       $3,548,190   $3,424,361
                                                       ==========   ==========
</TABLE>

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

                                       52
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                           ------------------------------------
                                              2000         1999         1998
                                           -----------  -----------  ----------
<S>                                        <C>          <C>          <C>
Revenues.................................  $ 1,237,447  $ 1,142,433  $1,240,723
Expenses:
  Film and television production and
   distribution..........................    1,019,897    1,172,740   1,191,848
  General and administrative expenses....      103,333       92,116      92,244
  Severance and related costs............       (3,715)      76,158      13,182
  Contract termination fee...............          --       225,000         --
  Goodwill amortization..................       14,734       14,853      14,289
                                           -----------  -----------  ----------
    Total expenses.......................    1,134,249    1,580,867   1,311,563
                                           -----------  -----------  ----------
Operating income (loss)..................      103,198     (438,434)    (70,840)
Other income (expense):
  Interest expense, net of amounts
   capitalized...........................      (51,425)     (86,445)    (80,611)
  Interest and other income, net.........       12,706        3,770       3,984
                                           -----------  -----------  ----------
    Total other expense..................      (38,719)     (82,675)    (76,627)
                                           -----------  -----------  ----------
Income (loss) from operations before
 provision for income taxes..............       64,479     (521,109)   (147,467)
Income tax provision.....................      (13,480)      (9,801)    (10,181)
                                           -----------  -----------  ----------
Net income (loss)........................       50,999     (530,910)   (157,648)
Foreign currency translation adjustments.          152           62        (741)
Unrealized gains on securities...........           43          --          --
                                           -----------  -----------  ----------
Comprehensive income (loss)..............  $    51,194  $  (530,848) $ (158,389)
                                           ===========  ===========  ==========
Income (loss) per share:
  Basic..................................  $      0.25  $     (3.36) $    (2.08)
                                           ===========  ===========  ==========
  Diluted................................  $      0.24  $     (3.36) $    (2.08)
                                           ===========  ===========  ==========
Weighted average number of common shares
 outstanding:
  Basic..................................  204,797,589  158,015,955  75,816,326
                                           ===========  ===========  ==========
  Diluted................................  210,313,274  158,015,955  75,816,326
                                           ===========  ===========  ==========
</TABLE>

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

                                       53
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

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

<TABLE>
<CAPTION>
                             Common Stock
                          ------------------   Add'l    Retained   Accum. Other   Less:        Total
                            No. of     Par    Paid-in   Earnings   Comprehensive Treasury  Stockholders'
                            Shares    Value   Capital   (Deficit)     Income      Stock       Equity
                          ----------- ------ ---------- ---------  ------------- --------  -------------
<S>                       <C>         <C>    <C>        <C>        <C>           <C>       <C>
Balance December 31,
 1997...................   65,765,655 $  658 $1,504,850 $(127,948)     $ 995     $   --     $1,378,555
Common stock issued in
 1998 rights offering,
 net....................   84,848,485    849    695,651       --         --          --        696,500
Common stock issued to
 directors, officers and
 employees, net.........      242,284      2      1,433       --         --          --          1,435
Amortization of deferred
 stock compensation.....          --     --       1,556       --         --          --          1,556
Foreign currency
 translation adjustment.          --     --         --        --        (741)        --           (741)
Net loss................          --     --         --   (157,648)       --          --       (157,648)
                          ----------- ------ ---------- ---------      -----     -------    ----------
Balance December 31,
 1998...................  150,856,424  1,509  2,203,490  (285,596)       254           0     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
Foreign currency
 translation adjustment.          --     --         --        --          62         --             62
Net loss................          --     --         --   (530,910)       --          --       (530,910)
                          ----------- ------ ---------- ---------      -----     -------    ----------
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
Other comprehensive
 income:
Foreign currency
 translation adjustment.          --     --         --        --         152         --            152
Unrealized gains on
 securities.............          --     --         --        --          43         --             43
Net income..............          --     --         --     50,999        --          --         50,999
                          ----------- ------ ---------- ---------      -----     -------    ----------
Balance December 31,
 2000...................  207,217,585 $2,072 $3,072,611 $(765,507)     $ 511     $   --     $2,309,687
                          =========== ====== ========== =========      =====     =======    ==========
</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 CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                               -------------------------------
                                                 2000       1999       1998
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Operating activities:
  Net income (loss)..........................  $  50,999  $(530,910) $(157,648)
  Adjustments to reconcile net loss to net
   cash provided by operating activities:
    Amortization of film and television costs
     and participants' share.................    665,148    853,411    751,807
    Depreciation and amortization of property
     and equipment...........................     13,913      9,601      8,564
    Amortization of goodwill and deferred
     financing costs.........................     20,994     20,742     19,985
    Amortization of deferred executive
     compensation............................        --       1,365      1,556
    Stock contributions to employees,
     directors and employee savings plan.....      3,432      7,175      1,435
    Provision for bad debt and other
     reserves................................      3,545      3,425        467
    Loss on sale of marketable equity
     securities..............................      1,265        --         --
    (Gains) losses on equity investments,
     net.....................................     (1,953)       757     10,887
    (Increase) decrease in accounts and
     contracts receivable and other assets...     36,589    (73,245)   (81,436)
    Decrease in accounts payable, accrued and
     other liabilities, accrued participants'
     share and domestic and foreign taxes....   (152,518)   (10,770)  (121,264)
    Increase (decrease) in advances and
     deferred revenues.......................    (20,052)   (18,944)       335
    Foreign currency exchange (gain) loss....      7,135      2,115     (1,145)
                                               ---------  ---------  ---------
    Net cash provided by operating
     activities..............................    628,497    264,722    433,543
                                               ---------  ---------  ---------
Investing activities:
  Additions to film costs, net...............   (810,956)  (624,599)  (871,271)
  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........    (12,259)   (14,883)   (14,005)
  Other investing activities, net............     (1,247)    (6,126)   (18,646)
                                               ---------  ---------  ---------
  Net cash used in investing activities......   (829,200)  (881,809)  (903,922)
                                               ---------  ---------  ---------
Financing activities:
  Net proceeds from issuance of equity
   securities to outside parties.............    133,384     73,184     73,185
  Net proceeds from issuance of equity
   securities to related parties.............      4,849    646,291    623,315
  Additions to borrowed funds................     54,000    872,172    472,478
  Repayments of borrowed funds...............    (63,121)  (876,420)  (647,412)
  Financing costs and other..................     (3,267)       --         --
                                               ---------  ---------  ---------
  Net cash provided by financing activities..    125,845    715,227    521,566
                                               ---------  ---------  ---------
Net change in cash and cash equivalents from
 operating, investing and financing
 activities..................................    (74,858)    98,140     51,187
Net decrease in cash due to foreign currency
 fluctuations................................       (215)      (766)      (326)
                                               ---------  ---------  ---------
Net change in cash and cash equivalents......    (75,073)    97,374     50,861
Cash and cash equivalents at beginning of the
 year........................................    152,213     54,839      3,978
                                               ---------  ---------  ---------
Cash and cash equivalents at end of the year.  $  77,140  $ 152,213  $  54,839
                                               =========  =========  =========
</TABLE>

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

                                       55
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 2000

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 Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Pictures," the
Company has presented an unclassified consolidated balance sheet. Certain
reclassifications have been made to amounts reported in prior periods to
conform with current presentation.

  Business. The Company is engaged primarily in the development, production
and worldwide distribution of theatrical motion pictures and television
programs. The Company also distributes films produced or financed, in whole or
in part, by third parties. The Company's business units have been aggregated
into three reportable operating segments: feature films, television
programming and other operating activities (see Note 12). Operating units
included in the other operating segment include licensing and merchandising,
interactive media and music, as well as the Company's equity investments.

  Motion picture and television production and distribution is highly
speculative and inherently risky. There can be no assurance of the economic
success of such motion pictures and television programming since the revenues
derived from the production and distribution (which do not necessarily bear a
direct correlation to the production or distribution costs incurred) depend
primarily upon their acceptance by the public, which cannot be predicted. The
commercial success of a motion picture also depends upon the quality and
acceptance of other competing films released into the marketplace at or near
the same time, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty. 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.

  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, 2000

                                      56
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and 1999 is approximately $7,680,000 and $2,143,000, respectively, of cash
restricted by various escrow agreements. 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, 2000.

  Revenue Recognition. 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 revenue 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. Long-term non-interest-bearing receivables arising from licensing
agreements are discounted to present value.

  Accounting for Film and Television Costs. Except for purchase accounting
adjustments, film costs include the costs of production, prints, pre-release
and other advertising expected to benefit future periods and 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 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.

  Film costs are stated at the lower of unamortized cost or estimated net
realizable 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 required to produce a zero gross
margin over the remaining life of the film or television program.

  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. 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. The Company has
adopted 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

                                      57
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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. 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. Accumulated amortization of goodwill was $56,303,000 and
$41,569,000 as of December 31, 2000 and 1999, respectively.

  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 bases 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 9.06 percent and 8.63 percent at December 31, 2000 and
1999, respectively), which approximates the Company's current effective
borrowing rates.

  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 mismatches 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 exchange, at specified intervals, the difference between fixed-rate
and floating-rate interest amounts calculated by reference to an agreed
notional principal amount. See "New Accounting Pronouncements."

  Accounts and Contracts Receivable. At December 31, 2000, accounts and
contracts receivable aggregated $439,031,000 (before allowance for doubtful
accounts), of which approximately $246,240,000 is due within one year.
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, 2000, there were no significant customers accounting for
greater than ten percent of the Company's accounts and contracts receivable.
At December 31, 1999, approximately 17 percent of the Company's accounts and
contracts receivable arose from an exclusive home video servicing agreement
with Warner Home Video (see Note 3).

  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

                                      58
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

loss per share was 204,797,589, 158,015,955 and 75,816,326 in the years ended
December 31, 2000, 1999 and 1998, 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
2,220,972 and 1,642,556 are not included in the calculation of diluted EPS for
the years ending December 31, 1999 and 1998, respectively, because they are
antidilutive.

  Comprehensive Income. 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.

  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 from those estimates.

  New Accounting Pronouncements. Effective January 1, 2000, the Company
adopted the Securities and Exchange Commission Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." The SAB
provides guidance on the recognition, presentation and disclosure of revenue
in financial statements, including certain criteria for gross versus net
recording of sales transactions. The adoption of SAB No. 101 did not
materially impact the Company's results of operations.

  The Company adopted the Emerging Issues Task Force ("EITF") Issue No. 00-02,
"Accounting For Web Site Development Costs" in 2000. The EITF provides
guidance on accounting for costs incurred to develop a web site. The adoption
of the EITF did not have a material impact on the Company's financial
statements.

  In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 139, which, effective for financial statements for fiscal years beginning
after December 15, 2000, rescinds FASB No. 53. The companies that were
previously subject to the requirements of SFAS No. 53 shall now follow the
guidance in American Institute of Certified Public Accountants Statement of
Position ("SOP") 00-2, "Accounting by Producers or Distributors of Films,"
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 Accounting Principles Board
Opinion No. 20, "Accounting Changes." The Company adopted SOP 00-2 beginning
January 1, 2001 and will reflect the results of this change in the 2001 first
quarter results. Based on the Company's estimates at this time, the effect of
adopting SOP 00-2 as of January 1, 2001 will result in a one-time, non-cash
cumulative effect charge to earnings of approximately $375,000,000 to
$400,000,000, primarily to reduce the carrying value of its film inventory.
The new rules also require that advertising costs be expensed as incurred as
opposed to the old rules which allowed advertising costs to be capitalized as
part of film costs and amortized using the film forecast model. 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.

  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Deferral of
the Effective Date of FASB No. 133, Accounting for Derivative Instruments and
Hedging Activities," and by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB No. 133,"
which is effective for all quarters of fiscal years beginning after June 15,
2000. This statement establishes accounting and reporting

                                      59
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company intends
to adopt SFAS No. 133 beginning January 1, 2001. The Company does not expect
the adoption of SFAS No. 133 to materially impact its results of operations.

Note 2--Acquisitions, Restructuring and Other Charges

  PFE Library Acquisition. On January 7, 1999, the Company acquired certain
film libraries and film related rights (the "PFE Libraries") containing over
1,300 feature films that were previously owned by PolyGram for $235,000,000
(the "PFE Library Acquisition"), plus acquisition related costs of $1,201,000.
The Company funded the PFE Library Acquisition through an advance on the
Revolving Facility (as defined in Note 7) and utilization of cash on hand.

  Restructuring and Other Charges. In association with a restructuring program
implemented by the Company in September 1998, the Company recorded a charge
against earnings of $13,182,000 representing severance and other costs, of
which $13,091,000 has been paid through December 31, 2000. This charge
included the termination of 114 employees across all divisions of the Company.

  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 million, including (i) a
$129,388,000 million 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 production, which has been included as a charge in film and
television production and distribution expenses, and (ii) $85,171,000 million
of severance and other related costs, of which $9,013,000 million has been
classified in 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. As of
December 31, 2000, the Company has utilized all $129,388,000 of the pre-
release film cost write-down reserves and has paid $52,377,000 of the
severance and related costs.

  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.

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 for
$225,000,000 for costs in connection with the early expiration of WHV's rights
under the WHV Agreement.

                                      60
<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,
                                                           2000         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Theatrical productions:
     Released.........................................  $3,396,540   $3,011,248
     Less: accumulated amortization...................  (1,779,647)  (1,277,426)
                                                        ----------   ----------
     Released, net....................................   1,616,893    1,733,822
     Completed not released ..........................      74,665       28,286
     In process and development, net..................     415,022       88,889
                                                        ----------   ----------
       Subtotal: theatrical productions...............   2,106,580    1,850,997
                                                        ----------   ----------
   Television programming.............................     814,224      697,515
     Less: accumulated amortization...................    (498,005)    (384,054)
                                                        ----------   ----------
       Subtotal: television programming...............     316,219      313,461
                                                        ----------   ----------
                                                        $2,422,799   $2,164,458
                                                        ==========   ==========
</TABLE>

  Interest costs capitalized to theatrical productions were $15,453,000,
$15,845,000 and $16,775,000 during the years ended December 31, 2000, 1999 and
1998, respectively.

  Based on the Company's estimates of projected gross revenues as of December
31, 2000, approximately 70 percent of unamortized film costs applicable to
released theatrical films and television programs, excluding acquired film
libraries, will be amortized during the four years ending December 31, 2004.
For acquired film libraries, approximately $1.2 billion of net film costs as
of December 31, 2000 remain to be amortized under the income forecast method
over an average remaining life of 16.4 years.

Note 5--Investments and Advances to Affiliates

  Until November 1, 2000, distribution in foreign theatrical and certain pay
television markets was performed by 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 profits in UIP realized in the year ended December 31,
2000. The Company's share of the net profits in UIP in the years ended
December 31, 1999 and 1998 were $5,568,000 and $7,391,000, respectively.

  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 annual 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.

  In May 1996, the Company entered into a joint venture agreement with Encore
International, Inc., an indirect subsidiary of Telecommunications, Inc., to
develop MGM Gold Networks (Asia) ("MGM Gold"), a satellite and cable delivery
channel based in Asia whose operations were terminated in April 1998. In
addition,

                                      61
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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
$21,000,000 as of December 31, 2000. The Company's share of MGM Gold's and MGM
Latin America's start-up losses in the years ended December 31, 2000, 1999 and
1998 were $3,388,000, $6,952,000 and $9,296,000, 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 (losses) aggregating $5,341,000,
$627,000 and $(3,240,000) in the years ended December 31, 2000, 1999 and 1998,
respectively.

  Investments are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           2000         1999
                                                       ------------ ------------
     <S>                                               <C>          <C>
     UIP..............................................   $   --       $ 6,004
     MGM Latin America................................     5,009        5,898
     Others...........................................     7,394        3,305
                                                         -------      -------
                                                         $12,403      $15,207
                                                         =======      =======
</TABLE>

Note 6--Property and Equipment

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

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           2000         1999
                                                       ------------ ------------
     <S>                                               <C>          <C>
     Leasehold improvements...........................   $ 25,877     $ 22,974
     Furniture, fixtures and equipment................     60,414       51,058
                                                         --------     --------
                                                           86,291       74,032
     Less accumulated depreciation and amortization...    (39,220)     (25,829)
                                                         --------     --------
                                                         $ 47,071     $ 48,203
                                                         ========     ========
</TABLE>

Note 7--Bank and Other Debt

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

<TABLE>
<CAPTION>
                                                      December 31, December 31,
                                                          2000         1999
                                                      ------------ ------------
     <S>                                              <C>          <C>
     Term Loans......................................   $700,000     $700,000
     Capitalized lease obligations and other
      borrowings.....................................      9,952       19,438
                                                        --------     --------
                                                        $709,952     $719,438
                                                        ========     ========
</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

                                      62
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 2.25 percent over the adjusted LIBOR rate, as defined (8.81
percent at December 31, 2000). The Tranche B Loan bears interest at 2.50
percent over the Adjusted LIBOR rate (9.06 percent at December 31, 2000).
Scheduled amortization of the Term Loans under the Amended Credit Facility
commences with $33,000,000 in 2001, $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 has entered into three year fixed interest rate swap contracts
in relation to a portion of the Amended Credit Facility for a notional value
of $575,000,000 at an average rate of approximately 7.82 percent, which expire
in various times no later than July 2003. The Company has also entered into
additional forward interest rate swap contracts commencing in 2001 for a
notional value of $325,000,000 at an average rate of approximately 8.71
percent, which expire in July 2003. At December 31, 2000, the Company would be
entitled to receive approximately $469,000 if all such swap contracts were
terminated.

  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.

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

  Maturity schedule. Credit facilities, lease and other borrowings as of
December 31, 2000 are scheduled to mature as follows (in thousands):

<TABLE>
     <S>                                                                <C>
     2001.............................................................. $ 34,077
     2002..............................................................   74,069
     2003..............................................................  108,689
     2004..............................................................  103,617
     2005..............................................................  103,000
     Thereafter........................................................  286,500
                                                                        --------
                                                                        $709,952
                                                                        ========
</TABLE>

Note 8--Stockholders' Equity

  Seven Sale. On September 1, 1998, Tracinda purchased from Seven Network
Limited, a former stockholder ("Seven"), 16,208,463 shares of the Common
Stock, representing all of the capital stock of the Company beneficially owned
by Seven, for a price per share of $24 and an aggregate purchase price of
$389,003,000 (the "Seven Sale"). With the consummation of the Seven Sale,
Tracinda and 250 Rodeo, Inc., an affiliate of Tracinda ("250 Rodeo"),
increased their beneficial ownership of the Company to approximately
89.5 percent.

  1998 Rights Offering. On October 26, 1998, the Company issued to the holders
of record of the Common Stock, at no charge to such holders, transferable
subscription rights (the "Rights") to subscribe for 84,848,485 shares (the
"Shares") of the Common Stock for $8.25 per share (the "1998 Subscription
Price") (the "1998 Rights Offering"). Holders of the Common Stock received
1.289 Rights for each share of the Common Stock held as of October 26, 1998.
Rights holders were allowed to purchase one share of the Common Stock at the
1998 Subscription Price for each whole Right held (the "Basic Subscription
Privilege"). Rights

                                      63
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

holders who exercised the Basic Subscription Privilege in full also had the
opportunity to purchase additional shares at the 1998 Subscription Price
pursuant to an Oversubscription Privilege, as defined. Pursuant to the 1998
Rights Offering, Tracinda and 250 Rodeo each committed to exercise the Basic
Subscription Privilege with respect to all of the Subscription Rights
distributed to it (subject to certain conditions). The Rights pursuant to the
1998 Rights Offering expired on November 16, 1998. The 1998 Rights Offering
was fully subscribed (including shares issued pursuant to the Oversubscription
Privilege), and the Company issued the Shares for total net proceeds of
$696,500,000 (gross proceeds of $700,000,000 less applicable fees and expenses
of approximately $3,500,000). The net proceeds from the 1998 Rights Offering
were used to repay in full the amounts outstanding under a bridge loan, and
then to repay borrowings outstanding under the Revolving Facility.

  In connection with the 1998 Rights Offering, the Company also amended its
Amended and Restated Certificate of Incorporation in order to increase the
number of shares of the Common Stock authorized from 125,000,000 to
250,000,000 (the "Amendment"). The Amendment was approved by the Board of
Directors of the Company and Tracinda (which represents a majority of the
outstanding Common Stock) on October 22, 1998 and was effective prior to the
closing of the 1998 Rights Offering.

  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 to subscribe for an aggregate of 49,714,554
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 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 its 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 its common stock at $25 per share to third party investors
for aggregate net proceeds of $11,845,000.

  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.

  In connection with the 1998 Rights Offering, the per share exercise price of
the stock options granted to certain executive officers and other senior
employees of the Company (the "Executive Repricing Participants") aggregating
3,164,604 options were reduced from between $20.00 and $24.00 to $14.90, and
for approximately 400 other employees the exercise price of 2,027,900 stock
options was reduced from $20.00 to $14.90, for 10,400 options from $22.00 to
$14.90, for 103,800 options from $21.50 to $14.90 and for 19,800 options from
$19.63 to $14.90 (collectively, the "Options Repricing").

                                      64
<PAGE>

                            METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Stock option transactions under the 1996 Incentive Plan were as follows:

<TABLE>
<CAPTION>
                             December 31, 2000    December 31, 1999    December 31, 1998
                            -------------------- -------------------- --------------------
                                        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...... 21,396,307   $20.52   7,712,611   $17.25   7,683,952   $22.71
   Granted.................  3,116,082   $22.92  16,198,950   $22.17   5,973,714   $14.73
   Exercised...............   (330,802)  $14.66    (218,421)  $14.83         --       --
   Cancelled...............   (506,553)  $16.08  (2,296,833)  $15.60  (5,945,055)  $22.16
                            ----------   ------  ----------   ------  ----------   ------
   Options outstanding at
    end of year............ 23,675,034   $21.01  21,396,307   $20.52   7,712,611   $17.25
                            ==========   ======  ==========   ======  ==========   ======
   Options exercisable at
    end of year............  9,457,039   $19.86   3,619,361   $15.77     765,662   $24.00
                            ==========   ======  ==========   ======  ==========   ======
</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.

  The following table summarizes information about the outstanding options as
of December 31, 2000 under the 1996 Incentive Plan :

<TABLE>
<CAPTION>
                                                    Outstanding Weighted average
                                                     number of     remaining
       Exercise price                                 options   contractual life
       --------------                               ----------- ----------------
       <S>                                          <C>         <C>
       $11.38......................................    151,580        7.94
       $14.90...................................... 11,954,992        6.39
       $15.19-$19.94...............................  1,282,750        9.49
       $20.00-$26.63...............................  2,435,712        8.87
       $30.00......................................  7,850,000        8.36
                                                    ----------
                                                    23,675,034
                                                    ==========
</TABLE>

  The Company applies Accounting Principles Board ("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 loss would have been
the following pro forma amounts (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                  ----------------------------
                                                   2000     1999       1998
                                                  ------- ---------  ---------
   <S>                                            <C>     <C>        <C>
   Net income (loss):
    As reported.................................. $50,999 $(530,910) $(157,648)
    Pro forma.................................... $16,721 $(547,304) $(170,546)
   Basic earnings per share:
    As reported.................................. $  0.25 $   (3.36) $   (2.08)
    Pro forma.................................... $  0.08 $   (3.46) $   (2.25)
   Diluted earnings per share:
    As reported.................................. $  0.24 $   (3.36) $   (2.08)
    Pro forma.................................... $  0.08 $   (3.46) $   (2.25)
</TABLE>

                                       65
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  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, 2000, 1999 and 1998 was
$12.54, $8.03 and $4.62, respectively. The dividend yield was 0 percent in all
periods, and expected volatility was 56.3 percent, 59.5 percent and 40.5
percent for the years ended December 31, 2000, 1999 and 1998, 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 6.2
percent, 5.6 percent and 4.9 percent for the years ended December 31, 2000,
1999 and 1998, 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") have been 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 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. At December 31, 2000, there
were 2,293,634 Bonus Interests outstanding, of which 2,147,927 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 $2,650,000 and $25,328,000 for obligations under
these plans for the years ended December 31, 2000 and 1999, respectively, of
which $25,328,000 is included in restructuring and other charges related to
employees terminated in 1999. There were no charges related to these plans in
the year ended December 31, 1998.

  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. In the case
of certain named executive officers of the Company (the "Named Executive
Officers"), bonus awards are determined solely by the Section 162(m)
Subcommittee of the Compensation Committee of the Board of Directors (the
"Subcommittee") as follows: (a) objective performance goals, bonus targets and
performance measures are pre-established by the Subcommittee at a time when
the actual performance relative to the goal remains substantially uncertain
and may be based on such objective business criteria as the Subcommittee may
determine, including film performance and EBITDA, among others; (b) the
Subcommittee 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 Subcommittee
will certify to the Company's Board of Directors or the Executive Committee
that the objective pre-established performance goals upon which such

                                      66
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

bonus is based have been attained and that the amount of each bonus has been
determined solely on the basis of the attainment of such goals (subject to the
exercise of the negative discretion discussed above). The Company has expensed
$14,000,000 for obligations under this plan for the year ended December 31,
2000.

  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 9--Income Taxes

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

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           2000         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Current............................................   $34,056      $31,619
   Deferred...........................................       --           --
                                                         -------      -------
                                                         $34,056      $31,619
                                                         =======      =======
</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,
                                                           2000         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Deferred tax assets:
     Film and television costs........................  $ 250,768    $ 182,954
     Participations and residuals payable.............     24,923       28,913
     Reserves and investments.........................     56,949       56,668
     Net miscellaneous tax assets.....................     43,691       34,127
     Operating loss carryforwards.....................    123,225      196,592
                                                        ---------    ---------
       Subtotal, gross deferred tax assets............    499,556      499,254
     Valuation allowance..............................   (396,362)    (368,628)
                                                        ---------    ---------
       Total deferred tax assets......................    103,194      130,626
                                                        ---------    ---------
   Deferred tax liabilities:
     Film revenue.....................................    (69,166)     (62,081)
     Purchased film costs.............................    (26,529)     (63,029)
     Goodwill.........................................     (7,499)      (5,516)
                                                        ---------    ---------
       Total deferred tax liabilities.................   (103,194)    (130,626)
                                                        ---------    ---------
   Net deferred tax liability.........................  $     --     $     --
                                                        =========    =========
</TABLE>

  At December 31, 2000, the Company and its subsidiaries for U.S. federal
income tax purposes had net operating loss carryforwards of $49,804,000,
$163,568,000, $91,511,000 and $10,977,000, which expire in 2019, 2018, 2012
and 2011, respectively. 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, 2000, the Company has determined that $396,000 of deferred
tax assets do not satisfy the recognition criteria set forth in SFAS No. 109.
Accordingly, a valuation allowance has been recorded by the Company for this
amount.

                                      67
<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,
                                                 -----------------------------
                                                   2000      1999       1998
                                                 --------  ---------  --------
   <S>                                           <C>       <C>        <C>
   Current taxes:
     Foreign taxes.............................. $ 12,480  $   9,801  $ 10,181
     Federal and state taxes....................    1,000        --        --
   Deferred taxes:
     Federal and state taxes....................  (27,734)  (140,584)  (54,177)
     Adjustment for change in valuation
      allowance.................................   27,734    140,584    54,177
                                                 --------  ---------  --------
   Total tax provision.......................... $ 13,480  $   9,801  $ 10,181
                                                 ========  =========  ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                  -----------------------------
                                                   2000       1999       1998
                                                  -------    -------    -------
   <S>                                            <C>        <C>        <C>
   Federal tax rate on pre-tax book income
    (loss).......................................      35 %      (35)%      (35)%
   Goodwill and other permanent differences......       9          1          3
   Foreign taxes, net of available federal tax
    benefit......................................      14          2          7
   Loss carryforward and other tax attributes
    (benefited) not benefited....................     (37)        34         32
                                                  -------    -------    -------
   Effective tax rate............................      21 %        2 %        7 %
                                                  =======    =======    =======
</TABLE>

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

Note 10--Retirement Plans

  The Company has a non-contributory retirement plan (the "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 Postretirement Benefits," which revised employers'
disclosures about pension and post-retirement benefit plans.

                                      68
<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,
                                                           2000         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Projected benefit obligations:
     Beginning obligations...........................    $13,840      $13,652
     Service cost....................................      1,459        1,681
     Interest cost...................................      1,230        1,070
     Actuarial loss (gain)...........................      1,282       (2,403)
     Curtailments....................................     (2,770)         --
     Benefits paid...................................       (499)        (160)
                                                         -------      -------
     Ending obligations..............................    $14,542      $13,840
                                                         =======      =======
   Fair value of plan assets (primarily debt
    securities):
     Beginning fair value............................    $13,640      $11,205
     Actual return on plan assets....................        313          935
     Employer contributions..........................      1,234        1,660
     Benefits paid...................................       (499)        (160)
                                                         -------      -------
     Ending fair value...............................    $14,688      $13,640
                                                         =======      =======

<CAPTION>
                                                       December 31, December 31,
                                                           2000         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Funded status of the plans:
     Projected benefit obligations...................    $14,542      $13,840
     Plan assets at fair value.......................     14,688       13,640
                                                         -------      -------
     Projected benefit obligations in excess of (less
      than) plan assets..............................        146         (200)
     Unrecognized net asset as of beginning of year..       (100)        (120)
     Unrecognized net gain...........................     (1,214)        (622)
     Unrecognized prior service credit...............       (121)        (136)
     Effect of curtailment...........................      1,588          --
                                                         -------      -------
     Net balance sheet asset (liability).............    $   299      $(1,078)
                                                         =======      =======

   Key assumptions used in the actuarial computations
    were as follows:

     Discount rate...................................       7.50%        7.75%
                                                         =======      =======
     Long-term rate of return on assets..............       7.25%        7.25%
                                                         =======      =======
     Rate of increase in future compensation levels..       5.00%        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.

                                      69
<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,
                                                        -----------------------
                                                         2000     1999    1998
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
     Service cost...................................... $ 1,459  $1,681  $1,149
     Interest cost on projected benefit obligation.....   1,230   1,070     852
     Expected return on plan assets....................  (1,210)   (857)   (676)
     Net amortization and deferral.....................     (34)     43     (34)
     Recognized curtailment gain.......................  (1,588)    --      --
                                                        -------  ------  ------
     Net periodic pension (benefit) cost............... $  (143) $1,937  $1,291
                                                        =======  ======  ======
</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 $11,577,000, $6,884,000 and $8,890,000,
respectively, for such plans for the years ended December 31, 2000, 1999 and
1998. 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 $1,285,000, $1,350,000 and $1,435,000, respectively,
to the Savings Plan in the years ended December 31, 2000, 1999 and 1998.

Note 11--Related Party Transactions

  In February 1980, a predecessor-in-interest to the Company granted to a
predecessor-in-interest to MGM Grand, Inc. an exclusive open-ended royalty-
free license, which was amended in 1992 and further 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. In 1986 MGM granted MGM Grand Air, Inc.
("Grand Air") an exclusive open-ended royalty-free license to use one of its
logos consisting of a stylized depiction of a lion in Grand Air's airline
business. The Company did not receive any monetary compensation for these
licenses. 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 both MGM Grand Hotel, Inc. ("Grand Hotel") and
Grand Air. 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. During the years ended December 31, 2000, 1999 and 1998, the Company
recognized revenues of $6,000, $17,000 and $24,000, respectively, for such
videocassettes and merchandise.

                                      70
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  From time to time, the Company charters airplanes from 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,
2000, 1999 and 1998, the aggregate of the payments made to Tracinda for such
charters were approximately $98,000, $149,000 and $3,000, respectively.

  In 1995, the Company licensed to a subsidiary of Seven, a former beneficial
owner of more than 5 percent of the Company's Common Stock, the right to
distribute certain motion picture and television product in the Australian
free television market. This agreement was amended on September 9, 1997. The
product licensed includes certain library pictures and theatrical motion
pictures and television series, miniseries and made-for-television movies
produced or distributed by the Company during the term of the agreement. The
license fees for the library product are at a rate which the Company believes
is arm's-length. The term of the output portion of the agreement is 15 years.
The license fees for output product television series, television movies and
television mini-series are on a "most favored nations" basis with prices paid
by the Seven subsidiary for comparable programming. During the years ended
December 31, 2000, 1999 and 1998, the Company recognized revenues of
$5,298,000, $5,475,000 and $5,651,000, respectively, under this agreement.
Management believes that the terms of this agreement are consistent with the
terms of comparable television license arrangements with third parties.

  In 1994, in connection with the formation of Movie Network Channels, a joint
venture in which the Company has a non-controlling interest and a subsidiary
of Seven had a non-controlling interest until April 1999, 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
$3,273,000, $3,261,000 and $3,678,000 during the years ended December 31,
2000, 1999 and 1998, 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.

  Seven has agreed to reimburse the Company for losses that the Company may
incur in connection with the distribution of an Australian film with respect
to which the Company has acquired distribution rights from an unrelated third
party.

  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
$23,861,000, $12,072,000 and $8,824,000 during the years ended December 31,
2000, 1999 and 1998, 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 and $2,429,000 during the years ended December 31, 1999 and 1998,
respectively. 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.

                                      71
<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 12--Segment Information

  The Company applies the disclosure provisions of SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." The Company's
business units have been aggregated into three reportable operating segments:
feature films, television programming and other (see Note 1). 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 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>
                                    Feature    Television
                                     Films      Programs   Other     Total
                                   ----------  ---------- -------  ----------
   <S>                             <C>         <C>        <C>      <C>
   Year Ended December 31, 2000:
     Revenues..................... $1,058,296   $139,229  $39,922  $1,237,447
     Segment income (loss)........ $  200,478   $ (2,649) $19,721  $  217,550
     Identifiable assets.......... $2,479,639   $401,776  $14,772  $2,896,187
     Capital expenditures......... $   10,493   $  1,700  $ 2,566  $   14,759
     Depreciation expense......... $   11,909   $  1,930  $    74  $   13,913

   Year Ended December 31, 1999:
     Revenues..................... $  888,303   $205,719  $48,411  $1,142,433
     Segment income (loss)........ $  (77,590)  $ 27,602  $19,681  $  (30,307)
     Identifiable assets.......... $2,255,693   $423,204  $18,104  $2,697,001
     Capital expenditures......... $   12,691   $  2,102  $ 6,216  $   21,009
     Depreciation expense......... $    8,187   $  1,356  $    58  $    9,601

   Year Ended December 31, 1998:
     Revenues..................... $1,005,747   $197,759  $37,217  $1,240,723
     Segment income (loss)........ $   39,748   $ 12,885  $(3,758) $   48,875
     Identifiable assets.......... $2,096,092   $400,646  $19,718  $2,516,456
     Capital expenditures......... $    9,293   $  1,776  $18,733  $   29,802
     Depreciation expense......... $    5,683   $  1,086  $    53  $    6,822
</TABLE>

                                      72
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    --------------------------
                                                     2000     1999      1998
                                                    -------  -------  --------
   <S>                                              <C>      <C>      <C>
   Licensing and merchandising..................... $ 5,666  $ 4,763  $    484
   Interactive media...............................   9,381    1,309    (9,930)
   Music...........................................   6,111    7,202     4,787
   Profit (loss) on equity investments.............   1,953   (6,325)  (12,536)
   Profit on sale of interest in joint venture.....     --       --     10,000
   Other...........................................  (3,390)  12,732     3,437
                                                    -------  -------  --------
                                                    $19,721  $19,681  $ (3,758)
                                                    =======  =======  ========
</TABLE>

  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,
                                               -------------------------------
                                                 2000       1999       1998
                                               ---------  ---------  ---------
   <S>                                         <C>        <C>        <C>
   Segment income (loss)...................... $ 217,550  $ (30,307) $  48,875
   General and administrative expenses........  (103,333)   (92,116)   (92,244)
   Severance and related (costs) recoveries...     3,715    (76,158)   (13,182)
   Contract termination fee...................       --    (225,000)       --
   Goodwill amortization......................   (14,734)   (14,853)   (14,289)
                                               ---------  ---------  ---------
     Operating income (loss)..................   103,198   (438,434)   (70,840)
   Interest expense, net of amounts
    capitalized...............................   (51,425)   (86,445)   (80,611)
   Interest and other income, net.............    12,706      3,770      3,984
                                               ---------  ---------  ---------
     Income (loss) from operations before
      provision for income taxes.............. $  64,479  $(521,109) $(147,467)
                                               =========  =========  =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                               --------------------------------
                                                  2000       1999       1998
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Total assets for reportable segments....... $2,896,187 $2,697,001 $2,516,456
   Goodwill not allocated to segments.........    531,440    546,173    561,026
   Other unallocated amounts (principally
    cash).....................................    120,563    181,187     81,496
                                               ---------- ---------- ----------
     Consolidated total assets................ $3,548,190 $3,424,361 $3,158,978
                                               ========== ========== ==========
</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,
                                               --------------------------------
                                                  2000       1999       1998
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   United States and Canada................... $  669,158 $  648,857 $  740,480
   Europe.....................................    372,308    338,811    276,673
   Asia and Australia.........................    138,672    106,965    158,615
   Other......................................     57,309     47,800     64,955
                                               ---------- ---------- ----------
                                               $1,237,447 $1,142,433 $1,240,723
                                               ========== ========== ==========
</TABLE>

                                      73
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 13--Commitments and Contingencies

  Leases. The Company has operating leases for offices and equipment. Certain
property leases include provisions for increases over base year rents as well
as for escalation clauses for maintenance and other building operations. Rent
expense was approximately $17,264,000, $16,528,000 and $15,011,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.

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

  Creative Talent Agreements. The Company has entered into contractual
agreements for creative talent related to future film production. Such amounts
are scheduled to be paid through 2002.

  Future minimum annual commitments under non-cancelable operating leases,
employment agreements, and creative talent agreements as of December 31, 2000
are as follows (in thousands):

<TABLE>
       <S>                                                              <C>
       2001............................................................ $ 70,980
       2002............................................................   36,431
       2003............................................................   27,310
       2004............................................................   21,335
       2005............................................................   19,955
       Thereafter......................................................  316,729
                                                                        --------
                                                                        $492,740
                                                                        ========
</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.

  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 14--Supplementary Cash Flow Information

  The Company paid interest, net of capitalized interest, of $43,936,000,
$74,054,000 and $66,887,000 during the years ended December 31, 2000, 1999 and
1998, respectively. The Company paid income taxes of $12,829,000, $13,037,000
and $7,137,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.

  During the year ended December 31, 2000, the Company issued to its 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 its 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).

                                      74
<PAGE>

                           METRO-GOLDWYN-MAYER INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 15--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>
   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 income per share............ $     .03  $     .03  $    .13  $    .06
   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

   1998:
   Revenues.......................... $ 316,460  $ 281,201  $259,622  $383,440
   Operating income (loss)........... $   1,929  $ (33,621) $(17,402) $(21,746)
   Interest expense, net of amounts
    capitalized...................... $ (18,254) $ (20,174) $(22,022) $(20,161)
   Net loss.......................... $ (18,643) $ (54,994) $(40,271) $(43,740)
   Basic and diluted loss per share.. $    (.28) $    (.84) $   (.61) $   (.30)
</TABLE>

  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.

Note 16--Subsequent Events

  Cable Investment. On February 1, 2001, the Company agreed to invest
$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) (the "Cable
Channels"). These partnerships are now 100 percent owned by Rainbow Media
Holdings, Inc., a 74 percent subsidiary of Cablevision Systems Corporation
("Rainbow Media"). The proceeds of the $825,000,000 investment will be used as
follows: (1) $365,000,000 will be used to repay bank debt of the partnerships;
(2) $295,500,000 will be used to repay intercompany loans from Cablevision and
its affiliates; and (3) $164,500,000 will be added to the working capital of
the partnerships. The Company's investment is to be made no later than April
2, 2001.

  While the Company will not be involved in the day-to-day operations of the
Cable Channels, the Company's approval will be 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.

  The Company will 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 the Company to participate in any such sale.

                                      75
<PAGE>

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, 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 is forming a wholly-owned
subsidiary which will make the above-described investment, will serve as a
general partner of the applicable Rainbow Media companies and will be the MGM
entity which holds the aforesaid partnership interests and rights attendant
thereto.

  Sale of Common Stock. In February 2001, pursuant to a Form S-3 shelf
registration statement filed on May 5, 2000 with the Securities and Exchange
Commission, the Company sold 10,660,590 shares of its common stock for gross
proceeds of $220,461,000. The Company intends to use the proceeds of this sale
to help finance the investment in the Cable Channels.

  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 $325,000,000. The Company intends to use the net proceeds of this sale to
help finance the investment in the Cable Channels. The Preferred Stock does
not bear dividends but has a liquidation preference of $0.01 per share. The
Preferred Stock will become 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. Tracinda will have a demand
registration right for the common stock it receives upon conversion of the
Preferred Stock. The Company expects to obtain stockholder approval of the
issuance of the common stock to Tracinda at its next annual meeting of
stockholders scheduled to be held on May 2, 2001. The Tracinda Group currently
beneficially owns approximately 82.2 percent of the Company's outstanding
common stock (83.4 percent assuming conversion of the Preferred Stock).

                                      76
<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 8, 2001. 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 8, 2001

                                      77
<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,
                                                          2000         1999
                                                      ------------ ------------
<S>                                                   <C>          <C>
                       ASSETS

Investments and advances to affiliates...............  $2,309,687   $2,116,824
                                                       ==========   ==========

        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, 207,217,585 and 201,419,331 shares
   issued............................................       2,072        2,014
  Additional paid-in capital.........................   3,072,611    2,931,004
  Deficit............................................    (765,507)    (816,506)
  Accumulated other comprehensive income.............         511          316
  Less: treasury stock, at cost......................         --            (4)
                                                       ----------   ----------
    Total stockholders' equity.......................   2,309,687    2,116,824
                                                       ----------   ----------
                                                       $2,309,687   $2,116,824
                                                       ==========   ==========
</TABLE>


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

                                       78
<PAGE>

                            METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

            STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                          ------------------------------------
                                             2000         1999         1998
                                          -----------  -----------  ----------
<S>                                       <C>          <C>          <C>
Revenues................................  $       --   $       --   $      --
Expenses:
  Equity in net (profit) losses of
   subsidiaries.........................      (50,999)     530,910     157,648
                                          -----------  -----------  ----------
    Total expenses......................      (50,999)     530,910     157,648
                                          -----------  -----------  ----------
Net income (loss).......................       50,999     (530,910)   (157,648)
Foreign currency translation
 adjustments............................          152           62        (741)
Unrealized gains on securities..........           43          --          --
                                          -----------  -----------  ----------
Comprehensive income (loss).............  $    51,194  $  (530,848) $ (158,389)
                                          -----------  -----------  ----------
Income (loss) per share:
  Basic.................................  $      0.25  $     (3.36) $    (2.08)
                                          ===========  ===========  ==========
  Diluted...............................  $      0.24  $     (3.36) $    (2.08)
                                          ===========  ===========  ==========
Weighted average number of common shares
 outstanding:
  Basic.................................  204,797,589  158,015,955  75,816,326
                                          -----------  -----------  ----------
  Diluted...............................  210,313,274  158,015,955  75,816,326
                                          ===========  ===========  ==========
</TABLE>


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

                                       79
<PAGE>

                            METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

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

<TABLE>
<CAPTION>
                             Common Stock
                          ------------------   Add'l    Retained   Accum. Other   Less:        Total
                            No. of     Par    Paid-in    Earnings  Comprehensive Treasury  Stockholders'
                            Shares    Value   Capital   (Deficit)     Income      Stock       Equity
                          ----------- ------ ---------- ---------  ------------- --------  -------------
<S>                       <C>         <C>    <C>        <C>        <C>           <C>       <C>
Balance December 31,
 1997...................   65,765,655 $  658 $1,504,850 $(127,948)     $ 995     $   --     $1,378,555
Common stock issued in
 1998 rights offering,
 net....................   84,848,485    849    695,651       --         --          --        696,500
Common stock issued to
 directors, officers and
 employees, net.........      242,284      2      1,433       --         --          --          1,435
Amortization of deferred
 stock compensation.....          --     --       1,556       --         --          --          1,556
Foreign currency
 translation adjustment.          --     --         --        --        (741)        --           (741)
Net loss................          --     --         --   (157,648)       --          --       (157,648)
                          ----------- ------ ---------- ---------      -----     -------    ----------
Balance December 31,
 1998...................  150,856,424  1,509  2,203,490  (285,596)       254           0     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
Foreign currency
 translation adjustment.          --     --         --        --          62         --             62
Net loss................          --     --         --   (530,910)       --          --       (530,910)
                          ----------- ------ ---------- ---------      -----     -------    ----------
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
Other comprehensive
 income:
  Unrealized gains on
   securities...........          --     --         --        --         152         --            152
  Foreign currency
   translation
   adjustment...........          --     --         --        --          43         --             43
Net income..............          --     --         --     50,999        --          --         50,999
                          ----------- ------ ---------- ---------      -----     -------    ----------
Balance December 31,
 2000...................  207,217,585 $2,072 $3,072,611 $(765,507)     $ 511     $   --     $2,309,687
                          =========== ====== ========== =========      =====     =======    ==========
</TABLE>

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

                                       80
<PAGE>

                            METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                               -------------------------------
                                                 2000       1999       1998
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Operating activities:
  Net income (loss)........................... $  50,999  $(530,910) $(157,648)
  Adjustments to reconcile net income from
   operations to net cash used by operating
   activities:
    (Profit) losses on equity investments,
     net......................................   (50,999)   530,910    157,648
                                               ---------  ---------  ---------
    Net cash from operating activities........       --         --         --
                                               ---------  ---------  ---------
Financing activities:
  Proceeds from issuance of equity securities
   to outside parties.........................   133,384     73,184     73,185
  Proceeds from issuance of equity securities
   to related parties.........................     4,849    646,291    623,315
  Net intercompany advances (repayments)......  (138,233)  (719,475)  (696,500)
                                               ---------  ---------  ---------
    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.

                                       81
<PAGE>

                           METRO-GOLDWYN-MAYER INC.
                                 (PARENT ONLY)

                         NOTES TO FINANCIAL STATEMENTS

                               December 31, 2000

Note 1--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.

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.

                                      82
<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,
 2000:
  Reserve for allowances
   and doubtful
   accounts.............  $20,985    $  3,545      $  --   $  (1,583)   $22,947
                          =======    ========      ======  =========    =======
  Reserve for home video
   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 video
   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
                          =======    ========      ======  =========    =======
Year Ended December 31,
 1998:
  Reserve for allowances
   and doubtful
   accounts.............  $27,603    $    467      $  --   $  (4,850)   $23,220
                          =======    ========      ======  =========    =======
  Reserve for
   termination costs
   under acquisitions...  $16,380    $    --       $  --   $ (16,380)   $   --
                          =======    ========      ======  =========    =======
  Reserve for severance
   under corporate
   restructuring
   program..............  $   --     $ 13,182      $  --   $  (9,372)   $ 3,810
                          =======    ========      ======  =========    =======
</TABLE>
--------
(1)  Includes $5,000 recovery of prior year reserves for contract termination
     costs.

                                       83
<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(2)  Senior Management Bonus Plan dated as of November 11, 1997 and form
            of related Bonus Interest Agreement*

 10.11(6)  Bonus Interest Amendment*

 10.12(11) Form of 2000 Employee Incentive Plan*

 10.12(2)  Amended and Restated Employment Agreement of Frank G. Mancuso dated
            as of August 4, 1997

 10.13(10) Consulting Agreement of Frank G. Mancuso dated as of August 12, 1999

 10.14(2)  Employment Agreement of William A. Jones dated as of October 10,
            1996*

 10.15(1)  Amendment to Employment Agreement of William A. Jones dated as of
            July 16, 1999*

 10.16(5)  Employment Agreement of Daniel J. Taylor dated as of August 1, 1997*

 10.17(5)  Amendment to Employment Agreement of Daniel J. Taylor dated as of
            June 15, 1998*

 10.18(1)  Amendment to Employment Agreement of Daniel J. Taylor dated as of
            November 1, 2000*

 10.19(6)  Employment Agreement of Robert Brada dated as of March 3, 1995*

 10.20(6)  Amendment to Employment Agreement of Robert Brada dated as of June
            1, 1998*

 10.21(6)  Amendment to Employment Agreement of Robert Brada dated as of
            October 30, 1998*

 10.22(9)  Employment Agreement of Christopher J. McGurk dated as of April 28,
            1999*

 10.23(9)  Letter Agreement between the Company and Christopher J. McGurk dated
            April 28, 1999*

 10.24(9)  Employment Agreement of Alex Yemenidjian dated as of April 28, 1999*

 10.25(12) Employment Agreement of Jay Rakow dated as of August 7, 2000*
</TABLE>

                                       84
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
  Number                           Document Description
  -------                          --------------------
 <C>       <S>
 10.26(12) Addendum to Employment Agreement of Jay Rakow dated as of August 7,
            2000*

 10.27(12) Employment Agreement of Michael R. Gleason dated August 22, 2000

 10.28(2)  Indemnification Agreement dated as of October 10, 1996--Frank G.
            Mancuso

 10.29(2)  Indemnification Agreement dated as of October 10, 1996--William A.
            Jones

 10.30(2)  Indemnification Agreement dated as of October 10, 1996--James D.
            Aljian

 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 October 10, 1996--Robert Brada

 10.37(6)  Indemnification Agreement dated as of November 12, 1998--Alexander
            M. Haig, Jr.

 10.38(6)  Indemnification Agreement dated as of November 12, 1998--Willie D.
            Davis

 10.39(9)  Indemnification Agreement dated as of April 28, 1999--Christopher J.
            McGurk

 10.40(12) Indemnification Agreement dated as of August 2, 2000--Jay Rakow

 10.41(12) Indemnification Agreement dated as of September 7, 2000--Priscilla
            Presley

 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*

 21(1)     List of Subsidiaries of Metro-Goldwyn-Mayer Inc.
</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.

 (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.

                                      85
<PAGE>

 (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 31, 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.

                                      86