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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



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For the Quarterly Period Ended June
30, 2004



Commission File No. 1-13481



METRO-GOLDWYN-MAYER INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-4605850                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|10250 Constellation Boulevard, Los Angeles, CA                 |  | 90067                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



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



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x    No ̈



The number of shares of the Registrants common stock outstanding as of July 30, 2004 was 237,575,462.



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



FORM 10-Q



June 30, 2004



INDEX



|           |  |                                                                                                                          |  |         
|---------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                                          |  | Page No.
|           |  |                                                                                                                         
|Part I.    |  | FINANCIAL INFORMATION                                                                                                    |  |         
|           |  |                                                                                                                         
|Item 1.    |  | Financial Statements                                                                                                     |  |         
|           |  |                                                                                                                         
|           |  | Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003                              |  | 1       
|           |  |                                                                                                                         
|           |  | Condensed Consolidated Statements of Operations for the Quarters and Six Months ended June 30, 2004 and 2003 (unaudited) |  | 2       
|           |  |                                                                                                                         
|           |  | Condensed Consolidated Statement of Stockholders Equity for the Six Months ended June 30, 2004 (unaudited)              |  | 3       
|           |  |                                                                                                                         
|           |  | Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2004 and 2003 (unaudited)              |  | 4       
|           |  |                                                                                                                         
|           |  | Notes to Condensed Consolidated Financial Statements                                                                     |  | 5       
|           |  |                                                                                                                         
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |  | 17      
|           |  |                                                                                                                         
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                               |  | 33      
|           |  |                                                                                                                         
|Item 4.    |  | Controls and Procedures                                                                                                  |  | 34      
|           |  |                                                                                                                         
|Part II.   |  | OTHER INFORMATION                                                                                                        |  |         
|           |  |                                                                                                                         
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                      |  | 35      
|           |  |                                                                                                                         
|Item 5.    |  | Other Information                                                                                                        |  | 35      
|           |  |                                                                                                                         
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                         |  | 36      
|           | 
|Signatures |  | 37                                                                                                                      



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##### Table of Contents

PART I.     FINANCIAL INFORMATION



Item 1.     Financial Statements



METRO-GOLDWYN-MAYER INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                |  |               |            |   |                   |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                |  | June 30, 2004 |            |   | December 31, 2003 |  
|                                                                                                                |  | (unaudited)   |            |   |                   |  
|ASSETS                                                                                                          |  |               |            |   |                   |   |            |  
|Cash and cash equivalents                                                                                       |  | $             | 39,072     |   |                   | $ | 61,894     |  
|Accounts and contracts receivable (net of allowance for doubtful accounts of $46,798 and $46,671, respectively) |  |               | 553,612    |   |                   |   | 615,907    |  
|Film and television costs, net                                                                                  |  |               | 1,889,313  |   |                   |   | 1,788,225  |  
|Investments in and advances to affiliates                                                                       |  |               | 23,535     |   |                   |   | 24,050     |  
|Property and equipment, net                                                                                     |  |               | 66,991     |   |                   |   | 68,657     |  
|Goodwill                                                                                                        |  |               | 516,706    |   |                   |   | 516,706    |  
|Other assets                                                                                                    |  |               | 39,201     |   |                   |   | 31,132     |  
|                                                                                                                |  |               |            |   |                   |   |            |  
|                                                                                                                |  | $             | 3,128,430  |   |                   | $ | 3,106,571  |  
|                                                                                                                |  |               |            |   |                   |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                            |  |               |            |   |                   |   |            |  
|Liabilities:                                                                                                    |  |               |            |   |                   |   |            |  
|Bank and other debt                                                                                             |  | $             | 2,000,235  |   |                   | $ | 813        |  
|Accounts payable and accrued liabilities                                                                        |  |               | 249,114    |   |                   |   | 234,397    |  
|Accrued participants share                                                                                     |  |               | 315,937    |   |                   |   | 320,347    |  
|Income taxes payable                                                                                            |  |               | 39,313     |   |                   |   | 37,129     |  
|Advances and deferred revenues                                                                                  |  |               | 96,966     |   |                   |   | 72,908     |  
|Other liabilities                                                                                               |  |               | 159,678    |   |                   |   | 112,606    |  
|                                                                                                                |  |               |            |   |                   |   |            |  
|Total liabilities                                                                                               |  |               | 2,861,243  |   |                   |   | 778,200    |  
|                                                                                                                |  |               |            |   |                   |   |            |  
|                                                                                                                |  |              
|Commitments and contingencies                                                                                   |  |               |            |   |                   |   |            |  
|                                                                                                                |  |              
|Stockholders equity:                                                                                           |  |               |            |   |                   |   |            |  
|Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued                                      |  |               |           |   |                   |   |           |  
|Common stock, $.01 par value, 500,000,000 shares authorized, 251,960,505 shares issued                          |  |               | 2,520      |   |                   |   | 2,520      |  
|Additional paid-in capital                                                                                      |  |               | 2,048,095  |   |                   |   | 3,915,777  |  
|Deficit                                                                                                         |  |               | (1,548,509 | ) |                   |   | (1,507,573 | )
|Accumulated other comprehensive income (loss)                                                                   |  |               | (82        | ) |                   |   | 2,046      |  
|Less: treasury stock, at cost, 15,560,808 and 7,347,530 shares, respectively                                    |  |               | (234,837   | ) |                   |   | (84,399    | )
|                                                                                                                |  |               |            |   |                   |   |            |  
|Total stockholders equity                                                                                      |  |               | 267,187    |   |                   |   | 2,328,371  |  
|                                                                                                                |  |               |            |   |                   |   |            |  
|                                                                                                                |  | $             | 3,128,430  |   |                   | $ | 3,106,571  |  
|                                                                                                                |  |               |            |   |                   |   |            |  



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



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METRO-GOLDWYN-MAYER INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)



|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|------------------------------------------------------ |  | ----------------------- | ----------- | - | ------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                       |  | Quarter  Ended June 30, |             |   | Six Months Ended June 30, |  
|                                                       |  | 2004                    |             |   | 2003                      |   |             | 2004 |  |   | 2003        |  
|Revenues                                               |  | $                       | 406,107     |   |                           | $ | 487,702     |      |  | $ | 870,103     |   |  | $ | 882,893     |  
|Expenses:                                              |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Operating                                              |  |                         | 203,291     |   |                           |   | 276,478     |      |  |   | 428,681     |   |  |   | 500,408     |  
|Selling, general and administrative                    |  |                         | 194,832     |   |                           |   | 224,698     |      |  |   | 446,828     |   |  |   | 429,775     |  
|Depreciation                                           |  |                         | 3,743       |   |                           |   | 5,013       |      |  |   | 7,169       |   |  |   | 10,252      |  
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Total expenses                                         |  |                         | 401,866     |   |                           |   | 506,189     |      |  |   | 882,678     |   |  |   | 940,435     |  
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|                                                       |  |                         |             |  
|Operating income (loss)                                |  |                         | 4,241       |   |                           |   | (18,487     | )    |  |   | (12,575     | ) |  |   | (57,542     | )
|Other income (expense):                                |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Write-down on investment in cable channels             |  |                         |            |   |                           |   | (93,059     | )    |  |   |            |   |  |   | (93,059     | )
|Equity in net earnings (losses) of affiliates          |  |                         | (614        | ) |                           |   | (1,211      | )    |  |   | (1,813      | ) |  |   | 1,279       |  
|Interest expense, net of amounts capitalized           |  |                         | (20,752     | ) |                           |   | (18,863     | )    |  |   | (21,839     | ) |  |   | (36,812     | )
|Interest and other income, net                         |  |                         | 2,044       |   |                           |   | 3,069       |      |  |   | 3,989       |   |  |   | 6,377       |  
|Other non-recurring costs                              |  |                         | (1,173      | ) |                           |   |            |      |  |   | (1,173      | ) |  |   |            |  
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Total other expenses                                   |  |                         | (20,495     | ) |                           |   | (110,064    | )    |  |   | (20,836     | ) |  |   | (122,215    | )
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|                                                       |  |                         |             |  
|Loss from operations before provision for income taxes |  |                         | (16,254     | ) |                           |   | (128,551    | )    |  |   | (33,411     | ) |  |   | (179,757    | )
|Income tax provision                                   |  |                         | (3,412      | ) |                           |   | (5,028      | )    |  |   | (7,525      | ) |  |   | (9,644      | )
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                               |  | $                       | (19,666     | ) |                           | $ | (133,579    | )    |  | $ | (40,936     | ) |  | $ | (189,401    | )
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Loss per share:                                        |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Basic and diluted                                      |  | $                       | (0.08       | ) |                           | $ | (0.55       | )    |  | $ | (0.17       | ) |  | $ | (0.77       | )
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|                                                       |  |                         |             |  
|Weighted average number of common shares outstanding:  |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  
|Basic and diluted                                      |  |                         | 235,961,448 |   |                           |   | 244,807,107 |      |  |   | 236,803,698 |   |  |   | 246,628,261 |  
|                                                       |  |                         |             |   |                           |   |             |      |  |   |             |   |  |   |             |  





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



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METRO-GOLDWYN-MAYER INC.



CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share data)



|                                                              |  |                 |  |              |   |                       |             |           |         |       |  |                             |            |   |                                          |   |            |                      |  |   |                            |   |  |   |        |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------- |  | --------------- |  | ------------ | - | --------------------- | ----------- | --------- | ------- | ----- |  | --------------------------- | ---------- | - | ---------------------------------------- | - | ---------- | -------------------- |  | - | -------------------------- | - |  | - | ------ | - |  | - | -------- | - |  | - | ---------- | -
|                                                              |  | Preferred Stock |  | Common Stock |   | Addl Paid-in Capital |             |           | Deficit |       |  | Comprehensive Income (Loss) |            |   | Accum. Other Comprehensive Income (Loss) |   |            | Less: Treasury Stock |  |   | Total Stockholders Equity |  
|                                                              |  | No. of Shares   |  | Par Value    |   | No. of Shares         |             | Par Value |         |       |  |                             |            |  
|Balance December 31, 2003                                     |  |                |  | $            |  |                       | 251,960,505 |           | $       | 2,520 |  | $                           | 3,915,777  |   |                                          | $ | (1,507,573 | )                    |  | $ |                           |   |  | $ | 2,046  |   |  | $ | (84,399  | ) |  | $ | 2,328,371  |  
|Payment of stockholder dividend                               |  |                |  |              |  |                       |            |           |         |      |  |                             | (1,892,983 | ) |                                          |   |           |                      |  |   |                           |   |  |   |       |   |  |   |         |   |  |   | (1,892,983 | )
|Acquisition of treasury stock, at cost                        |  |                |  |              |  |                       |            |           |         |      |  |                             |           |   |                                          |   |           |                      |  |   |                           |   |  |   |       |   |  |   | (181,370 | ) |  |   | (181,370   | )
|Common stock issued to directors, officers and employees, net |  |                |  |              |  |                       |            |           |         |      |  |                             | 6,968      |   |                                          |   |           |                      |  |   |                           |   |  |   |       |   |  |   | 30,932   |   |  |   | 37,900     |  
|Adoption of SFAS No. 123                                      |  |                |  |              |  |                       |            |           |         |      |  |                             | 3,823      |   |                                          |   |           |                      |  |   |                           |   |  |   |       |   |  |   |         |   |  |   | 3,823      |  
|Stock-based employee compensation                             |  |                |  |              |  |                       |            |           |         |      |  |                             | 14,510     |   |                                          |   |           |                      |  |   |                           |   |  |   |       |   |  |   |         |   |  |   | 14,510     |  
|Comprehensive income (loss):                                  |  |                 |  |              |   |                       |             |           |         |       |  |                             |            |   |                                          |   |            |                      |  |   |                            |   |  |   |        |   |  |   |          |   |  |   |            |  
|Net loss                                                      |  |                |  |              |  |                       |            |           |         |      |  |                             |           |   |                                          |   | (40,936    | )                    |  |   | (40,936                    | ) |  |   |       |   |  |   |         |   |  |   | (40,936    | )
|Unrealized loss on derivative instruments                     |  |                |  |              |  |                       |            |           |         |      |  |                             |           |   |                                          |   |           |                      |  |   | (2,806                     | ) |  |   | (2,806 | ) |  |   |         |   |  |   | (2,806     | )
|Unrealized gain on securities                                 |  |                |  |              |  |                       |            |           |         |      |  |                             |           |   |                                          |   |           |                      |  |   | 211                        |   |  |   | 211    |   |  |   |         |   |  |   | 211        |  
|Change in unfunded pension obligation                         |  |                |  |              |  |                       |            |           |         |      |  |                             |           |   |                                          |   |           |                      |  |   | 452                        |   |  |   | 452    |   |  |   |         |   |  |   | 452        |  
|Foreign currency translation adjustments                      |  |                |  |              |  |                       |            |           |         |      |  |                             |           |   |                                          |   |           |                      |  |   | 15                         |   |  |   | 15     |   |  |   |         |   |  |   | 15         |  
|                                                              |  |                 |  |              |   |                       |             |           |         |       |  |                             |            |   |                                          |   |            |                      |  |   |                            |   |  |   |        |   |  |   |          |   |  |   |            |  
|Comprehensive loss                                            |  |                |  |              |  |                       |            |           |         |      |  |                             |           |   |                                          |   |           |                      |  |   | (43,064                    | ) |  |   |       |   |  |   |         |   |  |   |            |  
|                                                              |  |                 |  |              |   |                       |             |           |         |       |  |                             |            |   |                                          |   |            |                      |  |   |                            |   |  |   |        |   |  |   |          |   |  |   |            |  
|Balance June 30, 2004 (unaudited)                             |  |                |  | $            |  |                       | 251,960,505 |           | $       | 2,520 |  | $                           | 2,048,095  |   |                                          | $ | (1,548,509 | )                    |  | $ |                           |   |  | $ | (82    | ) |  | $ | (234,837 | ) |  | $ | 267,187    |  
|                                                              |  |                 |  |              |   |                       |             |           |         |       |  |                             |            |   |                                          |   |            |                      |  |   |                            |   |  |   |        |   |  |   |          |   |  |   |            |  



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



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METRO-GOLDWYN-MAYER INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                           |  |                           |            |   |      |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------- | ---------- | - | ---- | - | ------- | -
|                                                                                           |  | Six Months Ended June 30, |           
|                                                                                           |  | 2004                      |            |   | 2003 |  
|Net cash provided by operating activities                                                  |  | $                         | 46,604     |   |      | $ | 159,537 |  
|                                                                                           |  |                           |            |   |      |   |         |  
|Investing activities:                                                                      |  |                           |            |   |      |   |         |  
|Dividends received                                                                         |  |                           | 1,690      |   |      |   | 10,000  |  
|Purchase of short-term investments                                                         |  |                           |           |   |      |   | (28,321 | )
|Additions to property and equipment                                                        |  |                           | (5,495     | ) |      |   | (9,518  | )
|Investment in and advances to affiliates                                                   |  |                           | (2,892     | ) |      |   | (2,752  | )
|                                                                                           |  |                           |            |   |      |   |         |  
|Net cash used in investing activities                                                      |  |                           | (6,697     | ) |      |   | (30,591 | )
|                                                                                           |  |                           |            |   |      |   |         |  
|Financing activities:                                                                      |  |                           |            |   |      |   |         |  
|Additions to borrowed funds                                                                |  |                           | 2,179,000  |   |      |   |        |  
|Dividend paid                                                                              |  |                           | (1,892,983 | ) |      |   |        |  
|Net proceeds from issuance of common stock to related parties                              |  |                           | 31,882     |   |      |   | 31      |  
|Acquisition of treasury stock                                                              |  |                           | (181,370   | ) |      |   | (49,785 | )
|Repayments of borrowed funds                                                               |  |                           | (179,431   | ) |      |   | (579    | )
|Financing fees                                                                             |  |                           | (19,394    | ) |      |   |        |  
|                                                                                           |  |                           |            |   |      |   |         |  
|Net cash used in financing activities                                                      |  |                           | (62,296    | ) |      |   | (50,333 | )
|                                                                                           |  |                           |            |   |      |   |         |  
|Net change in cash and cash equivalents from operating, investing and financing activities |  |                           | (22,389    | ) |      |   | 78,613  |  
|Net increase (decrease) in cash due to foreign currency fluctuations                       |  |                           | (433       | ) |      |   | 140     |  
|                                                                                           |  |                           |            |   |      |   |         |  
|Net change in cash and cash equivalents                                                    |  |                           | (22,822    | ) |      |   | 78,753  |  
|Cash and cash equivalents at beginning of the year                                         |  |                           | 61,894     |   |      |   | 593,131 |  
|                                                                                           |  |                           |            |   |      |   |         |  
|Cash and cash equivalents at end of the period                                             |  | $                         | 39,072     |   |      | $ | 671,884 |  
|                                                                                           |  |                           |            |   |      |   |         |  





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



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METRO-GOLDWYN-MAYER INC.



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



June 30,
2004



Note 1Basis of Presentation



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



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and the
instructions to Form 10-Q related to interim period financial statements. Accordingly, these financial statements do not include certain information and footnotes required by accounting principles generally accepted in the United States for complete
financial statements. However, these financial statements contain all adjustments consisting only of normal recurring accruals which, in the opinion of management, are necessary in order to make the financial statements not misleading. The balance
sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial
statements. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Companys audited financial statements
and notes thereto included in the Companys Form 10-K for the year ended December 31, 2003. As permitted by American Institute of Certified Public Accountants Statement of Position (SOP) 00-2, Accounting by Producers or
Distributors of Films, the Company has presented unclassified balance sheets.



Earnings Per Share.    The Company computes earnings per share in accordance with SFAS No. 128, Earnings Per Share (EPS). The weighted average number of shares used
in computing basic and diluted earnings or loss per share was 235,961,448 and 236,803,698 in the quarter and six months ended June 30, 2004, respectively, and 244,807,107 and 246,628,261 in the quarter and six months ended June 30, 2003,
respectively. Dilutive securities of 7,424,593 and 4,704,143 in the quarter and six months ended June 30, 2004, respectively, and 28,147 and 14,791 in the quarter and six months ended June 30, 2003, respectively, are not included in the calculation
of diluted EPS because they are antidilutive. Additionally, potentially dilutive securities of 9,304,184 and 9,849,216 in the quarter and six months ended June 30, 2004, respectively, and 30,182,873 and 30,530,673 in the quarter and six months ended
June 30, 2003, respectively, have not been included in the calculation of diluted EPS because their exercise prices are greater than the average market price of the Companys common stock during the periods.



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                    |  |                        |         |   |                          |   |          |      |  |   |         |   |  |   |          |  
|--------------------------------------------------- |  | ---------------------- | ------- | - | ------------------------ | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                    |  | Quarter Ended June 30, |         |   | Six Months EndedJune 30, |  
|                                                    |  | 2004                   |         |   | 2003                     |   |          | 2004 |  |   | 2003    |  
|Net loss                                            |  | $                      | (19,666 | ) |                          | $ | (133,579 | )    |  | $ | (40,936 | ) |  | $ | (189,401 | )
|Other comprehensive income (loss):                  |  |                        |         |   |                          |   |          |      |  |   |         |   |  |   |          |  
|Unrealized gain (loss) on derivative instruments    |  |                        | (416    | ) |                          |   | 7,799    |      |  |   | (2,806  | ) |  |   | 13,893   |  
|Unrealized gain (loss) on securities                |  |                        | (134    | ) |                          |   | (240     | )    |  |   | 211     |   |  |   | (436     | )
|Change in unfunded pension plan obligation          |  |                        |        |   |                          |   |         |      |  |   | 452     |   |  |   |         |  
|Cumulative foreign currency translation adjustments |  |                        | 595     |   |                          |   | (178     | )    |  |   | 15      |   |  |   | 124      |  
|                                                    |  |                        |         |   |                          |   |          |      |  |   |         |   |  |   |          |  
|Total comprehensive loss                            |  | $                      | (19,621 | ) |                          | $ | (126,198 | )    |  | $ | (43,064 | ) |  | $ | (175,820 | )
|                                                    |  |                        |         |   |                          |   |          |      |  |   |         |   |  |   |          |  



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



|                             |  |                                               |        |   |                             |   |                                |  |   |                                  |   |                                            |   |       |  |   |        |  
|---------------------------- |  | --------------------------------------------- | ------ | - | --------------------------- | - | ------------------------------ |  | - | -------------------------------- | - | ------------------------------------------ | - | ----- |  | - | ------ | -
|                             |  | UnrealizedGain (Loss)on DerivativeInstruments |        |   | UnrealizedGain onSecurities |   | UnfundedPension PlanObligation |  |   | CumulativeTranslationAdjustments |   | AccumulatedOtherComprehensiveIncome (Loss) |  
|Balance at December 31, 2003 |  |                                               | 2,770  |   |                             |   | 521                            |  |   | (4,350                           | ) |                                            |   | 3,105 |  |   | 2,046  |  
|Current period change        |  |                                               | (2,806 | ) |                             |   | 211                            |  |   | 452                              |   |                                            |   | 15    |  |   | (2,128 | )
|                             |  |                                               |        |   |                             |   |                                |  |   |                                  |   |                                            |   |       |  |   |        |  
|Balance at June 30, 2004     |  | $                                             | (36    | ) |                             | $ | 732                            |  | $ | (3,898                           | ) |                                            | $ | 3,120 |  | $ | (82    | )
|                             |  |                                               |        |   |                             |   |                                |  |   |                                  |   |                                            |   |       |  |   |        |  



Stock-Based
Compensation.    On January 1, 2004, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Under the modified prospective method of adoption selected by the Company under the provisions of SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, stock-based employee compensation expense recognized
in 2004 is the same as that which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied to all awards from its original effective date. During the quarter and six months ended June 30, 2004, the Company
recorded compensation expense of $7,013,000 and $14,510,000 regarding its employee stock incentive plan, which has been included in selling, general and administrative expenses in the consolidated statement of operations.



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                                               |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|------------------------------------------------------------------------------ |  | ---------------------- | ------- | - | ------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                                               |  | Quarter Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                               |  | 2004                   |         |   | 2003                      |   |          | 2004 |  |   | 2003    |  
|Net loss:                                                                      |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|As reported                                                                    |  | $                      | (19,666 | ) |                           | $ | (133,579 | )    |  | $ | (40,936 | ) |  | $ | (189,401 | )
|Add: Stock-based compensation included in reported net loss, net of tax effect |  |                        | 7,013   |   |                           |   |         |      |  |   | 14,510  |   |  |   |         |  
|Deduct: Stock-based compensation, net of tax effect                            |  |                        | (7,013  | ) |                           |   | (11,510  | )    |  |   | (14,510 | ) |  |   | (19,826  | )
|                                                                               |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Pro forma                                                                      |  | $                      | (19,666 | ) |                           | $ | (145,089 | )    |  | $ | (40,936 | ) |  | $ | (209,227 | )
|                                                                               |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Basic and diluted loss per share:                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|As reported                                                                    |  | $                      | (.08    | ) |                           | $ | (0.55    | )    |  | $ | (0.17   | ) |  | $ | (0.77    | )
|Add: Stock-based compensation included in reported net loss, net of tax effect |  |                        | .03     |   |                           |   |         |      |  |   | 0.06    |   |  |   |         |  
|Deduct: Stock-based compensation, net of tax effect                            |  |                        | (.03    | ) |                           |   | (0.04    | )    |  |   | (0.06   | ) |  |   | (0.08    | )
|                                                                               |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Pro forma                                                                      |  | $                      | (.08    | ) |                           | $ | (0.59    | )    |  | $ | (0.17   | ) |  | $ | (0.85    | )
|                                                                               |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  



The fair value of
option grants issued prior to January 1, 2004 were estimated using the Black-Scholes model and the fair value of option grants issued in 2004 were estimated using a binomial model. The weighted average fair value of stock options granted in the
quarter and six months ended June 30, 2004 was $7.33 and $6.52, respectively, and was $4.96 and $4.71 in the quarter and six months ended June 30, 2003, respectively. The fair values were determined using the following assumptions: the dividend
yield was 0 percent in all periods, and expected volatility was 44.6 percent and 44.8 percent for the quarter and six months ended June 30, 2004, respectively, and expected volatility was 52.6 percent and 52.8 percent for the quarter and six months
ended June 30, 2003, respectively. The weighted average expected life was 5.0 years in all periods, and the weighted average assumed risk-free interest rate was 3.7 percent and 3.6 percent for the quarter and six months ended June 30, 2004,
respectively, and 2.5 percent and 2.6 percent for the quarter and six months ended June 30, 2003, respectively.



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



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



Note 2Severance and Other
Related Costs



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



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



As of June 30, 2004, the Company has paid $54,844,000 of the severance and other related costs. In January and February
2002, in accordance with certain agreements with the Companys former Chairman and Vice Chairman, $16,964,000 of the severance and related costs were converted into 863,499 shares of common stock of the Company. The remaining unpaid severance
at June 30, 2004 consists of 1,745,680 unexercised stock options held by the Companys former Chairman. On January 1, 2004, upon adoption of the fair value recognition provisions of SFAS No. 123, such amount was transferred to additional
paid-in capital.



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 3Film and Television Costs



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



|                                 |  |               |            |   |                  |   |            |  
|-------------------------------- |  | ------------- | ---------- | - | ---------------- | - | ---------- | -
|                                 |  | June 30, 2004 |            |   | December 31,2003 |  
|Theatrical productions:          |  |               |            |   |                  |   |            |  
|Released                         |  | $             | 4,532,072  |   |                  | $ | 4,339,193  |  
|Less: accumulated amortization   |  |               | (3,177,075 | ) |                  |   | (2,994,401 | )
|                                 |  |               |            |   |                  |   |            |  
|Released, net                    |  |               | 1,354,997  |   |                  |   | 1,344,792  |  
|Completed not released           |  |               | 38,902     |   |                  |   | 6,724      |  
|In production                    |  |               | 183,891    |   |                  |   | 170,514    |  
|In development                   |  |               | 40,078     |   |                  |   | 34,317     |  
|                                 |  |               |            |   |                  |   |            |  
|Subtotal: theatrical productions |  |               | 1,617,868  |   |                  |   | 1,556,347  |  
|                                 |  |               |            |   |                  |   |            |  
|Television programming:          |  |               |            |   |                  |   |            |  
|Released                         |  |               | 1,084,320  |   |                  |   | 1,044,399  |  
|Less: accumulated amortization   |  |               | (871,127   | ) |                  |   | (831,127   | )
|                                 |  |               |            |   |                  |   |            |  
|Released, net                    |  |               | 213,193    |   |                  |   | 213,272    |  
|In production                    |  |               | 57,247     |   |                  |   | 17,902     |  
|In development                   |  |               | 1,005      |   |                  |   | 704        |  
|                                 |  |               |            |   |                  |   |            |  
|Subtotal: television programming |  |               | 271,445    |   |                  |   | 231,878    |  
|                                 |  |               |            |   |                  |   |            |  
|                                 |  | $             | 1,889,313  |   |                  | $ | 1,788,225  |  
|                                 |  |               |            |   |                  |   |            |  



Interest costs
capitalized to theatrical productions were $1,411,000 and $2,764,000 during the quarter and six months ended June 30, 2004, respectively, and were $2,204,000 and $5,174,000 during the quarter and six months ended June 30, 2003, respectively.



Note 4Investments In and Advances to Affiliates



On July 18, 2003, the Company sold its 20 percent equity interest in the
American Movie Classics, The Independent Film Channel and WE: Womens Entertainment cable channels (the Cable Channels) to Cablevision Systems Corporation for $500,000,000, less sales-related expenses of $2,750,000. The Company
received $250,000,000 in cash and a $250,000,000 promissory note that was collected in cash on December 18, 2003. As the Companys cost basis in the Cable Channels exceeded the net selling price, the Company recorded a write-down of its
investment in the cable channels of $93,059,000 during the quarter ended June 30, 2003.



The Company has accounted for its investment in the Cable Channels in accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Pursuant to the requirements of
APB No. 18, the Company has recorded its share of the earnings and losses in the Cable Channels based on the most recently available financial statements received from the cable channels. Due to a lag in the receipt of the financial statements from
the Cable Channels, the Company reported its interest in the Cable Channels on a one-quarter lag. Beginning April 1, 2003, due to the agreement to sell the remaining cable channels for less than the book value of the investment, which closed on July
18, 2003, the Company ceased recording its 20 percent equity interest in the operating results of the cable channels in its results of operations.



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In the six months ended June 30, 2003, the Companys share of the Cable Channels net
operating results was a profit of $4,781,000. Summarized financial information for the Cable Channels (including Bravo through December 5, 2002) for the six months ended March 31, 2003, were as follows (in thousands):



|                 |  |   |        
|---------------- |  | - | -------
|Revenues, net    |  | $ | 128,561
|Operating income |  | $ | 36,414 
|Net income       |  | $ | 33,751 



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



Note 5Property and Equipment



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



|                                               |  |              |         |   |                  |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                               |  | June 30,2004 |         |   | December 31,2003 |  
|Leasehold improvements                         |  | $            | 40,233  |   |                  | $ | 39,359  |  
|Furniture, fixtures and equipment              |  |              | 97,803  |   |                  |   | 93,182  |  
|                                               |  |              |         |   |                  |   |         |  
|                                               |  |              | 138,036 |   |                  |   | 132,541 |  
|Less accumulated depreciation and amortization |  |              | (71,045 | ) |                  |   | (63,884 | )
|                                               |  |              |         |   |                  |   |         |  
|                                               |  | $            | 66,991  |   |                  | $ | 68,657  |  
|                                               |  |              |         |   |                  |   |         |  



Note 6Bank and Other Debt



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



|                                                   |  |              |           |                  |   |    
|-------------------------------------------------- |  | ------------ | --------- | ---------------- | - | ---
|                                                   |  | June 30,2004 |           | December 31,2003
|Revolving Facility                                 |  | $            |          |                  | $ |   
|Term Loans                                         |  |              | 2,000,000 |                  |   |   
|Capitalized lease obligations and other borrowings |  |              | 235       |                  |   | 813
|                                                   |  |              |           |                  |   |    
|                                                   |  | $            | 2,000,235 |                  | $ | 813
|                                                   |  |              |           |                  |   |    



Credit
Facilities.    On April 26, 2004, the Company, through its subsidiary MGM Studios, entered into a fourth amended and restated credit facility with a syndicate of banks (the 2004 Credit Facility) aggregating $2.4
billion, consisting of a five-year $400,000,000 revolving credit facility (the Revolving Facility), a six-year $400,000,000 term loan (Term A Facility) and a seven-year $1.6 billion term loan (Term B Facility)
(collectively, the Term Loans), which replaced the pre-existing $1.75 billion amended credit facility. The Revolving Facility and Term A Facility bear interest at 2.25 percent over the Adjusted LIBOR rate, as defined (3.59 percent at
June 30, 2004), and the Term B Loan bears interest at 2.50 percent over the Adjusted LIBOR rate, as defined (3.84 percent at June 30, 2004). The Revolving Facility matures on April 30, 2009. The Company incurred approximately $19,400,000 in fees and
other costs associated with the refinancing of the credit facility.



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



In connection with the refinancing of the prior credit facility, the Company wrote-off deferred loan fees of $6,859,000 in
the quarter and six months ending June 30, 2004.



The
Companys borrowings under the 2004 Credit Facility are secured by substantially all the assets of the Company, with the exception of the copyrights in the James Bond series of motion pictures. The 2004 Credit Facility contains various
covenants, including limitations on indebtedness, dividends and capital expenditures, and maintenance of certain financial ratios. The 2004 Credit Facility limits the amount of the investment in MGM which may be made by Metro-Goldwyn-Mayer Studios
Inc. and Orion Pictures Corporation, both of which are wholly-owned subsidiaries, in the form of loans or advances, or purchases of capital stock of MGM, up to a maximum aggregate amount of $300,000,000. Such covenant does not preclude MGM from
using its own resources to purchase its capital stock. As of June 30, 2004, $231.7 million was loaned to MGM by MGM Studios primarily to fund the Dutch Auction tender offer (see Note 8) and the purchase of treasury stock by MGM. Restricted net
assets of Metro-Goldwyn-Mayer Studios Inc. and Orion Pictures Corporation at June 30, 2004 are approximately $2.1 billion. As of June 30, 2004, the Company was in compliance with all applicable covenants.



Capitalized Lease Obligations and Other
Borrowings.    Capitalized lease obligations and other borrowings relate principally to contractual liabilities and capitalized lease obligations.



Note 7Financial Instruments



The Company is subject to market risks resulting from fluctuations in foreign currency exchange rates because approximately 25 percent of the
Companys revenues are denominated, and the Company incurs certain operating and production costs, in foreign currencies. In certain instances, the Company enters into foreign currency exchange forward contracts in order to reduce exposure to
changes in foreign currency exchange rates that affect the value of the Companys firm commitments and certain anticipated foreign currency cash flows. The Company currently intends to continue to enter into such contracts to hedge against
future material foreign currency exchange rate risks. As of June 30, 2004, the Company has outstanding foreign currency forward contracts aggregating Canadian $28,570,000, EUR 3,525,000, CZK 40,459,000 and AUD 2,000. As of June 30, 2004, the Company
would be obligated to pay approximately $36,000 if all such foreign currency forward contracts were terminated. As of December 31, 2003, the Company had outstanding foreign currency forward contracts aggregating Canadian $26,100,000 and British
pounds 8,100,000. As of December 31, 2003, the Company was entitled to receive approximately $2,770,000 if all such foreign currency forward contracts were terminated. The market value of the foreign currency forward contracts as of June 30, 2004
and December 31, 2003 have been included in other assets and, with respect to qualified hedged instruments, in accumulated other comprehensive income (loss).



Note 8Stockholders Equity



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



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pursuant to the provisions of the Amended and Restated 1996 Stock Incentive Plan (the
Plan), the Compensation Committee of the Board of Directors of the Company has adjusted the outstanding stock options issued under the Plan such that following the payment of the one-time cash dividend to stockholders, each option holder
shall receive upon exercise, in addition to the shares of common stock otherwise obtainable, a cash amount of $8 per share.



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



The Dutch Auction Tender Offer expired on January 15, 2004.
Pursuant to the Dutch Auction Tender Offer, the Company purchased 10,000,000 shares of its common stock at a purchase price of $17.00 per share, or an aggregate amount of $170,000,000, plus offering expenses of approximately $1,000,000. The Dutch
Auction Tender Offer was financed primarily from available cash on hand, net cash flow provided by operating activities and borrowings under the Revolving Facility. Following completion of the Dutch Auction Tender Offer, Mr. Kerkorian and the
Tracinda Group together owned approximately 74.0 percent of the Companys outstanding common stock.



Treasury Stock.    On July 26, 2002, the Company announced a share repurchase program authorizing the Company to purchase up to
10,000,000 shares of its common stock. The Company has funded the repurchase program from available cash on hand. On November 12, 2003, the Board of Directors of the Company increased its authorization for the Companys share repurchase program
by an additional 2,500,000 shares, to a total of 12,500,000 shares. As of June 30, 2004, under the share repurchase program, the Company had repurchased 8,104,300 shares of common stock, at an average price of $11.46 per share, for an aggregate cost
of $92,890,000. During the quarter and six months ended June 30, 2004, the Company issued 1,226,673 and 2,403,022 shares of common stock, respectively, from treasury valued at $20,619,000 and $38,163,000, respectively, for directors, officers and
employees. During the quarter and six months ended June 30, 2003, the Company issued 102,650 and 210,886 shares of common stock, respectively, from treasury valued at $1,161,000 and $2,332,000, respectively, for directors, officers and employees.



Note 9Retirement Plans



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



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pension cost includes the following components (in thousands):



|                                              |  |                       |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|--------------------------------------------- |  | --------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                              |  | Quarter EndedJune 30, |      |   | Six Months EndedMarch 31, |  
|                                              |  | 2004                  |      |   | 2003                      |   |      | 2004 |  |   | 2003 |  
|Service cost                                  |  | $                     |     |   |                           | $ |     |      |  | $ |     |   |  | $ |     |  
|Interest cost on projected benefit obligation |  |                       | 292  |   |                           |   | 286  |      |  |   | 592  |   |  |   | 286  |  
|Expected return on plan assets                |  |                       | (252 | ) |                           |   | (221 | )    |  |   | (505 | ) |  |   | (221 | )
|Net amortization and deferral                 |  |                       | 68   |   |                           |   | 48   |      |  |   | 132  |   |  |   | 48   |  
|                                              |  |                       |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Net periodic pension cost                     |  | $                     | 108  |   |                           | $ | 113  |      |  | $ | 219  |   |  | $ | 113  |  
|                                              |  |                       |      |   |                           |   |      |      |  |   |      |   |  |   |      |  



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



The Company has not made any contribution to the pension plan in the six months ended June 30, 2004. Based on the most
recent actuarial report, the Company does not anticipate making any contributions to the pension plan in 2004.



A significant number of the Companys production employees are covered by union sponsored, collectively bargained multi-employer pension plans. The
Company contributed approximately $3,656,000 and $8,486,000, respectively, for such plans for the quarter and six months ended June 30, 2004, respectively, and $2,762,000 and $7,267,000 for the quarter and six months ended June 30, 2003,
respectively. 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 $1,430,000 and $2,735,000, respectively, in shares of the Companys common stock to the Savings Plan in the
quarter and six months ended June 30, 2004, and $1,058,000 and $2,162,000 was contributed to the Savings Plan in the quarter and six months ended June 30, 2003, respectively.



Note 10Segment Information



The Companys business units have been aggregated into four reportable operating segments: feature films, television programming, cable channels and
other. The Company sold its equity interest in the Bravo cable channel on December 5, 2002 and sold its equity interest in the remaining Cable Channels on July 18, 2003 (see Note 4). The factors for determining the reportable segments were based on
the distinct nature of their operations. They are managed as separate business units because each requires and is responsible for executing a unique business strategy. Income or losses of industry segments and geographic areas, other than those
accounted for under the equity method, exclude interest income, interest expense, goodwill amortization, income taxes and other unallocated corporate expenses. Identifiable assets are those assets used in the operations of the segments. Other
corporate assets consist of cash and certain corporate receivables.



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                               |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|------------------------------ |  | ---------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                               |  | Quarter Ended June 30, |         |   | Six Months Ended June 30, |  
|                               |  | 2004                   |         |   | 2003                      |   |         | 2004 |  |   | 2003    |  
|Revenues:                      |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Feature films                  |  | $                      | 347,451 |   |                           | $ | 427,487 |      |  | $ | 756,275 |   |  | $ | 783,556 |  
|Television programming         |  |                        | 44,492  |   |                           |   | 50,149  |      |  |   | 91,076  |   |  |   | 81,677  |  
|Cable channels                 |  |                        | 12,668  |   |                           |   | 10,244  |      |  |   | 24,980  |   |  |   | 38,747  |  
|Other                          |  |                        | 12,606  |   |                           |   | 8,985   |      |  |   | 19,442  |   |  |   | 16,003  |  
|                               |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Subtotal                       |  |                        | 417,217 |   |                           |   | 496,865 |      |  |   | 891,773 |   |  |   | 919,983 |  
|Less: unconsolidated companies |  |                        | (11,110 | ) |                           |   | (9,163  | )    |  |   | (21,670 | ) |  |   | (37,090 | )
|                               |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Consolidated revenues          |  | $                      | 406,107 |   |                           | $ | 487,702 |      |  | $ | 870,103 |   |  | $ | 882,893 |  
|                               |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Segment income (loss):         |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Feature films                  |  | $                      | 32,483  |   |                           | $ | 8,421   |      |  | $ | 59,485  |   |  | $ | (158    | )
|Television programming         |  |                        | 12,636  |   |                           |   | 3,103   |      |  |   | 10,589  |   |  |   | 661     |  
|Cable channels                 |  |                        | (212    | ) |                           |   | (898    | )    |  |   | (521    | ) |  |   | 1,553   |  
|Other                          |  |                        | 6,340   |   |                           |   | 7,151   |      |  |   | 10,692  |   |  |   | 10,627  |  
|                               |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Subtotal                       |  |                        | 51,247  |   |                           |   | 17,777  |      |  |   | 80,245  |   |  |   | 12,683  |  
|Less: unconsolidated companies |  |                        | 614     |   |                           |   | 1,211   |      |  |   | 1,813   |   |  |   | (1,279  | )
|                               |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Consolidated segment income    |  | $                      | 51,861  |   |                           | $ | 18,988  |      |  | $ | 82,058  |   |  | $ | 11,404  |  
|                               |  |                        |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



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



|                            |  |                       |       |                          |      |   |       |  |      |        |  |   |       
|--------------------------- |  | --------------------- | ----- | ------------------------ | ---- | - | ----- |  | ---- | ------ |  | - | ------
|                            |  | Quarter EndedJune 30, |       | Six Months EndedJune 30,
|                            |  | 2004                  |       |                          | 2003 |   | 2004  |  | 2003
|Licensing and merchandising |  | $                     | 2,390 |                          |      | $ | 1,829 |  | $    | 3,037  |  | $ | 2,395 
|Interactive media           |  |                       | 1,777 |                          |      |   | 1,043 |  |      | 2,019  |  |   | 2,374 
|Music                       |  |                       | 2,295 |                          |      |   | 2,364 |  |      | 5,445  |  |   | 3,589 
|Other                       |  |                       | (122  | )                        |      |   | 1,915 |  |      | 191    |  |   | 2,269 
|                            |  |                       |       |                          |      |   |       |  |      |        |  |   |       
|                            |  | $                     | 6,340 |                          |      | $ | 7,151 |  | $    | 10,692 |  | $ | 10,627
|                            |  |                       |       |                          |      |   |       |  |      |        |  |   |       



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METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                       |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                       |  | Quarter Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                       |  | 2004                   |         |   | 2003                      |   |          | 2004 |  |   | 2003    |  
|Segment income                                         |  | $                      | 51,861  |   |                           | $ | 18,988   |      |  | $ | 82,058  |   |  | $ | 11,404   |  
|General and administrative expenses                    |  |                        | (43,877 | ) |                           |   | (32,462  | )    |  |   | (87,464 | ) |  |   | (58,694  | )
|Depreciation                                           |  |                        | (3,743  | ) |                           |   | (5,013   | )    |  |   | (7,169  | ) |  |   | (10,252  | )
|                                                       |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Operating income (loss)                                |  |                        | 4,241   |   |                           |   | (18,487  | )    |  |   | (12,575 | ) |  |   | (57,542  | )
|Write-down of investment in cable channels             |  |                        |        |   |                           |   | (93,059  | )    |  |   |        |   |  |   | (93,059  | )
|Equity in net earnings (losses) of affiliates          |  |                        | (614    | ) |                           |   | (1,211   | )    |  |   | (1,813  | ) |  |   | 1,279    |  
|Interest expense, net of amounts capitalized           |  |                        | (20,752 | ) |                           |   | (18,863  | )    |  |   | (21,839 | ) |  |   | (36,812  | )
|Interest and other income                              |  |                        | 2,044   |   |                           |   | 3,069    |      |  |   | 3,989   |   |  |   | 6,377    |  
|Other non-recurring costs                              |  |                        | (1,173  | ) |                           |   |         |      |  |   | (1,173  | ) |  |   |         |  
|                                                       |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Loss from operations before provision for income taxes |  | $                      | (16,254 | ) |                           | $ | (128,551 | )    |  | $ | (33,411 | ) |  | $ | (179,757 | )
|                                                       |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  



The following is a
reconciliation of the change in reportable segment assets:



|                                |  |                   |           |                     |   |        |               |  |   |          
|------------------------------- |  | ----------------- | --------- | ------------------- | - | ------ | ------------- |  | - | ---------
|                                |  | December 31, 2003 |           | Increase (Decrease) |   |        | June 30, 2004
|Feature films                   |  | $                 | 2,595,706 |                     | $ | 14,351 |               |  | $ | 2,610,057
|Television programs             |  |                   | 405,140   |                     |   | 27,151 |               |  |   | 432,291  
|Cable channels                  |  |                   | 24,702    |                     |   | (702   | )             |  |   | 24,000   
|Other                           |  |                   | 4,389     |                     |   | (2,065 | )             |  |   | 2,324    
|                                |  |                   |           |                     |   |        |               |  |   |          
|Total reportable segment assets |  | $                 | 3,029,937 |                     | $ | 38,735 |               |  | $ | 3,068,672
|                                |  |                   |           |                     |   |        |               |  |   |          



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



|                                             |  |              |           |                  |   |          
|-------------------------------------------- |  | ------------ | --------- | ---------------- | - | ---------
|                                             |  | June 30,2004 |           | December 31,2003
|Total assets for reportable segments         |  | $            | 3,068,672 |                  | $ | 3,029,937
|Other unallocated amounts (principally cash) |  |              | 59,758    |                  |   | 76,634   
|                                             |  |              |           |                  |   |          
|Consolidated total assets                    |  | $            | 3,128,430 |                  | $ | 3,106,571
|                                             |  |              |           |                  |   |          



Note 11Commitments and
Contingencies



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



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



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##### Table of Contents

METRO-GOLDWYN-MAYER INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Contractual Commitments.    Effective February 1, 2000, the Company
entered into an International Home Video Subdistribution Services Agreement between Metro-Goldwyn-Mayer Home Entertainment LLC (MGMHE) and Twentieth Century Fox Home Entertainment, Inc. (Fox Home Entertainment), pursuant to
which Fox Home Entertainment provides distribution services for the Companys films in the international home video market. On June 24, 2003, MGMHE gave notice to Fox Home Entertainment of its intent to terminate the agreement as of January 31,
2004 as permitted under the agreement. Effective February 1, 2004, MGMHE and Fox Home Entertainment have entered into an amended agreement (the Amended Agreement) under which Fox Home Entertainment will continue to perform
sub-distribution services in certain territories. All termination payments required under the Amended Agreement were paid by the Company during the six months ended June 30, 2004. Under the terms of the Amended Agreement, the Company pays Fox
Home Entertainment a distribution fee based on gross receipts, as defined.



Effective November 1, 2000, the Company entered into an International Theatrical Distribution Services Agreement with Twentieth Century Fox Film Corporation (Fox) for distribution of the Companys
film releases in international theatrical and non-theatrical markets in territories in which the Company owns or controls the right to perform distribution services. Under the terms of the agreement, the Company pays Fox a distribution fee based on
gross film rentals.



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



Other Commitments.    The Company has various other commitments entered into in the ordinary course of business relating to
operating leases for offices and equipment, contractual agreements for creative talent for future film production, employment agreements and letters of credit.



Note 12Supplementary Cash Flow Information



The Company paid interest, net of capitalized interest, of $12,805,000 and $34,214,000 during the six months ended June 30, 2004 and 2003, respectively.
The Company paid income taxes of $4,676,000 and $8,581,000 during the six months ended June 30, 2004 and 2003, respectively.



During the six months ended June 30, 2003, property and equipment additions include a non-cash addition for tenant improvements of $17,066,000 paid by the
landlord of our new corporate headquarters in Los Angeles, California. A corresponding liability was established and is being amortized over the life of the lease as a reduction of rent expense.



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##### Table of Contents

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations



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



The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.



General



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



Recent Developments



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



Pursuant to the provisions of the Amended
and Restated 1996 Stock Incentive Plan, the Compensation Committee of the Board of Directors has adjusted the outstanding stock options issued under the plan such that following the payment of the one-time cash dividend to stockholders, each option
holder shall receive upon exercise, in addition to the shares of common stock otherwise obtainable, a cash amount of $8 per share.



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



In connection
with the refinancing of the prior credit facility, we wrote off deferred loan fees of $6.9 million in the quarter ending June 30, 2004.



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



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The Dutch Auction tender offer expired on January 15, 2004. Pursuant to the Dutch Auction tender offer,
we purchased 10,000,000 shares of our common stock at an average purchase price of $17.00 per share, or an aggregate amount of $170.0 million, plus offering expenses of approximately $1.0 million. The Dutch Auction tender offer was financed
primarily from available cash on hand, net cash flow provided by operating activities and borrowings under the revolving credit facility. See Liquidity and Capital Resources. Following completion of the Dutch Auction tender offer,
Mr. Kerkorian and the Tracinda Group together owned approximately 74.0 percent of our outstanding common stock.



Repayment of Term Loans.    On October 27, 2003, all $1.15 billion outstanding under our pre-existing term loans was repaid
from cash on hand and $200.0 million of borrowings under our revolving facility (see Liquidity and Capital ResourcesBank Borrowings).



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



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



Cost Structure



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



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



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



Advertising and other promotional costs
are included in selling, general and administrative expenses. The Company includes the cost of duplicating prints, which is a physical product, in operating costs. However, the Company considers the costs of shipping the prints to customers to be a
selling cost as it is part of the Companys



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distribution activities, and categorizes such activities as selling costs together with advertising, marketing and other promotional costs. Shipping and
handling costs of $19.0 million and $41.8 million for the quarter and six months ended June 30, 2004, respectively, and $17.4 million and $33.0 million for the quarter and six months ended June 30, 2003, respectively, have been included in selling,
general and administrative expense in the consolidated statements of operations, respectively.



Production Overhead.    The Company capitalizes production overhead, including allocable costs of individuals or departments with exclusive or significant responsibility for the production
of films in accordance with SOP 00-2 Accounting by Producers or Distributors of Films, as a component of film costs. Such allocable costs of departments are those with exclusive responsibility for the production of films, including
physical production and post production. Allocable costs of such departments principally include compensation costs of employees as well as certain other direct costs, such as travel costs and outside services. We compute the overhead to be
allocated to film and television costs based on the criteria noted above, and allocate such costs to film and television properties in proportion to the direct production expenditures of each property on an annual basis.



Collective Bargaining Agreements.    The motion
picture and television programs produced by MGM Studios, and the other major studios in the United States, generally employ actors, writers and directors who are members of the Screen Actors Guild, Writers Guild of America and Directors Guild of
America, respectively, pursuant to industry-wide collective bargaining agreements. The collective bargaining agreement with the Writers Guild of America expired on May 1, 2004 and negotiations for a successor agreement are ongoing. The collective
bargaining agreement with the Screen Actors Guild has been extended and expires on June 30, 2005. The Directors Guild of America collective bargaining agreement expires on June 30, 2005. Many productions also employ members of a number of other
labor organizations including, without limitation, the International Alliance of Theatrical and Stage Employees and the International Brotherhood of Teamsters. The collective bargaining agreement with Teamsters Local 399, which represents
significant numbers of persons within the motion picture and television industry, expires on July 31, 2004 and a tentative agreement has been reached which, when ratified, will be for a three-year term. The collective bargaining agreement with the
International Alliance of Theatrical and Stage Employees expires on July 31, 2006. A strike by one or more of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our ongoing
production activities. Such a halt or delay, depending on the length of time involved, could cause delay or interruption in our release of new motion pictures and television programs and thereby could adversely affect our cash flow and revenues. Our
revenues from motion pictures and television programs in our library should not be affected and may partially offset the effects of a strike to the extent, if any, that television exhibitors buy more library product to compensate for interruption in
their first-run programming.



Critical Accounting Estimates



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



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



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the capitalized film costs in accordance with SOP 00-2. The estimated future cash flows are discounted using a net present value model.



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



The commercial potential of individual motion pictures and television
programming varies dramatically, and is not directly correlated with production or acquisition costs. Therefore, it is difficult to predict or project a trend of our income or loss. However, the likelihood that we report losses, particularly in the
year of a motion pictures release, is increased by the industrys method of accounting which requires the immediate recognition of the entire loss (through increased amortization) in instances where it is estimated the ultimate revenues
of a motion picture or television program will not recover our capitalized costs. On the other hand, the profit of a profitable motion picture or television program must be deferred and recognized over the entire revenue stream generated by that
motion picture or television program. This method of accounting may also result in significant fluctuations in reported income or loss, particularly on a quarterly basis, depending on our release schedule, the timing of advertising campaigns and the
relative performance of individual motion pictures or television programs.



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



New Accounting Pronouncements



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



In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by Statement of Financial Accounting Standards No. 87, Employers Accounting for Pensions, Statement of Financial Accounting Standards No. 88,



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##### Table of Contents

Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and Statement of
Financial Accounting Standards No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. This statement retains the disclosure requirements contained in Statement of Accounting Standards No. 132,
Employers Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement of Financial Accounting Standards No. 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit
plans. This statement is effective for financial statements with fiscal years ending after December 15, 2003. We implemented the Statement of Financial Accounting Standards No. 132 (revised 2003) on December 31, 2003.



On January 1, 2004, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Under the modified prospective method of adoption selected by us under the provisions of Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure, stock-based employee compensation expense recognized in 2004 is the same as that which would have been recognized had the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 been applied to all awards from its original effective date. During the quarter and six months ended June 30, 2004, the Company recorded compensation expense of $7.0 million and $14.5 million,
respectively, regarding its employee stock incentive plan, which charge has been included in selling, general and administrative expenses in the consolidated statements of operations.



Results of Operations



The following table sets forth our reported operating results for the quarters and six months ended June 30, 2004 and 2003 (in thousands):



|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|--------------------------------------------- |  | ---------------------- | ------- | - | ------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                              |  | Quarter Ended June 30, |         |   | Six Months Ended June 30, |  
|                                              |  | 2004                   |         |   | 2003                      |   |          | 2004 |  |   | 2003    |  
|Revenues:                                     |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Feature films                                 |  | $                      | 347,451 |   |                           | $ | 427,487  |      |  | $ | 756,275 |   |  | $ | 783,556  |  
|Television programs                           |  |                        | 44,492  |   |                           |   | 50,149   |      |  |   | 91,076  |   |  |   | 81,677   |  
|Other                                         |  |                        | 14,164  |   |                           |   | 10,066   |      |  |   | 22,752  |   |  |   | 17,660   |  
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Total revenues                                |  |                        | 406,107 |   |                           |   | 487,702  |      |  |   | 870,103 |   |  |   | 882,893  |  
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Operating income (loss):                      |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Feature films                                 |  |                        | 32,483  |   |                           |   | 8,421    |      |  |   | 59,485  |   |  |   | (158     | )
|Television programs                           |  |                        | 12,636  |   |                           |   | 3,103    |      |  |   | 10,589  |   |  |   | 661      |  
|Other                                         |  |                        | 6,742   |   |                           |   | 7,464    |      |  |   | 11,984  |   |  |   | 10,901   |  
|General and administration expenses           |  |                        | (43,877 | ) |                           |   | (32,462  | )    |  |   | (87,464 | ) |  |   | (58,694  | )
|Depreciation                                  |  |                        | (3,743  | ) |                           |   | (5,013   | )    |  |   | (7,169  | ) |  |   | (10,252  | )
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Operating income (loss)                       |  |                        | 4,241   |   |                           |   | (18,487  | )    |  |   | (12,575 | ) |  |   | (57,542  | )
|Write-down of investment in cable channels    |  |                        |        |   |                           |   | (93,059  | )    |  |   |        |   |  |   | (93,059  | )
|Equity in net earnings (losses) of affiliates |  |                        | (614    | ) |                           |   | (1,211   | )    |  |   | (1,813  | ) |  |   | 1,279    |  
|Interest expense, net of amounts capitalized  |  |                        | (20,752 | ) |                           |   | (18,863  | )    |  |   | (21,839 | ) |  |   | (36,812  | )
|Interest and other income                     |  |                        | 2,044   |   |                           |   | 3,069    |      |  |   | 3,989   |   |  |   | 6,377    |  
|Other non-recurring costs                     |  |                        | (1,173  | ) |                           |   |         |      |  |   | (1,173  | ) |  |   |         |  
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Loss before provision for income taxes        |  |                        | (16,254 | ) |                           |   | (128,551 | )    |  |   | (33,411 | ) |  |   | (179,757 | )
|Income tax provision                          |  |                        | (3,412  | ) |                           |   | (5,028   | )    |  |   | (7,525  | ) |  |   | (9,644   | )
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Net loss                                      |  | $                      | (19,666 | ) |                           | $ | (133,579 | )    |  | $ | (40,936 | ) |  | $ | (189,401 | )
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  



21



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Overview



Quarter:    In the quarter ended June 30, 2004 (the 2004 Quarter), our revenues
decreased $81.6 million, or 17 percent, to $406.1 million as compared to the quarter ended June 30, 2003 (the 2003 Quarter). The decrease in 2004 Quarter revenues principally reflected lower home video revenues due to the release of
Die Another Dayin the 2003 Quarter, as there were no comparable releases in the 2004 Quarter.



Operating income in the 2004 Quarter increased to $4.2 million from an operating loss of $18.5 million in the 2003 Quarter, an improvement of $22.7
million. The improvement reflected increased profit margins, as the 2004 Quarter included higher television license revenues which carry lower distribution costs, as well as decreased theatrical print and advertising costs, which were $13.1 million
lower than in the 2003 Quarter as our 2004 Quarter film slate had lower releasing costs. Other benefits included the performance of Stargate SG-1 in worldwide home video markets, as well as the collection of an insurance recovery of $6.1
million in the 2004 Quarter.



Feature film write-downs in the
2004 Quarter were $9.2 million as compared to write-downs of $2.5 million in the 2003 Quarter. Additionally, in the 2004 Quarter, general and administrative expenses increased by $11.4 million, principally due to our adoption on January 1, 2004 of
the fair value recognition provisions of employee stock option accounting, as well as increased provisions under our employee benefit plans.



Net loss in the 2004 Quarter improved to $19.7 million, or $0.08 per share, from a net loss of $133.6 million, or $0.55 per share, in the 2003
Quarter. In the 2003 Quarter, we incurred a write-down of $93.1 million on our investment in three cable channels, American Movie Classics, The Independent Film Channel and WE: Womens Entertainment, which were sold in July 2003. Partially
offsetting the improvement in net loss in the 2004 Quarter was increased interest expense, principally reflecting the write-off of $6.9 million of deferred loan fees due to the refinancing of our credit facility in April 2004, and reduced interest
income due to lower cash balances.



Six
Months:    In the six months ended June 30, 2004 (the 2004 Period), our revenues decreased $12.8 million, or one percent, to $870.1 million as compared to the six months ended June 30, 2003 (the 2003
Period). The decrease in 2004 Period revenues principally reflected lower home video revenues due to the release of Die Another Day in the 2003 Period, partially offset by increased television licensing revenue.



Operating loss in the 2004 Period improved to $12.6 million from an operating
loss of $57.5 million in the 2003 Period. The improvement of $44.9 million reflected increased profit margins, as the 2004 Period included higher television license revenues which carry lower distribution costs, as well as decreased theatrical print
and advertising costs, which were $25.6 million lower than in the 2003 Period as our 2004 Period film slate had lower releasing costs. Other benefits included the performance of Stargate SG-1 in worldwide home video markets, as well as the
collection of an insurance recovery of $6.1 million in the 2004 Period. Additionally, in the 2003 Period we incurred a charge associated with the settlement of negotiations with a third party distributor regarding the distribution of our product in
the international home video markets. There were no comparable charges in the 2004 Period.



Feature film write-downs in the 2004 Period were $9.2 million as compared to write-downs of $6.8 million in the 2003 Period. Additionally, in the 2004 Period, bad debt charges increased by $19.0 million, principally
due to the bankruptcy of a significant international television customer, and general and administrative expenses increased by $28.8 million principally due to our adoption on January 1, 2004 of the fair value recognition provisions of employee
stock option accounting, as well as increased provisions under our employee benefit plans.



Net loss in the 2004 Period improved to $40.9 million, or $0.17 per share, from a net loss of $189.4 million, or $0.77 per share, in the 2003 Period. In the 2003 Period, we incurred a write-down of $93.1 million on
our



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##### Table of Contents

investment in three cable channels, American Movie Classics, The Independent Film Channel and WE: Womens Entertainment, which were sold in July 2003.
In the 2004 Period, interest costs decreased by $15.0 million as we had higher average debt balances in the 2003 Period. The lower interest costs were partially offset by the write-off of $6.9 million of deferred loan fees in the 2004 Period due to
the refinancing of our credit facility in April 2004.



EBITDA



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



The following table reconciles EBITDA to net loss for the quarters and six months ended June 30, 2004 and 2003 (in thousands):



|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|--------------------------------------------- |  | ---------------------- | ------- | - | ------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                              |  | Quarter Ended June 30, |         |   | Six Months Ended June 30, |  
|                                              |  | 2004                   |         |   | 2003                      |   |          | 2004 |  |   | 2003    |  
|EBITDA                                        |  | $                      | 7,984   |   |                           | $ | (13,474  | )    |  | $ | (5,406  | ) |  | $ | (47,290  | )
|Depreciation                                  |  |                        | (3,743  | ) |                           |   | (5,013   | )    |  |   | (7,169  | ) |  |   | (10,252  | )
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Operating income (loss)                       |  |                        | 4,241   |   |                           |   | (18,487  | )    |  |   | (12,575 | ) |  |   | (57,542  | )
|Write-down of investment in cable channels    |  |                        |        |   |                           |   | (93,059  | )    |  |   |        |   |  |   | (93,059  | )
|Equity in net earnings (losses) of affiliates |  |                        | (614    | ) |                           |   | (1,211   | )    |  |   | (1,813  | ) |  |   | 1,279    |  
|Interest expense, net of amounts capitalized  |  |                        | (20,752 | ) |                           |   | (18,863  | )    |  |   | (21,839 | ) |  |   | (36,812  | )
|Interest and other income                     |  |                        | 2,044   |   |                           |   | 3,069    |      |  |   | 3,989   |   |  |   | 6,377    |  
|Other non-recurring costs                     |  |                        | (1,173  | ) |                           |   |         |      |  |   | (1,173  | ) |  |   |         |  
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Loss before provision for income taxes        |  |                        | (16,254 | ) |                           |   | (128,551 | )    |  |   | (33,411 | ) |  |   | (179,757 | )
|Income tax provision                          |  |                        | (3,412  | ) |                           |   | (5,028   | )    |  |   | (7,525  | ) |  |   | (9,644   | )
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Net loss                                      |  | $                      | (19,666 | ) |                           | $ | (133,579 | )    |  | $ | (40,936 | ) |  | $ | (189,401 | )
|                                              |  |                        |         |   |                           |   |          |      |  |   |         |   |  |   |          |  



See further details of
operating changes under segments discussion below.



Feature Films



Consolidated feature
films revenues and operating income (loss) are as follows (in thousands):



|                        |  |                        |         |                           |   |         |  |      |         |  |   |         |  
|----------------------- |  | ---------------------- | ------- | ------------------------- | - | ------- |  | ---- | ------- |  | - | ------- | -
|                        |  | Quarter Ended June 30, |         | Six Months Ended June 30, |  
|                        |  | 2004                   |         | 2003                      |   | 2004    |  | 2003 |        
|Revenues                |  | $                      | 347,451 |                           | $ | 427,487 |  | $    | 756,275 |  | $ | 783,556 |  
|Operating income (loss) |  | $                      | 32,483  |                           | $ | 8,421   |  | $    | 59,485  |  | $ | (158    | )



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##### Table of Contents

Quarter Ended June 30, 2004 Compared to Quarter Ended June 30, 2003



Revenues.    Feature film revenues decreased by
$80.0 million, or 19 percent, to $347.5 million in the 2004 Quarter as compared to the 2003 Quarter.



Worldwide theatrical revenues increased by $8.9 million, or 37 percent, to $32.8 million in the 2004 Quarter. Overall, in the 2004 Quarter, we released
four new feature films domestically and two films internationally, as compared to the release of four new feature films domestically and two films internationally in the 2003 Quarter. In the 2004 Quarter, we released Walking Tall, Soul
Plane, Saved and Coffee and Cigarettes, which in the aggregate out-performed the releases in the 2003 Quarter. In the 2003 Quarter, we released theatrically Bulletproof Monk and It Runs In The Family, as well as
City ofGhosts and Together on a limited basis.



Worldwide home video revenues decreased by $132.8 million, or 41 percent, to $189.1 million in the 2004 Quarter. In the 2004 Quarter, we released Barbershop 2: Back In Businessin the home video marketplace. In the 2003 Quarter, we
released Die Another Day, A Guy Thing, Dark Blueand Evelyn, which generated substantially higher video revenues than the releases in the 2004 Quarter.Die Another Daygenerated $140.1 million in worldwide
home video revenues in the 2003 Quarter. There were no comparable releases in the 2004 Quarter.In the 2004 Quarter, worldwide DVD sales were $161.6 million as compared to $279.1 million in the 2003 Quarter, which included the release of
Die Another Day.



Worldwide pay television revenues from
feature films increased by $10.4 million, or 31 percent, to $44.0 million in the 2004 Quarter. In the 2004 Quarter, we delivered six new films to domestic pay television, Legally Blonde 2: Red, White and Blonde, Bulletproof Monk,
It Runs In The Family, City of Ghosts, Assassination Tango and Together. In the 2003 Quarter, we delivered three new films to domestic pay television, Windtalkers, CQ and Pumpkin, which generated
lower license fees than the films in the 2004 Quarter. Worldwide syndicated television revenues from feature films increased by $23.8 million, or 52 percent, to $69.8 million in the 2004 Quarter, principally due to the delivery of Hannibal,
Jeepers Creepers and Original Sin to domestic basic cable, as well as increased international sales, as compared to the 2003 Quarter.



Other revenues increased by $9.5 million in the 2004 Quarter, principally due to the receipt of entitlement royalties and timing of miscellaneous income.



Operating Results.    Operating
income from feature films increased by $24.1 million, or 286 percent, to $32.5 million in the 2004 Quarter. In the 2004 Quarter, we benefited from the successful theatrical releases of Walking Tall,Saved and Coffee and
Cigarettes as well as the increase in television revenues discussed above, which carry lower distribution costs. Additionally, our 2004 Quarter film slate had lower theatrical releasing costs than our film slate in the 2003 Quarter, which
provided an increase in our operating results in 2004 of $13.1 million. In the 2004 Quarter, we also benefited from the home video release of Barbershop 2: Back In Business. In the 2003 Quarter, we benefited from the theatrical release
of Agent Cody Banks and the home video release of Die Another Day. Additionally, in the 2004 Quarter, we realized an insurance recovery of $6.1 million. The 2003 Quarter also included a charge associated with the settlement of
negotiations with a third party distributor regarding the distribution of our product in the international home video markets (see Recent DevelopmentsNotice of Termination of Third Party International Home Video Subdistribution
Services Agreement).



Partially offsetting these benefits
were new provisions for outside producer claims in the 2004 Quarter of $5.5 million. Additionally, feature film write-downs were $9.2 million in the 2004 Quarter as compared to write-downs of $2.5 million incurred in the 2003 Quarter.



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



Revenues.    Feature film
revenues decreased by $27.3 million, or three percent, to $756.3 million in the 2004 Period as compared to the 2003 Period.



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##### Table of Contents

Worldwide theatrical revenues decreased by $16.0 million, or 17 percent, to $77.2 million in the 2004
Period. Domestically, we released seven new films in the 2004 Period and eight films in the 2003 Period. Internationally, we released five films in the 2004 Period as compared to three films in the 2003 Period. In the 2004 Period, we released
Barbershop 2: Back In Business, Walking Tall, Soul Plane,Agent Cody Banks 2:Destination London andSaved, as well as Osamaand Coffee and Cigarettes in limited release. In the 2003 Period, we
generated higher theatrical revenues from the continued successful worldwide theatrical release of Die Another Day as well as Agent Cody Banks.Additionally, in 2003 we releasedBulletproof Monk, It Runs In The Family, A Guy ThingandDark Blue, as well as the release of Together, City of Ghosts and Assassination Tango on a limited basis.



Worldwide home video revenues decreased by $65.0 million, or 12 percent, to $459.5 million in the 2004 Period. In the 2004 Period, we released
Barbershop 2: Back In Business, Out of Time, Uptown Girls, Good Boy! and Pieces of Aprilin the home video marketplace. In the 2003 Period, we released DieAnother Day, Barbershop, A Guy
Thing, Dark Blue, Igby Goes Down, Evelyn, and Killing Me Softly, which generated substantially higher video revenues than the releases in the 2004 Period. Die Another Daygenerated $140.1 million in
worldwide home video revenues in the 2003 Period. There were no comparable releases in the 2004 Period.In the 2004 Period, worldwide DVD sales were $407.6 million as compared to $451.6 million in the 2003 Period, which included the release
of Die Another Day.



Worldwide pay television revenues
from feature films increased by $12.0 million, or 18 percent, to $79.6 million in the 2004 Period. In the 2004 Period, we delivered nine new films to domestic pay television, including Legally Blonde 2: Red, White and Blonde, Agent
Cody Banks and Bulletproof Monk, which generated substantially higher license fees than the films delivered in 2003. In the 2003 Period, we delivered seven new films to domestic pay television, including Windtalkers, Harts Warand Deuces Wild. Network television revenues increased by $2.4 million, or 45 percent, to $7.7 million in the 2004 Period, principally due to the delivery of Legally Blonde in 2004 as compared to Return To Me in 2003,
which carried a lower license fee. Worldwide syndicated television revenues from feature films increased by $29.1 million, or 33 percent, to $118.2 million in the 2004 Period, principally due to the basic cable sale of Hannibal,
Jeepers Creepers, Whats The Worst That Could Happen and Original Sin in 2004, as compared to the delivery to basic cable of Autumn In New York in 2003.



Other revenues increased by $10.3 million in the 2004 Period, principally due to the receipt of entitlement royalties and
timing of miscellaneous income.



Operating
Results.    Operating income from feature films improved to $59.5 million in the 2004 Period from an operating loss of $0.2 million in the 2003 period. In the 2004 Period, we benefited from the successful theatrical releases
of Barbershop 2: Back In Business, Walking Tall,SavedandCoffee and Cigarettes as well as the increase in television revenues discussed above, which carry lower distribution costs. Additionally, our 2004 Period film
slate had lower theatrical releasing costs than our film slate in the 2003 Period, which provided an increase in our operating results in 2004 of $25.6 million. In the 2004 Period, we also benefited from the home video release of Barbershop 2:
Back In Business. In the 2003 Period, we benefited from the successful worldwide theatrical and home video performance of Die Another Day,the theatrical release ofAgent Cody Banksand the home video release ofBarbershop,
among others. Additionally, we realized an insurance recovery of $6.1 million in the 2004 Period. The 2003 Period also included a charge associated with the settlement of negotiations with a third party distributor regarding the distribution of our
product in the international home video markets (see Recent DevelopmentsNotice of Termination of Third Party International Home Video Subdistribution Services Agreement).



Partially offsetting these benefits were new provisions for outside producer
claims in the 2004 Period of $5.5 million. Additionally, feature film write-downs were $9.2 million in the 2004 Period as compared to write-downs of $6.8 million incurred in the 2003 Quarter. Bad debt expense increased by $15.0 million, primarily
due to the bankruptcy of a significant international television customer during the period. There were no such occurrences in the 2003 Period.



25



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##### Table of Contents

Television Programming



Consolidated television programming revenues and operating loss are as follows (in thousands):



|                 |  |                        |        |                          |   |        |  |      |        |  |   |       
|---------------- |  | ---------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                 |  | Quarter Ended June 30, |        | Six Months EndedJune 30,
|                 |  | 2004                   |        | 2003                     |   | 2004   |  | 2003
|Revenues         |  | $                      | 44,492 |                          | $ | 50,149 |  | $    | 91,076 |  | $ | 81,677
|Operating income |  | $                      | 12,636 |                          | $ | 3,103  |  | $    | 10,589 |  | $ | 661   



Quarter Ended June
30, 2004 Compared to Quarter Ended June 30, 2003



Revenues.    Television programming revenues decreased by $5.7 million, or 11 percent, to $44.5 million in the 2004 Quarter as compared to the 2003 Quarter.



There were no network television revenues in the 2004 Quarter as compared to
$5.8 million in the 2003 Quarter, which included the new series Fame. Worldwide pay television revenues decreased by $2.9 million, or 25 percent, to $8.7 million in the 2004 Quarter. In the 2004 Quarter, we had one series on domestic pay
television, Dead Like Me, as compared to two series in the 2003 Quarter, Jeremiahand Dead Like Me. In the 2003 Period, we realized higher domestic syndication and basic cable sales for Stargate SG-1than in the 2004
Quarter. However, international syndication sales increased forStargate SG-1in the 2004 Quarter. Worldwide home video revenues with respect to television programming increased by $2.6 million, or 25 percent, to $12.8 million in the 2004
Quarter, primarily due to increased sales of Stargate SG-1 in worldwide home video markets.



Other revenues increased by $3.0 million in the 2004 Quarter due to increased entitlement revenue.



Operating Results.    Operating income from
television programming increased by $9.5 million, or 307 percent, to $12.6 million in the 2004 Quarter. The increase reflected increased profit margins due to the performance of Stargate SG-1 in worldwide home video markets, as well as
reduced write-downs on new series and increased entitlement revenue.



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



Revenues.    Television programming revenues increased by $9.4 million, or 12 percent, to $91.1 million in the 2004 Period as compared to the 2003 Period.



There were no network television revenues in the 2004 Period as compared to
$5.8 million in the 2003 Period, which included the new series Fame. Worldwide pay television revenues decreased by $5.6 million, or 31 percent, to $12.5 million in the 2004 Period. In the 2004 Period, we had one series on domestic pay
television, Dead Like Me, as compared to two series in the 2003 Period, Jeremiahand Dead Like Me, as well as the delivery in international markets of two made-for-television movies in 2003. Worldwide syndicated television
programming revenues decreased by $6.6 million, or 16 percent, to $34.3 million in the 2004 Period. In the 2003 Period, we realized higher domestic syndication and basic cable sales for Stargate SG-1than in the 2004 Period. However,
international syndication sales increased forStargate SG-1in the 2004 Period. Worldwide home video revenues with respect to television programming increased by $24.1 million, or 148 percent, to $40.3 million in the 2004 Period, primarily
due to increased worldwide home video sales of Stargate SG-1.



Other revenues increased by $3.4 million in the 2004 Period due to increased entitlement revenue.



Operating Results.    Operating income from television programming increased by $9.9 million to $10.6 million in the 2004
Period, principally due to the performance of Stargate SG-1 in worldwide home video markets, as well as reduced write-downs on new series and increased entitlement revenue.



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##### Table of Contents

Partially offsetting the improvement in operating results in the 2004 Period was an increase in bad debt
expense of $4.0 million, due to the bankruptcy of a significant international television customer during the period. There were no such occurrences in the 2003 Period.



Other Businesses



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



|                 |  |                        |        |                          |   |        |  |      |        |  |   |       
|---------------- |  | ---------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                 |  | Quarter ended June 30, |        | Six Months endedJune 30,
|                 |  | 2004                   |        | 2003                     |   | 2004   |  | 2003
|Revenues         |  | $                      | 14,164 |                          | $ | 10,066 |  | $    | 22,752 |  | $ | 17,660
|Operating income |  | $                      | 6,742  |                          | $ | 7,464  |  | $    | 11,984 |  | $ | 10,901



Quarter Ended June
30, 2004 Compared to Quarter Ended June 30, 2003



Revenues.    Revenues from other businesses increased by $4.1 million, or 41 percent, to $14.2 million in the 2004 Quarter as compared to the 2003 Quarter. Operating results in the 2004 Quarter included consumer
products revenue of $4.7 million and music soundtrack and royalty revenue of $2.9 million, as compared to consumer products revenue of $3.4 million and music soundtrack and royalty revenue of $2.8 million in the 2003 Quarter. Interactive media
revenues were $4.6 million in the 2004 Quarter, which included license fees for interactive games, as compared to $2.7 million in the 2003 Quarter, which principally consisted of royalties earned from the interactive game release
007-Nightfire. Branded programming services revenues aggregated $1.6 million in the 2004 Quarter as compared to $1.1 million in the 2003 Quarter. The increase in branded programming services revenues in 2004 was principally due to an increase
in subscription revenues from the Companys wholly-owned international cable channels. Revenues from other businesses in the 2004 Quarter also included the receipt of $0.3 million of miscellaneous income as compared to $0.1 million in the 2003
Quarter.



Operating
Results.    Operating income from other businesses decreased by $0.7 million, or 10 percent, to $6.7 million in the 2004 Quarter. Expenses for other businesses include interactive product costs of $2.8 million in the 2004
Quarter as compared to $1.6 million in the 2003 Quarter. Consumer products cost of sales were $1.3 million in the 2004 Quarter as compared to $0.7 million in the 2003 Quarter. The increase in interactive and consumer product costs in 2004
correlated to the increase in such revenues. Overhead costs related to other businesses aggregated $2.1 million in the 2004 Quarter as compared to $1.8 million in the 2003 Quarter. Other expenses, including distribution costs associated with music
and branded programming services, aggregated $1.0 million in both the 2004 Quarter and the 2003 Quarter. We recognized foreign currency transaction losses of $0.1 million in the 2004 Quarter as compared to foreign currency gains of $2.5 million in
the 2003 Quarter.



Six Months Ended June 30, 2004 Compared
to Six Months Ended June 30, 2003



Revenues.    Revenues from other businesses increased by $5.1 million, or 29 percent, to $22.8 million in the 2004 Period as compared to the 2003 Period. Operating results in the 2004 Period included consumer
products revenue of $7.1 million and music soundtrack and royalty revenue of $6.3 million, as compared to consumer products revenue of $5.4 million and music soundtrack and royalty revenue of $4.3 million in the 2003 Period. Music soundtrack and
royalty revenue increased in the 2004 Period due to soundtrack revenue realized on Barbershop 2: Back In Business. Interactive media revenues were $5.6 million in the 2004 Period, which included license fees for interactive games, as compared
to $6.0 million in the 2003 Period, which principally consisted of royalties earned from the interactive game release 007-Nightfire. Branded programming services revenues aggregated $3.3 million in the 2004 Period as compared to $1.7 million
in the 2003 Period. Revenues from other businesses in 2004 also included the receipt of $0.4 million in third-party audit recoveries and other miscellaneous income as compared to $0.3 million in 2003.



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Operating Results.    Operating income from other businesses increased by $1.1
million, or 10 percent, to $12.0 million in the 2004 Period. Expenses for other businesses include interactive product costs of $3.4 million in the 2004 Period as compared to $3.5 million in the 2003 Period. Consumer products costs were $2.2 million
in the 2004 Period and $1.4 million in the 2003 Period. Overhead costs related to other businesses aggregated $3.9 million in the 2004 Period and $3.5 million in the 2003 Period. Other expenses, including distribution costs associated with
music and branded programming services, aggregated $1.4 million in the 2004 Period and $1.5 million in the 2003 Period. We recognized foreign currency transaction gains of $0.5 million in the 2004 Period as compared to foreign currency gains of
$3.1 million in the 2003 Period.



Corporate and Other



Quarter Ended June 30, 2004 Compared to Quarter
Ended June 30, 2003



General and Administrative
Expenses.    In the 2004 Quarter, general and administrative expenses increased by $11.4 million, or 35 percent, to $43.9 million, as compared to the 2003 Quarter.



Beginning January 1, 2004, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (seeNew Accounting Pronouncements). In the 2004 Quarter, we recognized compensation expense of $7.0 million regarding our employee stock incentive plan. Additionally, in
the 2004 Quarter, we recognized $6.4 million of charges relating to our management incentive plans, as compared to $5.8 million in the 2003 Quarter for such plans.



Additionally, in the 2004 Quarter our facilities and insurance charges increased by $2.9 million and our professional fees
increased by $0.5 million, as compared to the 2003 Quarter. Other increases generally reflected higher employee compensation costs and temporary services.



We also incurred relocation costs of approximately $1.5 million in the 2003 Quarter to move to our new corporate headquarters.



Depreciation.    Depreciation expense in the 2004
Quarter decreased by $1.3 million, or 25 percent, to $3.7 million, as compared to the 2003 Quarter, due to fixed assets retired when we moved to our new corporate headquarters in June 2003.



Equity in Net Earnings (Losses) of
Affiliates.    In the 2004 Quarter, loss from equity investees was $0.6 million as compared to a loss from our equity investees of $1.2 million in the 2003 Quarter. The improvement in 2004 reflected increased returns on
our international cable channels investments.



Interest
Expense, Net of Amounts Capitalized.    Net interest expense in the 2004 Quarter increased by $1.9 million, or 10 percent, to $20.8 million, as compared to the 2003 Quarter, primarily due to the write-off of deferred
loan fees of $6.9 million associated with the refinancing of our credit facility in April 2004, partially offset by lower average debt balances held in the 2004 Quarter as compared to the 2003 Quarter.



Interest and Other Income, Net.    Interest and
other income in the 2004 Quarter decreased by $1.0 million, or 33 percent, to $2.0 million, as compared to the 2003 Quarter, due to reduced average invested cash balances in the 2004 Quarter related to the repayment of our Term Loans in October
2003.



Other Non-Recurring
Costs.    In the 2004 Quarter, we incurred certain non-recurring costs of $1.2 million associated with our pursuit of potential strategic alternatives.



Income Tax Provision.    The provision for income taxes in the 2004 Quarter decreased by $1.6
million, or 32 percent, to $3.4 million, as compared to the 2003 Quarter. The provision for income taxes, comprising principally of foreign remittance taxes, decreased due to reduced international distribution revenues in the 2004 Quarter.



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Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



General and Administrative Expenses.    In the
2004 Period, general and administrative expenses increased by $28.8 million, or 49 percent, to $87.5 million, as compared to the 2003 Period.



Beginning January 1, 2004, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (see New Accounting Pronouncements). In the 2004 Period, we recognized compensation expense of $14.5 million regarding our employee stock incentive plan. Additionally, in the 2004 Period, we
recognized $12.8 million of charges relating to our management incentive plans, as compared to $8.7 million in the 2003 Period for such plans.



Additionally, in the 2004 Quarter our facilities and insurance charges increased by $5.1 million and our professional fees increased by $1.6 million, as
compared to the 2003 Period. Other increases generally reflected higher employee compensation costs and temporary services.



We also incurred relocation costs of approximately $1.5 million in the 2003 Period to move to our new corporate headquarters.



Depreciation.    Depreciation expense in the 2004
Period decreased by $3.1 million, or 30 percent, to $7.2 million, as compared to the 2003 Period, due to fixed assets retired when we moved to our new corporate headquarters in June 2003.



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



Equity in Net Earnings (Losses) of Affiliates.    In the 2004 Period, loss from equity investees was $1.8 million as
compared to income from our equity investees of $1.3 million in the 2003 Period. In the 2003 Period, we benefited from the inclusion (for one quarter) of our 20 percent share of the operating results of the Rainbow Media Group cable channels, which
contributed income of $4.8 million. Our equity interest in these cable channels were sold in July 2003.



Interest Expense, Net of Amounts Capitalized.    Net interest expense in the 2004 Period decreased by $15.0 million, or 41
percent, to $21.8 million, as compared to the 2003 Period, primarily due to the repayment of our Term Loans in October 2003. Partially offsetting the decrease in interest expense was the write-off of deferred loan fees of $6.9 million associated
with the refinancing of our credit facility in April 2004.



Interest and Other Income, Net.    Interest and other income in the 2004 Period decreased by $2.4 million, or 37 percent, to $4.0 million, as compared to the 2003 Period, due to reduced average invested cash
balances in the 2004 Period related to the repayment of our Term Loans in October 2003.



Other Non-Recurring Costs.    In the 2004 Period, we incurred certain non-recurring costs of $1.2 million associated with our pursuit of potential strategic alternatives.



Income Tax Provision.    The provision for income
taxes in the 2004 Period decreased by $2.1 million, or 22 percent, to $7.5 million, as compared to the 2003 Period. The provision for income taxes, comprising principally of foreign remittance taxes, decreased due to reduced international
distribution revenues in the 2004 Period.



Liquidity and Capital Resources



General.    Our operations are
capital intensive. In recent years we have funded our operations primarily from (a) the sale of equity securities, (b) bank borrowings and (c) internally generated funds. During the 2004



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Period, the net cash provided by operating activities was $46.6 million, which included spending associated with film and television production and
distribution costs of $456.4 million; net cash used in investing activities was $6.7 million, which included $5.5 million in property and equipment purchases and $2.9 million in affiliate advances, partially offset by the receipt of dividends from
equity investees of $1.7 million; and net cash used in financing activities was $62.3 million, including $1.89 billion for the payment of the stockholder dividend on May 17, 2004 (see below), $171.0 million for the Dutch Auction tender offer, the
acquisition of treasury shares of $10.4 million under our share repurchase program and $19.4 million of financing fees paid for our new credit facilities, partially offset by $2.0 billion of net bank borrowings as well as $31.9 million collected
from the issuance of equity securities to related parties.



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



Pursuant to the provisions of the Amended and Restated 1996 Stock Incentive Plan, the Compensation Committee of the Board of Directors has adjusted the
outstanding stock options issued under the plan such that following the payment of the one-time cash dividend to stockholders, each option holder shall receive upon exercise, in addition to the shares of common stock otherwise obtainable, a cash
amount of $8 per share.



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



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



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



Treasury Stock.    On July 26, 2002, we announced a share repurchase program authorizing the purchase of up to 10,000,000
million shares of our common stock. We intend to fund the repurchase program from available cash on hand. On November 12, 2003, our Board of Directors increased its authorization for our share repurchase program by an additional 2,500,000 shares, to
a total of 12,500,000 shares. As of June 30, 2004, under the share repurchase program, we had repurchased 8,104,300 shares of common stock at an average price of $11.46 per share, for an aggregate cost of $92.9 million.



Bank Borrowings.    On April 26, 2004, we entered
into a fourth amended and restated $2.4 billion credit facility with a syndicate of banks, which replaced the pre-existing $1.75 billion amended credit facility,



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consisting of a five-year $400.0 million revolving credit facility, a six-year $400.0 million term loan and a seven-year $1.6 billion term loan. The
revolving facility and the $400.0 million term loan bear interest at 2.25 percent over the Adjusted LIBOR rate, as defined (3.73 percent at July 30, 2004) and the $1.6 billion term loan bears interest at 2.50 percent over the Adjusted LIBOR rate, as
defined (3.98 percent at July 30, 2004).



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



As of July 30, 2004, the term loans under
the amended credit facility had an outstanding balance of $2.0 billion. Scheduled amortization of the term loans is as follows (in millions):



|      |  |   |        
|----- |  | - | -------
|2004  |  | $ | 16.2   
|2005  |  |   | 64.0   
|2006  |  |   | 64.0   
|2007  |  |   | 64.0   
|2008  |  |   | 64.0   
|2009  |  |   | 64.0   
|2010  |  |   | 164.0  
|2011  |  |   | 1,500.0
|      |  |   |        
|Total |  | $ | 2,000.2
|      |  |   |        



As of July 30, 2004,
we had $365.0 million, including commercial letters of credit, available under our revolving facility. The revolving facility matures on April 30, 2009.



Our credit facility contains various covenants, including limitations on indebtedness, dividends and capital expenditures, and maintenance of certain
financial ratios. Additionally, the credit facility requires mandatory prepayments under certain conditions. Restricted net assets of Metro-Goldwyn-Mayer Studios Inc. and Orion Pictures Corporation at June 30, 2004 are approximately $2.1 billion.
Although we are in compliance with all terms of our credit facility, there can be no assurances that we will remain in compliance with such covenants or other conditions under our credit facility in the future.



Cash Provided by Operating Activities.    In the
2004 Period, cash provided by operating activities was $46.6 million compared to cash provided by operating activities of $159.5 million in the 2003 Period. Cash provided by operating activities included film and television production and
distribution costs of $456.4 million in the 2004 Period as compared to $365.4 million in the 2003 Period.



Cash Used In Investing Activities.    In the 2004 Period, cash used in investing activities was $6.7 million, which included
property and equipment purchases of $5.5 million and advances to affiliates of $2.9 million, partially offset by dividends received from equity investees of $1.7 million. In the 2003 Period, cash used in investing activities was $30.6 million, which
included the purchase of short-term investments of $28.3 million, property and equipment purchases of $9.5 million and advances to affiliates of $2.8 million, partially offset by a cash dividend received from the Rainbow Media cable channels of
$10.0 million.



Cash Used in Financing
Activities.    In the 2004 Period, cash used in financing activities was $62.3 million, which included $1.89 billion for the payment of the stockholder dividend on May 17, 2004, $171.0 million for the Dutch Auction tender
offer, $10.4 million for the acquisition of treasury shares under our share repurchase program and $19.4 million of financing fees paid for our new credit facilities, partially offset by $2.0 billion of net bank borrowings as well as $31.9 million
collected from the issuance of equity securities to related parties. In the 2003 Period, cash used in financing activities was $50.3 million, which included the cost of acquisition of treasury stock of $49.8 million and repayments of borrowed funds
of $0.5 million.



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Commitments.    Future minimum annual commitments under bank and other debt
agreements, non-cancelable operating leases, employment agreements, creative talent agreements and commercial letters of credit as of June 30, 2004 are as follows (in thousands):



|                           |  |      |         |      |   |         |  |      |         |      |   |            |  |       |        |  |   |           |  |   |          
|-------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ---------- |  | ----- | ------ |  | - | --------- |  | - | ---------
|                           |  | 2004 |         | 2005 |   | 2006    |  | 2007 |         | 2008 |   | Thereafter |  | Total
|Bank and other debt        |  | $    | 16,235  |      | $ | 64,000  |  | $    | 64,000  |      | $ | 64,000     |  | $     | 64,000 |  | $ | 1,728,000 |  | $ | 2,000,235
|Operating leases           |  |      | 13,163  |      |   | 27,110  |  |      | 27,872  |      |   | 28,757     |  |       | 26,890 |  |   | 254,558   |  |   | 378,350  
|Employment agreements      |  |      | 23,895  |      |   | 27,621  |  |      | 12,056  |      |   | 1,067      |  |       |       |  |   |          |  |   | 64,639   
|Creative talent agreements |  |      | 44,521  |      |   | 15,255  |  |      | 2,065   |      |   | 12         |  |       |       |  |   |          |  |   | 61,853   
|Letters of credit          |  |      | 20,038  |      |   |        |  |      |        |      |   |           |  |       |       |  |   |          |  |   | 20,038   
|                           |  |      |         |      |   |         |  |      |         |      |   |            |  |       |        |  |   |           |  |   |          
|Total                      |  | $    | 117,852 |      | $ | 133,986 |  | $    | 105,993 |      | $ | 93,836     |  | $     | 90,890 |  | $ | 1,982,558 |  | $ | 2,525,115
|                           |  |      |         |      |   |         |  |      |         |      |   |            |  |       |        |  |   |           |  |   |          



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



We are obligated to fund 50 percent of the expenses of MGM Networks Latin America up to a maximum of $25.25 million. We have
funded $24.8 million under such obligation as of June 30, 2004. Although historically MGM Latin America has incurred losses from operations, we have not provided any additional cash funding to the joint venture since 2002. Based on MGM Latin
Americas current business plan, the joint venture is expected to remain cash self-sustaining into the foreseeable future, unless business conditions change. At this time, we are not forecasting any additional cash commitment to MGM Latin
America. Additionally, we have analyzed the recoverability of our investment in MGM Latin America based on a discounted future cash flow model and have determined that no write-down is necessary.



We are committed to fund our share of the operating expenses of certain joint
ventures, as required. These joint ventures include Movielink, LLC, a joint venture established to create an on-demand movie service via digital delivery for broadband internet users in the United States in which we own a 20 percent ownership
interest with four other major studios, as well a one-seventh ownership interest we hold in NDC, LLC, a partnership created with six other major studios to develop and deploy digital cinema technology and equipment in theatres. We are obligated to
fund $30.0 million to Movielink for our share of the ventures operating expenses over a five year term ending in August 2006. As of June 30, 2004, we have funded $17.8 million of this commitment. As of June 30, 2004, we have funded $1.0
million regarding our interest in NDC, LLC, and under certain circumstances may be required to contribute additional capital of up to $0.1 million. As of June 30, 2004, we have no significant future cash funding requirements to any of our cable
channel joint ventures.



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



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



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



We intend to
continue to consider either growing into or becoming part of a larger, vertically integrated organization. In connection with our pursuit of these options, 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 3.    Quantitative and Qualitative Disclosures About Market Risk



We are exposed to the impact of interest rate changes as a result of our variable rate long-term debt. Historically, we have entered into interest rate
swap agreements whereby we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate amounts calculated by reference to an agreed notional principal amount. As of July 30, 2004, the outstanding
balance of $2.015 billion under our amended credit facility was exposed to interest rate risk. Our amended credit facility requires that within 180 days after April 26, 2004 we enter into interest rate swaps or other appropriate hedging arrangements
to convert to fixed rate or otherwise limit the floating rate interest rate risk on at least 331/3% of term
loans outstanding for a period of not less than three years. As of July 30, 2004, we had not entered into any such arrangements. We will continue to evaluate strategies to manage the impact of interest rate changes on earnings and cash flows.



We are subject to market risks resulting from
fluctuations in foreign currency exchange rates because approximately 25 percent of our revenues are denominated, and we incur certain operating and production costs, in foreign currencies. In certain instances, we enter into foreign currency
exchange contracts in order to reduce exposure to changes in foreign currency exchange rates that affect the value of our firm commitments and certain anticipated foreign currency cash flows. We currently intend to continue to enter into such
contracts to hedge against future material foreign currency exchange rate risks. The following table provides information about our foreign currency forward contracts outstanding at June 30, 2004 (in thousands, except spot and forward rates):



|                                       |  |                                                                |        |                                    |   |     |  
|-------------------------------------- |  | -------------------------------------------------------------- | ------ | ---------------------------------- | - | --- | -
|                                       |  | AmountsScheduled forMaturity forthe Year EndedDecember 31,2004 |        | EstimatedFair Value atJune 30,2004 |  
|Foreign Currency Forward Contracts:    |  |                                                                |        |                                    |   |     |  
|Contract amount (receive CAD, pay $US) |  | $                                                              | 21,538 |                                    | $ | (98 | )
|Spot rate                              |  |                                                                | 1.333  |                                    |   |     |  
|Forward rate                           |  |                                                                | 1.327  |                                    |   |     |  
|Contract amount (receive EUR, pay $US) |  | $                                                              | 4,244  |                                    | $ | 51  |  
|Spot rate                              |  |                                                                | 1.220  |                                    |   |     |  
|Forward rate                           |  |                                                                | 1.204  |                                    |   |     |  
|Contract amount (receive CZK, pay $US) |  | $                                                              | 1,532  |                                    | $ | 11  |  
|Spot rate                              |  |                                                                | 26.198 |                                    |   |     |  
|Forward rate                           |  |                                                                | 26.409 |                                    |   |     |  
|Contract amount (receive $US, pay AUD) |  | $                                                              | 1      |                                    | $ |    |  
|Spot rate                              |  |                                                                | 0.699  |                                    |   |     |  
|Forward rate                           |  |                                                                | 0.697  |                                    |   |     |  



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Item 4.    Controls and Procedures



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



As of June 30, 2004, the end of the quarter covered by this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reports.



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PART II.    
OTHER INFORMATION



Item 4.    Submission of Matters to a Vote of Security Holders



At the Annual Meeting of Stockholders held on June 29, 2004, two proposals were submitted to the Companys stockholders. The Company nominees for
directors were elected and the other proposal was approved. A brief description of these proposals and the results of the voting are as follows:



Proposal OneElection of twelve directors to serve until the next Annual Meeting of Stockholders



|                       |  |             |  |               
|---------------------- |  | ----------- |  | --------------
|Nominee                |  | Votes For   |  | Votes Withheld
|James D. Aljian        |  | 215,578,420 |  | 8,102,730     
|Willie D. Davis        |  | 214,792,716 |  | 8,888,434     
|Alexander M. Haig, Jr. |  | 213,450,608 |  | 10,230,542    
|Michael R. Gleason     |  | 213,483,588 |  | 10,197,562    
|Kirk Kerkorian         |  | 213,441,270 |  | 10,239,880    
|Frank G. Mancuso       |  | 213,510,551 |  | 10,170,599    
|Christopher J. McGurk  |  | 213,506,552 |  | 10,174,598    
|A. N. Andy Mosich    |  | 221,662,394 |  | 2,018,756     
|Priscilla Presley      |  | 219,744,293 |  | 3,936,857     
|Henry D. Winterstern   |  | 222,556,939 |  | 1,124,211     
|Alex Yemenidjian       |  | 213,526,257 |  | 10,154,893    
|Jerome B. York         |  | 221,667,511 |  | 2,013,639     



Proposal TwoRatification of
appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2004



|                |  |            
|--------------- |  | -----------
|Voting Results  |  |            
|For Vote        |  | 222,373,475
|Against Vote    |  | 1,188,477  
|Abstain Vote    |  | 119,198    
|Broker Non-Vote |  | 0          



Item
5.    Other Information



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



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Item 6.    Exhibits and Reports on Form 8-K



(a)  Exhibits



|           |  |                                                                                                                                                                                                  
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Document Description                                                                                                                                                                             
|10.1       |  | Restatement IV of Credit Agreement dated as of April 26, 2004 among Metro-Goldwyn-Mayer Studios Inc., The Lenders Party Hereto, The L/C
Issuers Party Hereto and Bank of America, N.A., as Agent*
|           | 
|31.1       |  | Certification of CEO of Period Report Pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)                                                                                                     
|           | 
|31.2       |  | Certification of CFO of Period Report Pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)                                                                                                     
|           | 
|32.1       |  | Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                    
|           | 
|32.2       |  | Certification of CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                    



(b)  Reports on Form 8-K



|                                          |  |                                                                                                     
|----------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|Period or Date Filed                      |  | Relating to                                                                                         
|                                          | 
|Dated and Filed May 5, 2004               |  | Item 5.    Other Events Item 7.    Financial Statements and Exhibits                                
|                                          | 
|Dated May 17, 2004 and Filed May 18, 2004 |  | Item 5.    Other Events Item 7.    Financial Statements and Exhibits                                
|                                          | 
|Dated and Filed July 29, 2004             |  | Item 7.    Financial Statements and Exhibits Item 12.  Results of Operations and Financial Condition

---

|* | without schedules
|- | -----------------



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|               |  |  |  |                          |  |                                                                                
|-------------- |  |  |  | ------------------------ |  | -------------------------------------------------------------------------------
|August 2, 2004 |  |  |  | METRO-GOLDWYN-MAYER INC.
|               |  |  | 
|               |  |  |  | By:                      |  | /s/    ALEX
YEMENIDJIAN                                                        
|               |  |  |  |                          |  | Alex Yemenidjian Chairman of the Board of Directors and Chief Executive Officer
|               |  |  | 
|               |  |  |  | By:                      |  | /s/    DANIEL J.
TAYLOR                                                        
|               |  |  |  |                          |  | Daniel J. Taylor Senior Executive Vice President and Chief Financial Officer   



37