<PAGE>

                                                                    EXHIBIT 10.2

                             CONSULTING AGREEMENT


     This Consulting Agreement (this "Agreement") is entered into as of August
12, 1999 among Metro-Goldwyn-Mayer Studios Inc., a Delaware corporation ("MGM
Studios"), Metro-Goldwyn-Mayer Inc., a Delaware corporation and the corporate
parent of MGM Studios (the "Company"), and Frank G. Mancuso ("Consultant").

                                  WITNESSETH:

     WHEREAS, MGM Studios, the Company and Consultant are parties to that
certain Amended and Restated Employment Agreement, dated August 4, 1997 (the
"Employment Agreement");

     WHEREAS, pursuant to the Employment Agreement, Consultant was employed by
MGM Studios and the Company as Chairman and Chief Executive Officer;

     WHEREAS, on April 26, 1999, Consultant voluntarily resigned his employment
with MGM Studios, the Company and each of their affiliates for "Good Reason" (as
defined in Section 7(c) of the Employment Agreement) (with Consultant's
termination of employment under the Employment Agreement having become effective
as of April 30, 1999), and agreed to serve as a consultant to MGM Studios and
the Company, on the terms specified herein;

     NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein as well as the parties' rights pursuant to those documents
referred to in Section 7, the parties, intending to be legally bound, agree as
follows:

<PAGE>

     1.  Consulting Engagement.
         ---------------------

          (a) General. MGM Studios, the Company and Consultant agree that,
              -------
effective as of May 1, 1999, Consultant has been retained as a consultant to
MGM Studios and the Company in accordance with the terms and conditions set
forth in this Agreement. During the Term, Consultant will make himself available
in person at the Company's offices in Santa Monica, California or by telephone.
Consultant will not be required to travel in rendering the consulting services
hereunder. MGM Studios and the Company agree that the assistance required of
Consultant under this Section 1(a) will be reasonable under the circumstances
both in nature and in the amount of time to be devoted by Consultant.

          (b) Outside Engagement. MGM Studios and the Company acknowledge and
              ------------------
agree that, except as otherwise provided herein, Consultant will be free, during
the Term, to obtain employment with or consult with any third party. Throughout
the Term, Consultant will be free to engage in civic and charitable activities,
serve on the board of directors of for-profit or non-profit organizations and
manage his personal investments.

     2.  Term. Unless sooner terminated as provided below, the term of
         ----
Consultant's engagement hereunder (the "Term") shall be for a period commencing
on May 1, l999 and ending on October 10, 2001.

     3.  Compensation.
         ------------

          (a) Consulting Fees. In full consideration for the consulting services
              ---------------
to be rendered by Consultant and in full discharge of the obligations of the
Company, MGM Studios and their affiliates to Consultant hereunder, MGM Studios
shall pay to Consultant and Consultant shall accept:

              (i) Annual base consulting fees at the rate of $2 million per
annum during each year of the Term, payable bi-weekly (reduced by the amount of
federal, state and local income tax withholding and other appropriate
deductions) in arrears commencing on August 16, 1999 for the bi-weekly payment
period ended August 6, 1999. Amounts payable for less than a full bi-weekly
payment period will be prorated based on the number of days for which
compensation is payable as a percentage of the total number of days in such bi-
weekly payment period. Consultant acknowledges receipt of consulting fees for
the period from May 1, 1999 through July 23, 1999 at the same prorated rate
provided in this Section 3(a)(i). Consultant

                                       2
<PAGE>

further acknowledges receipt of payment in respect of all earned but unused
vacation days through April 30, 1999.

          (ii)  Additional payments of $3 million on November 18, 1999, and
$2,688,525 on November 18, 2000, (each reduced by the amount of federal, state
and local income tax withholding and other appropriate deductions).

          (iii) In the event of an Acceleration Event (as defined below),
Consultant's death, Disability (as defined below), a Designated Change in
Control (as defined in the Bonus Interest Agreement pursuant to the Senior
Management Bonus Plan, dated November 6, 1997, among MGM Studios, the Company
and Consultant (the "Bonus Interest Agreement")), or the adoption by the Board
of Directors or stockholders of the Company of a resolution authorizing the
dissolution or liquidation of the Company, no further payments shall be made
pursuant to Sections 3(a)(i) or 3(a)(ii) of this Agreement. In lieu of any
further such payments, Consultant or Consultant's estate shall be paid, within
ten days following such Acceleration Event, death, Disability, Designated Change
in Control, or adoption of, resolution authorizing the dissolution or
liquidation of the Company, a lump sum amount equal to the present value of the
sum of (i) Consultant's consulting fees specified in Section 3(a)(i) hereof that
would be otherwise payable after the date of such event and (ii) the additional
payment amounts specified in Section 3(a)(ii) hereof that would otherwise be
payable after such date, discounted at a rate per annum equal to 7.75%. In the
event that, in accordance with this Section 3(a)(iii), Consultant's consulting
fees are accelerated upon the occurrence of an Acceleration Event, Consultant's
Disability, a Designated Change in Control, or the adoption by the Board of
Directors or stockholders of the Company of a resolution authorizing the
dissolution or liquidation of he Company, the present value amount calculated in
accordance with this Section 3(a)(iii) shall be reduced by an amount equal to
the product of (x) $100 and (y) the number of payment periods remaining in the
Term at the time of such Acceleration Event, Disability, Designated Change in
Control, or resolution authorizing the dissolution or liquidation of the
Company, which latter amount shall  be payable as a base consulting fee in bi-
weekly installments (reduced by the amount of federal, state and local income
tax withholding and other appropriate deductions) during the remainder of the
Term following the occurrence of such event. An "Acceleration Event" shall be
deemed to occur when the closing price of the Company's common stock (the
"Common Stock") on The New York Stock Exchange, Inc. is at least $24 for 20
trading days in any 30-trading day period (subject to appropriate adjustments in
the event of a stock split, stock dividend, combination, or other similar
transaction involving the Common Stock). "Disability" shall mean Consultant's

                                       3
<PAGE>

inability, due to a physical, mental or emotional illness or injury, to
substantially perform his duties hereunder for 90 consecutive days or for 120
days in any 12-month period, whether or not consecutive.

          (b)  Bonus Interest Agreement.
               ------------------------

               (i)   Survival of Agreement. The Bonus Interest Agreement shall
                     ---------------------
remain in full force and effect and Consultant shall continue to be entitled to
the benefits contained therein (notwithstanding that Consultant is no longer an
employee of the Company), except as such may be modified by the provisions of
this Agreement. Pursuant to Section 4(a)(iii) of the Bonus Interest Agreement,
the parties agree that all of the bonus interests granted to Consultant pursuant
to the Bonus Interest Agreement ("Bonus Interests") became fully vested as of
April 30, 1999. Sections 3, 4(a)(i), 4(a)(ii), 4(b), 4(c), 5(e)(v) and 6(e) of
the Bonus Interest Agreement shall have no applicability to Consultant's rights
to payments under the Bonus Interest Agreement and payments in respect of Bonus
Interests shall be made pursuant to the applicable provisions of the Bonus
Interest Agreement, as if Sections 3, 4(a)(i), 4(a)(ii), 4(b), 4(c), 5(e)(v) and
6(e) of the Bonus Interest Agreement were not a part thereof. The parties
acknowledge that Consultant has been granted the number of Bonus Interests set
forth on Schedule I hereto.

               (ii)  Repricing. (x) MGM Studios, the Company and Consultant
                     ---------
hereby agree that, subject to Section 3(b)(ii)(y). hereof, effective as of the
date of the effectiveness of this Agreement (pursuant to Section 13(k)(ii)
hereof), all of Consultant's Bonus Interests are hereby repriced on the same
terms as agreed to by MGM Studios and the Company and certain of their
executives and employees pursuant to those certain Amendments to Bonus Interest
Agreements, each dated as of November 30, 1998, such that the floor or trigger
amount and the ceiling or cap, amount of the Bonus Interests set forth in
Sections 4, 5, 7 and 8 (or any other sections of the Bonus Interest Agreement)
shall be adjusted from $24 and $48, respectively, to $14.90 and $29.80,
respectively.

                     (y) Notwithstanding any provision of the Bonus Interest
Agreement or this Agreement to the contrary, no payments shall be made with
respect to Bonus Interests until the earlier to occur of:

                         (A)  December 31, 2001;

                                       4
<PAGE>

                                (B) Consultant's death or Permanent Disability
(as defined in the Bonus Interest Agreement), in which case payments in respect
of Bonus Interests shall be paid in accordance with Sections 5(b) and 6(b) of
the Bonus Interest Agreement;

                                (C) the occurrence of a Designated Change in
Control, in which case payments in respect of Bonus Interests shall be paid in
accordance with Sections 5(c) and 6(c) of the Bonus Interest Agreement; or

                                (D) the adoption by the Board of Directors or
stockholders of the Company of a resolution authorizing the dissolution or
liquidation of the Company, in which case payments in respect of Bonus Interests
shall be paid in accordance with Sections 5(d) and 6(d) of the Bonus Interest
Agreement.

          (c)  Stock Option Agreement.
               ----------------------

               (i)  Cancellation and Grant of Options. MGM Studios, the Company
                    ---------------------------------
and Consultant acknowledge that, under the Stock Option Agreement pursuant to
the Amended and Restated 1996 Stock Incentive Plan, dated as of November 6, 1997
(the "Stock Option Agreement"), between the Company and Consultant, Consultant
has been granted that number of Series A Options and Series B Options (each as
defined in the Stock Option Agreement) as set forth in Schedule I hereto
(together, the "Old Options"). The parties agree that, effective as of the date
of the effectiveness of this Agreement, Consultant's Old Options are hereby
canceled in exchange for that number of new options set forth on Schedule I
hereto (the "New Options"), which the Company, effective as of such date, hereby
grants to Consultant pursuant to the Amended and Restated 1996 Stock Incentive
Plan (the "Stock Incentive Plan"). Effective as of the date of the effectiveness
of this Agreement, Consultant's Old Options shall be of no further force or
effect, without the requirement of any further action by the Company or
Consultant, and the Stock Option Agreement shall be terminated and void with
respect to the Old Options. The New Options shall be subject to the terms and
conditions specified herein and (except as described in Section 3(c)(ii) hereof)
set forth in the Stock Option Agreement.

               Consultant acknowledges that, by reason of the foregoing
cancellation of the Old Options, Consultant releases all rights and interests
Consultant may have held, whether pursuant to the Stock Option Plan, the Stock
Option Agreement, the Amended and Restated Shareholders Agreement, dated as of
August 4, 1997, between the parties hereto and certain other parties, as amended
from time to time (the

                                       5
<PAGE>

"Shareholders Agreement"), or otherwise, to acquire the shares of the Common
Stock with respect to the Old Options. Consultant hereby represents to the
Company that (A) he is the sole owner of the Old Options and that he has not
sold, transferred, assigned, conveyed, gifted, pledged, hypothecated or
otherwise transferred in any manner any of the Old Options or any right to or
interest in the Old Options to any person; (B) the number of Old Options set
forth on Schedule I to this Agreement represents all of the Old Options
heretofore granted to him under the Stock Incentive Plan and the Stock Option
Agreement; (C) he, or his representative, has had an opportunity to ask
questions and receive answers and to undertake whatever additional inquiry
regarding the subject matter of this Agreement as Consultant has deemed
necessary or appropriate under the circumstances in order to reach an informed
decision regarding the merits of the subject matter of this Agreement; and (D)
he has carefully reviewed and understood the Stock Incentive Plan, the Stock
Option Agreement and this Agreement and has had an opportunity to review such
documents with counsel of his choosing. Consultant agrees and acknowledges that
the Company is relying on Consultant's representations in entering into and
effecting the transactions contemplated by this Agreement.

              (ii) Terms of the New Options. Except as set forth in this Section
                   ------------------------
3(c)(ii), the terms and conditions of the New Options shall be identical to the
terms and conditions of the Old Options and will be governed by the Stock
Incentive Plan and the Stock Option Agreement (which, except as set forth in
this Section 3(c)(ii), shall remain in full force and effect with respect to the
New Options) in all respects, including, but not limited to, the date of grant
and expiration date, provided, however, that, notwithstanding anything to the
                     -----------------
contrary in the Stock Incentive Plan, the Stock Option Agreement or in this
Agreement:

                   (A) the exercise price of the New Options shall be as set
forth in Schedule I hereto;

                   (B) the new Options are, effective as of the date of the
effectiveness of this Agreement, fully vested and immediately exercisable and
Sections 3,4 and 5 of the Stock Option Agreement shall have no applicability to
the New Options; and

                   (C) all references in the Stock Option Agreement to the Old
Options shall be deemed to refer to the New Options.

                                       6
<PAGE>

          (d) Business Expenses. During the Term, the Company and/or MGM Studios
              -----------------
shall pay or reimburse Consultant promptly for all reasonable and documented
business expenses incurred by Consultant in the performance of his duties under
this Agreement, provided, however, that Consultant shall have obtained prior
approval for such expenses from MGM Studios or the Company.

          (e) Fringe Benefits. (i) From the date of the effectiveness of this
              ---------------
Agreement through October 31, 1999, MGM Studios shall provide Consultant with
an office, the secretarial services of Trini Ornelas, and parking for such times
that Consultant is at the premises of MGM Studios performing his obligations
hereunder.

              (ii)  During the Term, Consultant shall continue to be entitled to
and accorded all rights and benefits under any disability insurance, health or
major medical insurance policy or policies, which the Company and/or MGM Studios
provides for its senior officers. Nothing in this paragraph shall require the
Company and/or MGM Studios to retain any particular policy or plan, but some
reasonable policy or plan shall be maintained. Consultant shall continue to be
entitled to benefits under this Section 3(e)(ii) throughout the Term, except in
the event of Consultant's death, in which case such benefits shall immediately
terminate (other than those plan benefits and payments required to be made by
carriers pursuant to plans prior to such termination of benefits). The parties
agree that Consultant shall not be entitled to any life insurance hereunder and
that the reducing-term life insurance policy previously provided for Consultant
shall be canceled effective five business days after the date of this Agreement
unless, prior to such date, Consultant gives written notice to MGM Studios and
the Company of Consultant's election that MGM Studios and/or the Company, as
applicable, assign such policy to Consultant. The parties agree that, in the
event Consultant makes such election, MGM Studios and the Company shall have no
obligation to make any premium payments on or after the date of this Agreement
with respect to such policy and that Consultant shall have the sole obligation
to make premium payments in respect of such policy.

              (iii) Consultant shall be entitled to all rights and amounts as
are vested in Consultant as of April 30, 1999 under and subject to the terms of
any retirement plans in which Consultant is a participant, including, without
limitation the MGM Retirement Plan and the MGM Savings Plan (the "Plans").
Subject to the requirements of the Plans, MGM shall fully cooperate with
Consultant in distributing all amounts in which Consultant is vested pursuant to
the Plans in the manner Consultant directs.

                                       7
<PAGE>

              (iv) Except as provided above, Consultant will not be entitled to
any other fringe benefits during the Term.

     4.  Termination. Consultant's service as a consultant hereunder shall
         -----------
terminate without further action by any party hereto (a) upon the expiration of
the Term, or (b) earlier upon the occurrence of Consultant's death or
Disability, a Designated Change in Control, or the adoption of a resolution by
the Board of Directors or stockholders of the Company authorizing the
dissolution or liquidation of the Company.

     5.  Consultant Not Entitled to Delegate Duties or Assign Rights.
         -----------------------------------------------------------

         (a)  It is agreed by the parties that Consultant will provide the
consulting services described herein himself and, accordingly, Consultant may
not delegate the performance of any of his duties or obligations as Consultant
hereunder, or assign any rights hereunder, other than by will or testamentary
trust, without the prior written consent of MGM Studios or the Company. Any such
purported delegation or assignment in the absence of such written consent shall
be null and void and with no force or effect. However, the assignability of
Bonus Interests and New Options shall be governed by the Bonus Interest
Agreement and the Stock Option Agreement, respectively.

         (b)  In the event of a valid assignment pursuant to this Section 5,
this Agreement shall be binding on and inure to the benefit of the permitted
assigns of Consultant hereunder and the respective heirs, representatives,
successors and permitted assigns of such persons and any receiver, trustee in
bankruptcy or representative of the creditors, of each such person.

     6.  Warranty. Consultant hereby represents and warrants that he has not
         --------
taken any action, and covenants that during the Term of this Agreement he shall
take no such action, that constitutes or will constitute a breach of any
agreement concerning confidential information and trade secrets,
confidentiality, solicitation or non-competition to which he is bound as a party
where such action would have a material adverse effect on the Company, MGM
Studios or any affiliate of either of them. Consultant hereby agrees to
indemnify and hold harmless MGM Studios and the Company and their affiliates
from and against any claim, loss, cost or expense (including reasonable
attorneys' fees) incurred by any of them as a result of actions by Consultant in
violation of the immediately preceding sentence.

                                       8
<PAGE>

     7.  Entire Agreement Amendment. This Agreement supercedes the Employment
         --------------------------
Agreement and all other agreements between Consultant and the Company and/or MGM
Studios (but not including those agreements specifically referred to in the
following sentence), which Employment Agreement and other agreements are,
effective as of the date of the effectiveness of this Agreement, null and void
and of no further force or effect. This Agreement, the Shareholders Agreement,
the Joint and Several Indemnity Agreement, dated as of October 10, 1996, among
the Company, Consultant and the other parties thereto (the "Indemnity
Agreement"), the Stock Option Agreement and the Bonus Interest Agreement contain
the entire understanding and agreement between the parties relating to the
subject matter hereof. Nothing contained herein shall limit the terms and
provisions of the Indemnity Agreement. Consultant agrees that this Agreement
shall not modify the Shareholders Agreement in any respect. Neither this
Agreement nor any provisions hereof may be waived, modified, amended, changed,
discharged or terminated, except by an agreement in writing signed by the party
against whom enforcement of any waiver, modification, change, amendment,
discharge or termination is sought; provided, however, any such writing shall
                                    --------- -------
not be enforceable against MGM Studios unless also signed by the Company. It is
hereby acknowledged that each of(i) the Amended and Restated Investors
Shareholder Agreement, dated as of August 4, 1997, among the parties hereto,
Seven Network Limited and Tracinda Corporation, as amended from time to time;
and (ii) the Non-Competition Agreement, dated October 10, 1996, among the
Company and Consultant and the other parties thereto, are, effective as of the
date of the effectiveness of this Agreement, hereby terminated and are of no
further force or effect.

     8.  No Mitigation. Except as otherwise provided herein, any income and any
         -------------
other benefits received by Consultant from any and all sources other than MGM
Studios or the Company before or after the expiration or termination of this
Agreement for any reason whatsoever shall in no way reduce or otherwise affect
MGM Studios' or the Company's obligation to make payments and afford benefits
hereunder.

     9.  Directors' and Officers' Insurance. To the extent available at reason-
         ----------------------------------
able cost, the Company and/or MGM Studios shall continue to maintain a policy of
directors' and officers' insurance in a mutually acceptable amount with
Consultant as a named insured thereunder. Such policy shall cover Consultant for
so long as he serves as a director of the Company and for so long thereafter as
he shall have liability for his actions or omissions in his capacity as an
officer or director of the Company, MGM Studios, and their affiliates, but not
after April 30, 2005. Further,

                                       9
<PAGE>

the Company and/or MGM Studios shall cause Consultant to be added as a named
insured under any and all their other liability policies, to the extent such
addition is customary in respect of such policies.

     10.  No Disparagments. MGM Studios and the Company shall make no oral or
          ----------------
written, public or private, statements that are disparaging of Consultant.
Consultant shall make no oral or written, public or private, statements that are
disparaging of MGM Studios, the Company, their affiliates, or any of their
respective present or former officers, directors, agents, employees and
successors or assigns, nor shall Consultant make any oral or written, public or
private statements that disparage or otherwise constitute trade libel of MGM
Studios', the Company's or their affiliates' products.

     11.  Return of Documents and Property. Consultant shall return all
          --------------------------------
records, documents, proposals, notes, lists (including all lists of customers,
distributors, vendors and/or suppliers), files and any and all other materials
including, without limitation, computerized and/or electronic information, that
refers, relates or otherwise pertains to MGM Studios and/or the Company, their
affiliates, and/or each of their respective officers, directors, shareholders,
agents, employees, and successors or assigns, and any and all business dealings
of said persons and entities (the "Company Documents"), to the Company within
ten days of the date of the effectiveness of this Agreement, by personally
delivering the Company Documents to the Company's offices in Santa Monica,
California; provided, however, that Consultant shall be entitled to retain those
            --------- -------
Company Documents that have been made available to other members of the Board of
Directors of the Company. In addition, Consultant shall return to the Company
all property and equipment that he has been issued during the course of his
employment pursuant to the Employment Agreement or which he otherwise currently
possesses, including, but not limited to, any passes, keys or  identification,
laptop computers, cellular phones, pagers, leased cars or other corporate
vehicle(s), and credit, charge or calling cards (the "Company Property") within
ten days of the date of the effectiveness of this Agreement, by personally
delivering the Company Property to the Company's offices in Santa Monica.
Consultant shall not retain any copies or duplicates of any returned Company
Documents, nor shall he retain any of the Company Property. Moreover, if, during
the Term of this Agreement, Consultant is issued any Company Documents or
Company Property, at the end of the Term or upon termination of this Agreement,
Consultant shall return all of the Company Documents and the Company Property
issued or provided to him during the Term by personally delivering the Company
Property and the Company Documents to the Company's offices in Santa Monica on
the last day of the Term or immediately

                                       10
<PAGE>

upon the termination of this Agreement, whichever date occurs earlier, except
for such Company Documents as have been made available to other members of the
Board of Directors of the Company during Consultant's service as a director. At
the end of the Term, Consultant shall not retain any copies or duplicates of any
of the Company Documents, nor shall he retain any of the Company Property,
subject to the provisions of the prior sentence pertaining to Company Documents
that are made available to other members of the Board. MGM Studios and the
Company acknowledge that Consultant's personal files, including address book,
and office furnishings are Consultant's personal property and make no claim with
respect thereto.

     12.  Mutual Releases.
          ---------------

          (a) Mr. Mancuso's Release. In consideration of MGM Studios' and the
              ---------------------
Company's promises contained herein, effective as of the date of the
effectiveness of this Agreement, Consultant, on behalf of himself and his heirs,
representatives and assigns, hereby releases and discharges MGM Studios, the
Company, their parents, subsidiaries and divisions, and all of their respective
current and former officers, directors, shareholders, agents, employees,
representatives, attorneys, predecessors, successors and assigns (collectively
"Releasees"), from any and all complaints, claims, liabilities, obligations,
promises, agreements, controversies, damages, actions, causes of action, suits,
rights, demands, costs, losses, debts and expenses (including attorneys' fees
and costs actually incurred) of any nature whatsoever, from the beginning of
time to April 30, 1999 which Consultant now hai, owns or holds or claims to
have, own or hold, or which Consultant at any time heretofore had, owned, or
held, or claimed to have had, owned or held, or which Consultant may in the
future assert, against each or any of the Releasees, including, but not limited
to, rights under the Civil Rights Act of 1964; the Civil Rights Act of 1991;
the Age Discrimination in Employment Act; the California Fair Employment and
Housing Act; the Employee Retirement Income Security Act of 1974; the Americans
with Disabilities Act; that relate or are in any manner incidental to
Consultant's employment with or separation from MGM Studios and the Company.
Consultant hereby acknowledges that he has been paid for all amounts payable to
him pursuant to Section 6 of the Employment Agreement (other than vacation pay
provided for in Section 3(a)(i) hereof) during the term of the Employment
Agreement up to and including April 30, 1999.

          (b) MGM Studios' and the Company's Release. In consideration of
              --------------------------------------
Consultant's promises contained herein, effective as of the date of the
effectiveness of this Agreement, MGM Studios and the Company, on behalf of
themselves and their parents, subsidiaries and divisions and, to the fullest
extent permitted by law, all of

                                       11
<PAGE>

their respective current and former officers, directors, shareholders, agents,
employees representatives, attorneys, predecessors, successors and assigns,
hereby release and discharge Consultant and his heirs, representatives and
assigns from any and all complaints, claims, liabilities, obligations, promises,
agreements, controversies, damages, actions, causes of action, suits, rights,
demands, costs, losses, debts and expenses (including attorneys' fees and costs
actually incurred) which they now have, own or hold, or which they at any time
heretofore had, owned, or held, or claimed to have had owned or held, or which
they may in the future assert, against Consultant or his heirs, representatives
or assigns, that arise from facts known prior to April 30, 1999 by members of
the Board of Directors of either the Company or MGM Studios, or by members of
such boards' respective Executive Committees or Finance Committees, or by the
Chairman of the Board, Chief Financial Officer, Secretary, or General Counsel of
the Company or MGM Studios (not including Consultant or Robert Pisano).

          (c)  Unknown Claims. The parties hereby acknowledge that they are
               --------------
familiar with the provisions of California Civil Code (S)1542, which provides as
follows:

               "A general release does not extend to claims which the creditor
               does not know or suspect to exist in his favor at the time of
               executing the release, which if known by him must have materially
               affected his settlement with the debtor."

The parties expressly do not waive or relinquish, but intend to keep and
maintain, any and all rights or benefits that they may have under, or which may
be conferred upon them by, the provisions of (S)1542 of the California Civil
Code.

          (d)  Covenant Not to Sue. Pursuant to and as a part of the mutual
               -------------------
releases herein, each of the parties hereto: (i) agrees not to sue, file a
charge, claim or complaint in any forum or (except as set forth in Section 13
below) assist or otherwise participate willingly or voluntarily in any claim,
arbitration, suit, action, investigation or other proceeding (hereafter
collectively referred to as "proceedings") of any kind which that party has
released pursuant to Section 12(a) or 12(b), as the case may be; and (ii)
represents that no such proceedings have heretofore been filed or initiated
against the other party.

                                       12
<PAGE>

          (e) Excluded Claims. The Release set forth in this Section 12 shall
              ---------------
not operate to release any of the obligations set forth in this Agreement, or in
any agreement referred to in the second sentence of Section 7 hereof, or any
right of Consultant to indemnification or contribution pursuant to this
Agreement, the Indemnity Agreement, or otherwise by law.

     13.  Miscellaneous.
          -------------

          (a) Independence. Nothing in this Agreement shall be construed to
              ------------
constitute the parties hereto as partners, joint venturers or employer and
employee. Consultant's relationship to MGM Studios and the Company shall be
solely that of an independent contractor, and Consultant shall perform all
services pursuant to this Agreement as such.

          (b) Arbitration. Any controversy or claim arising out of or relating
              -----------
to this Agreement or any breach of this Agreement shall be settled by
arbitration. Any such arbitration shall be held in Los Angeles, California and
shall be conducted in accordance with the Commercial Arbitration rules of the
American Arbitration Association. The Special New Procedures for Large, Complex
Issues shall apply. The arbitration panel shall consist of three (3) arbitrators
to be selected pursuant to such Commercial Arbitration Rules. Notwithstanding
the above, (x) any controversy or claim arising out of or relating to the Bonus
Interests, the Bonus Interest Agreement, or Section 3(b) of this Agreement shall
be settled by arbitration pursuant to Section 16 of the Bonus Interest
Agreement; and (y) any controversy or claim arising out of or relating to the
New Options, the Old Options, the Stock Option Agreement or Section 3(c) of this
Agreement shall be settled by arbitration pursuant to Section 16 of the Stock
Option Agreement.

          (c) Applicable Law and Venue. Except as otherwise provided herein,
              ------------------------
this Agreement and any disputes or claims arising hereunder shall be construed
in accordance with, governed by and enforced under the laws of the State of
California without regard to any rules of choice or conflicts of law. Except
with respect to matters governed by Delaware law, the state and federal courts
(or arbitrators appointed as described herein) located in Los Angeles,
California shall be the sole and exclusive forum for any action for relief
arising out of or pursuant to, or to enforce or interpret, this Agreement;
provided, however, that actions in such state or federal courts shall be limited
to actions or petitions to confirm or set aside an arbitration award. Each party
to this Agreement consents to the personal jurisdiction and arbitration in any
such forum and each party hereto covenants not to, and waives

                                       13
<PAGE>

any right to, seek a transfer of venue from such jurisdiction on any grounds.
Notwithstanding the above, (x) except to the extent provided in Section 16(d)
of the Bonus Interest Agreement, the Bonus Interests, the Bonus Interest
Agreement and Section 3(b) of this Agreement are governed by and are to be
construed and enforced in accordance with the internal laws, and not the laws
pertaining to the choice or conflict of laws, of the State of Delaware; and (y)
except to the extent provided in Section 16(d) of the Stock Option Agreement,
the New Options, the Old Options, the Stock Option Agreement and Section 3(c) of
this Agreement are governed by and are to be construed and enforced in
accordance with the internal laws, and not the laws pertaining to the choice or
conflict of laws, of the State of Delaware.

          (d) Interpretation. The provisions of this Agreement were negotiated
              --------------
by each of the parties hereto and this Agreement shall not be deemed to have
been drafted by either party.

          (e) Indemnification. The Company and/or MGM Studios shall indemnify
              ---------------
Consultant through their respective Certificate of Incorporation, By-laws, the
Indemnity Agreement or otherwise to the fullest extent permitted by the Delaware
General Corporation Law (including the reimbursement of defense costs as
incurred), as such law exists and may hereafter be amended. Such indemnification
shall apply, but not be limited to, any actions taken or omissions by
Consultant, including, without limitation, furnishing information, during the
period from and after January 1, 1996 until the Original Effective Date (as
defined in the Employment Agreement) in connection with the potential sale of
MGM Studios and Consultant's efforts to assemble a bid group to purchase MGM
Studios. Such indemnification shall not apply to any matters arising under (x)
the Amended Agreement as of July 25, 1993 between Consultant and Credit
Lyonnaise, S.A., (y) the Senior Executive Incentive Plan of MGM Holdings
Corporation adopted as of 16 December 1994 and (z) the Senior Executive Pool
Plan of MGM Holdings Corporation adopted as of 15 December 1995.


          (f) Representations of MGM Studios and the Company. Each of the
              ----------------------------------------------
Company and MGM Studios represents and warrants that (i) this Agreement has been
approved by the Board of Directors of each of the Company and MGM Studios, as
applicable, and is binding on MGM Studios and the Company, as applicable and
(ii) this Agreement will not violate the corporate charter or bylaws of MGM
Studios and/or the Company, as applicable. Consultant represents and warrants
that this Agreement is binding on Consultant.

                                       14
<PAGE>

          (g) No Waivers. The failure of either party to enforce any provision
              ----------
of this Agreement shall not be construed as a waiver of any such provision, nor
prevent such party thereafter from enforcing such provision or any other
provision of this Agreement. Rights granted the parties hereto herein are
cumulative and the election of one shall not constitute a waiver of such party's
right to assert all other legal remedies available under the circumstances.

          (h) Executive Assistant's Continued Employment and Severance. Trini
              --------------------------------------------------------
Ornelas will be retained by MGM Studios and/or the Company as a full-time
employee until October 31, 1999 and will be available to Consultant on a full-
time basis prior to such date. In recognition of her service to MGM Studios and
the Company, Trini Omelas will be provided with a severance payment equal to six
months salary at the time of her termination of employment with MGM Studios
and/or the Company, as applicable.

          (i) Notices. Any notice to be given under the terms of this Agreement
              -------
shall be in writing and may be delivered personally, by telecopy, telex or other
form of written electronic transmission, by overnight courier or by registered
or certified mail, postage prepaid, and shall be addressed as follows:

TO THE COMPANY OR MGM STUDIOS:

     Mr. Alex Yemenidjian
     Metro-Goldwyn-Mayer Inc.
     2500 Broadway Street
     Santa Monica, California 90404-3061
     Telecopier:  (310)449-3020

WITH COPIES TO:

     William A. Jones, Esq.
     Metro-Goldwyn-Mayer Inc.
     2500 Broadway Street
     Santa Monica, California 90404-3061
     Telecopier:  (310) 449-3088

              and

                                       15
<PAGE>

     Richard E. Sobelle, Esq.
     Tracinda Corporation
     150 South Rodeo Drive, Suite 250
     Beverly Hills, California 90212
     Telecopier:  (310) 271-3416

            and

     Frank Rothman, Esq.
     Jerome L. Coben, Esq.
     Skadden, Arps, Slate, Meagher & Flom LLP
     300 South Grand Avenue, Suite 3400
     Los Angeles, California 90071
     Telecopier:  (213) 687-5600

TO THE CONSULTANT:

     Mr. Frank O. Mancuso
     1201 Bel Air Road
     Los Angeles, California. 90077
     Telecopier:  (310) 471-0175

WITH A COPY TO:

     Bertram Fields, Esq.
     Greenberg Glusker Fields Claman & Machtinger LLP
     l900 Avenue of the Stars
     Suite 2000
     Los Angeles, California 90067
     Telecopier:  (310) 553-0687

Either party may hereafter notify the other in writing of any change in address.
Any notice hereunder shall be deemed duly given when received by the person to
whom it was sent.

          (j) Severability. The provisions of this Agreement are severable and
              ------------
if any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts thereof, shall not be affected thereby unless, as a result of
such severing, the remaining provisions or enforceable parts do not
substantially reflect the intention of the parties in entering into this
Agreement.

                                       16
<PAGE>

          (k)  Legal Acknowledgments.
               ---------------------

               (i) Consultant acknowledges that he has been advised that
he has a period of twenty-one (21) days within which to consider this Agreement,
and Consultant hereby waives such period. Consultant further acknowledges that
Consultant has reviewed this Agreement with counsel of Consultant's own
choosing, that Consultant has read this Agreement carefully and that he has had
it read by his counsel, and that Consultant is fully aware of and understands
this Agreement's contents and legal effects.

               (ii) Consultant further understands and agrees that this
Agreement is revocable by Consultant for seven (7) days following Consultant's
signing of this Agreement, and that this Agreement shall not become effective or
enforceable until that revocation period has expired. This Agreement shall
automatically become enforceable and effective on the eighth (8th) day after the
date this Agreement is signed by Consultant.

          (l) Confidentiality and Publicity. This Agreement shall remain
              -----------------------------
confidential and the terms shall not be divulged to any person except (i) to the
extent required by law or legal process or (ii) to Consultant's attorneys,
accountants, lenders, other professional advisors and members of Consultant's
immediate family, provided, however, that any such person to whom disclosure is
                  -----------------
made shall be advised of and agree to honor this confidentiality requirement.
Any press release or announcement of or relating to this Agreement and the
timing of any such announcement shall only be made with the agreement of
Consultant and the Company.

          (m) Attorneys' Fees and Costs. If any arbitration proceeding or any
              -------------------------
action at law or in equity is commenced to enforce this Agreement, the
prevailing party shall receive its attorneys' fees, costs and disbursements in
addition to any other relief granted.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       17
<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

                                       METRO-GOLDWYN-MAYER INC.

                                       By: /s/ Alex Yemenidjian
                                          -----------------------------
                                       Name:  Alex Yemenidjian
                                       Title: Chairman of the Board and
                                              Chief Executive Officer


                                       By: /s/ William Jones
                                          -----------------------------
                                       Name:  William Jones
                                       Title: Senior Executive Vice President
                                              and Secretary



                                       METRO-GOLDWYN-MAYER STUDIOS INC.

                                       By: /s/ Alex Yemenidjian
                                          -----------------------------
                                       Name:  Alex Yemenidjian
                                       Title: Chairman of the Board and
                                              Chief Executive Officer


                                       By: /s/ William Jones
                                          -----------------------------
                                       Name:  William Jones
                                       Title: Senior Executive Vice President
                                              and Secretary


                                       CONSULTANT

                                       /s/ FRANK G. MANCUSO
                                       --------------------------------
                                              FRANK G. MANCUSO

<PAGE>

                                  SCHEDULE I

Capitalized terms used in this Schedule I shall have the meanings given to such
terms in the Consulting Agreement to which this Schedule is attached (the
"Consulting Agreement").

Number of Bonus Interests
       granted pursuant to
       the Bonus Interest Agreement:       811,756



The following sets forth Old Options which are being canceled under the
Consulting Agreement and the New Options that Consultant is being granted under
the Consulting Agreement, the Stock Option Agreement and the Stock Incentive
Plan, effective as of the date of the effectiveness of the Consulting Agreement.

<TABLE>
<CAPTION>
                           Series A Options                      Series B Options
                           ----------------                      ----------------

                    Number of Shares                      Number of Shares
                    of Common Stock                       of Common Stock
                   Subject to Options   Exercise Price   Subject to Options   Exercise Price
                   ------------------   --------------   ------------------   --------------
<S>                <C>                  <C>              <C>                  <C>
Old Options
(to be canceled)        872,840            $24.00             872,840            $24.00

New Options             872,840            $14.90             872,840            $14.90
</TABLE>