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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission File No. 1-13481

METRO-GOLDWYN-MAYER INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the Registrant’s best knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K.    x

The aggregate market value of the voting stock (based on the last sale price of such stock as reported by the Dow Jones News Retrieval) held by non-affiliates of the Registrant as of June 30, 2004 was $742,865,500.

The number of shares of the Registrant’s common stock outstanding as of February 24, 2005 was 238,635,783.

PART I

Item 1.    Business

General

Metro-Goldwyn-Mayer Inc. (“MGM” or the “Company”) is a premier global entertainment content company, and we are one of seven major U.S. film and television studios. We are actively engaged in the development and worldwide production and distribution of entertainment product, including theatrical motion pictures, television programming, home video, interactive media, music, and licensed merchandise. See “Note 12 to Consolidated Financial Statements” for information on our business segments. Our principal subsidiaries are Metro-Goldwyn-Mayer Studios Inc., United Artists Corporation, United Artists Films Inc. and Orion Pictures Corporation. Our library contains approximately 4,000 theatrically released feature film titles and over 10,000 television episodes and is the largest collection of post-1948 feature films in the world. Films in our library have won over 200 Academy Awards, including Best Picture Awards for Annie Hall, The Apartment, The Best Years of Our Lives, Dances With Wolves, Hamlet, In the Heat of the Night, Marty, Midnight Cowboy, Platoon, Rain Man, Rocky, The Silence of the Lambs, Tom Jones and West Side Story. Our library also includes 22 titles in the James Bond film franchise, five titles in the Rocky film franchise and nine titles in the Pink Panther film franchise.

In addition, through MGM Networks, we have ownership interests in television channels that are distributed to subscribers in over 100 countries and territories around the globe.

MGM was incorporated in Delaware on July 10, 1996. Our executive offices are located at 10250 Constellation Boulevard, Los Angeles, California 90067-6241. Our telephone number is (310) 449-3000.

We make available free of charge (on or through our Internet website under the caption “Investor Relations—SEC Filings”) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, which is within 24 hours. Our Internet address is www.mgm.com.

Background of the Company

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

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

In November 1997, we completed an initial public offering, whereby we issued and sold 9,000,000 new shares of common stock, $.01 par value per share, at a price per share of $20.00, less an underwriting discount, for net proceeds (after expenses of the initial public offering) of $165.0 million. Concurrently with the consummation of the initial public offering, Tracinda Corporation (our principal stockholder) purchased directly from us, at a purchase price of $18.85 per share (equal to the per share price to the public in the initial public offering, less the underwriting discount), 3,978,780 shares of the common stock for an aggregate purchase price of $75.0 million.

In November 1998, we completed a rights offering, whereby we issued and sold 84,848,485 new shares of the common stock at a subscription price of $8.25 per share for net proceeds (after expenses of the rights offering) of $696.5 million.

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

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

In November 1999, we completed a rights offering, whereby we issued and sold 49,714,554 new shares of the common stock at a subscription price of $14.50 per share for net proceeds (after expenses of the rights offering) of approximately $715.0 million.

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

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

In March 2002, pursuant to our shelf registration statement, we sold 10,550,000 additional shares of common stock in a public offering for aggregate net proceeds of $164.8 million.

In January 2003, we filed a registration statement pursuant to registration rights held by Tracinda in connection with the underwritten public offering by it of 25,000,000 shares of common stock.

On October 9, 2003, Mr. Kerkorian and Tracinda completed an unsolicited tender offer and purchased 15,000,000 shares of our common stock from existing stockholders at a net price of $16.00 per share.

Recent Developments

Merger with LOC Acquisition Company.    On September 23, 2004, we entered into an Agreement and Plan of Merger with LOC Acquisition Company, a Delaware corporation owned by a consortium comprised of Sony Corporation of America, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners. Under the agreement, the consortium will acquire MGM for $12.00 in cash per share of our common stock plus the assumption of our debt. Completion of the merger is subject to various regulatory approvals and customary closing conditions. JP Morgan Chase and Credit Suisse First Boston have committed to provide the consortium with up to $4.25 billion of senior debt financing. The consortium’s obligation to acquire MGM is conditioned upon consummation of the debt financing on the terms set forth in the commitment letters delivered by JP Morgan Chase and Credit Suisse First Boston or substitute financing which, if the debt financing commitments become unavailable, the consortium is obligated to use its reasonable best efforts to obtain. MGM’s stockholders approved the merger at a special meeting held on December 17, 2004. In connection with merger agreement, Tracinda and 250 Rodeo, Inc. voted all of their shares of MGM common stock in favor of the merger.

In connection with the merger agreement, we and Sony entered into a Deposit Agreement, dated as of September 13, 2004, as amended, pursuant to which Sony paid us a $150 million deposit. Under the Deposit Agreement, we must return the deposit to Sony at the effective time of the merger. Otherwise, the deposit is nonrefundable unless (1) the merger agreement is terminated under circumstances where we are required to pay a termination fee to LOC Acquisition Company; provided that if the merger agreement is terminated by LOC Acquisition Company because (a) our Board withdraws, or modifies in a manner adverse to LOC Acquisition

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Company, its recommendation that our stockholders adopt the merger agreement or recommends, approves or adopts an alternative takeover proposal, or (b) we fail to include in the proxy statement relating to the merger (or any amendment) the recommendation of our Board that our stockholders vote in favor of the merger, or (c) a third party commences a tender or exchange offer for MGM and our Board does not recommend rejection of the offer within ten business days or (d) our Board approves or recommends an alternative takeover proposal or approves or recommends that its stockholders tender their shares in any tender or exchange offer, the deposit is only refundable if we enter into a binding agreement with a third party with respect to an alternative takeover proposal within nine months of termination of the merger agreement; or (2) a court has determined that there has been material adverse effect with respect to MGM.

In addition, if LOC Acquisition Company terminates the merger agreement because we have breached any of our covenants such that the conditions to closing cannot be satisfied and there is a final binding judgment of a court that we willfully and materially breached the merger agreement (as to which all rights of appeal or other avenues of review have been exhausted or lapsed), then the amount of the deposit may be taken into account in determining any damages resulting from our willful and material breach.

In addition, in connection with the merger agreement, we entered into an Indemnity Agreement with Tracinda, 250 Rodeo and Mr. Kerkorian pursuant to which we will indemnify Tracinda, 250 Rodeo and Mr. Kerkorian against certain liabilities relating to the transactions contemplated by the merger agreement.

The merger presently is expected to close shortly after the end of the first quarter of 2005. However, there can be no assurance that all of the conditions to the merger, including the conditions within our control, will be satisfied or that the merger will be completed.

Although we have no reason to believe that the merger will not be consummated, the pendency of a merger involving a motion picture studio tends to create uncertainty in the entertainment business community. As a result, it has been more difficult for us to attract development projects, attach talent to projects, commence productions, and implement distribution initiatives in the home video and television sales markets during the progress of merger discussions and the executory period of the merger agreement. Accordingly, in the event that the merger should fail to be consummated, there may be a gap or reduction in the number of motion picture releases for a period of time following termination of the merger agreement until we can reinvigorate its development, production and distribution activities. In addition, we could face a loss of personnel or a decline in morale if the merger should fail to be consummated. Such occurrences could be expected to have, at least temporarily, a significant adverse effect upon our business. In the event that, as a result of termination of the merger agreement, we retain Sony’s $150 million deposit, these adverse effects would be mitigated but there is no guarantee that the deposit alone would be sufficient to mitigate the entire negative effect of non-consummation of the merger.

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.

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 on or before May 17, 2004 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 $8.00 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

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payment of the $1.89 billion stockholder dividend (see above) and to refinance loans under the pre-existing credit facility. The new revolving credit facility will be used for general corporate purposes. The credit agreement provides that certain change of control transactions, including a transaction such as the pending merger with LOC Acquisition Company, constitute an event of default resulting in acceleration of the loans and termination of the revolving credit facility. In connection with the closing of the merger, the credit facility will be replaced and superseded by debt financing arranged by the consortium.

In February 2002, MGM Domestic Television Distribution LLC and NBC Enterprises, Inc. formed a joint venture 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. On September 30, 2004, the joint venture was terminated and all distribution agreements were terminated by December 31, 2004. We assumed the sale of advertising spots for our programming in the domestic television syndication market.

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 were properly tendered and not withdrawn. 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. Tracinda Group, 250 Rodeo and Mr. Kerkorian, our principal stockholders, did not participate in the Dutch Auction tender offer; nor did any member of our Board of Directors or 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 a 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.

Notice of Termination of Third Party International Subdistribution Agreement.    In June 1999, we entered into an agreement with Twentieth Century Fox Home Entertainment, Inc. 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 under which Fox Home Entertainment will continue to perform subdistribution services in certain territories. In 2003, we expanded our sales and marketing operations in Western Europe, adding France and Germany to operations already in place in the UK. We also added to our North American sales, marketing and distribution operations with the addition of Canada to our existing U.S. distribution. Furthermore, in early 2004 we took control of all sales, marketing and distribution operations in the UK, France, Germany, Australia and Benelux. See Note 13 to the Consolidated Financial Statements.

Treasury Stock.    In July 2002, we publicly announced a share repurchase program to purchase up to 10,000,000 shares of our common stock in the open market using available cash on hand. In November 2003, we announced that we had increased the number of shares of our common stock we could purchase in the share repurchase program by an additional 2,500,000 shares (for a total of up to 12,500,000 shares). Under this program, as of December 31, 2004, we had repurchased 8,104,300 shares at an average price of $11.46 per share and at an aggregate cost of $92.9 million.

The Motion Picture and Television Industry

Motion Pictures—General.    The motion picture industry consists of two principal activities: production and distribution. Production involves the development, financing and production of feature-length motion

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pictures. Distribution involves the promotion and exploitation of motion pictures throughout the world in a variety of media, including theatrical exhibition, home entertainment, television and other ancillary markets. The U.S. motion picture industry can be divided into major studios and independent companies, with the major studios accounting for a large majority of the number of theatrical releases. In addition to us (including MGM Studios, MGM Pictures, UA Films and Orion), the major studios are The Walt Disney Company (including Buena Vista, Touchstone and Miramax Films), Paramount Pictures Corporation, Sony Pictures Entertainment, Inc. (including Columbia Pictures), Twentieth Century Fox Film Corp., NBC Universal (including Universal Studios) and Warner Bros. (including New Line Cinema and Castle Rock Entertainment). The major studios are typically large diversified corporations that have strong relationships with creative talent, exhibitors and others involved in the entertainment industry and have global film production and distribution capabilities.

Historically, the major studios have produced and distributed the majority of high grossing theatrical motion pictures released annually in the United States. In addition, most of the studios have created or accumulated substantial and valuable motion picture libraries that generate significant revenues. These revenues can provide the major studios with a stable source of earnings that partially offsets the variations in the financial performance of their current motion picture releases and other aspects of their motion picture operations.

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

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

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

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

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

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

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

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

Television production can generally be divided into two distinct markets: (a) network production, consisting of production for the broadcast networks (i.e., ABC, CBS, NBC, FOX, UPN and WB) and made-for-cable networks (i.e., pay and basic cable networks) and (b) first-run syndication production. The economics of the two types of television production are different. In broadcast network and made-for-cable network production, a network generally orders a minimum number of initial episodes (approximately six to 13 episodes if produced for a broadcast network and approximately 13 to 22 episodes if produced for a cable network) of each new series for a license fee equal to a percentage of the program’s cost. The balance of the production cost for such shows (which is customarily lower for made-for-cable productions than for productions made for broadcast networks) can only be recouped through international sales and, if a series is successful, syndication, second run domestic basic cable, and home entertainment sales, and generally remains unrecouped for at least four years. In the first-run syndication production business, a producer seeking to launch a new series, commits to produce a minimum number of episodes if the producer can “clear” the series by selling to individual television stations in sufficient markets throughout the country (generally comprising at least 75 percent of U.S. television households). Once produced, the episodes are immediately available for licensing to international broadcasters as well and can subsequently be licensed to a domestic basic cable network. This approach generally involves a lower production cost risk and earlier return on investment than the network production business; however, first-run syndicated programming generally reduces the potential total return on investment as compared to successful network production. See “—Production—Television Production.”

Television Distribution.    The U.S. television market is served by network affiliated stations, independent stations and cable systems, although the number of independent stations has decreased as many formerly independent stations have become affiliated with new networks in recent years. During “prime time” hours, network affiliates primarily broadcast programming produced for the network. In non-prime time, network affiliates broadcast network programming, off-network programming, first-run programming (programming produced for distribution on a syndicated basis) and programming produced by the local stations themselves. Independent television stations and cable networks, during both prime and non-prime time, produce their own

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programs and telecast off-network programs or first-run programs acquired from independent producers or syndicators. Syndicators generally are companies that sell to independent television stations and network affiliates programming produced or acquired by the syndicator for distribution.

Business Strategy

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

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

Create Branded Cable and Satellite Programming Channels.    We believe we can create significant value by utilizing our library and current production to establish MGM branded cable and satellite channels. We have launched channels serving over 100 countries and territories around the globe and have been actively exploring strategic alternatives to gain carriage for additional proposed channels. See “—Branded Cable and Satellite Channels.”

Maintain Film and Television Production While Improving Our Risk Profile.    Current management intends to conduct our production business in a financially disciplined manner by:

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

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

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

We plan to increase distribution revenues by:

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

Impact of Merger.    The foregoing discussion of business strategy was based upon the Company’s current status as an independent publicly-traded entity. Upon and after consummation of the merger agreement with LOC Acquisition Company, the Company’s business strategy is likely to change significantly.

Film and Television Library

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

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

Our library also includes over 10,000 episodes from television series previously broadcast on prime-time network television, cable or in first-run syndication, including episodes of The Addams Family, American Gladiators, Bat Masterson, Cagney & Lacey, Fame, Green Acres, Highway Patrol, In the Heat of the Night, Mr. Ed, The Patty Duke Show, Pink Panther, Sea Hunt and thirtysomething. Programming in our library has won, among others, 87 Emmy awards and 18 Golden Globe awards.

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

Currently, we seek to continue to implement the strategy of developing or licensing the development of new projects from existing library assets. Our library represents a readily-available, “market tested” source of development ideas. For example, in 2005, we are releasing The Pink Panther, the latest installment in the Pink Panther franchise; Beauty Shop, a spin-off of the Barbershop series; and Be Cool, a sequel to the 1995 film Get Shorty. We are currently developing Yours, Mine and Ours, a remake, in a single-pot co-production with Paramount. In 2004 we released a remake of Walking Tall. Additionally, in 1999 we had success with the remake of The Thomas Crown Affair and in 1995 we had success with The Birdcage, a remake of La Cage aux Folles. Furthermore, we have successfully expanded the valuable film franchises within our library, most notably the James Bond franchise, with the commercial success of GoldenEye in 1995, Tomorrow Never Dies in 1997, The World Is Not Enough in 1999 and Die Another Day in 2002. Additionally, we have successfully developed television series based on library motion pictures such as: Poltergeist: The Legacy based on Poltergeist; Stargate SG-1 and Stargate Atlantis based on Stargate; and All Dogs Go to Heaven, based on the movie of the same name. We also have produced a remake of Twelve Angry Men and Inherit The Wind as made-for-television movies for Showtime Networks and Carrie as a made-for-television movie for NBC.

We, together with Danjaq LLC, are the sole owners of all of the James Bond motion pictures. Twenty James Bond motion pictures in our library were produced and are distributed pursuant to a series of agreements with Danjaq. The James Bond motion pictures are produced by Danjaq, and we have the right to approve all key elements of the pictures, such as the selection of the director and the leading actors. The copyright in each of the motion pictures is owned jointly by MGM and Danjaq. Historically, we have the right to distribute each of the pictures in all media worldwide in perpetuity or for a term of 15 years. Where our distribution rights are not perpetual, the rights revert to joint control by MGM and Danjaq after expiration of the distribution term. On January 21, 2004, we entered into an extension agreement with Danjaq. Under that agreement, our distribution term for each of the non-perpetual James Bond motion pictures was extended by 15 years from the previously scheduled expiration date, and the initial distribution term for new James Bond pictures, beginning with Die Another Day, was extended from 15 years to 20 years. Danjaq controls certain merchandising rights with respect to the pictures, and we are entitled to receive a portion of the revenues from Danjaq’s merchandising licenses. Additionally, we control all the marketing rights and the music from The Living Daylights (1987) and all subsequent pictures. All other rights relating to the pictures are controlled jointly by MGM and Danjaq. The agreements contain certain restrictions on the sale or licensing by MGM of any of our rights in the pictures.

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

We seek aggressively to market and distribute titles in our film library in existing pay and free television, home video and other markets worldwide. We believe that the size of our library allows us to minimize the over-exploitation of any title and therefore better preserve the ongoing value of our library by actively managing the rotation of titles through such markets. As of December 31, 2004, approximately 80 percent of the theatrical motion picture titles and approximately 92 percent of the television title episodes in our library have been exploited.

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

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We have differing types of rights to the various titles in our library. In some cases, we own the title outright, with the right to exploit the title in all media and territories for an unlimited time. In other cases, the title may be owned by a third party and we may have obtained the right to distribute the title in certain media and territories for a limited term. Even if we own a title, we may have granted rights to exploit the title in certain media and territories to others. As of December 31, 2004, we owned outright, or had been granted rights in perpetuity to, approximately 67 percent of the titles in our library. Our rights in the other library titles are limited in time and, pursuant to the terms of the existing arrangements, the rights granted to us expire, with respect to approximately three percent of the library over the next two years (i.e. through the end of 2006), with respect to another approximately 23 percent over the seven years thereafter (from 2007 to 2014), and with respect to another approximately seven percent thereafter (from 2014 on). We have generally been able to renew such rights on acceptable terms; however, we cannot assure you that we will continue to be able to do so in the future. In accordance with industry practice, for purposes of calculating the size of the library, we include any title that we have the right to distribute in any territory in any media for any term.

Certain long-term pre-paid licenses were entered into before 1993 by a prior management. As of December 31, 2004, the titles included in these licenses represent a cross-section of the titles in the library, including approximately 15 percent of all pre-1990 MGM and UA titles, which remain under license in one or more of the U.S., France and Spain and approximately 15 percent of the Orion and PolyGram titles which remain under license to television in one or more of France, Spain, Germany and the United Kingdom. See “—Distribution—Television Distribution.” We expect to benefit as certain rights to the library that have been previously licensed to others revert to us over time. See “—Distribution.”

Because we have historically derived approximately 35 to 40 percent of our revenues from non-U.S. sources, our business is subject to risks inherent in international trade, many of which are beyond our control. These risks include: changes in laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and to withholding taxes; differing degrees of protection for intellectual property; financial instability and increased market concentration of buyers in foreign television markets, including in European pay television markets; the instability of foreign economies and governments; fluctuating foreign exchange rates; and war and acts of terrorism. See “—Regulation,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”

Production

Motion Picture Production

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

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

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financial risk in connection with motion picture production. We expect to enhance creative diversity by employing the production alliance strategy discussed above and by entering into selective production agreements with successful established producers.

We also intend to seek to spread the financial risk inherent in motion picture production, as well as increase the breadth of our release slate, by entering into co-production and/or co-financing arrangements. As an example of this strategy, in December 2003, we entered into an agreement with Miramax Films pursuant to which MGM and Miramax would jointly produce, finance and distribute a remake of The Amityville Horror. Additionally, we are currently developing Yours, Mine and Ours, a remake, in a single-pot co-production with Paramount.

We have established UA Films as a speciality artist-friendly division for quality, independent films, which will release approximately five to ten motion pictures each year. These motion pictures will be produced or co-produced by UA Films or acquired through negative pickups or other distribution arrangements and will include some motion pictures in a variety of genres generally involving producers, directors, writers or other talent who typically work outside of the studio system as well as lower budget films from established filmmakers. Our investment in such pictures is expected to be significantly less than our investment for pictures produced through MGM Pictures. We believe that this strategy of releasing specialty motion pictures will add greater diversity to our release slate and enhance the library both through the addition of new film product and the building of relationships with up-and-coming producers and directors, writers and other talent.

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

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

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

Finally, consummation of the merger with LOC Acquisition Company would likely result in a change in our plans and business model described above.

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The following table details our tentative 2005 domestic theatrical release

Release Schedule

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

Television Production

We have in the past engaged in the development and production of episodic television series, mini-series and movies for distribution on domestic and international television networks, local independent and network affiliated television stations, pay television networks, basic cable networks and home video. Since the re- establishment of our television series production operations in 1994, we have obtained commitments for approximately 1,525 hours of television programming, of which approximately four percent remained to be aired as of December 31, 2004.

Our strategy has been to focus on the development and production of series for cable television and the first-run syndication market, which involves a lower production investment risk, and movies and mini-series for both network and off-network broadcasters. As part of our strategy, in 1994 we entered into a programming arrangement with Showtime whereby we provided television series and movies for premiere on Showtime. Showtime agreed to license from us exclusive U.S. pay television rights to the following television series: (a) 132 hours (six seasons) of The Outer Limits (winner of the Cable Ace award for Best Dramatic Series in 1995 and 1996), all of which have aired; (b) 66 episodes (three seasons) of Poltergeist: The Legacy, all of which have aired; and (c) 110 episodes (five seasons) of Stargate SG-1, all of which have aired. We have no further commitments from Showtime with respect to these series. Following their initial exhibition cycle on Showtime, we have exploited these programs further in other markets. In this respect, we entered into a license agreement with USA/Sci-Fi Channel for the exclusive domestic basic cable exhibition rights of The Outer Limits, Poltergeist: The Legacy and Stargate SG-1. We are producing 84 new episodes of Stargate SG-1 for USA/Sci Fi, of which 54 episodes have aired as of December 31, 2004, 20 episodes will be aired in 2005 and ten episodes will be aired in 2006. In continuance of this strategy, we have entered into a license agreement with USA/Sci-Fi Channel with respect to the production of 40 episodes of Stargate Atlantis, a new one-hour action adventure series based on our successful Stargate franchise. Ten episodes of Stargate Atlantis have aired as of December 31, 2004, 20 episodes will air in 2005 and ten episodes will air in 2006.

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The programming agreement with Showtime also included a commitment by Showtime to license eight made-for-television movies from us, none of which remain to be produced as of December 31, 2004. One of the licensed movies, Dirty Pictures, won the Golden Globe award for “Best Mini-Series or Motion Picture Made for Television” in 2001, giving Showtime its first ever victory in that category. In addition, Showtime has committed to licensing three one-hour series, the first of which, Jeremiah, is a one-hour action series. Thirty-five episodes of Jeremiah have been produced, and all of such episodes have aired as of December 31, 2004. The second series is Dead Like Me, a one-hour drama. Thirty episodes have been produced and all have aired as of December 31, 2004. The additional series commitment remains to be produced.

In first-run syndication, we launched a new series for the 2002/2003 broadcast season called She Spies in an arrangement with NBC for station clearances on NBC owned and operated stations. She Spies was renewed for the 2003/2004 broadcast season. Forty episodes of the series were produced as of December 31, 2003, and all episodes have aired as of December 31, 2004. In addition, all 40 episodes have been cleared on NBC owned and operated stations for the 2004/2005 broadcast season.

As the risks involved in the first-run syndication business have increased significantly in recent years with the advent of mass vertical integration, the resulting consolidation in the marketplace, and the recent downturn in the economy and advertising market, we are evaluating production of series for network television and continuing to focus on cable television. Although network television production typically requires greater deficit financing while offering the potential for greater financial return, we intend to pursue joint ventures, co-productions and other partnering arrangements for some of our future series in order to minimize our financial risk. Recently, reality-based programming has been an exception to the high deficit/high risk network model as networks will typically cover most, if not all, of the production costs of such programming. Although the potential financial return for reality programming is significantly lower than it is for high-deficit network programming, we intend to explore this market due to the minimization of financial risk it offers. In fact, during the summer of 2003, we produced 12 episodes of Fame, a one-hour reality-based series inspired by our feature film for NBC.

Our rich film library provides us with a vast resource for developing television production and potential licensing opportunities. Much of our past success has resulted from transforming such library product into successful television franchises, such as In the Heat of the Night, Stargate SG-1, Stargate Atlantis and The Outer Limits. Currently, we are developing the following projects, among others: Legally Blonde, a one-hour series adaptation of our recent hit feature films; Barbershop, a half-hour series adaptation of our recent hit feature film; and The Thomas Crown Affairs, a one-hour adaptation of our popular feature film.

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

Distribution

Theatrical Distribution

General.    The initial step in the release of a motion picture is the booking of engagements with theatrical exhibitors. The exhibitors retain a portion of admissions paid at the box office, which generally includes a fixed amount per week, as well as a percentage of the gross receipts that escalates over time. A studio’s or other

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producer’s (or third party distributor’s) share is generally approximately 50 percent of gross box office receipts, although that percentage has generally decreased in recent years and varies depending upon factors such as market competition and the overall performance of the film.

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

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

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

Co-Production and Distribution Agreements.    In addition to producing motion pictures independently, we enter into co-production agreements, split rights deals and similar arrangements under which we retain certain distribution rights with respect to a picture and share the cost of production with a partner that obtains other rights. While such agreements limit our risk relating to a motion picture’s performance as they reduce our production costs, such agreements also limit profitability. We also acquire rights to distribute films through negative pickup arrangements under which we acquire a completed motion picture, or certain rights therein, from a third party. Under co-production agreements, split rights deals or negative pickup arrangements, we may be committed to spend specified amounts for prints and advertising. Additionally, we occasionally enter into “rent-a-system” arrangements under which we provide distribution services to an independent film company for a percentage distribution fee. Under rent-a-system arrangements, the independent film company generally is responsible for all print and advertising costs. These types of arrangements may be entered into before, during or after production of a particular motion picture.

Digital Distribution.    On March 27, 2002, a wholly-owned subsidiary, MGM Digital Development Inc., acquired a one-seventh interest in NDC, LLC, a partnership created with the six other major studios to (a) develop and/or ratify standards for digital motion picture equipment and for digital cinema technology to be used in the delivery of high quality in-theatre digital cinema and (b) update and deploy a limited amount of new digital motion picture equipment in theatres. We have contributed approximately $1.2 million for our equity interest in the joint venture. The initial term of the agreement has been extended and now expires on September 30, 2005.

Theatrical Marketing.    Our theatrical marketing department consists of five functional groups: research, media planning, advertising, promotion and publicity. The objective of the marketing department is to maximize each motion picture’s commercial potential by designing and implementing a marketing campaign tailored to appeal to the picture’s most receptive audience. The marketing process begins with research before a motion picture is completed. The research department determines, through audience screenings and focus groups, a motion picture’s appeal to its most likely target audience. The marketing group begins to develop marketing materials well in advance of a motion picture’s scheduled theatrical release. The marketing campaign generally begins six months before release with the circulation of teaser trailers, posters and exhibitor advertising materials. The campaign becomes more aggressive two to three months before release as full-length trailers are released in theaters and additional materials are sent to exhibitors. Finally, a national media campaign is launched four to five weeks before opening day. This media campaign generally involves advertising a picture’s release on national television, including network prime time and syndication markets, national cable and radio and in

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magazines, newspapers and specific target markets. In addition, public appearances, such as television talk shows, are arranged for a picture’s stars in order to promote the film. The entire process is managed by our in-house staff, although outside agencies are frequently retained to provide certain creative services.

Home Video Distribution

Our marketing and distribution strategy in the home video market domestically and internationally has been to (a) market our motion picture and television titles in cohesive consumer and retailer promotions, (b) create branded product lines, (c) adapt to a maturing VHS market and a growing DVD market and (d) release new motion pictures into the home entertainment market at the time of the year that we believe will achieve the best results.

In addition to organizing our VHS and DVD product into branded collections, we have launched an integrated sales and marketing branding initiative designed to create awareness for MGM catalog product and to drive store traffic to dedicated displays in key customer outlets. Under the “MGM Means Great Movies” umbrella message, the general advertising, retailer-specific advertising and all in-store signage for the MGM dedicated sections are combined to create awareness and demand for MGM catalog titles and to help consumers find them in stores.

Additionally, in connection with new films which we release into the market, we often release related library films, or groups of library films, in order to increase sales of both the library films and new releases. An example is the release of the James Bond library titles in connection with the November 2002 theatrical release of Die Another Day. Another example is the re-promotion of Barbershop in connection with the February 2004 theatrical release of Barbershop 2. Furthermore, we have released 1,000 MGM DVD titles and now have a critical mass of properties in the marketplace from which we are able to create effective promotions that target the growing DVD consumer base.

MGM Home Entertainment manages the marketing and distribution of our current feature motion pictures and library product in the home video and other home entertainment markets.

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. However, we negotiated to continue the agreement in a modified form under which Fox has continued to provide subdistribution services in certain territories and we continue to reserve broad powers to direct and control the handling of our home video product. In 2003, we expanded our sales and marketing operations in Western Europe, adding France and Germany to operations already in place in the UK. We also added to our North American sales, marketing and distribution operations with the addition of Canada to our existing U.S. distribution. Furthermore, in early 2004 we took control of all sales, marketing and distribution operations in the UK, France, Germany, Australia and Benelux.

From 2001 to 2004, we increased our annual worldwide home video gross revenue from feature films from $584.5 million to $919.2 million. We believe that this increase is in part a result of effective and efficient sales, marketing and distribution of new release and library product and the growth of the DVD market.

In 2004, we continued to focus on developing strong retail relationships and programs that have increased our in-store presence. This presence has, in turn, increased our exposure to the end-consumer at retail and has had a positive impact on sales. Furthermore, our retailers have recognized our successful sales and distribution effort. In 2004, we were named Sam’s Club Vendor of the Third Quarter, K-Mart’s Entertainment & Leisure Vendor of the Year for Australia and received the AAFES Best Partner Award. In 2003, we were named Vendor of the Year from Best Buy, an award we also won in 2001. We also received the Altitunes Vendor of the Year award and the Shopko Vendor of the Year award for the second consecutive year.

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

In 2004, we continued efforts to expand our video library domestically and internationally through the acquisition of distribution rights from third parties, and the internal development of films that leverage our properties. An example of this is the December 2004 DVD premiere and release of Species III, which is the sequel to the Species and Species II theatrical features.

We intend to continue capitalizing on growing distribution formats such as DVD. The DVD console installed base in the United States grew from over one million households at the beginning of 1999 to a base of approximately 68 million households by the end of 2004. We believe that this rapid growth, combined with the strong desire among new DVD owners to create new film collections, will continue to be a source of incremental revenue for us.

Our DVD sales have increased from $388.1 million in 2001 to $910.8 million in 2004, an increase of approximately 135 percent. The increase in DVD sales was partially offset by a drop in videocassette format sales, resulting in an approximate 64 percent increase in worldwide home video sales. We intend to continue expansion and exploitation of our DVD library product into 2005.

We also seek to capitalize on emerging distribution technologies such as video-on-demand, a technology that gives consumers the ability to order and control the playback of a feature film or other property. As an example, in 2001, we entered into a video-on-demand joint venture, now named Movielink, with four other major studios to distribute our properties. In 2002, Movielink launched a video-on-demand service over the Internet.

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

Television Distribution

General.    We frequently license our current theatrical motion pictures for pay television through output agreements pursuant to which films not yet produced are pre-licensed for a specified fee paid on delivery. We believe that output agreements with international distributors with recognized expertise are beneficial.

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

Domestic Pay Television.    We have a theatrical motion picture output agreement with Showtime requiring our future theatrical motion pictures to air on Showtime’s pay television network. We have extended the output term of the agreement with Showtime to cover pictures theatrically released in the U.S. commencing January 1, 2000 and continuing until the earlier of December 31, 2008 or the delivery of 270 pictures under the agreement. We have delivered 61 titles to date. The license fees for each picture are generally determined according to a formula based on U.S. theatrical rentals of such picture.

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

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

In February 2002, we transitioned our barter sales operations to MGM-NBC Media Sales, LLC, a new media sales company formed by MGM Domestic Television Distribution LLC and NBC Enterprises, Inc., to act as an agent to sell barter advertising spots received by each company as full or partial consideration from the licensing of feature film and television programming product in the domestic syndication market. The joint venture recognized income from fees earned on each company’s barter sales and incurred overhead costs to operate the joint venture, which were shared between the companies. Each company was entitled to its share of the net profits or losses of MGM-NBC Media Sales, LLC based on a contractual formula as specified in the agreement. As of June 30, 2004 the parties agreed to terminate the venture as of the end of 2004. Under the termination agreement, we assumed the sale of advertising spots for our programming in the domestic television syndication market in July 2004. On September 30, 2004 the joint venture was terminated and all distribution agreements were terminated by December 31, 2004.

In connection with the acquisition of MGM/UA by Pathe in November 1990, MGM-Pathe licensed the domestic free television rights to a substantial portion of its library (the UA library and the post-1986 MGM/UA titles in theatrical release at the time, constituting approximately 850 titles) and selected television programs to Turner for a period of ten years beginning from the availability of each such product in that market. The license excludes motion pictures released theatrically beginning in 1987. With respect to all but 85 motion pictures covered by the Turner license, the domestic free television rights revert to us by the end of 2005. We expect to receive relatively little revenue from the licensing of the product covered by the agreement with Turner in the domestic free television market until such product reverts to us. We completed negotiations with Turner to accelerate the termination of the Turner license. All rights revert by the end of 2006. We believe that, due to the significant increases in licensing fees for domestic television since 1990, the expiration of the Turner license and our subsequent ability to freely license the library in this market, together with our ability to utilize these titles on MGM branded cable and satellite channels, will generate incremental revenue for us. See “—Film and Television Library.”

In June 2001, we e