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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark One)


x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934


For the quarterly period ended March 25, 2011


Or


o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934


For the transition period from                 to


Commission File Number 000-51333





SILICON GRAPHICS INTERNATIONAL CORP.


(Exact name of registrant as specified in its charter)





Delaware32-0047154(State or Other Jurisdiction ofIncorporation or Organization)(I.R.S. EmployerIdentification No.)


46600 Landing Parkway


Fremont, California 94538


(Address of principal executive offices, including zip code)


(510) 933-8300


(Registrant's telephone number, including area code)





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 o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated fileroAccelerated filerxNon-accelerated fileroSmaller reporting companyo





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x


As of April 29, 2011, there were 30,987,613 shares of the registrant's common stock outstanding.





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SILICON GRAPHICS INTERNATIONAL CORP.


TABLE OF CONTENTS





PagePART IFINANCIAL INFORMATION2Item 1.Financial Statements(unaudited)2Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 25, 2011 and March 26, 20102Condensed Consolidated Balance Sheets as of March 25, 2011 and June 25, 20103Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 25, 2011 and March 26, 20104Notes to Condensed Consolidated Financial Statements5Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations30Item 3.Quantitative and Qualitative Disclosures About Market Risk43Item 4.Controls and Procedures44PART IIOTHER INFORMATION46Item 1.Legal Proceedings46Item 1A.Risk Factors46Item 2.Unregistered Sales of Equity Securities and Use of Proceeds59Item 3.Defaults Upon Senior Securities59Item 4.Reserved59Item 5.Other Information59Item 6.Exhibits59SIGNATURES





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PART I - FINANCIAL INFORMATION





ITEM 1. Financial Statements (unaudited).





SILICON GRAPHICS INTERNATIONAL CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share amounts)


(Unaudited)


Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25, 2011March 26, 2010RevenueProduct$88,205$—$265,281$—Service34,143—100,821—Combined product and service21,316107,82067,980302,080Total revenue (Note 3):143,664107,820434,082302,080Cost of revenueProduct68,482—203,653—Service19,883—57,454—Combined product and service14,79778,90049,147232,106Total cost of revenue103,16278,900310,254232,106Gross profit40,50228,920123,82869,974Operating expenses:Research and development13,30516,26740,47341,986Sales and marketing16,60715,19449,56646,811General and administrative12,42813,27036,95240,056Restructuring9151,4341,7163,652Acquisition-related1,094—1,094(557)Total operating expenses44,34946,165129,801131,948Loss from operations(3,847)(17,245)(5,973)(61,974)Total other income (expense), net:Interest income, net10105236332Other income (expense), net2,880(2,566)(1,300)(3,480)Total other income (expense), net2,890(2,461)(1,064)(3,148)Loss from continuing operations before income taxes(957)(19,706)(7,037)(65,122)Income tax provision (benefit) from continuing operations7155562,098(3,930)Net loss from continuing operations(1,672)(20,262)(9,135)(61,192)Discontinued operations (Note 21):Income from discontinued operations, net of tax—82—346Net loss$(1,672)$(20,180)$(9,135)$(60,846)Net loss per share, basic and diluted:Continuing operations$(0.05)$(0.67)$(0.30)$(2.04)Discontinued operations———0.01Basic and diluted net loss per share$(0.05)$(0.67)$(0.30)$(2.03)Shares used in computing net loss per shareBasic and diluted30,57730,09730,46830,041


See accompanying notes.


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SILICON GRAPHICS INTERNATIONAL CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands, except per share amounts)


(Unaudited)


March 25,2011June 25,2010ASSETSCurrent assets:Cash and cash equivalents$128,727$129,343Current portion of restricted cash and cash equivalents1,730830Accounts receivable, net of allowance for doubtful accounts of $2,008 and $1,646 as of March 25, 2011 and June 25, 2010, respectively101,64879,464Inventories82,72289,929Deferred cost of revenue57,43945,255Prepaid expenses and other current assets15,52715,967Total current assets387,793360,788Non-current portion of restricted cash and cash equivalents3,3513,102Long-term investments—7,475Property and equipment, net29,16028,172Intangible assets, net18,06816,223Non-current portion of deferred cost of revenue52,82549,109Other assets33,62132,343Total assets$524,818$497,212LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable$44,065$49,204Accrued compensation24,85621,885Other current liabilities33,21627,608Current portion of notes payable8,157—Current portion of deferred revenue138,957137,596Total current liabilities249,251236,293Notes payable, net of current portion1,483—Non-current portion of deferred revenue96,07791,989Long-term income taxes payable24,28521,715Other non-current liabilities21,08112,286Total liabilities392,177362,283Commitments and contingencies (Note 25)Stockholders' equity:Preferred stock, par value $0.001 per share; 12,000 shares authorized; none outstanding——Common stock, par value $0.001 per share; 120,000 shares authorized; 31,731 shares and 30,709 shares issued at March 25, 2011 and June 25, 2010, respectively3131Additional paid-in capital468,229459,339Treasury stock, at cost (749 shares and 244 shares at March 25, 2011 and June 25, 2010, respectively)(4,912)(1,022)Accumulated other comprehensive loss(56)(1,903)Accumulated deficit(330,651)(321,516)Total stockholders' equity132,641134,929Total liabilities and stockholders' equity$524,818$497,212





See accompanying notes.


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SILICON GRAPHICS INTERNATIONAL CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)


Nine Months EndedMarch 25,2011March 26,2010CASH FLOWS FROM OPERATING ACTIVITIES:Net loss$(9,135)$(60,846)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization12,25413,725Share-based compensation3,9483,584Impairment of investment in SGI Japan Ltd.2,904—Realized loss on investments858—Provision (recovery) for doubtful accounts receivable(190)430Loss on disposal of property and equipment60395Deferred income taxes(89)(87)Changes in operating assets and liabilities:Accounts receivable1,011(17,463)Inventories15,45641,981Deferred cost of revenue(7,689)(72,558)Prepaid expenses and other assets2,304220Other long term assets(559)(273)Accounts payable(19,846)(12,932)Accrued compensation(2,838)(2,212)Other liabilities(4,777)2,703Deferred revenue(3,352)124,698Net cash provided by (used in) operating activities(9,680)21,365CASH FLOWS FROM INVESTING ACTIVITIES AND ACQUISITIONS:Purchases of property and equipment(5,383)(5,287)Increase in restricted cash and cash equivalents(1,149)(782)Proceeds from sales of long-term investments7,692—Proceeds from maturities of long-term investments225225Cash acquired, net of cash used in acquisition6,046(1,983)Net cash provided by (used in) investing activities and acquisitions7,431(7,827)CASH FLOWS FROM FINANCING ACTIVITIES:Repurchases of restricted stock(894)(766)Purchase of treasury stock(3,890)—Proceeds from issuance of common stock upon exercise of stock options3,725860Proceeds from issuance of common stock under ESPP plan2,123902Net cash provided by financing activities1,064996Effect of exchange rate changes on cash and cash equivalents569—Net increase (decrease) in cash and cash equivalents(616)14,534Cash and cash equivalents-beginning of period129,343128,714Cash and cash equivalents-end of period$128,727$143,248NON-CASH INVESTING AND FINANCING ACTIVITIES:Property and equipment purchases in accounts payable$420$257Unrealized gain on investments$—$90SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION:Income taxes paid$4$1,293





See accompanying notes.


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SILICON GRAPHICS INTERNATIONAL CORP. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1. DESCRIPTION OF BUSINESS


Silicon Graphics International Corp. (“SGI” or the “Company”) was originally incorporated as Rackable Corporation which later changed its name to Rackable Systems, Inc. (“Rackable Systems” or “Legacy Rackable”) prior to changing its name to SGI. Rackable Systems was incorporated in the state of Delaware in December 2002. On May 8, 2009, Rackable Systems completed the acquisition of substantially all of the assets, excluding certain assets unrelated to the ongoing business, and assumed certain liabilities of Silicon Graphics, Inc. (“Legacy SGI”). This acquisition was consummated pursuant to the terms of an Asset Purchase Agreement dated March 31, 2009, as amended on April 30, 2009, which was approved by the United States Bankruptcy Court for the Southern District of New York for Silicon Graphics, Inc. Effective May 18, 2009, Rackable Systems changed its name to Silicon Graphics International Corp.


The Company's headquarters is located in Fremont, California. The Company has significant global presence with the ability to provide products and services globally either directly or through its partner network. The principal business of the Company is the design, manufacture and implementation of highly scalable compute servers, high-capacity storage systems and high-end computing and data management systems. The Company has its primary manufacturing facility located in Chippewa Falls, Wisconsin. In addition to the broad line of mid-range to high-end computing servers, data storage and data center technologies, the Company provides global customer support and professional services related to these products. The Company's products are used by the scientific, technical and business communities to solve challenging data intensive computing, data management and visualization problems. The vertical markets the Company serves include the federal government, defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive, Internet, financial services, media and entertainment, and business intelligence and data analytics.





2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Basis of Presentation. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. These unaudited condensed consolidated financial statements also have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. The results for the interim periods are not necessarily indicative of results for the entire year or any future periods. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended June 25, 2010 , which are included in the Company's Annual Report on Form 10-K filed with the SEC on September 8, 2010.


Reclassifications. The Company reclassified certain costs that were previously reported as sales and marketing expense to research and development expense to conform to the Company's internal reporting structure. Accordingly, $1.5 million and $4.1 million of costs reported for the three months and nine months ended March 26, 2010 , respectively, have been reclassified from sales and marketing expense to research and development expense to conform to the current period's presentation. The reclassification did not impact the Company's previously reported net revenues, gross profit, operating income, net income or earnings per share.


Fiscal Year. The Company has a 52 or 53-week fiscal year ending on the last Friday in June. Fiscal year 2011 will be comprised of 52-weeks and will end on June 24, 2011. Fiscal year 2010 was comprised of 52-weeks and ended on June 25, 2010 . The Company's fiscal quarters generally have 13-week quarters ending on the last Friday of the respective period. The third quarter of fiscal year 2011 and fiscal year 2010 ended on March 25, 2011 and March 26, 2010 , respectively.  Each of the three and nine months periods ended on March 25, 2011 and March 26, 2010 were comprised of 13 weeks or 91 days and 39 weeks or 273 days, respectively. The Company's next 53-week fiscal year will be fiscal year 2012, and the first quarter of fiscal year 2012 will be comprised of 14 weeks or 98 days.


Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.


Foreign Currency Transactions. The functional currency of the Company's foreign subsidiaries is the U.S. dollar, except for its Japanese subsidiary. Accordingly, all monetary assets and liabilities of the foreign subsidiaries, except for the Japanese subsidiary, are re-measured into U.S. dollars at the exchange rates in effect at the reporting date, nonmonetary assets and liabilities are translated at historical rates, and revenue and expenses are translated at average exchange rates in effect during each reporting period. The transaction gains and losses are included as a component of other income (expense), net in the


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 SILICON GRAPHICS INTERNATIONAL CORP.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 (UNAUDITED)


accompanying unaudited condensed consolidated statements of operations.


The Company uses the Japanese yen as the functional currency for its Japanese subsidiary. Assets and liabilities denominated in non-U.S. dollars are re-measured into U.S. dollars at the rates of exchange rates in effect at the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the period. Translation adjustments are included in stockholders' equity in the unaudited condensed consolidated balance sheet as a component of accumulated other comprehensive income (loss).


Estimates and Assumptions. The preparation of unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as presented in the unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company's critical accounting policies are those that affect the Company's financial statements materially and involve difficult, subjective or complex judgments by management and include revenue recognition, share-based compensation, restructuring reserve, allowance for doubtful accounts, inventory valuation, impairment of long-lived assets, fair value measurements and impairments, warranty reserve, and accounting for income taxes.


Discontinued Operations. In October 2008, the Company committed to a formal plan to abandon the RapidScale product line (“RapidScale”). The Company has accounted for the RapidScale product line as a discontinued operation. The results of operations of the RapidScale product line have been reclassified and presented as discontinued operations, net of tax, for fiscal year 2010. The cash flows of the RapidScale product line have not been reported separately within the unaudited condensed consolidated statement of cash flows as these are not material (see Note 21). The results of operations of the RapidScale product line for fiscal year 2011 are not material.





3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Recent Accounting Policy Changes .


There have been no significant changes in the Company's significant accounting policies for the nine months ended March 25, 2011 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended June 25, 2010 , except for the changes in revenue recognition as a result of new accounting standards as described below.


Revenue Recognition .


The Company enters into sales contracts to deliver multiple products and/or services. A typical multiple-element arrangement includes product, customer support services and professional services. The Company also sells software products as part of certain multiple-element arrangements.  In addition to selling multiple-element arrangements, the Company also sells certain products and services on a stand-alone basis.


Product revenue. The Company recognizes revenue from sales of products, primarily hardware, when persuasive evidence of an arrangement exists, shipment has occurred and title has transferred, the sales price is fixed or determinable, and collection of the resulting receivable is reasonably assured. In customer arrangements where a formal acceptance of products or services is required by the customer, revenue is recognized upon meeting such acceptance criteria.


Service revenue . Service revenue includes customer support services, primarily hardware maintenance services, and professional services, which include consulting services and integration services of third-party products. Revenue from extended service contracts, that is not subject to deferral under the Company's revenue recognition policy applicable to sales contracts entered into prior to fiscal year 2011 discussed below and are expressly priced separately from the hardware, is recognized ratably over the contract term, generally one to three years. Professional services are offered under time and material or fixed fee-based contracts or as part of multiple-element arrangements. Professional services revenue is recognized as services are performed.


Multiple-element arrangements . The Company's multiple-element arrangements include products, customer support services and/or professional services. Certain multiple-element arrangements include software products integrated with the hardware (“Hardware Appliance”) and the Company provides unspecified software updates and enhancements to the software through its service contracts. For arrangements which do not include Hardware Appliances and where services are included, the Company recognizes revenue from the sale of products prior to the completion of services as product sales are not dependent


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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 (UNAUDITED)


on services to be functional.


In October 2009, the Financial Accounting Standards Board ("FASB") amended the Accounting Standards Codification (“ASC”) as summarized in Accounting Standards Update ("ASU") No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements , and ASU No. 2009-13, Revenue Recognition (Topic  605): Multiple-Deliverable Revenue Arrangements . ASU 2009-14 amends industry specific revenue accounting guidance for software and software related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product's essential functionality. ASU 2009-13 amends the accounting for multiple-element arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method. ASU 2009-13 also requires an entity to allocate revenue using the relative selling price method. The standard establishes a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on vendor-specific objective evidence ("VSOE"), third-party evidence ("TPE"), and the best estimate of selling price ("BESP"). If VSOE is available, it would be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used.


Effective June 26, 2010, the Company adopted the provisions of ASU 2009-13 and ASU 2009-14 for new and materially modified arrangements originating after June 25, 2010. The adoption of ASU 2009-13 and ASU 2009-14 was material to the Company's financial results, increasing revenues by $25.5 million and $83.3 million for the three and nine months ended March 25, 2011 , respectively, and increasing gross profit by $7.4 million and $32.0 million for the three and nine months ended March 25, 2011 , respectively. The impact was due to the recognition of revenue that would have been previously deferred for multiple-element arrangements which include Hardware Appliances or arrangements where the undelivered element is post contract customer support ("PCS") for which the Company was unable to establish VSOE of fair value of the element. The new standard allows for deliverables for which revenue would have been previously deferred to be separated and recognized as delivered, rather than over the longest service delivery period as a single unit with other elements in the arrangement. The Company expects the adoption of ASU 2009-13 and ASU 2009-14 to be material to future periods; however, the Company cannot reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified arrangements in any given period.


For fiscal year 2011 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, such as products, software, customer support services, and/or professional services, the Company allocates revenue to each element based on the aforementioned selling price hierarchy. In multiple element arrangements where software is essential to the functionality of the products, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then recognized as one unit of accounting using the guidance for recognizing software revenue, as amended.


The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.


The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. The delivered item constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. If the arrangement includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company's control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and revenue recognition is determined for the combined unit as a single unit. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price.


The Company has not consistently established VSOE of fair value of any of its products or services.  In addition, the Company has not established TPE as there are no similar or interchangeable competitor products or services in standalone sales to similarly situated customers. Therefore, revenue from these multiple-element arrangements is allocated based on the BESP.  The objective of BESP is to determine the price at which the Company would transact a sale if a product or service were sold on a stand-alone basis. The Company determines BESP for product or service by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific market factors, competitive positioning, competitor actions, profit objectives and pricing practices. The determination of BESP is a formal process within the Company


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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 (UNAUDITED)


that includes review and approval by the Company's management. In addition, the Company regularly reviews VSOE and TPE for its products and services, in addition to BESP.


For fiscal year 2010 and sales contracts entered into prior to fiscal year 2011, the Company recognizes revenue pursuant to the previous guidance for multiple-element arrangements. For arrangements which do not include Hardware Appliances and where services are included, the Company recognizes revenue from the sale of products prior to the completion of services as the services are not essential to the functionality of the products. For certain multiple-element arrangements, the Company delivers software products integrated with the Hardware Appliance and provides unspecified software updates and enhancements to the software through its PCS. For arrangements which include Hardware Appliances or arrangements where the undelivered element is PCS, the Company had not established VSOE of fair value of the element. Therefore, revenue and related cost of revenue from these arrangements are deferred and recognized ratably over the PCS period as combined product and service revenue in the unaudited condensed consolidated statements of operations.


Recently Issued Accounting Standards .


In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which requires new disclosures about significant transfers in and out of Level 1 and Level 2 and separate disclosures about purchases, sales, issuances, and settlements with respect to Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about valuation techniques and inputs used to measure fair value. The new disclosures and clarifications of existing disclosures were effective beginning June 26, 2010 (fiscal year 2011), except for the disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which will be effective for the Company beginning June 25, 2011 (fiscal year 2012). As the provisions of ASU 2010-06 relate to disclosure requirements only, the revised guidance did not have a material impact on our financial statements during the nine months ended March 25, 2011 .





4. ACQUISITION


Acquisition of SGI Japan, Ltd.


On March 9, 2011 (the “Closing Date”), pursuant to a Stock Purchase Agreement (the "Agreement") dated March 8, 2011, the Company's wholly-owned subsidiary, Silicon Graphics World Trade BV ("SGI BV") acquired the remaining outstanding shares of SGI Japan, Ltd., a Japanese corporation (“SGI Japan”). Prior to the Closing Date, the Company owned approximately 10% of the outstanding shares of SGI Japan and accounted for such investment as a cost method investment. SGI Japan operates primarily as a seller and servicer of high-performance computing ("HPC"), visualization, data center, and media and archive systems in Japan.


Pursuant to the terms of the Agreement, the total purchase price was approximately $17.9 million in cash, $1.8 million of which was placed in escrow to secure the Company's indemnification rights under the Agreement. The acquisition is expected to serve as a strategic entry into the large technical computing market of Japan and to enable the Company to extend its global reach, accelerate growth opportunities, and strengthen the relationships with its partners and customers in Japan. Furthermore, the acquisition is expected to enable the Company to more fully participate in the Japanese HPC market and benefit from SGI Japan's extensive service business.


The Company has retained independent appraisers to assist management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned to the assets acquired and the liabilities assumed in these financial statements are preliminary, representing management’s best estimate of fair values as of the Closing Date and are therefore subject to change. As the Company finalizes the determination of the fair value of the assets acquired and the liabilities assumed, it is possible that the acquisition of SGI Japan may result in recognition of goodwill or a gain on acquisition. The preliminary fair value of the acquired assets, net of assumed liabilities and the fair value of the Company's previous investment, preliminarily equals the $17.9 million cash consideration paid by the Company. The acquisition-date fair value of the equity interest in SGI Japan held by the Company immediately before the Closing Date was $2.1 million and was equal to its carrying value of $2.1 million. No gain or loss was recorded as the fair value approximated the carrying value of the investment.


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The preliminary estimates of fair value of the assets acquired and liabilities assumed as of the Closing Date which is subject to finalization of the fair value determination are as follows (in thousands):


Cash and cash equivalents$23,950Prepaid maintenance contracts8,211Other tangible assets41,190Deferred revenue(8,801)Notes payable(9,408)Other liabilities assumed(41,834)Net tangible assets13,308Other intangible assets6,692Total net assets acquired20,000Less: acquisition-date fair value of investment in SGI Japan previously held2,096Cash paid17,904


The fair value of the major components of the intangibles assets acquired and their estimated useful lives is as follows (dollars in thousands):


Intangible Asset ClassPreliminary Fair ValueWeighted Average Useful Life(in Years)Customer Backlog$6,692(a)


(a) The customer backlog intangible asset is amortized as all revenue recognition criteria is accomplished for a particular customer order, reflecting the use of the asset.


The revenue and earnings of SGI Japan from the Closing Date to March 25, 2011 included in the Company's unaudited condensed consolidated statement of operations was $5.4 million and net loss of $0.5 million for the three and nine months ended March 25, 2011 (see Note 23).


The Company incurred acquisition-related costs (i.e., advisory, legal, accounting, valuation, and other costs) of $1.1 million during the three months ended March 25, 2011 . The acquisition-related costs were expensed in the periods in which the costs were incurred and are recorded in the unaudited condensed consolidated statements of operations.


The following unaudited pro forma condensed financial information presents the combined results of operations of the Company and SGI Japan as if the acquisition had occurred at the beginning of fiscal year 2010 (in thousands except per share amounts):


Three Months EndedNine Months EndedMarch 25,2011March 26,2010March 25,2011March 26,2010Revenue$159,297$156,319$475,677$386,734Net loss from continuing operations$(3,760)$(19,634)$(14,697)$(65,856)Income from discontinued operations, net of tax—82—346Net loss$(3,760)$(19,552)$(14,697)$(65,510)Net loss per share, basic and diluted:Continuing operations$(0.12)$(0.65)$(0.48)$(2.19)Discontinued operations———0.01Basic and diluted net loss per share$(0.12)$(0.65)$(0.48)$(2.18)Shares used in computing net loss per shareBasic and diluted30,57730,09730,46830,041


The unaudited pro forma condensed financial information is not intended to represent or be indicative of the condensed


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results of operations of the Company that would have been reported had the acquisition been completed as of the beginning of the period presented, and should not be taken as representative of the future consolidated results of operations of the Company.  The acquisition-related costs of $1.1 million during the three months ended March 25, 2011 are not presented in the pro forma condensed financial information because they will not have a continuing impact on the combined results.





5. FINANCIAL INSTRUMENTS AND FAIR VALUE


The Company measures its assets and liabilities at fair value based upon the expected exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value reflects the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.


The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:


|  |                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|• | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

|  |                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

|  |                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------
|• | Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The Company's assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and view an inactive market as one in which there are a few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, the Company or the counterparty's non-performance risk is considered in determining the fair values of liabilities and assets, respectively.


Long-term Investments


Long-term investments consisted of auction rate securities ("ARS"), which are investments with contractual maturities generally between zero and 50 years. The Company's ARS consisted of investments that were backed by pools of student loans, the majority of which are ultimately guaranteed by the U.S. Department of Education. Beginning in February 2008, certain ARS failed auction due to sell orders exceeding buy orders. Given disruptions in the credit markets and the fact that the liquidity for these types of securities were considered uncertain, the Company classified the ARS as long-term investments in the accompanying unaudited condensed consolidated balance sheets as the Company's ability to liquidate such securities within 12 months was considered uncertain.


On February 4, 2011, the Company and its former investment advisor, Thomas Weisel Partners LLC ("TWP"), entered into a settlement agreement whereby the Company sold all of its ARS through TWP and received proceeds of approximately $6.5 million (see Note 25). At the time of the sale, the fair value of the remaining securities was approximately $6.2 million and the Company recorded a realized gain of $0.3 million during the three months ended March 25, 2011 , which is classified as other income in the unaudited condensed consolidated statement of operations. As a result of the sale, the Company no longer has any ARS in its investment portfolio as of March 25, 2011 .


During the three months ended September 24, 2010, the Company entered into an 'offer to sell' with a secondary market broker for all of its ARS securities. As such, the Company determined that an other-than-temporary impairment had occurred with respect to its entire ARS portfolio. The Company recognized the total unrealized loss of $1.2 million as realized loss in the unaudited condensed consolidated statement of operations during the three months ended September 24, 2010. During the three months ended December 24, 2010, the Company sold one of its ARS and received approximately $1.2 million in cash proceeds. The fair value of the ARS was approximately $1.1 million at the time of the sale. As a result, the Company recognized a gain of approximately $0.1 million in the unaudited condensed consolidated statement of operations during the three months ended December 24, 2010. Realized loss on sale of investments was $0.8 million during the nine months ended March 25, 2011 .


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As of June 25, 2010, long-term investments consisted of the following (in thousands): AmortizedCostGrossUnrealizedGainGrossUnrealizedLossEstimated FairValueAuction rate securities$8,775$—$(1,300)$7,475


As of June 25, 2010 , the Company recorded a temporary impairment loss within accumulated other comprehensive loss of $1.3 million. The unrealized losses on the investments in ARS were caused by market declines as a result of the recent disruption in the credit markets. Because the decline in market value was attributable to changes in market conditions and not credit quality, and the Company did not intend to sell nor likely would be required to sell these investments prior to the recovery of the entire amortized cost basis, the Company did not consider the investments in ARS to be other-than temporarily impaired at June 25, 2010.


Fair Value of Financial Instruments


As of March 25, 2011 , the Company held money market funds and U.S. treasury bills measured at fair value on a recurring basis of $1.5 million and $15.5 million, respectively. The Company's money market funds and U.S. treasury bills are classified within Level 1 of the fair value hierarchy as these are valued using quoted market prices of the identical underlying securities in active markets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended March 25, 2011 .


As of March 25, 2011 , the Company has sold all of its investments in ARS. The Company's ARS was classified within Level 3 of the fair value hierarchy as the fair value of ARS was estimated using an income (discounted cash flow) approach that incorporates both observable and unobservable inputs to discount the expected future cash flows. The material factors used in preparing the discounted cash flow model were 1) the discount rate utilized to present value the cash flows, 2) the time period until redemption and 3) the estimated rate of return. The Company derived the estimates by obtaining input from market data on the applicable discount rate, estimated time to maturity and estimated rate of return. The changes in fair value had been primarily due to changes in the estimated rate of return.


The changes in Level 3 assets measured at fair value on a recurring basis for the nine months ended March 25, 2011 were as follows (in thousands): Nine Months Ended March 25, 2011ARSBeginning balance at June 25, 2010$7,475Redemption at par value(225)Total realized gains included in net income442Sale of securities(7,692)Ending balance at March 25, 2011$—


The Company may also be required to measure certain assets or liabilities at fair value on a nonrecurring basis. The fair values of accounts receivable, accounts payable, accrued liabilities and notes payable due within one-year approximates their carrying values because of the short-term nature of these instruments. The carrying amount of long-term note payable approximates fair value because the interest rate adjusts to market interest rate quarterly (see Note 15). Prior to its acquisition, the Company's investment in SGI Japan was accounted for under the cost method and fair value of the investment was measured using comparisons to companies in Japan, analysis of the financial condition of SGI Japan, and conditions reflected in the capital markets. During the three months ended December 24, 2010, the Company determined that there had been an other-than-temporary impairment of its investment in SGI Japan. As a result, the Company wrote down the investment by $2.9 million, which represented the difference between the investment's carrying value and the estimated fair value of the investment of $2.1 million. The Company included the impairment loss in other expense, net, for the three and nine months ended March 25, 2011 . As of June 25, 2010 , the fair value of the investment in SGI Japan was $5.0 million.





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6. INVENTORIES


Inventories consist of the following (in thousands): March 25, 2011June 25, 2010Finished goods$26,986$37,525Work in process13,42813,875Raw materials42,30838,529Total inventories$82,722$89,929





7. PREPAID EXPENSES AND OTHER CURRENT ASSETS


Prepaid expenses and other current assets consist of the following (in thousands): March 25, 2011June 25, 2010Non-trade accounts receivable$2,114$4,794Prepaid taxes9452,128Value-added tax receivable7,5065,272Deferred income taxes461463Other prepaid and current assets4,5013,310Total prepaid expenses and other current assets$15,527$15,967





8. PROPERTY AND EQUIPMENT, NET


Property and equipment, net consist of the following (dollars in thousands): EstimatedUseful LifeMarch 25, 2011June 25, 2010LandN/A$799$799Building30-3211,29711,062Computer equipment and software2-621,98817,830Manufacturing equipment2-76,0145,451Leasehold improvements2-78,2007,501Furniture and fixtures2-73,1541,532Vehicles530104Construction in progressN/A71542852,19744,707Less accumulated depreciation and amortization(23,037)(16,535)Total property and equipment, net$29,160$28,172


Depreciation and amortization expense w as $2.3 million a nd $3.1 million for the three months ended March 25, 2011 and March 26, 2010 , respectively. Depreciation and amortization expense was $7.3 million and $9.2 million for the nine months ended March 25, 2011 and March 26, 2010 , respectively.





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9. INTANGIBLE ASSETS


Intangible Assets, Net


The following table details the Company's intangible asset balance by major asset class (dollars in thousands): Intangible Asset ClassWeightedAverageUseful Life(in Years)March 25, 2011GrossCarryingAmountAccumulatedAmortizationNetCustomer relationships5$6,900$(2,645)$4,255Purchased technology57,800(2,812)4,988Customer backlog(a)11,957(5,470)6,487Trademark/trade name portfolio53,667(1,421)2,246Patents & other2200(108)92Total$30,524$(12,456)$18,068


Intangible Asset ClassWeightedAverageUseful Life(in Years)June 25, 2010GrossCarryingAmountAccumulatedAmortizationNetCustomer relationships5$6,900$(1,610)$5,290Purchased technology45,300(1,434)3,866Customer backlog(a)5,100(3,517)1,583Trademark/trade name portfolio53,667(849)2,818Patents & other2200(34)166Subtotal21,167(7,444)13,723In-process research & development costs not subject to amortization(b)2,500—2,500Total$23,667$(7,444)$16,223


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The customer backlog intangible asset is amortized as all revenue recognition criteria is accomplished for a particular customer order, reflecting the use of the asset. As part of the acquisition of SGI Japan (See Note 4), the Company acquired customer backlog intangible asset of $6.9 million, of which $0.4 million was amortized during the three months endedMarch 25, 2011.  The value assigned to the customer backlog intangible asset related to the acquisition of SGI Japan is preliminary and represent management’s best estimate of fair values as of the Closing Date. As the Company finalizes the determination of the fair value of the customer backlog intangible asset, it is possible that the fair value of the customer backlog intangible asset may be revised.

|    |                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | In-process research and development is accounted for as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. During the three months ended September 24, 2010, the Company completed the associated research and development efforts and transferred the in-process research and development costs to purchased technology category.

Intangible assets amortization expense was $1.4 million and $0.8 million in the three months ended March 25, 2011 and March 26, 2010 , respectively. Intangible assets amortization expense was $5.0 million and $4.5 million in the nine months ended March 25, 2011 and March 26, 2010 , respectively.


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As of March 25, 2011 , the expected amortization expense for all intangible assets is as follows (in thousands):


Fiscal YearAmortizationExpense2011 (remaining three months)$4,75220124,87820133,85520143,28820155102016 and thereafter785Total amortization$18,068





10. OTHER ASSETS


Other assets consist of the following (in thousands): March 25, 2011June 25, 2010Long-term service inventory$18,994$16,135Restricted pension plan assets8,2336,945Investment in SGI Japan—5,000Residual value of leased equipment257763Long-term refundable deposits4,0751,154Other assets2,0622,346Total other assets$33,621$32,343





11. OTHER CURRENT LIABILITIES


Other current liabilities consist of the following (in thousands): March 25, 2011June 25, 2010Accrued sales and use tax payable$10,381$8,083Accrued warranty, current portion4,1312,859Accrued professional services fees4,5814,772Income taxes payable1,2381,214Accrued restructuring8251,311Accured royalty payable584927Other11,4768,442Total other current liabilities$33,216$27,608





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12. OTHER NON-CURRENT LIABILITIES


Other non-current liabilities consist of the following (in thousands): March 25, 2011June 25, 2010Pension liability$15,819$7,012Deferred income taxes342342Accrued warranty, non-current portion1,4381,527Deferred rent, non-current portion770981Other2,7122,424Total other non-current liabilities$21,081$12,286





13. WARRANTY RESERVE


Activity in the warranty reserve, which is included in other current and non-current liabilities, is as follows (in thousands): Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25,2011March 26,2010Balance at beginning of period$3,726$7,352$4,386$8,572Accrual assumed in acquisition of SGI Japan1,690—1,690—Current period accrual9583632,2391,245Warranty expenditures charged to accrual(1,053)(1,832)(2,914)(3,934)Changes in accrual for pre-existing warranties248—168—Balance at end of period$5,569$5,883$5,569$5,883





14. RESTRUCTURING ACTIVITY


Fiscal 2011 Restructuring Action


On February 18, 2011, management approved restructuring actions to reduce the Company's worldwide workforce to streamline operations and reduce operating expenses. The Company expects to incur up to $6.6 million for severance pay and related cash expenditures. The Company expects to recognize the majority of the severance charges in the fourth quarter of fiscal 2011, with the remaining costs to be incurred in the first quarter of fiscal 2012. As of March 25, 2011, the total cost incurred in connection with the fiscal 2011 restructuring action was $0.9 million.


The total expense for the fiscal 2011 restructuring action is as follows (in thousands):


Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25,2011March 26,2010Employee terminations$930—$—$930$—


Activity in accrued restructuring for the fiscal 2011 restructuring action during the three months ended March 25, 2011 is as follows (in thousands):


EmployeeTerminationsFacilitiesExit CostsTotalBalance at December 24, 2010$—$——$—Costs incurred930—930Cash payments(750)—(750)Balance at March 25, 2011$180$—$180


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There was no activity in accrued restructuring for the fiscal 2011 restructuring action prior to the three months ended March 25, 2011.


Fiscal 2010 Restructuring Action


On July 27, 2009, management approved restructuring actions to reduce the Company's European workforce and vacate certain facilities in Europe. The total amount expected to be incurred in connection with the restructuring activity is $9.0 million. The Company expects employee severance to be substantially paid during the remainder of fiscal year 2011 and the Company expects to substantially fulfill the remaining contractual obligations related to the facilities exit costs by fiscal year 2012. As of March 25, 2011 , the total cost incurred in connection with the fiscal 2010 restructuring action was $8.5 million.


The total restructuring expense for the fiscal 2010 restructuring action is as follows (in thousands): Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25,2011March 26,2010Employee terminations$(9)$1,378$729$3,329Facilities exits costs(6)6469331Total restructuring expense$(15)$1,442$798$3,660


Activity in accrued restructuring for the fiscal 2010 restructuring action during the nine months ended March 25, 2011 is as follows (in thousands):


EmployeeTerminationsFacilitiesExit CostsTotalBalance at June 25, 2010$1,268$337$1,605Costs incurred56075635Cash payments(1,179)(67)(1,246)Balance at September 24, 2010649345994Costs incurred178—178Cash payments(312)(67)(379)Balance at December 24, 2010515278793Costs incurred(9)(6)(15)Cash payments(38)(83)(121)Balance at March 25, 2011$468$189$657


All Restructuring Actions


Total expense for all restructuring actions was $0.9 million and $1.4 million for the three months ended March 25, 2011 and March 26, 2010, respectively. Total expense for all restructuring actions was $1.7 million and $3.7 million for the nine months ended March 25, 2011 and March 26, 2010, respectively. The restructuring liability for all restructuring actions was $0.8 million as of March 26, 2011 and is included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet.





15. NOTES PAYABLE


In connection with the Acquisition of SGI Japan (see Note 4), the Company assumed the outstanding borrowings under SGI Japan's note payable to various Japanese financial institutions.


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As of March 25, 2011, the Company's outstanding notes payable to financial institutions are as follows:


Interest rate at March 25,2011March 25,2011(in thousands)Notes payable (fixed interest rate)1,000 million yen issued January 31, 2007, due January 31, 20121.442%$2,4721,000 million yen issued January 30, 2007, due January 30, 20121.490%2,472Notes payable (variable interest rate)1,000 million yen issued January 30, 2007, due January 30, 20120.489%2,472300 million yen issued March 27, 2009, due February 28, 20141.350%2,224Total notes payable$9,640Less: current portion(8,157)Total notes payable, net of current portion$1,483


The interest on the 1,000 million yen variable rate note payable accrues at a rate per annum, reset quarterly, equal to the 3-month British Bankers Association Interest Settlement Rate plus 0.3% and the interest on the 300 million yen variable rate note payable accrues at a rate per annum, reset quarterly, equal to the 3-month Japanese Bankers Association Tokyo Inter-Bank Offered Rate plus 1.010%. The principal and interest on all notes payable outstanding is due quarterly over the maturity period.  There are no guarantees or loan covenants related to these notes payable.


The following table summarizes the Company's principal payment schedule as of March 25, 2011 , (in thousands):


Fiscal Year2011 (remaining three months)$2,03920126,30320137422014556Total$9,640


Interest expense for the three and nine months ended March 25, 2011 was not material to the financial statements.





16. SHARE-BASED COMPENSATION


Share-Based Benefit Plans


In 2005, the Company's Board of Directors adopted and its stockholders approved the Company's 2005 Equity Incentive Plan (“2005 Plan”), 2005 Non-Employee Directors' Stock Option Plan and 2005 Employee Stock Purchase Plan (“2005 ESPP Plan”). In January 2006, the Company's Board of Directors adopted the 2006 New Recruit Equity Incentive Plan (“New Recruit Plan”), which allows the Company to grant non-statutory stock awards for up to 1,000,000 shares of common stock to newly hired employees as an inducement to join the Company. No grants may be made under the New Recruit Plan to persons who are continuing employees or directors.


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Determining Fair Value


The fair value of share-based awards was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods: Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25, 2011March 26, 2010Option Plans SharesRisk-free interest rate1.6%2.3%1.5%2.6%Volatility60.3%59.8%57.9%61.7%Weighted average expected life (in years)4.065.004.315.00Weighted average fair value$4.37$4.89$3.92$2.99ESPP Plan sharesRisk-free interest rate0.4%0.4%0.3%0.6%Volatility60.6%55.0%55.5%58.0%Weighted average expected life (in years)1.251.251.251.25Weighted average fair value$4.81$3.59$4.11$2.55


The computation of expected life is based on an analysis of the Company's historical exercise patterns and post-vest termination rates. In the three and nine months ended March 25, 2011 , expected volatility is based on the implied and historical volatility for the Company. The interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. Where the expected term of the Company's share-based awards do not correspond with the terms for which interest rates are quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities. As share-based compensation expense recognized in the accompanying unaudited condensed consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimated.


Share-Based Compensation Expense


Total share-based compensation expense is as follows (in thousands):


Three Months EndedNine Months EndedMarch 25,2011March 26,2010March 25,2011March 26,2010Cost of revenue$188$155$499$565Research and development82169361554Sales and marketing262143707264General and administrative9636942,3812,307Continuing operations1,4951,1613,9483,690Discontinued operations———(106)Total share-based compensation expense$1,495$1,161$3,948$3,584


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Stock Options and Restricted Stock Awards Activity


Summary of stock option activity for the nine months ended March 25, 2011 is as follows: SharesWeightedAverageExercisePriceWeightedAverageRemainingContractual termin yearsAggregateIntrinsicValueBalance at June 25, 20103,752,920$9.85Options granted135,0008.45Options exercised(429,027)8.68Options cancelled(317,929)8.21Balance at March 25, 20113,140,964$10.117.13$30,452,073Vested and expected to vest at March 25, 20112,880,768$10.427.01$27,110,098Exercisable at March 25, 20111,894,669$12.096.38$15,018,905


The total intrinsic value of options exercised in the nine months ended March 25, 2011 and March 26, 2010 was $2.9 million and $0.5 million, respectively.


As of March 25, 2011 , there was $1.4 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.2 years.


The following table summarizes the Company's restricted stock awards (“RSA”) activity for the nine months ended March 25, 2011 : Number ofSharesWeightedAverageGrant DateFair ValueBalance at June 25, 201041,252$13.91Released(34,377)$14.08Balance at March 25, 20116,875$13.08


As of March 25, 2011 , there was $0.1 million of total unrecognized compensation cost related to RSA, which is expected to be recognized over a weighted average period of approximately 1 month.


The following table summarizes the Company's restricted stock units (“RSU”) activity for the nine months ended March 25, 2011 . Number ofSharesBalance at June 25, 2010314,348Awarded558,043Released(203,862)Forfeited(24,914)Balance at March 25, 2011643,615Vested and expected to vest at March 25, 2011508,179


As of March 25, 2011 , there was $3.4 million of total unrecognized compensation cost related to RSU, which is expected to be recognized over a weighted average period of 2.8 years.


During the nine months ended March 25, 2011 , 84,809 shares of common stock were delivered to the Company in payment of $0.9 million of withholding tax obligations arising from the release of RSA and RSU. The withholding tax obligations were based upon the fair market value of the Company's common stock on the vesting date.


At March 25, 2011 , the total compensation cost related to options to purchase the Company's common stock under the 2005 ESPP Plan not yet recognized was approximately $1.0 million. This cost will be amortized on a straight-line basis over


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approximately 1.9 years. The following table shows the shares issued, and their respective weighted-average purchase price per share, pursuant to the 2005 ESPP Plan during the three and nine months ended March 25, 2011 and March 26, 2010 . March 25,2011March 26,2010Shares issued473,698238,889Weighted-average purchase price per share$4.51$3.78





17. STOCKHOLDERS' EQUITY


Stock Repurchase Program


In February 2009, the Company's Board of Directors authorized a share repurchase program of up to $40.0 million of its common stock. Under the program, the Company was able to purchase shares of common stock through open market transactions and privately negotiated purchases at prices deemed appropriate by management. The timing and amount of repurchase transactions under this program will depend on market conditions, corporate and regulatory considerations, and other relevant considerations. The shares the Company repurchases will be held in treasury for general corporate purposes, including issuance under employee equity incentive plans. The program was suspended in April 2009, and on August 31, 2010, the Company's Board of Directors authorized the Company to resume its stock repurchase program. The program may be discontinued at any time by the Board of Directors.


During the three months ended March 25, 2011 , the Company did not repurchase any shares of outstanding common stock. During the nine months ended March 25, 2011 , the Company repurchased and held in treasury 505,100 shares of outstanding common stock for a total of $3.9 million. Such repurchases were accounted for at cost and reflected as treasury stock in the accompanying unaudited condensed balance sheets. No shares of outstanding common stock were repurchased during the three and nine months ended March 26, 2010 .


As of March 25, 2011 , the Company held in treasury 748,795 shares for a total of $ 4.9 million . The Company has $ 35.1 million in remaining authorization for the stock repurchase program as of March 25, 2011 .


Accumulated Other Comprehensive Loss


The following table summarized the components of accumulated other comprehensive loss as of March 25, 2011 and June 25, 2010 (in thousands): March 25,2011June 25,2010Cumulative translation adjustment$492$—Net unrealized losses on investments—(1,355)Losses on pension assets(548)(548)Accumulated other comprehensive loss$(56)$(1,903)


Comprehensive Loss


Comprehensive loss for the three months ended March 25, 2011 includes unrecognized gain in foreign currency translation adjustment. Comprehensive loss for the nine months ended March 25, 2011 includes unrecognized gain in foreign currency translation adjustment and change in unrealized loss on investments. Comprehensive loss for the three and nine months ended March 26, 2010 includes changes in unrealized loss on investments and unrecognized loss on pension assets. The tax effect of the changes has been taken into account, if applicable.


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Three Months EndedNine Months EndedMarch 25,2011March 26,2010March 25,2011March 26,2010Net loss$(1,672)$(20,180)$(9,135)$(60,846)Change in cumulative translation adjustment492492Change in unrealized loss on investments—1021,35590Change in unrecognized loss on pension assets—58—(1)Comprehensive loss$(1,180)$(20,020)$(7,288)$(60,757)





18. EARNINGS PER SHARE


Basic and diluted net loss per common share is computed by dividing unaudited consolidated net loss by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing unaudited consolidated net income by the weighted average number of common shares outstanding and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock awards, and the assumed issuance of common stock under the employee stock purchase plan. Potentially dilutive common shares are excluded when the effect would be to reduce a net loss per share. As the Company had a net loss in the three and nine months ended March 25, 2011 and March 26, 2010 , respectively, basic and diluted net loss per share are the same for these periods.


The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended March 25, 2011 and March 26, 2010 (in thousands, except per share amount):


Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25,2011March 26,2010Numerators:Loss from continuing operations, net of tax$(1,672)$(20,262)$(9,135)$(61,192)Income from discontinued operations, net of tax—82—346Net Loss$(1,672)$(20,180)$(9,135)$(60,846)Denominator:Weighted-average common shares used in computing basic and diluted net loss per share30,57730,09730,46830,041Net income (loss) per share, basic and diluted:Continuing operations$(0.05)$(0.67)$(0.30)$(2.04)Discontinued operations———0.01Basic and diluted net loss per share$(0.05)$(0.67)$(0.30)$(2.03)


For the three and nine months ended March 25, 2011 , options and restricted stock units to purchase 3.1 million shares and 0.7 million shares, respectively, of common stock were outstanding but not included in the computation of diluted net loss per share because these were antidilutive compared to options and restricted stock units to purchase 3.8 million shares and 0.4 million shares, respectively, for the same periods in fiscal year 2010.





19. EMPLOYEE BENEFIT PLAN


Defined Benefit Plans


The Company sponsors defined benefit plans covering certain of its international employees in the United Kingdom and Germany. No additional employees are eligible to join these plans. Pension benefits associated with these plans generally are based on each participant's years of service, compensation, and age at retirement or termination. The Company funds these pension plans in amounts sufficient to meet the minimum requirements of the local laws and regulations. Additional funding may be provided as deemed appropriate.


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In addition, in connection with the acquisition of SGI Japan (See Note 4), the Company acquired a defined benefit plan ("Japan plan") covering substantially all of its employees in Japan. All employees of SGI Japan are eligible to participate in the Japan plan. Pension benefits associated with the Japan plan are based on a point-based plan under which a point is added every year reflecting the individual employee's years of service and their job classification. The amount of pension benefit payment is determined based on sum of cumulative points from past services. The pension benefits are payable, depending on the employee's eligibility, in either in a lump-sum amount or monthly pension payments. The Company funds the SGI Japan pension plan in amounts sufficient to meet the minimum requirements of the local laws and regulations. Additional funding may be provided as deemed appropriate.


United Kingdom Plan


The projected benefit obligation ("PBO") and the assets of the United Kingdom plan have been transferred to an insurance company and the Company is not responsible for any additional contributions to the plan to fund the benefit payments to the employees. However, the Company continues to pay the annual administrative costs of the plan.


German Plan


The German plan is managed by an insurance company and the insurance company makes investment decisions with the guidelines set by the German regulation. The plan assets are invested as part of the insurance company's general fund and the Company does not have control over the target allocation or visibility of the investment strategies of these investments.


The Company has life insurance policies with cash surrender values that have been earmarked by the Company to partly cover the underfunded status of the plan of $9.0 million and $7.9 million as of March 25, 2011 and March 26, 2010 , respectively. The cash surrender value of the life insurance plan balance is $8.5 million, of which $0.3 million is included in other current assets and $8.2 million is included in other assets in the accompanying unaudited condensed consolidated balance sheets.


The net periodic benefit cost of the German plan was comprised of the following components during the three and nine months ended March 25, 2011 and March 26, 2010 (in thousands): Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25,2011March 26,2010Net periodic benefit costService cost$29$32$190$98Interest expense131141285433Expected return on plan assets(21)(24)(65)(75)Net periodic benefit cost$139$149$410$456


The Company does not expect to make any contributions to the German plan during the remaining portion of fiscal 2011 or in the next fiscal year as contributions are not required by funding regulations or laws and the cash surrender value of the life insurance plan earmarked by the Company substantially covers the under-funded status of the German plan.


Japan Plan


The Japan plan is managed by financial institutions and the financial institutions make investment decisions with the guidelines set by the Company’s investment policy. The investment objectives of the SGI Japan plan assets are designed to generate returns that will enable the plan to meet its future obligations. The plan assets are invested in domestic and international equity and fixed-income securities.


The net periodic benefit cost of the Japan plan was not material to the financial statements during the three months ended March 25, 2011. The acquired projected benefit obligation, net of plan assets, was $7.3 million as of the Closing Date. The projected benefit obligation, net of plan assets, is $7.5 million as of March 25, 2011 .


The Company expects to make contributions to the Japan plan of approximately $0.5 million during the current fiscal year and approximately $3.2 million during the next fiscal year.


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Defined Contribution Plan


The Company's U.S. employees are eligible to participate in the Company's qualified defined contribution plan under section 401(k) of the Internal Revenue Code. The plan provides for voluntary salary reduction contributions up to the maximum allowed under Internal Revenue Service rules. Under the terms of the plan, the Company may provide a discretionary matching contribution at the discretion of its management or the Company can make annual contributions to the plan at the discretion of the Board of Directors. There were no contributions for the three and nine months ended March 25, 2011 and March 26, 2010 , respectively.





20. INCOME TAXES


The Company recorded a tax expense of $ 0.7 million and $2.1 million for the three and nine months ended March 25, 2011 . The tax expense was computed based on the Company's projected financial results for the year ending June 24, 2011 and amounts related to unrecognized tax benefits and interest. The effective tax rate used to record the tax expense differed from the combined federal and net state statutory income tax rate for the three months and nine months ended March 25, 2011 primarily due to domestic operating losses generated from which the Company does not benefit, tax expense incurred by the Company's foreign subsidiaries with operating income, and the Company's unrecognized tax benefits and related interest recorded during the period.


The Company recorded a tax expense of $0.6 million and a tax benefit of $3.9 million for the three and nine months ended March 26, 2010 , respectively. The income tax benefit for the nine month period included a discrete tax benefit of $4.9 million resulting from the November 6, 2009 enactment of the Worker, Homeownership, and Business Assistance Act of 2009 (the Act). The Act provides an election for federal taxpayers to increase the carry back period for an applicable net operating loss to three to five years from two years. Additional amounts recorded include a discrete tax benefit of $0.3 million related to a research and development credit claim for fiscal 2006, net of unrecognized tax benefits, and tax expense of $0.6 million for unrecognized tax benefits and related interest. The effective tax rate used to record the tax benefit differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 26, 2010 primarily due to the Company's tax benefit attributable to the utilization of tax attributes in the prior years and operating losses generated during the period from which the Company does not benefit.


As of March 25, 2011 , the Company has provided a partial valuation allowance against our net deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and related valuation allowance. If management's assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.


The Company had approximately $9.7 million of gross unrecognized tax benefit as of March 25, 2011 , primarily due to the recognition of tax benefits as a result of Legacy SGI's tax contingency recorded in the acquisition, of which $9.7 million, when recognized, will impact the effective tax rate. As of March 25, 2011 , the Company also had approximately $14.6 million of interest, penalties and foreign currency differences attributable to the gross unrecognized tax benefits. During the three and nine months ended March 25, 2011 , the Company recorded a net decrease of $0.3 million and a net increase of $2.6 million, respectively, in taxes, accrued interest, penalties and foreign currency associated with unrecognized tax benefits.


As of March 25, 2011 , the net recorded tax liability for uncertain tax positions was $24.3 million, including interest and penalty. With respect to an uncertain tax position of one of our foreign subsidiaries, we expect a cash payment of $0.5 million within the next twelve months.  In addition, we anticipate that a tax examination of one of our foreign subsidiaries will conclude within the next twelve months.  We cannot conclude on the range of cash payments that will be made within the next twelve months associated with the tax examination and our other uncertain tax positions.





21. DISCONTINUED OPERATIONS


In October 2008, the Company committed to a formal plan to abandon the RapidScale TM product line, which was reviewed and approved by management with appropriate authority, and was communicated to the affected employees. The Company continues to honor service contracts with existing RapidScale customers, but had no other significant continuing involvement in the operations of the RapidScale product line subsequent to the abandonment.


The results of operations of the RapidScale product line were reclassified and included in discontinued operations, net of tax, within the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended March 26, 2010 . Results of operations of the RapidScale product line for the three and nine months ended March 25, 2011 were


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not material to the Company's operations and, therefore, were not reclassified.


The following summarizes the results of discontinued operations (in thousands):


Three Months EndedNine Months EndedMarch 26, 2010March 26,2010Revenue$85$290Cost of revenue960Gross profit76230Operating expenses:Research and development—(105)Sales and marketing—(14)General and administrative(6)9Total operating expenses(6)(110)Income from discontinued operations82340Total other income—6Income from discontinued operations$82$346





22. SEGMENT INFORMATION


The Company's operating segments are determined based upon several criteria including: the Company's internal organizational structure; the manner in which the Company's operations are managed; the criteria used by the Company's Chief Executive Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the availability of separate financial information. The Company's business is organized as two operating segments, products and services. Due to their similar economic characteristics, production processes, and distribution methods, the Company groups the product lines as the product operating segment and service offerings as the service operating segment. The Company's CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by product and service for purposes of allocating resources and evaluating financial performance. The products and services metrics are derived on a contractual basis.


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Segment Results


The following table presents revenues, cost of revenues and gross margin for the Company's products and services segments for the three and nine months ended March 25, 2011 and March 26, 2010 (dollars in thousands): Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25,2011March 26,2010RevenueProducts$104,904$69,652$321,857$189,350Services38,76038,168112,225112,730Total$143,664$107,820$434,082$302,080Cost of revenueProducts$83,279$57,576$251,541$168,564Services19,88321,32458,71363,542Total$103,162$78,900$310,254$232,106Gross profitProducts$21,625$12,076$70,316$20,786Services18,87716,84453,51249,188Total$40,502$28,920$123,828$69,974Gross margin:Products20.6%17.3%21.8%11.0%Services48.7%44.1%47.7%43.6%Total28.2%26.8%28.5%23.2%


Revenue and cost of revenue is the only discrete financial information the Company has available for its segments. For this reason, the Company is not able to provide other financial results or assets by segment.


Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.


The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income. In addition, the Company's assets are located primarily in the United States and are not allocated to any specific region. The Company does not measure the performance of its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenues.


Customer information


For the three months ended March 25, 2011 , Amazon and the U.S. government accounted for approximately 12% and 10% of the Company's revenue, respectively. For the nine months ended March 25, 2011 , Amazon accounted for approximately 12% of the Company's revenue. For the three and nine months ended March 26, 2010 , Amazon accounted for approximately 19% and 22% of the Company's revenue. No other customers accounted for 10% or more of the Company's revenue for the three and nine months ended March 25, 2011 and March 26, 2010 .


At March 25, 2011 , Amazon accounted for approximately 11% of the Company's accounts receivable. No other single customer accounted for 10% or more of the Company's trade accounts receivable at March 25, 2011 and June 25, 2010 .


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Geographic Information


Revenue from both domestic and international customers (based on the address of the customer on the invoice) was as follows (in thousands): Three Months EndedNine Months EndedMarch 25, 2011March 26, 2010March 25,2011March 26,2010Domestic revenue$93,306$83,735$280,814$236,232International revenue50,35824,085153,26865,848Total revenue$143,664$107,820$434,082$302,080


No individual foreign country's revenue was material for disclosure purposes.


Approximately 83% and 91% of the Company's property and equipment, net was located in the United States as of March 25, 2011 and June 25, 2010 , respectively.





23. RELATED PARTY TRANSACTIONS


Investment in SGI Japan


The Company acquired approximately 90% of the outstanding stock of SGI Japan for $17.9 million on March 9, 2011. Prior to that date, the Company owned approximately 10% of the outstanding stock of SGI Japan, which was acquired in connection with the acquisition of Legacy SGI. As a result, effective March 10, 2011, SGI Japan became a wholly-owned subsidiary of the Company (See Note 4).


Prior to March 10, 2011, the Company's investment in SGI Japan of $2.1 million was accounted for under the cost method and was included in other assets in the accompanying unaudited condensed consolidated balance sheet at June 25, 2010. During the three months ended December 24, 2010, the Company determined that there had been an other-than-temporary impairment of its investment in SGI Japan. As a result, the Company wrote down the investment from $5.0 million to $2.1 million, which represented the estimated fair value of the investment at December 24, 2010. On March 9, 2011, the carrying value of $2.1 million was equal to the acquisition-date fair value of the equity interest in SGI Japan held by the Company immediately before the acquisition, no gain or loss was recorded.


The Company's unaudited condensed consolidated statements of operations for the three and nine months ended March 25, 2011 and the unaudited condensed consolidated statement of cash flows for the nine months ended March 25, 2011 include SGI Japan's statement of operations and statement of cash flows for the period from March 10, 2011 to March 25, 2011. The Company's unaudited condensed consolidated balance sheet at March 25, 2011 includes the accounts of SGI Japan. All significant intercompany transactions between the Company and SGI Japan for the period from March 10, 2011 to March 25, 2011 have been eliminated in consolidation. All significant intercompany balances between the Company and SGI Japan at March 25, 2011 have also been eliminated in consolidation.


Sales to Related Party


Prior to March 10, 2011, the Company recognized product revenue and cost of product revenue from sales to SGI Japan. The Company ceased recognizing product revenue and cost of product revenue from sales to SGI Japan effective March 10, 2011. Product revenue and cost of product revenue from sales to SGI Japan prior to March 10, 2011 were as follows (in thousands): Period FromThreePeriod FromNineDecember 25, 2010MonthsJune 26, 2010MonthstoEndedtoEndedMarch 9, 2011March 26, 2010March 9, 2011March 26, 2010Product revenue$3,029$1,222$15,718$7,592Cost of product revenue$1,922$758$10,027$4,681


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Amounts Receivable From and Payable to Related Party


As of June 25, 2010, amounts receivable from and payable to SGI Japan were as follows (in thousands): June 25, 2010Amounts receivable from SGI Japan$8,845Amounts payable to SGI Japan$127


Amounts receivable from SGI Japan at June 25, 2010 were included in accounts receivable in the unaudited condensed consolidated balance sheet. Amounts payable to SGI Japan at June 25, 2010 were included in accounts payable in the unaudited condensed consolidated balance sheet.


Amounts receivable from and payable to SGI Japan as of March 25, 2011 have been reclassified to intercompany accounts. All significant intercompany balances have been eliminated in consolidation.





24. FINANCIAL GUARANTEES


The Company has issued financial guarantees to cover rent on leased facilities and equipment to government authorities for value-added tax and other taxes and to various other parties to support payments in advance of future delivery on goods and services. The majority of the Company's financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at March 25, 2011 was $5.6 m illion for which the Company has $5.1 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash and cash equivalents in the unaudited condensed consolidated balance sheets.





25. COMMITMENTS AND CONTINGENCIES


Notes Payable


The following table summarizes the Company's principal payment schedule as of March 25, 2011 , (in thousands):


Fiscal Year2011 (remaining three months)$2,03920126,30320137422014556Total$9,640


Leases


The Company leases its facilities and office buildings under operating leases that expire at various dates through March 2017. Certain leases also contain escalation and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession such as a rent holiday, rent expense is recognized using the straight line method over the term of the lease. In addition to the minimum future lease commitments presented below, the leases generally require that the Company pay property taxes, insurance, maintenance and repair costs. Also, under certain leases, the Company is granted an option to terminate the lease early by providing an advance notice and paying an early termination fee. The Company does not intend to invoke the early termination option of the leases and hence the future minimum operating lease commitments disclosed herein consist of the total lease payments through the end of the initial lease terms.


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Future minimum lease payments under non-cancelable operating leases are as follows (in thousands):


Fiscal Year2011 (remaining three months)$2,61220129,56120136,32020143,02620159042016 and thereafter517Total$22,940


Rent expense for the three months ended March 25, 2011 and March 26, 2010 was $1.6 million and $1.6 million, respectively. Rent expense for the nine months ended March 25, 2011 and March 26, 2010 was $4.3 million and $4.9 million, respectively.


Purchase Commitments


In connection with supplier agreements, the Company has agreements to purchase certain units of inventory and non-inventory items through 2012. As of March 25, 2011 , these remaining non-cancelable commitments were $15.2 million , which are due in less than a year.


Indemnification Agreements


The Company enters into standard indemnification agreements with its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that the Company's product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third-party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of March 25, 2011 . As a result, the Company believes the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to such indemnifications as of March 25, 2011 .


Contingencies


The Company may, from time to time, be involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company records a provision for a liability when management believes that it is both probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.


On May 1, 2007, Legacy SGI received a legal notice from counsel to Bharat Heavy Electricals Ltd. (“BHEL”), located in India, alleging delay in and failure to deliver products and technical problems with its hardware and software in relation to the establishment of a facility in Hyderabad. The Company assumed this claim in connection with its acquisition of Legacy SGI assets, and is currently engaged in arbitration. On January 21, 2008, BHEL filed its statement of claim against Silicon Graphics Systems (India) Pvt. Ltd. for a sum of Indian Rupee (“INR”) 78,478,200 ($1.7 million based on the conversion rate on March 25, 2011 ) plus interest and costs. On February 29, 2008, the Company filed its reply as well as a counter claim for a sum of INR 27,453,007 ($0.6 million based on the conversion rate on March 25, 2011 ) plus interest and costs. The proceeding has commenced and a hearing is scheduled for June 2011. The Company cannot currently predict the outcome of this dispute nor determine the amount or a reasonable range of potential loss, if any.


On January 16, 2009, the Company and certain of its former officers were sued in the United States District Court for the Northern District of California, in a matter captioned In Re Rackable Systems, Inc. Securities Litigation, Case No. C-09-0222-CW . On April 16, 2009, the Court appointed Elroy Whittaker as Lead Plaintiff and the Law Firm of Glancy Binkow &


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Goldberg LLP as Lead Plaintiff's Counsel. Lead Plaintiff filed a consolidated amended complaint (the “Amended Complaint”) on June 15, 2009. The Amended Complaint asserts claims for violations of (i) Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and (ii) Section 20(a) of the Exchange Act. The allegations relate to the drops in the Company's share price in early 2007 relating to its earnings reports for 2006 and Q4 2006. On April 9, 2010, the Company and its former officers filed a Motion to Dismiss the Supplemental Second Amended Complaint. The Court granted the Motion to Dismiss and entered judgment dismissing the action with prejudice on August 31, 2010. Because Lead Plaintiffs did not appeal the dismissal, the Court's judgment is now final and the action is terminated.


On March 10, 2009, the Company and certain of its present and former directors and officers were sued in the Superior Court of the State of California for Alameda County, in a shareholder derivative lawsuit captioned Milo v. Barton, et al, Case No. R30944-0474 . The complaint alleges that the defendants engaged in various acts and omissions that resulted in the drops of our share price in early 2007, and asserts claims for alleged breaches of defendants' fiduciary duties, waste of corporate assets, and unjust enrichment. The complaint seeks compensatory damages in an unspecified amount, unspecified equitable or injunctive relief, disgorgement of unspecified compensation earned by the defendants, and an award of an unspecified amount for plaintiff's costs and attorney's fees. On January 18, 2011, defendants filed a demurrer to the complaint on the grounds that plaintiff failed to plead that a pre-suit demand on the Company's Board of Directors was excused under controlling state law.  On February 15, 2011, plaintiff stipulated to a voluntary dismissal of the action. The Court entered judgment dismissing the action with prejudice and the action is terminated.


On December 3, 2009, the Company initiated an arbitration proceeding captioned Silicon Graphics Intl. Corp., f/k/a Rackable Systems, Inc. v. Thomas Weisel Partners Group, Inc., et al., FINRA Arb. No. 09-06849 , against its former investment advisor Thomas Weisel Partners LLC (“TWP”), as well as TWP's parent company Thomas Wiesel Partners Group, Inc., to remedy TWP's alleged mismanagement and wrongful advice pertaining to the Company's investments in allegedly unsuitable and illiquid investments called “auction rate securities” (“ARS”). On February 4, 2011, the Company settled with TWP.  As part of the settlement, the Company sold all of its remaining ARS through TWP and received proceeds of approximately $6.5 million.  Each of the parties agreed to bear their own attorneys' fees and costs.  The Company's carrying value of the ARS was $6.2 million; therefore, the Company recorded a $0.3 million gain as a result of the settlement.


Third parties in the past have asserted, and may in the future assert, intellectual property infringement claims against the Company, and such future claims, if proved, could require the Company to pay substantial damages or to redesign its existing products or pay fees to obtain cross-license agreements. Litigation may be necessary in the future to enforce or defend the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of its proprietary rights or the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm the Company's business, operating results and financial condition. Further, many of the Company's current and potential competitors have the ability to dedicate substantially greater resources to enforcing and defending their intellectual property rights than the Company.


Additionally, from time to time, the Company receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any given case that such informal review will not lead to further proceedings involving the Company in the future.


The Company is not aware of any pending disputes, including those disputes and settlements described above, that would be likely to have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages, cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods.





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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included or incorporated by reference in this Form 10-Q other than statements of historical fact, are forward-looking statements. Investors can identify these and other forward-looking statements by the use of words such as “estimate,” “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other similar expressions. Forward-looking statements also include the assumptions underlying or relating to such statements.


Our actual results could differ materially from those projected in the forward-looking statements included herein as a result of a number of factors, risks and uncertainties, including, among others, the effect that the current economic and credit crises may continue to have on our business, the risk factors set forth in, Part I, Item 2 -”Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A- "Risk Factors,” and elsewhere in this Form 10-Q and the risks detailed from time to time in our future U.S. Securities and Exchange Commission reports. The information included in this Form 10-Q is as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ materially from the forward-looking statements included herein. We assume no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results except as required by law. Accordingly, we caution readers not to place undue reliance on such statements. We expressly disclaim any obligation to update or alter our forward-looking statements, whether, as a result of new information, future events or otherwise.


The following discussion and analysis should be read in conjunction with the condensed financial statements and notes thereto in Item 1 in this Form 10-Q and with our financial statements and notes thereto for the year ended June 25, 2010 , contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 8, 2010.


“Silicon Graphics,” “SGI,” “Eco-Logical,” “RapidScale,” “ICE Cube,” “COPAN,” “Rackable,” “Altix,” and the “Silicon Graphics” logo are trademarks or registered trademarks of Silicon Graphics International Corp. or its subsidiaries in the U.S. and/or other countries. Other trademarks or service marks appearing in this report may be trademarks or service marks of other owners.


Overview


We are a global leader in large-scale clustered computing and storage, high-performance compute and storage, and data center technologies integrated with a choice of software, customer support services and professional services. We are dedicated to solving the information technology ("IT") industry's most demanding business and technology challenges by delivering clustered computing and storage solutions, high performance computing and storage solutions, Eco-LogicalTM data center solutions, cloud computing solutions, software and services. We develop, market, and sell a broad line of low cost, mid-range and high-end computing servers and data storage products as well as differentiating software. We sell infrastructure products purpose-built for large-scale data center deployments. In addition, we provide global customer support and professional services related to our products. We are also a leading developer of enterprise class, high-performance features for the Linux operating system that provide our customers with a standard Linux operating environment combined with our differentiated yet un-intrusive Linux capabilities that are designed to improve performance, simplify system management, and provide a more robust development environment.


Our products and services are used by the scientific, technical, and business communities to solve challenging data-intensive computing, data management and visualization problems. These problems typically require large amounts of computing power and fast and efficient data movement both within the computing system and to and from large-scale data storage installations. Enterprises have also begun to deploy large-scale computing and storage installations by aggregating large numbers of relatively inexpensive, open-standard modular computing and storage systems. Our end-users employ our systems to access, analyze, transform, manage, visualize and store very large amounts of data in real time or near real time. By running low-cost operating systems such as Linux ® and Microsoft ® Windows ® , we believe that we enable enterprises to meet their computing and storage requirements at a lower total cost of ownership and provide enterprises with greater flexibility and scalability. The vertical markets we serve include the federal government, defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive, Internet, financial services, media and entertainment, and business intelligence and data analytics.


We are positioning ourselves to grow market share and become a leader in the technical computing market. We continue to deploy our sales and support organizations to focus on the vertical markets we serve. We believe technical computing is relevant across the vertical markets we serve and offers us opportunities for continued industry diversification and to compete internationally.


On March 9, 2011 (the “Closing Date”), pursuant to a Stock Purchase Agreement (the "Agreement") dated March 8, 2011, our wholly-owned subsidiary, Silicon Graphics World Trade BV ("SGI BV") acquired the remaining outstanding shares


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of SGI Japan, Ltd., a Japanese corporation (“SGI Japan”). Prior to the Closing Date, we owned approximately 10% of the outstanding shares of SGI Japan and accounted for such investment as a cost method investment. SGI Japan operates primarily as a seller and servicer of high-performance computing ("HPC"), visualization, data center, and media and archive systems in Japan.  At the present time, the economic disruption in Japan caused by the earthquake has not significantly impacted our operations or financial performance in Japan and we determined that no asset impairment has occurred as a result of this event.


In fiscal year 2011, our strategy and operations are focused on growing our revenue, improving our gross margins, and controlling our operating expenses. Our results during the three and nine months ended March 25, 2011 are consistent with our fiscal year 2011 strategy.  As part of this strategy, we acquired SGI Japan, Ltd., a Japanese corporation, ("SGI Japan") to serve as an entry  into the large technical computing market of Japan and to enable us to extend our global reach, accelerate growth opportunities, and strengthen the relationships with our partners and customers in Japan. Furthermore, the acquisition is expected to enable us to more fully participate in the Japanese HPC market and benefit from SGI Japan's extensive service business.


Excluding the impact from new accounting standards for revenue recognition, we increased our revenue by $10.3 million comparing the three months ended March 25, 2011 and March 26, 2010 and $48.7 million comparing the nine months ended March 25, 2011 and March 26, 2010 . Included in the three and nine months ended March 25, 2011 , SGI Japan contributed $5.4 million of revenue subsequent to the acquisition. We increased our gross margin by 140 basis points from 26.8% in the three months ended March 26, 2010 to 28.2% in the three months ended March 25, 2011 and by 540 basis points from 23.2% in the nine months ended March 26, 2010 to 28.5% in the nine months ended March 25, 2011 . Our operating expenses decreased in the three and nine months ended March 25, 2011 as compared to the three and nine months ended March 26, 2010 . We believe we are on track to continue to execute according to our fiscal year 2011 strategy.


In fiscal year 2011, we adopted new accounting standards for revenue recognition which was required to be adopted for fiscal years beginning on or after June 15, 2010. Under these new accounting standards, we are recognizing, and not deferring, more product revenue prospectively beginning with the first quarter of fiscal year 2011. Our total revenue and gross margin in the three months ended March 25, 2011 were $143.7 million and 28.2% , respectively. Our total revenue and gross margin in the nine months ended March 25, 2011 were $434.1 million and 28.5% , respectively. Under the previous accounting standards for revenue recognition, our total revenue and gross margin would have been $118.1 million and 28.1% , respectively, in the three months ended March 25, 2011 and $350.8 million and 26.2% , respectively, in the nine months ended March 25, 2011 .


We believe that focused investments in research and development are critical to our future performance and competitiveness in the marketplace. Our investments in this area will directly relate to enhancement of our current product line, development of new products that achieve market acceptance, and our ability to meet an expanding range of customer requirements. As such, we expect to continue to spend on current and future product development efforts.





Results of Operations


Summarized below is the results of our operations for the three and nine months ended March 25, 2011 compared to the three and nine months ended March 26, 2010 .


Comparison of the three and nine months ended March 25, 2011 and March 26, 2010


Financial Highlights


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|• | We recognized revenue of$143.7 millionin the three months endedMarch 25, 2011. Revenue increased$35.8 millionor33%in the three months endedMarch 25, 2011from$107.8 millionin the three months endedMarch 26, 2010. Our higher revenue resulted partially from the required adoption of new accounting standards for revenue recognition which resulted in us recognizing more revenue upon delivery or acceptance and from increase in sales of high performance compute server and storage products. The required adoption of these new accounting standards for revenue recognition resulted in$25.5 millionand$18.2 millionincremental increase in revenue and cost of revenue in the three months endedMarch 25, 2011, respectively. In addition, our acquisition of SGI Japan increased our revenue by $5.4 million during the three months endedMarch 25, 2011.

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|• | We increased our gross margin by140basis points from26.8%in the three months endedMarch 26, 2010to28.2%in the three months endedMarch 25, 2011. Our gross margin increased by540basis points from23.2%for theninemonths endedMarch 26, 2010to28.5%for theninemonths endedMarch 25, 2011.

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|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | As a result of increased revenue and gross margin, our gross profit increased$11.6 millionor40%to$40.5 millionin the three months endedMarch 25, 2011from$28.9 millionin the three months endedMarch 26, 2010. In addition, our gross profit increased$53.9 millionor77%to$123.8 millionin theninemonths endedMarch 25, 2011from$70.0

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million in the nine months ended March 26, 2010 . The increase in gross profit of $7.4 million and $32.0 million is primarily attributable to the required adoption of the new accountings standards for revenue recognition in the three and nine months ended March 25, 2011 , respectively.


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|• | We incurred acquisition related costs of$1.1 millionresulting from our purchase of all the remaining shares of SGI Japan. Prior to this acquisition, we owned approximately 10% of the outstanding shares of SGI Japan.

Revenue, cost of revenue, gross profit and gross margin


The following table presents revenue, cost of revenue, gross profit, and gross margin for the three and nine months ended March 25, 2011 and March 26, 2010 (in thousands except percentages): Three Months EndedChangeNine Months EndedChangeMarch 25, 2011March 26, 2010$%March 25, 2011March 26, 2010$%Product revenue$88,205$—$88,205n/a$265,281$—$265,281n/aService revenue34,143—34,143n/a100,821—100,821n/aCombined product and service revenue21,316107,820(86,504)(80)%67,980302,080(234,100)(77)%Total revenue$143,664$107,820$35,84433%$434,082$302,080$132,00244%Cost of product revenue$68,482$—$68,482n/a$203,653$203,653n/aCost of service revenue19,883—19,883n/a57,45457,454n/aCombined product and service cost of revenue14,79778,900(64,103)(81)%49,147232,106(182,959)(79)%Total cost of revenue$103,162$78,900$24,26231%$310,254$232,106$78,14834%Product gross profit$19,723$—$19,723n/a$61,628$—$61,628n/aService gross profit14,260—14,260n/a43,367—43,367n/aCombined product and service gross profit6,51928,920(22,401)(77)%18,83369,974(51,141)(73)%Total gross profit$40,502$28,920$11,58240%$123,828$69,974$53,85477%Product gross margin22.4%—%23.2%—%Service gross margin41.8%—%43.0%—%Combined product and service gross margin30.6%26.8%27.7%23.2%Overall gross margin28.2%26.8%28.5%23.2%


Revenue. We derive revenue from the sale of products and services directly to end-users as well as through resellers and system integrators. Product revenue is derived from the sale of mid-range to high-end computing servers and data storage systems as well as software. We enter into sales contracts to deliver multiple products and/or services. In accordance with our revenue recognition policy, certain sales contracts are deferred and recognized over the service period. Service revenue is generated from the sale of standard maintenance contracts as well as custom maintenance contracts that are tailored to individual customer's needs. We recognize service revenue ratably over the service periods. Maintenance contracts are typically between one to three years in length and we actively pursue renewals of these contracts. We also generate professional services revenue related to implementation of and training on our products.


Our products are highly configurable for customer requirements. Price changes, unit volumes, customer mix and product configuration can impact our revenues, cost of revenues and gross profit. Effective June 26, 2010, we adopted the provisions of Accounting Standards Update ("ASU") No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements , and ASU No. 2009-13, Revenue Recognition (Topic  605): Multiple-Deliverable Revenue Arrangements for new and materially modified arrangements originating after June 25, 2010. The new standard allows for deliverables for which revenue would have been previously deferred to be separated and recognized as delivered, rather than over the longest service delivery period as a single unit of accounting with other elements in the arrangement. The new standards were required to be adopted for fiscal years beginning on or after June 15, 2010. For fiscal year 2011 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, such as products, software, customer support services, and or professional services, we will allocate revenue to each element based on a selling price hierarchy as described in Item 2,


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"Management's Discussion and Analysis of Financial Condition and Results of Operations" under the Critical Accounting Policies and Estimates - Revenue Recognition below. In multiple element arrangements where software is essential to the functionality, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then recognized as one unit of accounting using the guidance for recognizing software revenue, as amended. The new accounting principles permit prospective or retrospective adoption, and we elected prospective adoption.


Prior to the adoption of the new standards, we did not have a reasonable basis for separating product and service revenue as we have not been able to establish vendor-specific objective evidence of fair value of both the delivered and undelivered elements(s) for our multiple-element arrangements which include software products integrated with our hardware or include post-contract customer support. As such, revenue and related cost of revenue for the three and nine months ended March 26, 2010 are presented in the table above as combined product and service revenue and cost of revenue. As a result of the adoption of the new standards, we now have a reasonable basis for separately presenting product and service for new and materially modified arrangements originating after June 25, 2010 as we are able to allocate revenue to each element within a multiple-element arrangement based on the aforementioned selling price hierarchy.


Revenue increased $35.8 million or 33% to $143.7 million in the three months ended March 25, 2011 from $107.8 million in the three months ended March 26, 2010 . Of the $35.8 million increase in revenue, $25.5 million is attributable to the adoption of the new accounting standards for revenue recognition which allows for us to generally recognize more revenue upon shipment or acceptance. Excluding the impact from the adoption of the new accounting standards, revenue increased $10.3 million or 10% to $118.1 million in the three months ended March 25, 2011 . During the three months ended March 25, 2011 , our product mix continued to shift to higher margin high performance compute server and storage products, driven by the strength in sales of our new Altix ® UV and COPAN TM products. Both Altix ® UV and COPAN TM products are new product offerings introduced in fiscal year 2011. Altix ® UV is our next generation shared-memory computer and continues to be well received in the market place. Consistent with the shift in product mix, our Amazon customer concentration moved from 19% of total revenue during the three months ended March 26, 2010 to 12% during the three months ended March 25, 2011 .  In addition, consistent with our strategy to extend our global reach and accelerate our growth opportunities, our acquisition of SGI Japan resulted in an increase of $5.4 million in revenue during the third quarter of fiscal year 2011. Furthermore, our international sales grew to 35% of our total revenue during the three months ended March 25, 2011 compared to 22% in the comparable period last fiscal year. The increase in international sales as percentage of total revenue is attributable to the adoption of the new accounting standards for revenue recognition and an increase in sales in our European region for the three months ended March 25, 2011 .


Revenue increased $132.0 million or 44% to $434.1 million in the nine months ended March 25, 2011 from $302.1 million in the nine months ended March 26, 2010 . Of the $132.0 million increase in revenue, $83.3 million is attributable to the adoption of the new accounting standards for revenue recognition. Excluding the impact from the adoption of the new accounting standards, revenue increased $48.7 million or 16.1% in the nine months ended March 25, 2011 . During the nine months ended March 25, 2011 , our product mix continues to shift to higher margin high performance compute server and storage products, driven by the introduction of our new Altix ® UV and COPAN TM products. Consistent with the shift in our product mix, our Amazon customer concentration decreased from 22% of total revenue during the nine months ended March 26, 2010 to 12% during the nine months ended March 25, 2011 . Our international sales grew to 35% of our total revenue in the nine months ended March 25, 2011 compared to 22% in the comparable period last fiscal year. The increase in international sales as percentage of total revenue is attributable to the adoption of the new accounting standards for revenue recognition and an increase in sales in our European region for the nine months ended March 25, 2011 .


Our continuous introduction of new products and improvements of our product's performance and data storage capacity  means that we are unable to directly compare our products from period to period, and therefore, we are unable to quantify the changes in pricing of our products from period to period. We believe that our on-going introduction of new products and product features help mitigate competitive pricing pressures by forcing our competitors to compete on the basis of product features, rather than on pricing.


Cost of revenue and gross profit . Cost of revenue consists of costs associated with direct material, labor, manufacturing overhead, shipment of products, inventory write downs and share-based compensation. Cost of revenue also includes personnel costs for providing maintenance and professional services. Our manufacturing overhead and professional services personnel costs are fixed or semi-variable. Our gross margins are impacted by changes in customer and product mix, pricing actions by our competitors and commodity prices that comprise a significant portion of cost of revenue from period to period. Further when certain sales contracts are deferred in accordance with our revenue recognition policy, the related cost of revenue is deferred and recognized over the service period.


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Our cost of revenue and gross profit are impacted by price changes, product configuration, revenue mix and product material costs. Our service cost of revenue and gross margin are impacted by timing of support service initiations and renewals, and incremental investments in our customer support infrastructure.


Our headcount in the manufacturing and services organization, excluding employees acquired through the acquisition of SGI Japan, decreased by 26 employees from 579 employees at March 26, 2010 to 553 employees at March 25, 2011. We acquired 191 employees as a result of the acquisition of SGI Japan; however, the increase in headcount did not significantly impact our compensation and related expenses due to only 15 days as a combined company


Gross profit increased $11.6 million or 40% to $40.5 million in the three months ended March 25, 2011 from $28.9 million in the three months ended March 26, 2010 . Gross margin percentage increased to 28.2% in the three months ended March 25, 2011 from 26.8% in the three months ended March 26, 2010 . Our gross profit and gross margin percentage increased due to a change in mix shift to higher margin high performance compute server and storage products, including the increase in sales of our new Altix UV and COPAN products. In addition as a portion of our manufacturing overhead and professional services personnel costs are fixed, the gross margins improved as revenue increased across all of our product offerings.  Our gross profit increased by $0.7 million due to our acquisition of SGI Japan during the third quarter of fiscal year 2011. Further, for the three months ended March 26, 2010 , our gross profit was negatively impacted by a $1.3 million excess and obsolete inventory charge. The adoption of the new accounting standards for revenue recognition increased cost of revenue and gross profit by $18.2 million and $7.4 million , respectively. Approximately 13 basis point increase in our gross margin percentage is attributable to the adoption of the new accounting standards for revenue recognition.  Historically, our high performance compute server and storage products were deferred and amortized under the previous revenue recognition standards. With the adoption of the new accounting standards, we are able to recognize revenue and gross profit on these products at the time of delivery or acceptance.


Gross profit increased $53.9 million or 77% to $123.8 million in the nine months ended March 25, 2011 from $70.0 million in the nine months ended March 26, 2010 . Gross margin percentage increased to 28.5% in the nine months ended March 25, 2011 from 23.2% in the nine months ended March 26, 2010 . Our gross profit and gross margin percentage increased due to a change in mix shift to higher margin high performance compute server and storage products, including the increase in sales of our new Altix UV and COPAN products. In addition as a portion of our manufacturing overhead and professional services personnel costs are fixed, the gross margins improved as revenue increased across all of our product offerings. Further, our gross profit for the nine months ended March 26, 2010 was negatively impacted by a $7.5 million excess and obsolete inventory charge. The adoption of the new accounting standards for revenue recognition increased cost of revenue and gross profit by $51.3 million and $32.0 million , respectively. Approximately 240 basis point increase in our gross margin percentage is attributable to the adoption of the new accounting standards for revenue recognition.


Operating Expenses


Operating expenses for the three and nine months ended March 25, 2011 and March 26, 2010 were as follows (in thousands except percentages): Three Months EndedChangeNine Months EndedChangeMarch 25, 2011March 26, 2010$%March 25, 2011March 26, 2010$%Research and development$13,305$16,267$(2,962)(18)%$40,473$41,986$(1,513)(4)%Sales and marketing$16,607$15,194$1,4139%$49,566$46,811$2,7556%General and administrative$12,428$13,270$(842)(6)%$36,952$40,056$(3,104)(8)%Restructuring$915$1,434$(519)(36)%$1,716$3,652$(1,936)(53)%Acquisition-related$1,094$—$1,094n/a$1,094$(557)$1,651(296)%


Research and development. Research and development expense consists primarily of personnel and related costs, contractor fees, new component testing and evaluation, test equipment, new product design and testing, other product development activities, share-based compensation, and facilities and information technology costs.


Research and development expense decreased $3.0 million or 18% to $13.3 million in the three months ended March 25, 2011 from $16.3 million in the three months ended March 26, 2010 . The decrease in research and development expense was primarily due to a decrease in third-party research and development services of $1.4 million, a decrease in facilities related expenses of $0.6 million and a decrease in purchases of materials and test equipment used for research and development activities of $0.5 million. In addition, during the three months ended March 25, 2011 , research and development reimbursements from our business partners increased by $0.4 million. During the three months ended March 25, 2011 , we


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received $0.4 million of research and development reimbursements compared to an immaterial amount received during the three months ended March 26, 2010 .  Compensation and related expenses during the three months ended March 25, 2011 did not significantly change compared with the three months ended March 26, 2010 . Excluding the 13 employees acquired through the acquisition of SGI Japan, our headcount decreased by six from 283 employees as of March 26, 2010 to 277 employees as of March 25, 2011. The employees of SGI Japan did not significantly impact our compensation and related expense due to only 15 days as a combined company.


Research and development expense decreased $1.5 million or 4% to $40.5 million in the nine months ended March 25, 2011 from $42.0 million in the nine months ended March 26, 2010 . The decrease in research and development expense was primarily due to a decrease in purchases of materials and test equipment used for research and development activities of $1.1 million, a decrease in facilities related expense of $1.1 million, and a decrease in third party research and development services of $0.6 million. In addition, during the nine months ended March 25, 2011 , our losses from disposal of fixed assets decreased by $0.2 million. These decreases in research and development expense were partially offset by a $0.7 million increase in compensation and related expenses and a $1.0 million decrease in research and development reimbursements from our business partners. During the nine months ended March 25, 2011 , we received $1.0 million of research and development reimbursements compared to $2.0 million research and development reimbursements received during the nine months ended March 26, 2010 .


Sales and marketing. Sales and marketing expense consists primarily of salaries, bonuses and commissions paid to our sales and marketing employees, amortization of intangible assets, share-based compensation, and facilities and information technology costs. We also incur marketing expenses for activities such as trade shows, direct mail and advertising.


Sales and marketing expense increased $1.4 million or 9% to $16.6 million in the three months ended March 25, 2011 from $15.2 million in the three months ended March 26, 2010 . This increase was primarily due to an increase in compensation and related expenses of $1.1 million during the three months ended March 25, 2011 . This increase in compensation was primarily due to higher commission paid during the three months ended March 25, 2011 compared to the same period last year. Headcount increased by 54 employees from 239 employees as of March 26, 2010 to 293 employees as of March 25, 2011 which include 52 employees acquired through the acquisition of SGI Japan. The employees of SGI Japan did not significantly impact our compensation and related expense due to only 15 days as a combined company. In addition to compensation and related expenses, the increase in sales and marketing expense was also due to an increase in intangible amortization of $0.4 million, third party sales and marketing services of $0.2 million and share-based compensation expense of $0.1 million. The overall increase in sales and marketing expense was partially offset by a decrease in facilities related expense of $0.3 million.


Sales and marketing expense increased $2.8 million or 6% to $49.6 million in the nine months ended March 25, 2011 from $46.8 million in the nine months ended March 26, 2010 . The increase in sales and marketing expense was primarily due to an increase in compensation and related expenses of $1.7 million, third party sales and marketing services of $0.7 million, recruiting related expenses of $0.2 million, travel expenses of $0.5 million and share-based compensation expenses of $0.4 million. The overall increase in sales and marketing expense was partially offset by a decrease in facilities related expense of $1.1 million.


General and administrative. General and administrative expense consists primarily of personnel costs, legal and professional service costs, depreciation, share-based compensation, and facilities and information technology costs.


General and administrative expense decreased $0.8 million or 6% to $12.4 million in the three months ended March 25, 2011 from $13.3 million in the three months ended March 26, 2010 . The decrease in general and administrative expense was primarily due to a decrease in bad debt expense of $1.1 million due to recovery of certain receivables during the quarter. In addition, audit and tax related services decreased by $0.2 million, third party related services decreased by $0.6 million, insurance expense decreased by $0.3 million and facility related expenses decreased by $0.6 million. The overall decrease in general and administrative expense was partially offset by increases in compensation and related expense of $0.7 million, legal services of $0.3 million, recruiting related expenses of $0.3 million, and share-based compensation expense of $0.3 million. The acquisition of SGI Japan increased general and administrative expenses by $0.1 million. Total headcount as of March 25, 2011 increased by 30 employees from 194 employees as of March 26, 2010 to 224 employees as of March 25, 2011  which include 32 employees acquired through the acquisition of SGI Japan. The employees of SGI Japan did not significantly impact our compensation and related expense due to only 15 days as a combined company.


General and administrative expense decreased $3.1 million or 8% to $37.0 million in the nine months ended March 25, 2011 from $40.1 million in the nine months ended March 26, 2010 . The decrease in general and administrative expense was primarily due to decreases in third party consulting services and legal related services of $2.3 million, audit and tax related services of $0.5 million, insurance of $0.8 million, facility related expenses of $0.7 million, and bad debt expense of $0.6 million. The overall decrease in general and administrative expense was partially offset by an increase in compensation and related expenses of $1.4 million.


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Restructuring .  On February 18, 2011, management approved the 2011 restructuring action as part of a worldwide workforce reduction to streamline operations and reduce operating expenses. Prior to this action, on July 27, 2009, management approved the 2010 restructuring action to reduce our European workforce and vacate certain facilities.


Restructuring expense for the three and nine months ended March 25, 2011 related to these actions was $0.9 million and $1.7 million , respectively. For the three and nine months ended March 26, 2010 , restructuring expense was $1.4 million and $3.7 million , respectively. As a result of the restructuring actions undertaken, we anticipate future cash outflow of $6.6 million, primarily during fiscal year 2011.


Acquisition-related . On March 9, 2011, pursuant to a Stock Purchase Agreement dated March 8, 2011, we acquired the remaining outstanding shares of SGI Japan. In connection with the acquisition, during the three months ended March 25, 2011, we incurred acquisition-related costs of $1.1 million, which consisted primarily of costs related to due diligence, legal and other professional fees.


During the nine months ended March 26, 2010 , we recorded a net gain of $0.6 million related to our acquisition of Legacy SGI. During the three months ended December 25, 2009, we received a $1.0 million payment from Legacy SGI related to potential liabilities of Legacy SGI, which pursuant to the Asset Purchase Agreement, were to be remitted to us if not paid to a third party. At the Closing Date of the acquisition, we assessed whether it was more likely than not that a contingent asset existed, and, based on all available information, concluded that no asset existed. Accordingly, we recorded the $1.0 million payment as a gain in our statement of operations upon receipt of the cash during the nine months ended March 26, 2010. The gain was partially offset by $0.4 million of expenses related to the acquisition of Legacy SGI, resulting in a net gain of $0.6 million. We did not incur any acquisition-related expenses during the three months ended March 26, 2010 .


Total other income (expense), net


Total other expense for the three and nine months ended March 25, 2011 and March 26, 2010 were as follows (in thousands except percentages):


Three Months EndedChangeNine Months EndedChangeMarch 25, 2011March 26, 2010$%March 25,2011March 26,2010$%Interest income, net$10$105$(95)(90)%$236$332$(96)(29)%Other income (expense), net$2,880$(2,566)$5,446(212)%$(1,300)$(3,480)$2,180(63)%


Interest income, net. Interest income, net primarily consists of interest earned on our interest-bearing investment accounts which include money market funds, U.S. treasury bills, and auction rate securities ("ARS"). The decrease in interest income, net was immaterial in the three and nine months ended March 25, 2011 compared to the three and nine months ended March 26, 2010 .


Other income (expense), net. Other income (expense), net during the three months ended March 25, 2011 consisted primarily of foreign exchange gains of $2.6 million as a result of the favorable exchange rate effect due to the strengthening of the Euro against the U.S. Dollar. In addition, we realized a gain of $0.3 million related to the sale of our remaining investments in auction rate securities. During the three months ended March 26, 2010 , other expense, net consisted of foreign exchange losses of $2.6 million that resulted from the unfavorable exchange rate effect due to the strengthening of the U.S. dollar against the Euro.


Other income (expense), net during the nine months ended March 25, 2011 consisted primarily of an impairment charge of $2.9 million of our investment in SGI Japan and $0.8 million in recognized losses on our investments in auction rate securities. These losses were partially offset by foreign exchange gains of $2.4 million that resulted from the favorable exchange rate effect due to the strengthening of the Euro against the U.S. Dollar. Other expense, net during the nine months ended March 26, 2010 consisted primarily of $3.5 million in foreign exchange losses.


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Income tax provision (benefit) from continuing operations


Income tax provision from continuing operations for the three and nine months ended March 25, 2011 and March 26, 2010 was as follows (in thousands except percentages): Three Months EndedChangeNine Months EndedChangeMarch 25, 2011March 26, 2010$%March 25, 2011March 26, 2010$%Income tax provision (benefit) from continuing operations$715$556$15929%$2,098$(3,930)$6,028(153)%


We recorded a tax expense of $ 0.7 million and $2.1 million for the three and nine months ended March 25, 2011 . Our tax expense for the three and nine months ended March 25, 2011 included $0.3 million and $1.6 million of unrecognized tax benefits and related interest. The effective tax rate used to record the tax expense differed from the combined federal and net state statutory income tax rate for the year ending June 24, 2011 primarily due to domestic operating losses generated during the period from which the Company does not benefit, tax expense incurred by the Company's foreign subsidiaries with operating income, and  tax expense associated with our unrecognized tax benefits and related interest.


We recorded a tax expense of $0.6 million and a net tax benefit of $3.9 million for the three months and nine months ended March 26, 2010 . The tax benefit for the nine month period included a discrete tax benefit of $4.9 million resulting from the November 6, 2009 enactment of the Worker, Homeownership, and Business Assistance Act of 2009 (the "Act"). The Act provides an election for federal taxpayers to increase the carry back period for an applicable net operating loss to three to five years from two years. Additional amounts recorded include a discrete tax benefit of $0.3 million related to a research and development credit claim for fiscal 2006, net of unrecognized tax benefits, and tax expense of $0.6 million for unrecognized tax benefits and related interest. The effective tax rate used to record the tax expense differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 26, 2010 primarily due to the tax benefit attributable to the utilization of tax attributes in the prior years and operating losses generated during the period from which we do not benefit.


As of March 25, 2011 , we have provided a partial valuation allowance against our net deferred tax assets. Based on all available evidence, on a jurisdictional basis, including our historical operating results, and the uncertainty of predicting our future income, the valuation allowance reduces the majority of our deferred tax assets to an amount that is more likely than not to be realized. The amount of the valuation allowance is attributable to U.S. federal, state and certain foreign deferred tax assets primarily consisting of net operating loss carryovers, tax credit carryovers, accrued expenses, and other temporary differences. As of March 25, 2011 , we have determined that it is more likely than not that certain foreign deferred tax assets will be realized and as a result, we released the valuation allowance related to the deferred tax assets of certain foreign subsidiaries. We continue to evaluate the realizability of deferred tax assets and related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which management makes the determination.


As of March 26, 2010 , we had provided a full valuation allowance against net deferred tax assets.


Income from discontinued operations, net of tax


Income from discontinued operations, net of tax, for the three and nine months ended March 25, 2011 and March 26, 2010 were as follows (in thousands except percentages): Three Months EndedChangeNine Months EndedChangeMarch 25, 2011March 26, 2010$%December 24, 2010December 25, 2009$%Income from discontinued operations, net of tax$—$82$(82)(100)%$—$346$(346)(100)%


During the year ended January 3, 2009, we classified our RapidScale TM product line as a discontinued operation as a result of discontinuing this product line. Our decision was a result of a change in strategic direction, as well as an inability to license certain third party software on reasonable commercial terms.


The revenue contribution from this product line was immaterial for the three and nine months ended March 25, 2011 and $0.1 million and $0.3 million for the three and nine months ended March 26, 2010 .





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Liquidity and Capital Resources


We had $128.7 million of cash and cash equivalents at March 25, 2011 and $129.3 million at June 25, 2010 . Historically, we have required capital principally to fund our working capital needs. It is our investment policy to invest in a manner that preserves capital, provides liquidity and maintains appropriate diversification and optimizes after-tax yield and return within our policy's framework and stipulated benchmarks. Adherence with our policy requires the assets to be liquid on and before their maturity dates. This liquidity requirement means that the holder of the assets must be able to pay us, upon our demand, the cash value of the assets invested.


At March 25, 2011 , we had short-term and long-term restricted cash and cash equivalents of $5.1 million that are pledged as collateral for various guarantees issued to cover rent on leased facilities and equipment, to government authorities for value-added tax (“VAT”) and other taxes, and certain vendors to support payments in advance of delivery of goods and services.


As of March 25, 2011 , we no longer held any investments in ARS. During the quarter, we and our former investment advisor, Thomas Weisel Partners LLC ("TWP"), entered into a settlement agreement, whereby we sold all of our ARS through TWP and received proceeds of approximately $6.5 million. At the time of the sale, the fair value of the remaining securities was approximately $6.2 million and we recorded a realized gain of $0.3 million during the three months ended March 25, 2011 , which is classified as other income in the unaudited condensed consolidated statements of operations. As a result of the sale, the Company no longer has any ARS in its investment portfolio as of March 25, 2011 . For additional information related to our investments in ARS investments, see Note 5 to our unaudited condensed consolidated financial statements in this Form 10-Q.


On August 31, 2010, the Board of Directors authorized management to resume our stock repurchase program previously authorized by the Board of Directors in February 2009. Under the program, we are authorized to repurchase up to $40.0 million of our common stock and the duration of the program is open ended. We did not repurchase any shares of our common stock during the three months ended March 25, 2011 . For the nine months ended March 25, 2011 , we repurchased 505,100 shares of our common stock totaling $3.9 million. As of March 25, 2011 , we have $35.1 million in remaining authorization for the stock repurchase program. We do not expect the stock repurchase to have an adverse effect on our future liquidity or capital resources as the program may be discontinued or suspended at any time by the Board of Directors.


The adequacy of these resources to meet our liquidity needs beyond the next twelve months will depend on our growth, operating results and capital expenditures required to meet our business needs. If we fail to generate cash from operations, or generate additional cash from our operations on a timely basis, we may not have the cash resources required to run our business and we may need to seek additional sources of funds to meet our needs. Cash flows from our discontinued operations have been included in our unaudited consolidated statement of cash flows with continuing operations within each cash flow category. The absence of cash flows from discontinued operations is not expected to affect our future liquidity or capital resources.


At March 25, 2011 , we believe our current cash and cash equivalents will be sufficient to fund working capital requirements, capital expenditures, and operations for at least the next twelve months. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future. At the present time, we have no material commitments for capital expenditures.


If we require additional capital resources to expand our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.


The following is a summary of cash activity (in thousands):


Nine Months EndedMarch 25, 2011March 26, 2010Unaudited consolidated statements of cash flows data:Net cash provided by (used in) operating activities$(9,680)$21,365Net cash provided by (used in) investing activities and acquisitions7,431(7,827)Net cash provided by financing activities1,064996Effect of exchange rate changes on cash and cash equivalents569$—Net increase (decrease) in cash and cash equivalents$(616)$14,534


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Operating Activities


Cash used in operating activities was $9.7 million for the nine months ended March 25, 2011 . Our net loss was $9.1 million for the nine months ended March 25, 2011 . Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $12.3 million , share-based compensation expense of $3.9 million , impairment of equity investment of $2.9 million , realized loss on investments of $0.9 million , and recovery of doubtful accounts receivable of $0.2 million . Net change in operating assets and liabilities was $20.3 million . The primary operating activity source of cash was a decrease in inventory. The primary operating activities uses of cash were increases in deferred cost of revenue, decreases in accounts payable and other liabilities.


For the nine months ended March 25, 2011 , deferred revenue decreased $3.4 million and deferred cost of revenue increased $7.7 million , respectively, primarily due to the timing of revenue recognition on sales transactions which were required to be deferred in accordance with our revenue recognition policy. Inventory decreased $15.5 million due to timing of inventory purchases and shipments to customers. Additionally, accounts payable decreased $19.8 million , primarily due to the decrease in inventory purchases and the timing of payments. Accrued compensation decreased $2.8 million primarily due to timing of compensation and related payments.


Cash provided by operating activities of $21.4 million for the nine months ended March 26, 2010 reflected cash provided by changes in working capital of $64.2 million, offset by our net loss of $60.8 million, net of adjustments for non-cash expenses. The primary working capital sources of cash were an increase in deferred revenue and a decrease in inventories. The primary working capital uses of cash were increases in deferred cost of revenue and accounts receivable and a decrease in


accounts payable. Non-cash expenses consisted primarily of depreciation and amortization of $13.7 million and share-based


compensation of $3.6 million.


Deferred revenue increased $124.7 million, primarily due to the timing of revenue recognition on sales transactions. Inventory decreased $42.0 million. These sources of cash were offset by an increase in deferred cost of revenue of $72.6 million related to the increase in deferred revenue. Additionally, accounts receivable increased $17.5 million, reflecting an increase in shipments and the timing of sales. Accounts payable decreased $12.9 million, primarily due to the timing of payments.


Investing Activities and Acquisitions


Cash provided by investing activities and acquisitions was $7.4 million in the nine months ended March 25, 2011 , primarily due to proceeds from sales and maturities of investments of $7.9 million. In addition, we purchased approximately 90% of the outstanding shares of SGI Japan for $17.9 million in cash. In connection with the acquisition, we acquired $24.0 million of cash, for a net cash acquired of $6.0 million. Cash provided by investing activities was partially offset by purchases property and equipment of $5.4 million and an increase in our restricted cash and cash equivalents of $1.1 million .


Cash used in investing activities and acquisitions was $7.8 million in the nine months ended March 26, 2010, primarily due to the purchases of property and equipment of $5.3 million and the acquisition of Copan Systems, Inc. of $2.0 million.


Financing Activities


Cash provided by financing activities was $1.1 million in the nine months ended March 25, 2011 , primarily due to proceeds from the issuance of stock under the employee stock purchase plan and stock options of $5.8 million , partially offset by repurchases of restricted stock of $0.9 million and the purchase of treasury stock of $3.9 million .


Cash provided by financing activities was $1.0 million in the nine months ended March 26, 2010, primarily due to proceeds from the sale of stock under the employee stock purchase plan and stock options of $1.8 million, partially offset by purchases of restricted stock retired to cover taxes of $0.8 million.


In February 2009, the Board of Directors authorized a share repurchase program of up to $40.0 million of our common stock. Under the program, we are able to purchase shares of common stock through open market transactions and privately negotiated purchases at prices deemed appropriate by management. During the nine months ended March 25, 2011 , we repurchased 505,100 shares of outstanding common stock for a total of $3.9 million which was paid in cash. There were no repurchases in the nine months ended March 26, 2010 .


We expect to continue to invest in the business including working capital, capital expenditures and operating expenses. We intend to fund these activities with our cash reserves and cash generated from operations, if any. Increases in operating expenses may not result in an increase in our revenue and our anticipated revenue may not be sufficient to support these increased expenditures. We anticipate that operating expenses and working capital will constitute a material use of our cash resources.


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Contractual Obligations and Commitments


The following are contractual obligations and commitments at March 25, 2011 , associated with lease obligations and contractual commitments (in thousands):


Contractual ObligationsTotalLess than 1 year1-3 years3-5 yearsMore than 5 yearsNotes Payable Obligations (1)$9,800$8,259$1,541$—$—Operating Lease Obligations22,9409,79310,9742,057116Purchase Commitments15,22415,224———Total$47,964$33,276$12,515$2,057$116(1)Amount reflects total anticipated cash payments, including anticipated interest payments.


As of March 25, 2011 , the net recorded tax liability for uncertain tax positions was $24.3 million, including interest and penalty. With respect to an uncertain tax position of one of our foreign subsidiaries, we expect a cash payment of $0.5 million within the next twelve months.  We cannot conclude on the range of cash payments that will be made within the next twelve months associated with our other uncertain tax positions.


Notes Payable


As part of the Acquisition of SGI Japan (see Note 4), the Company assumed the remaining balances of SGI Japan's note payable to various Japanese financial institutions. As of March 25, 2011, $9.6 million of notes payable is outstanding to financial institutions, of which $8.2 million is due within one-year.


Operating Leases


As of March 25, 2011 , we had total outstanding commitments on non-cancelable operating leases of $22.9 million , $11.1 million of which relate to our domestic leases. These leases are generally for terms of five to seven years and generally provide renewal options for terms of three to five additional years. The total outstanding commitments included $5.6 million, which relates to our leased facility in Japan, which was acquired as part of the SGI Japan acquisition. A significant portion of our domestic leases will expire on 2013. Our domestic leases include our headquarters in Fremont, CA.


We have total outstanding commitments of $11.9 million in our non-cancelable international operating leases. Of this total amount, $4.5 million relate to our operating lease in the Europe, Middle East, and Africa (“EMEA”) region, $1.7 million relates to our facilities in the Asia Pacific (“APAC”) region, and $5.6 million relates to our facilities in the Japan region. Our major facility leases in the EMEA region are generally for terms of four to nine years, and generally do not provide renewal options. Our major facility leases in the APAC region, except for Melbourne, Australia, are generally for terms of three to five years, and generally do not provide renewal options. We can renew our Melbourne, Australia lease for one additional period of five years. Our major facility leases in the Japan region will expire on 2012.


Purchase Commitments


From time to time, we issue blanket purchase orders to our contract manufacturers for the procurement of materials to be used for upcoming orders, particularly for those components that have long lead times. Blanket purchase orders vary in size depending on our projected requirements. If we do not consume these materials on a timely basis or if our relationship with one of our contract manufacturers was to terminate, we could experience an abnormal increase to our inventory carrying amount and related accounts payable.


In connection with supplier agreements, we agreed to purchase certain units of inventory and non-inventory through 2012. As of March 25, 2011 , there was a remaining commitment of approximately $15.2 million , of which the entire  amount is expected to be paid in the next 12 months.


Other than the contractual obligations and commitments described above, we have no significant unconditional purchase obligations or similar instruments. We are not a guarantor of any other entities' debt or other financial obligations.


Off Balance Sheet Arrangements


We have issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for VAT and other taxes, and to various other parties to support payments in advance of future delivery on goods and services. The majority of our financial guarantees have terms of one year or more. The maximum potential obligation under financial


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guarantees at March 25, 2011 was $5.6 million for which we have $5.1 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash and cash equivalents in the unaudited condensed consolidated balance sheets.


Additionally, we enter into standard indemnification agreements with our customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third-party to the extent any such claim alleges that our product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third-party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. We have not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of March 25, 2011 . As a result, we believe the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to such indemnifications as of March 25, 2011 .





Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements. We periodically evaluate our material estimates and judgments based on the terms of underlying agreements, the expected course of development, historical experience and other factors that we believe are reasonable under the circumstances. However, actual future results may vary from our estimates.


We believe that the accounting policies discussed under Part I, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended June 25, 2010 are significantly affected by critical accounting estimates and that they are both highly important to the portrayal of our financial condition and results and require difficult management judgments and assumptions about matters that are inherently uncertain. Certain of these significant accounting policies are considered to be critical accounting policies.


Our critical accounting policies and estimates are as follows:


|  |                     
|- | --------------------
|• | Revenue recognition;

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|• | Share-based compensation;

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|- | ----------------------
|• | Restructuring expense;

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|- | --------------------------------
|• | Allowance for doubtful accounts;

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|- | --------------------
|• | Inventory valuation;

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|- | --------------------------------
|• | Impairment of long-lived assets;

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|- | ----------------------------------------
|• | Fair value measurements and impairments;

|  |                      
|- | ---------------------
|• | Warranty reserve; and

|  |                             
|- | ----------------------------
|• | Accounting for income taxes;




There have been no significant changes in the Company's significant accounting policies for the nine months ended March 25, 2011 as compared to those discussed under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended June 25, 2010 , except for the changes in revenue recognition as a result of new accounting standards as described below.


Revenue Recognition .


We enter into sales contracts to deliver multiple products and/or services. A typical multiple-element arrangement includes product, customer support services and professional services.  We also sell software products as part of certain multiple-element arrangements.  In addition to selling multiple-element arrangements, we also sell certain products and services on a stand-alone basis.


Product revenue. We recognize revenue from sales of products, primarily hardware, when persuasive evidence of an arrangement exists, shipment has occurred and title has transferred, the sales price is fixed or determinable, and collection of


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the resulting receivable is reasonably assured. In customer arrangements where a formal acceptance of products or services is required by the customer, revenue is recognized upon meeting such acceptance criteria.


Service revenue . Service revenue includes customer support services, primarily hardware maintenance services, and professional services, which include consulting services and integration services of third-party products. Revenue from extended service contracts, that is not subject to deferral under our revenue recognition policy applicable to sales contracts entered into prior to fiscal year 2011 discussed below and are expressly priced separately from the hardware, is recognized ratably over the contract term, generally one to three years. Professional services are offered under time and material or fixed fee-based contracts or as part of multiple-element arrangements. Professional services revenue is recognized as services are performed.


Multiple-element arrangements . Our multiple-element arrangements include products, customer support services and/or professional services. Certain multiple-element arrangements include software products integrated with the hardware (“Hardware Appliance”) and we provide unspecified software updates and enhancements to the software through its service contracts. For arrangements which do not include Hardware Appliances and where services are included, we recognize revenue from the sale of products prior to the completion of services as product sales are not dependent on services to be functional.


In October 2009, the Financial Accounting Standards Board ("FASB") amended the Accounting Standards Codification (“ASC”) as summarized in Accounting Standards Update ("ASU") No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements , and ASU No. 2009-13, Revenue Recognition (Topic  605): Multiple-Deliverable Revenue Arrangements . ASU 2009-14 amends industry specific revenue accounting guidance for software and software related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product's essential functionality. ASU 2009-13 amends the accounting for multiple-element arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method. ASU 2009-13 also requires an entity to allocate revenue using the relative selling price method. The standard establishes a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on vendor-specific objective evidence ("VSOE"), third-party evidence ("TPE"), and the best estimate of selling price ("BESP").  If VSOE is available, it would be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used.


Effective June 26, 2010, we adopted the provisions of ASU 2009-13 and ASU 2009-14 for new and materially modified arrangements originating after June 25, 2010. The adoption of ASU 2009-13 and ASU 2009-14 was material to our financial results, increasing revenues by $25.5 million and $83.3 million and gross profit by $7.4 million  and $32.0 million , for the three and nine months ended March 25, 2011 , respectively. The impact was due to the recognition of revenue that would have been previously deferred for multiple-element arrangements which include hardware appliances or arrangements where the undelivered element is post contract customer support ("PCS") for which we were unable to establish VSOE of fair value of the element.  The new standard allows for deliverables for which revenue would have been previously deferred to be separated and recognized as delivered, rather than over the longest service delivery period as a single unit with other elements in the arrangement. We expect the adoption of ASU 2009-13 and ASU 2009-14 to be material to future periods; however, we cannot reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified arrangements in any given period.


For fiscal year 2011 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, such as products, software, customer support services, and or professional services, we allocate revenue to each element based on the aforementioned selling price hierarchy. In multiple element arrangements where software is essential to the functionality of our products, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then recognized as one unit of accounting using the guidance for recognizing software revenue, as amended.


We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.


We evaluate each deliverable in an arrangement to determine whether they represent separate units of accounting. The delivered item constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. If the arrangement includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are


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not met, the deliverable is combined with the undelivered elements and revenue recognition is determined for the combined unit as a single unit. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price.


We have not consistently established VSOE of fair value of any of its products or services. In addition, we have not established TPE as there are no similar or interchangeable competitor products or services in standalone sales to similarly situated customers. Therefore, revenue from these multiple-element arrangements are allocated based on the BESP. The objective of BESP is to determine the price at which we would transact a sale if a product or service were sold on a stand-alone basis. We determine BESP for product or service by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific market factors, competitive positioning, competitor actions, profit objectives and pricing practices. The determination of BESP is a formal process that includes review and approval by our management. In addition, we regularly review VSOE and TPE for our products and services, in addition to BESP.


For fiscal year 2010 and sales contracts entered into prior to fiscal year 2011, we recognize revenue pursuant to the previous guidance for multiple-element arrangements. For arrangements which do not include Hardware Appliances and where services are included, we recognize revenue from the sale of products prior to the completion of services as the services are not essential to the functionality of the products. For certain multiple-element arrangements, we deliver software products integrated with the Hardware Appliance and provide unspecified software updates and enhancements to the software through its PCS. For arrangements which include Hardware Appliances or arrangements where the undelivered element is PCS, we have not established VSOE of fair value of the element. Therefore, revenue and related cost of revenue from these arrangements are deferred and recognized ratably over the PCS period as combined product and service revenue in the unaudited condensed consolidated statements of operations.





Recent Accounting Pronouncements


See Note 3 to our unaudited condensed consolidated financial statements in this Form 10-Q for a description of recent accounting pronouncements, including our expected adoption dates and estimated effects on our results of operations, financial condition, and cash flows.





ITEM 3. Quantitative and Qualitative Disclosures About Market Risk


In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk for investments associated with interest rate movements, liquidity risks, credit risks, and foreign exchange market risk associated with currency rate movements on non-U.S. dollar denominated assets and liabilities. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, we do not anticipate material losses in these areas.


Investment Risk


The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash, cash equivalents, and investments in high credit quality, readily liquid securities, primarily U.S. treasuries and money market funds. Our exposure to market risks for changes in interest rates relates primarily to our investment portfolio. As of March 25, 2011 , our cash and cash equivalents of $128.7 million consisted primarily of cash, money market funds, and U.S. treasury bills. Due to the short term nature of our investment portfolio, we believe that the exposure of our principal to interest rate risk is minimal, although our future interest income is subject to reinvestment risk.


There has been significant deterioration and instability in the financial markets since 2008. The extraordinary disruption and readjustment in the financial markets exposes us to additional investment risk. The value and liquidity of the securities in which we invest could deteriorate rapidly and the issuers of such securities could be subject to credit rating downgrades. In light of the current market conditions and these additional risks, we actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated securities with relatively short maturities and do not invest in securities we believe involve a higher degree of risk. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated as there are circumstances outside of our control. We currently believe that the current credit market difficulties do not have a material impact on our investment portfolio. However, future degradation in credit market conditions could have a material adverse affect on our financial position.


As of March 25, 2011 , we are no longer exposed to market risks relating to our ARS as the investment portfolio have been sold in its entirety. During the quarter, the Company and its former investment advisor, Thomas Weisel Partners LLC ("TWP"), entered into a settlement agreement whereby the Company sold all of its ARS through TWP and received proceeds of


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approximately $6.5 million. At the time of the sale, the fair value of the remaining securities was approximately $6.2 million and the Company recorded a realized gain of $0.3 million during the three months ended March 25, 2011 , which is classified as other income in the unaudited condensed consolidated statements of operations. As a result of the sale, the Company no longer has any ARS in its investment portfolio as of March 25, 2011 .


Foreign Exchange Risk


As of March 25, 2011 and June 25, 2010 , foreign currency cash accounts totaled $64.4 million and $28.6 million, respectively (primarily in Euros, Japanese Yen, and British Pounds).


Foreign currency risks are associated with our cash and cash equivalents, investments, receivables, and payables denominated in foreign currencies. Fluctuations in exchange rates will result in foreign exchange gains and losses on these foreign currency assets and liabilities, which are included in other income, net in our unaudited consolidated statements of operations. Our exposure to foreign currency exchange rate risk relates to sales commitments, anticipated sales, purchases and other expenses, and assets and liabilities denominated in foreign currencies. For most currencies, we are a net receiver of the foreign currency and are adversely affected by a stronger U.S. dollar relative to the foreign currency.


At March 25, 2011 , we had no foreign currency forward contracts or option contracts.


Sensitivity Analysis


For purposes of specific risk analysis, we use a sensitivity analysis to determine the impact that market risk exposures may have on the fair values of financial instruments. The financial instruments included in the sensitivity analysis consist of all of our cash and cash equivalents.


To perform the sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments. Given the short term nature of our cash and cash equivalents, a sensitivity analysis was not performed as the risk of loss in fair value was deemed immaterial.


As of March 25, 2011 , we are no longer exposed to risk of loss in fair values or our ARS as the investment portfolio have been sold in its entirety.


For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $6.4 million change in the value of our financial instruments.


Interest Rate Risk


Our exposure to interest rate risk is related principally to our obligation on the notes payable and the risk of increases in market interest rates that increase future cash outflow of interest payments due on such obligation. A significant portion of our outstanding notes payable are due within one year and we believe that our risk exposure to changes in interest rates on notes payable due within one year is not significant. For the note payable due over one year, we expect that fair value changes and cash flows resulting from reasonable near-term changes in interest rates will be not be material to the financial statements.





Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures


Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The evaluation considered the procedures designed to ensure that the information included in reports we file under the Exchange Act, is recorded, processed, summarized and reported within the appropriate time periods and that information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 25, 2011 .


Changes in Internal Control over Financial Reporting


On March 9, 2011, we acquired SGI Japan which operated under its own set of systems and internal controls. We have not completed incorporating SGI Japan's processes into our systems and control environment as of March 25, 2011 . We believe that


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we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this change. There were no changes in the Company's internal control over financial reporting during the quarter ended March 25, 2011 , which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.


Inherent Limitation on the Effectiveness of Internal Controls


The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure  that such improvements will be sufficient to provide us with effective internal control over financial reporting.





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PART II - OTHER INFORMATION





ITEM 1. Legal Proceedings.


We are involved in various legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, and other matters. We do not know whether we will prevail in these matters nor can we assure that any remedy could be reached on commercially viable terms, if at all. Based on currently available information, we believe that we have meritorious defenses to these actions and that the resolution of these cases is not likely to have a material adverse effect on our business, financial position or future results of operations. We record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.


On May 1, 2007, Legacy SGI received a legal notice from counsel to Bharat Heavy Electricals Ltd. (“BHEL”), located in India, alleging delay in and failure to deliver products and technical problems with its hardware and software in relation to the establishment of a facility in Hyderabad. We assumed this claim in connection with our acquisition of Legacy SGI assets, and are currently engaged in arbitration. On January 21, 2008, BHEL filed its statement of claim against Silicon Graphics Systems (India) Pvt. Ltd. for a sum of Indian Rupee (“INR”) 78,478,200 ($1.7 million based on the conversion rate on March 25, 2011 ) plus interest and costs. On February 29, 2008, we filed our reply as well as a counter claim for a sum of INR 27,453,007 ($0.6 million based on the conversion rate on March 25, 2011 ) plus interest and costs. The proceeding has commenced and a hearing is scheduled for June 2011. We cannot currently predict the outcome of this dispute nor determine the amount or a reasonable range of potential loss, if any.


On December 3, 2009, we initiated an arbitration proceeding captioned Silicon Graphics Intl. Corp., f/k/a Rackable Systems, Inc. v. Thomas Weisel Partners Group, Inc., et al., FINRA Arb. No. 09-06849 , against its former investment advisor Thomas Weisel Partners LLC (“TWP”), as well as TWP's parent company Thomas Wiesel Partners Group, Inc., to remedy TWP's alleged mismanagement and wrongful advice pertaining to our investments in allegedly unsuitable and illiquid investments called “auction rate securities” (“ARS”). On February 4, 2011, the Company settled with TWP.  As part of the settlement, the Company sold all of its remaining ARS through TWP and received proceeds of approximately $6.5 million.  Each of the parties agreed to bear their own attorneys' fees and costs.








Item 1A. Risk Factors.


We have updated the risk factors appearing under the caption “Risks Relating to our Business and Industry” set forth in our Annual Report on Form 10-K for the year ended June 25, 2010. These updated risk factors are set forth below. We have designated with an asterisk (*) those risk factors that have changed substantively from those set forth in our Annual Report on Form 10-K.


Risks Related To Our Business and Industry


Our periodic operating results have fluctuated significantly in the past and will continue to fluctuate in the future, which could cause our stock price to decline.*


Our quarterly and annual periodic operating results have fluctuated significantly in the past, and we believe that they will continue to fluctuate in the future, due to a number of factors, many of which are beyond our control. We expect that our revenue, gross margin, and earnings per share will fluctuate on a periodic basis in future periods. If in future periods our operating results do not meet the expectations of investors or analysts who choose to follow our company, our stock price may fall. Factors that may affect our periodic operating results include the following:


|  |                                                                                               
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|• | fluctuations in the buying patterns and sizes of customer orders from one quarter to the next;

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|• | increased competition causing us to sell our products or services at decreasing margins;

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|• | location and timing requirements for the delivery of our products and services;

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|• | longer acceptance cycles of our products by certain customers;

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|• | addition of new customers or loss of existing customers, especially involving our largest customers;

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|• | gross margin obtained on the sales of products and services, especially to our largest customers;

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|• | write-off of excess and obsolete inventory;

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|• | impairment and shortening of the useful life of components from our suppliers;

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|• | unexpected changes in the price for, and the availability of, components from our suppliers;

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|• | our ability to enhance our products with new and better designs and functionality;

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|• | costs associated with obtaining components to satisfy customer demand;

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|• | productivity and growth of our sales force;

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|• | actions taken by our competitors, such as new product announcements or introductions or changes in pricing;

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|• | revenue and gross margin disparity among our lines of server product and storage product lines;

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|• | market acceptance of our newer products, such as Altix UV and our COPAN platforms;

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|• | technology regulatory compliance, certification and intellectual property issues associated with our products;

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|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | the payment of unexpected legal fees and potential damages or settlements resulting from protecting or defending our intellectual property or other matters;

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|• | the payment of significant damages or settlements resulting from faulty or malfunctioning products or the provision of services unsatisfactory to our customers;

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|- | --------------------------------------------------------
|• | the market downturn and delay in orders of our products;

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|- | ------------------------------------------------------------------------
|• | the departure and acquisition of key management and other personnel; and

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|- | -------------------------------------------------------------------------------------------------------------------------------------------
|• | general economic trends, including changes in information technology spending or geopolitical events such as war or incidents of terrorism.




We face intense competition from the leading enterprise computing companies in the world as well as from emerging companies. If we are unable to compete effectively, we might not be able to achieve sufficient market penetration, revenue growth or profitability.


The markets for compute server products and storage products are highly competitive. In addition to intensely competitive smaller companies, we face challenges from some of the most established companies in the computer industry, such as Dell Inc., Hewlett-Packard Company (“HP”), International Business Machines Corporation and Oracle Corporation in the computer server market. In the storage market, we compete primarily with EMC Corporation, HP, Hitachi Data Systems, Inc, and NetApp, Inc. These larger competitors have at least the following advantages over us:


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|• | substantially greater market presence and greater name recognition;

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|• | substantially greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources;

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|• | longer operating histories;

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|• | a broader offering of products and services;

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|• | more established relationships with customers, suppliers and other technology companies; and

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|• | the ability to acquire technologies or consolidate with other companies in the industry to compete more effectively.




Because these competitors may have greater financial strength than we do and are able to offer a more diversified bundle of products and services, they may have the ability to severely undercut the pricing of our products or provide additional products or servicing at little or no cost, which would make us less competitive or force us to reduce our average selling prices, negatively impacting our margins. In the past, we have had transactions where one or more competitors undercut our prices causing us to reduce our price, which negatively impacted our gross margin on that transaction and our overall gross margin. In addition, we have on occasion lost sales opportunities due to a competitor undercutting the pricing of our products or maintaining superior brand recognition. These competitors may be able to develop products that are superior to the commercially available components that we incorporate into our products, or may be able to offer products that provide significant price advantages over those we offer. For instance, a competitor could use its resources to develop proprietary motherboards with specifications and performance that are superior in comparison with the platforms that are currently available to the marketplace, which could give that competitor a distinct technological advantage. In addition, if our competitors' products become more accepted than our products, our competitive position will be impaired.


The intense competition we face in the sales of our products and services and general economic and business conditions can put pressure on us to change our prices. If our competitors offer deep discounts on certain products or services or develop products that the marketplace considers more valuable, we may need to lower prices or offer other favorable terms in order to compete successfully. Any such changes may reduce margins and could adversely affect operating results.


As the enterprise computing industry evolves, we expect to encounter additional competitors, including companies in


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adjacent technology businesses such as storage and networking infrastructure and management, companies providing technology that is complementary to ours in functionality, such as data center management software, contract manufacturers, and other emerging companies that may announce server product offerings. Moreover, our current and potential competitors, including companies with whom we currently have strategic alliances, may establish cooperative relationships among themselves or with other third parties. If this occurs, new competitors or alliances may emerge that could negatively impact our competitive position.


We intend to expand our operations and increase our expenditures in an effort to grow our business. If we are not able to manage this growth and expansion, or if our business does not grow as we expect, our operating results may suffer.


We intend to continue to grow our business by entering new markets, acquisitions, developing new product and service offerings and pursuing new customers. In connection with this growth, we expect that our annual operating expenses may increase over the next several years to the extent we expand our sales and marketing, research and development, manufacturing and production infrastructure, and our customer service and support efforts. Our failure to timely or efficiently expand operational and financial systems and to implement or maintain effective internal controls and procedures could result in additional operating inefficiencies that could increase our costs and expenses more than we had planned and might cause us to lose the ability to take advantage of market opportunities, enhance existing products, develop new products, satisfy customer requirements, respond to competitive pressures or otherwise execute our business plan. Additionally, if we do increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results could be negatively impacted.


If we acquire or invest in other companies, assets or technologies and we are not able to integrate them with our business, or we do not realize the anticipated financial and strategic goals for any of these existing or future transactions, our financial performance may be impaired.


If appropriate opportunities present themselves, as they have in the past, we may consider acquiring or making investments in companies, assets or technologies that we believe are strategic. We only have limited experience in doing so, and for any such company, asset or technology which we successfully acquire or invest in, we will be exposed to a number of risks, including:


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|• | we may find that the acquired company, asset or technology does not further our business strategy, that we overpaid for the company, asset or technology or that the economic conditions underlying our acquisition decision have changed;

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|• | we may have difficulty integrating the assets, technologies, operations or personnel of an acquired company, or retaining the key personnel of the acquired company;

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|• | our ongoing business and management's attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;

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|• | we may encounter difficulty entering and competing in new product or geographic markets or increased competition, including price competition or intellectual property litigation; and

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|• | we may experience significant problems or liabilities associated with product quality, technology and legal contingencies relating to the acquired business or technology, such as intellectual property or employment matters.




For example, in connection with our acquisition of Terrascale Technologies, Inc., we expended a great deal of effort and resources, but were unable to generate revenue, increase gross profit or contribute positive cash flow into our business, sufficient to realize our investment, causing us to exit this product line. This resulted in an impairment charge of $17.5 million during the year ended January 3, 2009. We have presented the results of this product line as discontinued operations in our consolidated financial statements.


If we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, existing stockholders might be diluted and earnings per share might decrease. In addition, acquisitions and investments may result in the incurrence of debt, large one-time write-offs, such as acquired in-process research and development costs and restructuring charges.


We rely on sales to U.S. government entities. A loss of contracts, a failure to obtain new contracts or a reduction of sales under existing contracts with the U.S. government could adversely affect our operating performance.


We expect to derive a significant portion of our revenue directly from U.S. government entities, research institutions funded by the U.S. government and third-parties that sell directly to the U.S. government. In addition, many of our scientific


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and research customers depend on U.S. government funding for their information technology budgets. As a result, a significant portion of our revenue depends on sales to or funded by the U.S. government such that a loss of a U.S. government contract or the failure to obtain new contracts could adversely affect our operating performance. Sales to or funded by the government present risks in addition to those involved in sales to commercial customers, including potential disruptions and delays due to changes in appropriation and spending patterns. Our government business is also highly sensitive to changes in the U.S. government's national and international priorities and budgeting. Changes in the continuing war on terrorism may affect funding for our programs or result in changes in government programs or spending priorities that may harm our business. In addition, the U.S. government can typically terminate or modify its contracts with us at any time for its convenience. Our U.S. government business is also subject to specific procurement regulations and a variety of other requirements. Failure to comply with these or other applicable regulations and requirements could lead to suspension or debarment from government contracting or subcontracting for a period of time. Any disruption or limitation in our ability to do business with the U.S. government or entities funded by the U.S. government would materially and adversely affect our revenue and operating results.


Prior to our acquisition of the Legacy SGI assets, sales to U.S. Government entities were not a significant part of our business, and we have limited experience in dealing with the U.S. government as a customer. In addition, we have not historically required government security clearances which are necessary in some cases to do business with the U.S. government, and have limited experience in obtaining or maintaining these security clearances for us or our employees. Failure to retain necessary security clearances could negatively impact our business with the U.S. Government.


We have extensive international operations, which subject us to additional business risks.*


A significant portion of our sales occur and are expected to occur in international jurisdictions, including countries outside of Europe, Middle East, Asia and Africa where we have limited operating experience. International operations involve inherent risks that we may not be able to control, and risks of which we may not be aware, including:


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|• | supporting multiple languages;

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|• | recruiting sales and technical support personnel internationally with the skills to design, manufacture, sell and support our products;

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|• | complying with governmental regulation of encryption technology and regulation of imports and exports, including obtaining required import or export approval for our products;

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|• | increased complexity and costs of managing international operations;

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|• | increased exposure to foreign currency exchange rate fluctuations;

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|• | commercial laws and business practices that favor local competition;

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|• | multiple, potentially conflicting, and changing governmental laws, regulations and practices, including differing export, import, tax, labor, anti-bribery and employment laws, including potential changes to the tax laws in Japan;

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|• | longer sales cycles and manufacturing lead times;

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|• | difficulties in collecting accounts receivable;

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|• | reduced or limited protection of intellectual property rights;

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|• | more complicated logistics and distribution arrangements; and

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|• | political and economic instability.




These factors, as well as international political instability may halt or hinder our ability to do business and may increase our costs. Various events, including the occurrence or threat of terrorist attacks, increased national security measures in the United States and other countries, and military action and armed conflicts, may suddenly increase international tensions. In addition, other international crises or concerns about these crises, such as potential pandemics or natural disasters, may have an adverse effect on our operations as well as the world economy generally and could adversely affect our business operations or the operations of our contract manufacturers and suppliers.  For example, our operations in Japan may be negatively affected by natural disasters, including earthquakes and tsunamis.Further, a lthough our operations to date have not been significantly affected by the Japanese earthquake in March 2011, the continuing instability of the power supplies in Japan may negatively affect our operations or those of our customers and suppliers in the future.


We maintain a program of insurance coverage for various types of property, casualty, business interruption and other risks. We place our insurance coverage with various carriers in numerous jurisdictions. However, there is a risk that one or more of our insurance providers may be unable to pay a claim. The types and amounts of insurance that we obtain vary from time to time and from location to location, depending on availability, cost, and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. Losses not covered by insurance may be substantial and may increase our expenses, which could harm our results of operations and


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financial condition.


We may experience foreign currency gains and losses.


We conduct a significant number of transactions in currencies other than the U.S. Dollar. Changes in the value of major foreign currencies, particularly the Euro, Japanese Yen, and British Pound relative to the U.S. Dollar can significantly affect revenues and our operating results. Our revenues and operating results are adversely affected when the dollar strengthens relative to other currencies and are positively affected when the dollar weakens. Our revenues and operating results in fiscal 2010 have been unfavorably affected by the recent strengthening U.S. Dollar relative to other major foreign currencies.


For the three and nine months ended March 25, 2011 , our international revenue was $50.4 million and $153.3 million . As of March 25, 2011 , the balance in our foreign currency cash accounts is $64.4 million. As of March 25, 2011 , we had no foreign currency forward contracts or option contracts. As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products more expensive and, thus, not competitively priced in foreign markets. Additionally, a decrease in the value of the United States dollar relative to foreign currencies could increase our operating costs in foreign locations. In the future, a larger portion of our international revenue may be denominated in foreign currencies, which will subject us to additional risks associated with fluctuations in those foreign currencies. In addition, we may be unable to successfully hedge against any such fluctuations.


Our international sales may require export licenses and expose us to additional risks.


Our sales to customers outside the United States are subject to U.S. export regulations. Under these regulations, sales of many of our high-end products require clearance and export licenses from the U.S. Department of Commerce. Our international sales would be adversely affected if these regulations were tightened, or if they are not modified over time to reflect the increasing performance of our products. Delay or denial in the granting of any required licenses could make it more difficult to make sales to non-U.S. customers. In addition, we could be subject to regulations, fines and penalties for violations of import and export regulations if we were found in violation of these regulations. End users could circumvent end-user documentation requirements that are intended to aid in our compliance with export regulations, potentially causing us to violate these regulations. These violations could result in penalties, including prohibitions on us from exporting our products to one or more countries, and could materially harm our business, including our sales to the U.S. government.


Our sales cycle requires us to expend a significant amount of resources, and could have an adverse effect on the amount, timing and predictability of future revenue.


The sales cycle of our products, beginning from our first customer contact to closing of the sale, often ranges from three to six months. We may expend significant resources during the sales cycle and ultimately fail to close the sale. The success of our product sales process is subject to factors, over which we have little or no control, including:


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|• | the timing of our customers' budget cycles and approval processes;

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|• | our customers' existing use of, or willingness to adopt, open standard server products, or to replace their existing servers or expand their processing capacity with our products;

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|• | the announcement or introduction of competing products; and

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|• | established relationships between our competitors and our potential customers.




We expend substantial time, effort and money educating our current and prospective customers as to the value of our products. Even if we are successful in persuading lower-level decision makers within our customers' organizations of the benefits of our products, senior management might nonetheless elect not to buy our products after months of sales efforts by our employees or resellers. If we were unsuccessful in closing sales, after expending significant resources, our revenue and operating expenses will be adversely affected.


We rely primarily on our direct sales force to generate revenue, and may be unable to hire additional qualified sales personnel in a timely manner or retain our existing sales representatives.


To date, we have relied primarily on our direct sales force to sell our products in the United States. Because we are looking to expand our customer base and grow our sales to existing customers, we will need to continue to hire qualified sales personnel, both in the United States and abroad, if we are to achieve our business objectives. The competition for qualified sales personnel in our industry is very intense. If we are unable to hire, train, deploy and manage qualified sales personnel in a timely manner, our ability to grow our business will be impaired. For example, in the past it has taken us up to six months to hire a qualified sales executive and it may take a newly-hired sales executive up to nine months after hiring to become productive, resulting in aggregate lag time between the commencements of the search to productivity, in excess of one year. In addition, if we are unable to retain our existing sales personnel, or if our sales personal are ineffective, our ability to maintain or


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grow our current level of revenue will be adversely affected. In addition, a large percentage of our revenue has been historically generated from a small number of customers. If we are unable to retain the sales personnel who are responsible for those customer accounts, our business could be negatively impacted.


We are continuing to develop and execute upon a channel strategy to generate additional sales and revenue, and the failure to successfully expand channel sales might affect our ability to sustain revenue growth and may harm our business and operations.


An increasing portion of our sales strategy is to develop our sales efforts through the use of resellers and other third parties to sell our systems. We may not be successful in building or expanding relationships with these third parties. Further, even if we do develop and expand these relationships, they may conflict with our direct sales efforts in some territories. Ineffective marketing of our products by our resellers or disruptions in our distribution channels could lead to decreased sales or slower than expected growth in revenue and might harm our business and operations.


We have been substantially dependent on a concentrated number of customers that purchase in large quantities. If we are unable to maintain or replace our relationships with concentrated customers and/or diversify our customer base, our revenue may fluctuate and our growth may be limited.*


Historically, a significant portion of our revenue has come from a limited number of customers. There can be no guarantee that we will be able to sustain our revenue levels from this type of customer. For the three and nine months ended March 25, 2011 , our top five customers accounted for approximately 36% of our total revenues.  For the three months ended March 25, 2011 , Amazon and the U.S. Government accounted for 12% and 10% of our total revenues, respectively. For the nine months ended March 25, 2011 , Amazon accounted for 12% of our total revenues. We expect a limited number of customers to continue to account for a significant portion of our revenues for the foreseeable future. This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or reduction of business from one or a combination of our significant customers could materially adversely affect our revenues, financial condition and results of operations.


Our customers require a high degree of reliability in our products and services, and if we cannot meet their expectations our relationships with our customers could be damaged and demand for our products and services will decline.


Because our customers rely on our products and services for their enterprise or mission critical applications, any failure to provide high quality products and reliable services, whether caused by our own failure or failures by our suppliers or contract manufacturers, could damage our reputation and reduce demand for our products and services. Some of our products, such as our ICE Cube TM line, are particularly complex and carry a higher per unit price. A failure of products in our ICE Cube line would therefore potentially be more costly to us, with the risk and potential cost to us increasing proportionately with the number of products we sell in this line. Most of our customers use our systems for applications that are critical to their organization; as a result system reliability is critical to the success of our products. In addition, delays in our ability to fill product orders as a result of quality control issues, such as an increase in failure rates or the rate of product returns under warranty, may negatively impact our relationships with our customers and harm our revenue and growth.


Our business depends on decisions by potential customers to adopt our modular, open standard-based products and to replace their legacy server systems with our products, and they may be reluctant to do so, which would limit our growth.


Our business depends on companies moving away from large proprietary RISC/UNIX servers to standardized servers that utilize commercially available x86 processor architectures and can deploy a variety of operating systems, including Linux and Microsoft Windows. Excluding sales to Microsoft Corporation, we believe that a majority of the server systems that we sold in 2009, 2008, and 2007 ran on the Linux ® operating system. Products based on the Linux operating system and sold by other software vendors have been the subject of intellectual property infringement litigation.


Legal actions taken by The SCO Group, Inc. (“SCO”) against IBM in 2003 and Novell, Inc. (“Novell”) in 2004 alleging intellectual property infringement and disputing the ownership of core UNIX ® copyrights in code that allegedly is used in Linux are ongoing. The litigation involving SCO's claim against IBM that Linux is an unauthorized derivative work of the UNIX operating system has been stayed due to SCO's bankruptcy filing. On March 30, 2010 in the Novell litigation, a jury returned a verdict in favor of Novell finding that Novell owns the UNIX copyrights. SCO has appealed the verdict to the U.S. Court of Appeals for the Tenth Circuit. If SCO's appeal is ultimately successful, SCO could obtain a ruling that users or distributors of Linux must pay royalties to SCO or others, which could impede broader Linux adoption and could materially harm our ability to sell our products based on the Linux operating system.


In addition, Microsoft has publicly claimed that Linux infringes 235 or more of Microsoft's patents and has entered into


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transactions with Novell, Inc. and other Linux distributors under which the parties reportedly agree, among other things, not to sue each other's customers for potential patent infringements related to Linux. It is possible that a party (including Microsoft) could prove a claim for proprietary rights in the Linux operating system or other programs developed and distributed under the GNU General Public License or other open source software licenses. In addition, the GNU General Public License has been, and may be in the future, a subject of litigation, and it is possible that a court could hold these licenses to be unenforceable in that litigation. Any ruling by a court that the Linux operating system or significant portions of it may not be copied, modified or distributed subject only to the minimal restrictions contained in these licenses, that users or distributors of Linux must pay royalties to Microsoft or others or that these licenses are not enforceable could also impede broader Linux adoption and materially harm our ability to sell our products based on the Linux operating system. Further, because potential customers have often invested significant capital and other resources in existing systems, many of which run mission-critical applications, customers may be hesitant to make dramatic changes to their data center systems. The failure of our customers and potential customers to replace their legacy server systems and adopt open standard-based modular technologies could have a material adverse impact on our ability to maintain or generate additional revenue.


Our products have incorporated or have been dependent upon, open standards, commoditized components and materials that we obtain in spot markets, and, as a result, our cost structure and our ability to respond in a timely manner to customer demand are sensitive to volatility of the market prices for these components and materials.


A significant portion of our cost of revenue is directly related to the pricing of commoditized materials and components utilized in the manufacture of our products, such as memory, hard drives, central processing units (“CPUs”), or power supplies. As part of our procurement model, we generally do not enter into long-term supply contracts for these materials and components, but instead, purchase these materials and components in a competitive bid purchase order environment with suppliers or on the open market at spot prices. As a result, our cost structure is affected by the availability and price volatility in the marketplace for these components and materials, including new versions of hard drives and CPUs that are introduced by our suppliers. This volatility makes it difficult to predict expense levels and operating results and may cause them to fluctuate significantly. In addition, if we are successful in growing our business, we may not be able to continue to procure components solely on the spot market, which would require us to enter into contracts with component suppliers to obtain these components.


In addition, because our procurement model involves our ability to maintain low inventory and to acquire materials and components as needed, and because we do not enter into long-term supply contracts for these materials and components, our ability to effectively and efficiently respond to customer orders may be constrained by the then-current availability or the terms and pricing of these materials and components. Our industry has experienced component shortages and delivery delays in the past, and in the future we may experience shortages or delays of critical components as a result of strong demand in the industry or other factors. For example, occasionally we may experience a shortage of, or a delay in receiving, certain components as a result of strong demand, capacity constraints, supplier financial weaknesses, inability of suppliers to borrow funds in the credit markets, disputes with suppliers (some of whom are also customers), disruptions in the operations of component suppliers, other problems experienced by suppliers or problems faced during the transition to new suppliers.


If shortages or delays occur, the price of these components may increase, we may be exposed to quality issues or the components may not be available at all. We may therefore not be able to secure enough components at reasonable prices or of acceptable quality to build products or provide services in a timely manner in the quantities or according to the specifications needed. Accordingly, our revenue and gross margin could suffer as we could lose time-sensitive sales, incur additional freight costs or be unable to pass on price increases to our customers. If we cannot adequately address supply issues, we might have to re-engineer some products or service offerings, resulting in further costs and delays.


In order to secure components for the provision of products or services, at times we may enter into non-cancelable commitments with vendors. In addition, we may purchase components strategically in advance of demand to take advantage of favorable pricing or to address concerns about the availability of future components. If we fail to anticipate customer demand properly, a temporary oversupply could result in excess or obsolete components, which could adversely affect our gross margin. This could increase our costs and decrease our gross margin. In addition, we compete in an industry that is characterized by rapid technological advances in hardware with frequent introduction of new products. New product introductions provide risks in predicting customer demand for the future products as well as the transition from existing products. If we do not make an effective transition from existing products to future products, an oversupply could result in excess components. For example, we recorded a $10.6 million expense related to the write down of excess and obsolete inventory during fiscal year 2010, due in large part to shifts in customer demand driven by transitions to new product offerings. As another example, DRAM can also represent a significant portion of our cost of revenue, and both the price and availability of various kinds of DRAM are subject to substantial volatility in the spot market. In addition, if any of our suppliers of CPUs, such as Intel or AMD, were to increase the costs to us for components we use, we would either pass these price increases on to our customers, which could cause us to lose business from these customers, or we would need to absorb these price increases, which would cause our margins to decrease, either of which could adversely affect our business and financial results.


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If we fail to maintain or expand our relationships with our suppliers, in some cases single-source suppliers, we may not have adequate access to new or key technology necessary for our products, and, as a result, our ability to deliver leading-edge products may be impaired.


In addition to the technologies we develop, our suppliers develop product innovations at our direction that are requested by our customers. In many cases, we retain the ownership of the intellectual property developed by these suppliers. In addition, we rely heavily on our component suppliers, such as Intel and AMD, to provide us with leading-edge components. If we are not able to maintain or expand our relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to deliver leading-edge products may be impaired and we could be required to incur additional research and development expenses.


We have historically relied on contract manufacturers to manufacture our products, and our failure to successfully manage our relationships with these contract manufacturers could impair our ability to deliver our systems in a manner consistent with required volumes or delivery schedules, which could damage our relationships with our customers and decrease our revenue.


We have historically relied on a very small number of contract manufacturers to assemble and test our products. None of these third-party contract manufacturers are obligated to perform services or supply products to us for any specific period, or in any specific quantities, except as may be provided in a particular purchase order. For example, we design custom silicon chips for application specific integrated circuits (ASIC), but rely on a third party to manufacture the ASICs for us. None of our contract manufacturers has provided contractual assurances to us that adequate capacity will be available to us to meet future demand for our products. If our contract manufacturers are not able to maintain our high standards of quality, are not able to increase capacity as needed, or are forced to shut down a factory, our ability to deliver quality products to our customers on a timely basis may decline, which would damage our relationships with customers, decrease our revenue and negatively impact our growth.


If our cost cutting measures are not successful, we may become less competitive.


A variety of factors could prevent us from achieving our goal of better aligning our product and service offerings and cost structure with customer needs in the current business environment. We are currently focused on reducing our operating expenses, reducing total costs in procurement, product design, transformation, and simplifying our structure. For example, we may experience delays in the anticipated timing of activities related to our cost savings plans and higher than expected or unanticipated costs to implement the plans. As a result, we may not achieve our expected cost savings in the time anticipated, or at all. In such case, our results of operations and profitability may be negatively impacted, making us less competitive and potentially causing us to lose industry unit share.


We may fail to achieve our financial forecasts.


Our revenues are difficult to forecast and our quarterly and annual operating results can fluctuate substantially. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of all proposals and estimate when a customer will make a purchase decision and the dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. Our pipeline estimates can prove to be unreliable both in a particular quarter and over a longer period of time, in part because the “conversion rate” or “closure rate” of the pipeline into contracts can be very difficult to estimate. A contraction in the conversion rate, or in the pipeline itself, could cause us to plan or budget incorrectly and adversely affect our business or results of operations.


In particular, a slowdown in IT spending or economic conditions generally can unexpectedly reduce the conversion rate in particular periods as purchasing decisions are delayed, reduced in amount or canceled. The conversion rate can also be affected by the tendency of some of our customers to wait until the end of a fiscal period in the hope of obtaining more favorable terms, which can also impede our ability to negotiate and execute these contracts in a timely manner. In addition, for newly acquired companies, we have limited ability to predict how their pipelines will convert into sales or revenues for one or two quarters following the acquisition and their conversion rate post-acquisition may be quite different from their historical conversion rate.


If we are not able to retain and attract adequate qualified personnel, including key executive, managerial, technical, finance, marketing and sales personnel, we may not be able to execute on our business strategy.


Our future success depends in large part upon the continued service and enhancement of our executive, managerial, technical, finance, marketing and sales employees. Changes in management can be disruptive within a company, which could negatively affect our operations, our culture and our strategic direction. Our employees may terminate their employment with us at any time. Our U.S. employees are “at will,” while outside of the U.S., notice or severance may be required if we wish to


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terminate an employee. The failure of our management team to seamlessly manage employee transitions, or the loss of services of any of these executives or of one or more other members of our executive management or sales team or other key employees could seriously harm our business. Competition for qualified executives is intense and if we are unable to continue expanding our management team, or successfully integrate new additions to our management team in a manner that enables us to scale our business and operations effectively, our ability to operate effectively and efficiently could be limited or negatively impacted.


Additionally, to help attract, retain, and motivate qualified employees, we use share-based incentive awards such as employee stock options and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations.


We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our results of operations.


In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this report. In addition, as discussed in Note 25 to the unaudited condensed consolidated financial statements in the Form 10-Q, we make certain estimates, including decisions related to provisions for legal proceedings and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our results of operations, and we may be required to restate our financial results for prior periods which could cause our stock price to decline.


Maintaining and improving our financial controls, particularly in light of the requirements of being a public company, may strain our resources and divert management's attention.


We are subject to the reporting requirements of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder (the “Exchange Act”) and The NASDAQ Stock Market Rules. The requirements of these rules and regulations have increased our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources.


The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. This can be difficult to do. In particular, we acquired substantially all the assets of Legacy SGI and went through the process of integrating and harmonizing Legacy SGI financial reporting and information technology systems, including internal control over financial reporting, with our own. As a result of this and similar activities, management's attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. We may not be able to meet the requirements needed to prevent additional material weaknesses. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Select Market.


If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.*


Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and effectively prevent fraud. As a publicly traded company we must maintain effective disclosure controls and procedures and internal control over financial reporting. This can be difficult to do. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that:


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|• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

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|• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

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|• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such


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that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.


Even after corrective actions are implemented, the effectiveness of our controls and procedures may be limited by a variety of risks including:


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|• | faulty human judgment and simple errors, omissions or mistakes;

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|• | collusion of two or more people;

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|• | inappropriate management override of procedures; and

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|• | the risk that enhanced controls and procedures may still not be adequate to assure timely and reliable financial information




A failure to have effective internal controls and procedures for financial reporting in place could result in a restatement of our financial statements, as it did in our Form 10-Q for the quarterly period ended March 29, 2008, or impact our ability to accurately report financial information on a timely basis, which could adversely affect our stock price.


Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.


We are subject to income taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory, services, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. For example, we have been assessed tax and interest by the Canada Revenue Agency (CRA) in connection with excess research credits claimed by our Canadian subsidiaries in prior periods. The assessment has not been paid because the CRA has not yet accepted our claim that the assessment should be reduced due to overstatement of taxable income of our Canadian subsidiaries during these periods. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows.


In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process.


Unsuccessful deployment of new transaction processing applications and other systems integration issues could disrupt our internal operations and any such disruption could reduce our expected revenue, increase our expenses, and damage our reputation.


Portions of our IT infrastructure may experience interruptions, delays or cessations of service or produce errors in connection with systems integration and implementation of new transaction processing applications, including accounting, manufacturing and sales system. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive to remediate. Such disruptions could adversely impact our ability to fulfill orders and negatively impact our business or interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected us in the past, and in the future could adversely affect our financial results, public disclosures and reputation.


Business disruptions could affect our operating results.*


A significant portion of our research and development activities and certain other critical business operations is concentrated in a few geographic areas. We are a highly automated business and a disruption or failure of our systems could cause delays in completing sales and providing services. A major earthquake, fire or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be materially and adversely affected.  For example, our operations in Japan may be negatively affected by earthquakes and other natural disasters, as well as potential power supply disruptions following the March 2011 earthquake and tsunami.


Unstable market and economic conditions may have serious adverse consequences on our business.


Our general business strategy may be adversely affected by the current economic downturn and volatile business environment and continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not continue to improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. We believe we are well positioned with significant capital resources to meet our current working capital and


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capital expenditure requirements. However, a further prolonged or profound economic downturn may result in adverse changes to demand for our products, or our customers' ability to pay for our products, which would harm our operating results. There is also a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which would directly affect our ability to attain our operating goals on schedule and on budget. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our financial performance and stock price and could require us to change our business plans.


If we are unable to protect our intellectual property adequately, we may not be able to compete effectively.


Our intellectual property is critical to our success and our ability to compete. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology. Unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology despite our efforts to protect our intellectual property. In addition, we license our technology and intellectual property to third parties, including in some cases, our competitors, which could under some circumstances make our patent rights more difficult enforce. Third parties could also obtain licenses to some of our intellectual property as a consequence of a merger or acquisition. Also, our participation in standard setting organizations or industry initiatives may require us to license our patents to other companies that adopt certain standards or specifications. As a result of such licensing, our patents might not be enforceable against others who might otherwise be infringing those patents and the value of our intellectual property may be impaired.


However, litigation is inherently uncertain, and there is no assurance that any litigation we initiate will have a successful outcome. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as the laws of the United States. Any claims or litigation that we have initiated or that we may initiate in the future to protect our proprietary technology could be time consuming and expensive and divert the attention of our technical and management resources whether or not the claims or litigation are decided in our favor. Enforcing our rights could subject us to claims that the intellectual property right is invalid, is otherwise not enforceable, or is licensed to the party against whom we are asserting a claim. Also, assertion of our intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own or assert other claims against us, which could harm our business.


We currently have numerous patents issued and a number of patent applications pending in the United States and other countries. These patents may be limited in value in asserting our intellectual property rights against more established companies in the computer technology sector that have sizeable patent portfolios and greater capital resources. In addition, patents may not be issued from these patent applications, and even if patents are issued, they may not benefit us or give us adequate protection from competing products. For example, issued patents might be circumvented or challenged, and could be declared invalid or unenforceable. Moreover, if other companies develop unpatented proprietary technology similar to ours or competing technologies, our competitive position will be weakened.


If we are found to have violated the intellectual property rights of others, we could be required to indemnify our customers, resellers or suppliers, redesign our products, pay significant royalties and enter into license agreements with third parties.


Our industry is characterized by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. As we continue our business, expand our product lines and our product functionality, and expand into new jurisdictions around the world, third parties may assert that our technology or products violate their intellectual property rights. Because of technological changes and the extent of issued patents in our industry, it is possible certain components of our products and business methods may unknowingly infringe existing patents of others. Any claim, regardless of its merits, could be expensive and time consuming to defend against. It would also divert the attention of our technical and management resources. Successful intellectual property claims against us could result in significant financial liability, impair our ability to compete effectively, or prevent us from operating our business or portions of our business. In addition, resolution of claims may require us to redesign our technology, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights, and to indemnify our customers, resellers or suppliers. Any of these events could result in unexpected expenses, negatively affect our competitive position and materially harm our business, financial condition and results of operations.


Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our products.


We incorporate open source software into our products. Open source software is made available to us and to the public by its authors or other third parties under licenses that impose certain obligations on licensees in the event those licensees re-distribute or make derivative works of the open source software. The terms of many open source licenses have not been


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interpreted by United States or other courts, and these licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In this event, we could be required to seek licenses from third parties in order to continue offering our products, to make generally available, in source code form, proprietary code that links to certain open source modules, to re-engineer our products, or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which might harm our business, operating results and financial condition.


Adverse litigation results could affect our business.


We are subject to various legal proceedings. Litigation can be lengthy, expensive and disruptive to our operations, and results cannot be predicted with certainty. An adverse decision could result in monetary damages or injunctive relief that could affect our business, operating results or financial condition. Additional information regarding certain of the lawsuits we are involved in is discussed under Part II, Item 1- "Legal Proceedings" of the Quarterly Report on Form 10-Q.


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Risks Related to Owning Our Stock


Our stock price in the past has been volatile, and may continue to be volatile or may decline regardless of our operating performance, and investors may not be able to resell shares at or above the price at which they purchased the shares.


Our stock has been publicly traded for a relatively short period of time, having first begun trading in June 2005. During that time our stock price has fluctuated significantly, from a high of approximately $56.00 per share to a low of approximately $3.42 per share. At times the stock price has changed very quickly. During the three months period ended March 25, 2011 , our stock price has fluctuated from a high of approximately $19.92 to a low of approximately $8.77. If investors purchase shares of our common stock, they may not be able to resell those shares at or above the price at which they purchase them. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control including:


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|• | price and volume fluctuations in the overall stock market;

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|• | purchases of shares of our common stock pursuant to our share repurchase program;

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|• | the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

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|• | actual or anticipated fluctuations in our operating results;

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|• | changes in operating performance and stock market valuations of other technology companies generally, or those that sell enterprise computing products in particular;

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|• | changes in financial estimates by any securities analysts who follow our company, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock;

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|• | ratings downgrades by any securities analysts who follow our company;

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|• | the public's response to our press releases or other public announcements, including our filings with the SEC;

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|• | announcements by us or our competitors of significant technical innovations, customer wins or losses, acquisitions, strategic partnerships, joint ventures or capital commitments;

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|• | introduction of technologies or product enhancements that reduce the need for our products;

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|• | market conditions or trends in our industry or the economy as a whole;

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|• | the loss of one or more key customers;

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|• | the loss of key personnel;

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|• | the development and sustainability of an active trading market for our common stock;

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|• | lawsuits threatened or filed against us;

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|• | future sales of our common stock by our officers, directors and significant stockholders; and

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|• | other events or factors, including those resulting from war, incidents of terrorism or responses to these events.




In addition, the stock markets, and in particular the NASDAQ Stock Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. We are currently involved in securities litigation, and could become involved in additional securities litigation in the future, either of which could have substantial costs and divert resources and the attention of management from our business. For additional information regarding our securities litigation, please see the section of this report titled “Legal Proceedings.”


Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.


Some provisions in our certificate of incorporation and bylaws may deter third parties from acquiring us.


Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:


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|• | limitations on persons authorized to call a special meeting of stockholders;

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|• | our stockholders may take action only at a meeting of stockholders and not by written consent;

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|• | our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and

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|• | advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors


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of their choosing and cause us to take other corporate actions they desire.


We do not expect to pay any cash dividends for the foreseeable future.


We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


None.





Item 3. Defaults Upon Senior Securities.


None.





Item 4. Reserved.





Item 5. Other Information.


None.








Item 6. Exhibits.





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EXHIBIT INDEX ExhibitNumberExhibit DescriptionIncorporated by ReferenceFiling DateFiledHerewithFormEx. No.File No.2.1Asset Acquisition Agreement, dated December 23, 2002, by and between GNJ, Inc. (f.k.a. Rackable Systems, Inc.) and RegistrantS-12.1333-1225762/4/20052.2Share Purchase Agreement dated as of August 29, 2006, by and among Rackable Systems, Inc., Rackable Systems Canada Acquisition ULC, Terrascale Technologies Inc. and the other parties identified on Schedule A thereto8-K2.1000-513338/30/20062.3Asset Purchase Agreement dated as of March 31, 2009, by and among Silicon Graphics, Inc., the subsidiaries of Silicon Graphics, Inc. listed on Schedule I thereto, and Rackable Systems, Inc.8-K2.1000-513334/1/20092.4Amendment to Asset Purchase Agreement dated as of March 31, 2009, by and among Silicon Graphics, Inc., the subsidiaries of Silicon Graphics, Inc. listed on Schedule I thereto, and Rackable Systems, Inc., dated as of April 30, 2009.8-K2.1000-513335/5/20092.5Secured Creditor Asset Purchase Agreement dated as of February 23, 2010, by and between Silicon Valley Bank and Silicon Graphics International Corp.8-K2.5000-513333/1/20102.6Stock Purchase Agreement dated as of March 8, 2011, by and among SGI Japan, Ltd., Silicon Graphics World Trade B.V., NEC SOFT, LTD., SONY CORPORATION, Morgan Stanley MUFG Securities Co., Ltd., Nomura Securities Co., Ltd., JAFCO V2 Venture Capital Investment Limited Partnership, JAFCO V2-R Venture Capital Investment Limited Partnership, SOFTBANK Media Marketing Holdings Corp., NIHON SGI TRUST EIGHT and NEC CORPORATION as the Stockholders' Representative8-K2.1000-513333/9/20113.1Amended and Restated Certificate of Incorporation10-Q3.1000-513338/12/20053.2Amended and Restated Bylaws8-K3.2000-513333/7/20083.3Certificate of Ownership and Merger8-K3.3000-513335/21/20094.1Reference is made to Exhibits 3.1, 3.2 and 3.34.2Form of Specimen Stock Certificate8-K4.2000-513335/21/200931.2Certification required by Rule 13a-14(a) or Rule15d-14(a).X31.2Certification required by Rule 13a-14(a) or Rule15d-14(a).X32.1Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)X








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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





SILICON GRAPHICS INTERNATIONAL CORP.By:/s/    JAMESD. WHEATJames D. WheatChief Financial Officer


Dated: May 4, 2011