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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|/x/ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|--- | -------------------------------------------------------------------------------------

For the fiscal year ended June 30, 2001.

|/ / | 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 1-10441

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SILICON GRAPHICS, INC.(Exact name of registrant as specified in its charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

94-2789662(I.R.S. Employer
Identification Number)


1600 Amphitheatre Parkway, Mountain View, California 94043-1351(Address of principal executive offices and zip code)

Registrant's
telephone number, including area code:(650) 960-1980

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

Title of each class

Name of each exchange
on which registered:Common Stock, $0.001 par value

New York Stock Exchange51/4% Senior Convertible Notes

New York Stock Exchange


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

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

The
aggregate market value of the registrant's voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on
August 31, 2001 on the New York Stock Exchange as reported in The Wall Street Journal, was approximately $64 million. Shares of voting stock held by each executive officer and director
and by each person who owns 5% or more of any class of registrant's voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As
of August 31, 2001, the registrant had outstanding 192,217,995 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for registrant's Annual Meeting of Stockholders to be held November 29, 2001 are incorporated by reference into
Part III of this Report on Form 10-K.

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PART I

This Form 10-K includes forward-looking statements regarding our business, objectives, financial condition and future performance. These
forward-looking statements include, among others, statements relating to expected levels of revenue, gross margin, operating expense, and future profitability, our business transition objectives,
headcount reductions and the expected impact on our business of legal proceedings and government regulatory actions. We have based these forward-looking statements on our current expectations about
future events. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions.

These
forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking
statements. Such risks and uncertainties include, among other things: adverse changes in general economic or business conditions; adverse changes in the specific markets for our products, including
expected rates of growth and decline in our current markets; ability to achieve profitable operations; adverse business conditions; changes in customer order patterns; the impact of employee attrition
rates; heightened competition, reflecting rapid technological advances and constantly improving price/performance, which may result in significant discounting and lower gross profit margins; continued
success in technological advancements and new product introduction, including timely development and successful introduction of strategic products for specific markets; inability to effectively
implement our visual workstation and server strategy, including the development of appropriate distribution, marketing and customer support models; risks related to dependence on our partners and
suppliers; risks related to foreign operations (including the downturn of economic trends, unfavorable currency movements, and export compliance issues); risks associated with implementation of our
new business practices, processes and information systems; litigation involving export compliance, intellectual property or other issues; and other factors including those listed under the heading
"Risks That Affect Our Business."

We
undertake no obligation to publicly update or revise any forward-looking statements, whether changes occur as a result of new information, future events or otherwise. The matters
addressed in this discussion, with the exception of the historical information presented, are forward-looking statements involving risks and uncertainties, including business transition and other
risks discussed under the heading "Risks That Affect Our Business" and elsewhere in this report. Our actual results may differ significantly from the results discussed in the forward-looking
statements.

The
following tables and discussion present certain financial information on a comparative basis. During the third and fourth quarters of fiscal 2000, respectively, we sold our
Cray® product line and distributed our remaining interest MIPS Technologies, Inc. ("MTI") through a spin-off. We believe it
more relevant if certain current fiscal year results (revenue, gross margin and operating expenses other than restructuring activity) are compared with pro forma fiscal 2000 and 1999 results. The pro
forma results for the twelve-month periods of fiscal 2000 and 1999 used throughout this discussion are adjusted to exclude the results of operations of the Cray product line and MTI.

ITEM 1. BUSINESS

General

SGI is a leading provider of high-performance computing, complex data management and visualization solutions. SGI products, services, and solutions
enable technical and creative users to gain strategic and competitive advantages. We focus on five primary market segmentsmanufacturing, science, government and defense, media, and
energy.

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Products

Most SGI computer systems are designed to use MIPS® RISC processors and our IRIX® operating system, which is an enhanced,
real-time version of the UNIX® operating system. We also offer products and solutions based on the Intel® processor architecture and the Linux®
operating system.

Servers

SGI Origin 3000The SGI Origin 3000 series of high-performance servers
builds on the robust SGI NUMA architecture and IRIX operating system that has made the award-winning SGI Origin family of servers the most modular and scalable in the industry. The SGI Origin 3000
series delivers flexibility, resiliency, investment protection, and performance at breakthrough levels.

With
SGI NUMAflexa revolutionary snap-together server system concept that allows you to configure and reconfigure systems brick by
brickyou can easily construct small to very large systems from a common set of building blocks. Taking modularity a step further, you can scale CPU, storage, and I/O
components independently within each system. This enables the system to meet the exact demands of technical and creative user communities, working to provide them with the most advanced computational
tools.

SGI Origin 200The SGI Origin 200 server is a MIPS processor and IRIX operating system based deskside server employing from
one to four processors with PCI I/O. For customers with maximum I/O needs, the SGI Origin 200 GIGAchannel server provides additional PCI interfaces to deliver enterprise-class throughput
for I/O-intensive applications. The SGI Origin 200 server is designed for departmental and other workgroup serving applications as well as Web serving.

Advanced Graphics SystemsFor eight years, the SGI Onyx® family of products has been driving the world's most
realistic computing environments with increasing levels of system and graphics performance. Today's SGI Onyx 3000 series represents SGI's third generation of SGI Onyx family products and is built on
the high-bandwidth SGI NUMA architecture and industry-leading InfiniteReality3 graphics. SGI Onyx 3000 series systems are leading edge in their ability to integrate
high-performance computing, complex data management, and high-performance visualization into a single system.

SGI
Reality Center environments are powered by SGI Onyx family systems and enable SGI customers to be leaders in their industry by allowing groups of decision makers to
increase their level of innovation and address mission-critical problems in a visual and interactive manner. By immersing decision makers in high-quality, high-resolution and
interactive environments, oil exploration companies can reduce the number of dry wells; automotive companies can design stylish, fuel-efficient, and safe cars; and pharmaceutical companies
can identify successful drugs, minimize their side effects, and bring them to market in less time and at lower cost.

SGI
Graphics Cluster systems are cost-effective solutions for dedicated low-end visual simulation environments and are built using commercial
off-the-shelf Linux operating systems and graphics cards with the addition of SGI hardware and software technology. SGI Graphics Cluster complements the SGI Onyx 3000 series at
the high end of the visual simulation market and leverages SGI's expertise in creating multichannel solutions. SGI Graphics Cluster expands the reach of SGI solutions into the rapidly growing
low-end multichannel visual simulation market.

Desktop Systems

SGI desktop workstations combine key elements of workgroup collaboration, interactive media, and computing in a range of prices and performance. Systems in
this family can be used for tasks as diverse as manipulating 3D models for computer-aided design ("CAD"), crunching numbers for

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chemistry and geographic information systems applications, guiding surgeons during medical procedures, or functioning as a tool for video editing, animation rendering, technical publishing, World Wide
Web and intranet authoring and serving, and software development.

Our
Silicon Graphics® O2® and Silicon Graphics Octane® families of MIPS processor and IRIX operating system based desktop workstations provide key
functionality for digital content creation in graphics-intensive markets such as industrial design and entertainment. The O2 family of entry-level desktop workstations features advanced 3D graphics
and powerful imaging integrated with real-time video capability in an innovative Unified Memory Architecture. The O2 workstation has significant appeal in markets such as medical imaging,
scientific visualization, weather broadcast, digital content creation, simulation, defense, mechanical CAD, software development, and education. The Octane family of single- and
dual-processor workstations is designed to provide the strongest graphics and computational capability available in the desktop category for applications such as 3D solids modeling,
mechanical CAD, digital prototyping, 3D visualization, animation, medical imaging, seismic interpretation, and professional audio and video production, including high-definition video and
architectural design. The Silicon Graphics® Octane2 workstation features robust SGI VPro graphics for IRIX, designed for the demanding requirements of
leading-edge professionals.

The
Silicon Graphics 750 system is the first offering in the Silicon Graphics family of Itanium processor-based products for Linux, incorporating the Intel
64-bit architecture, open-source Linux software, and libraries optimized for SGI to set a new standard for high-performance Linux computing. It is designed to
accommodate the most demanding power users in technical and high-performance computing markets at affordable, entry-level prices.

Other Products

Customers in the high-performance computing ("HPC") markets desire ever increasing performance from their servers, creating a parallel need to manage massive
amounts of data generated by these servers. To address the problem of complex data management, SGI has developed a series of products and solutions to help customers utilize their data in a more
efficient manner, resulting in better workflow management, faster cycle times, and higher levels of performance, availability, and security.

SGI
offers a broad range of disks and disk subsystems, ranging from entry-level disk arrays to complex enterprise-class storage systems, in either direct- or fabric-attached
configurations. As an industry leader in delivering high-bandwidth storage area networks ("SAN") for the HPC market, SGI offers SAN solutions based on tightly integrating the
CXFS shared filesystem, along with FailSafe high-availability software and Data Migration Facility ("DMF") for hierarchical storage management. SGI also has
network attached storage offerings through a range of file-serving solution bundles. At the core of SGI storage solutions are three key product offerings:

The
SGI TP9100 storage array delivers excellent value for a RAID storage solution, providing the benefits of Fibre Channel for budget-conscious customers interested in high
performance, scalability, and availability. An integrated package design makes the TP9100 a good fit for the workgroup; it's available in either deskside tower packaging or a
rack-mountable chassis.

The
SGI TP9400 storage array complements the high-performance SGI Origin 3000 series of NUMA servers. Delivering the highest level of bandwidth for demanding customer
environments, the TP9400 can manage heavy I/O at sustained rates and also provide advanced software features to simplify management and maintain high levels of availability. The flexible design of
this RAID subsystem allows customers to create tailored configurations for either high-bandwidth or high transaction rate environments.

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Hitachi Freedom Storage Lightning 9960 is an enterprise-class storage subsystem for customers who cannot afford to lose access to their data. The internal
system architecture delivers the highest levels of scalable bandwidth and I/O performance in the industry. A multitude of advanced software management features is available to maintain a high level of
availability for customers unwilling to settle for less. The HDS 9960 is also certified to support SGI XFS and CXFS filesystems, FailSafe, and DMF as part of a total SAN
solution.

Alias/Wavefront

Our Alias/Wavefront subsidiary develops award-winning solutions for the film and video, game, interactive media, industrial design, and visualization markets.
These solutionsMaya® software for the entertainment industry and Alias Studio tools for designgive artists a distinct creative advantage, no matter
what their discipline. These industry-leading solutions run on the IRIX, Linux, Windows®, and Macintosh® operating systems. Alias/Wavefront is based in Toronto, Canada, with
sales offices and distribution worldwide.

Applications Software

We maintain active programs to encourage independent software development for our systems. Through our Global Developer Program we provide hardware, software,
service, and marketing support benefits to attract and retain software developers and enable these developers to deliver the highest quality software and hardware products on our platform.

Marketing, Sales, and Distribution

We sell our system products and solutions through both our direct sales force and indirect channel partners. In fiscal year 2001 direct sales accounted for
more than half of our product revenues. The direct sales and support organization operates throughout the United States and in all significant international markets. We also have channel partners in
almost all the countries in which we have a presence; in others, we work through an SGI authorized distributor.

Our
indirect channel partners include service providers, systems integrators, VARs, ISVs, distributors and master resellers.

Information
with respect to international operations and export sales may be found in Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of this
Form 10-K. See also "Risks That Affect Our Business" included in Part II, Item 7 of this Form 10-K. No single end-user customer accounted for
10% or more of our revenues for each of the last three fiscal years.

Customer Service and Support

We believe that the quality and reliability of our products and the support we provide to customers are critical to our success. Our customer service
organization includes field service engineers, field product and applications specialists, product support engineers, training specialists, and administrative support personnel. We also provide
customer education through regularly scheduled courses in system software administration, applications programming, and hardware maintenance. We provide local customer support from offices in North
America, Western Europe, and the Pacific Rim, with spare parts inventories at each location. International distributors provide training and support for products sold by them. We typically provide a
standard "return-to-factory" hardware warranty against defects in materials and workmanship for periods of up to three years.

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Professional Services

We have developed our own professional services organization to enable us to offer a wider variety of solutions-oriented services, including consulting, custom
engineering, and systems integration services. This organization has more than 240 professionals engaged in this effort. The employees in this organization are solution architects, senior project
managers, and technical engineers.

Research and Development

Our research and development program is directed principally toward maintaining and enhancing our competitive position through incorporating the latest
advances in microprocessor, hardware, software and networking technologies. This effort is focused specifically on developing and enhancing our computing architectures, graphics subsystems, MIPS
microprocessors, compiler software, operating system, applications software and development tools. We also are leveraging our work on our MIPS and IRIX systems to introduce systems that incorporate
the Intel Itanium family of processors.

As
the evolution to industry-standard instead of proprietary components continues, our ability to focus research and development investments in areas where we have specific
competencies for innovation will become increasingly important. There are no assurances that we will be able to sufficiently focus our development efforts or that our investments will yield sufficient
differentiation to achieve and sustain a competitive advantage.

During
fiscal 2001, 2000 and 1999, we spent approximately $236 million, $301 million and $380 million, respectively, on research and development which represented
12.7%, 12.9% and 13.8%, respectively, of total revenue. Fiscal 2000 and 1999 includes research and development associated with Cray product line and MTI, which were divested in the later part of
fiscal 2000. We are committed to continuing innovation and differentiation and as a result will most likely continue to make research and development investments that are above average for the
computer industry as a percentage of revenues. However, declines in total revenue over the last several fiscal years have led us to substantially reduce the absolute level of our investment in
research and development.

Manufacturing

Our manufacturing operations primarily involve assembling high level subassemblies and systems and testing major purchased subassemblies. Products are
subjected to substantial environmental stress and electronic testing prior to shipment.

Our
main manufacturing facilities are in Chippewa Falls, Wisconsin and near Neuchâtel, Switzerland. Our U.S. plant currently produces MIPS-based servers and
graphics systems, while our plant in Switzerland produces desktop systems. Our Intel-based products are manufactured by third party manufacturing partners. We continually evaluate the allocation of
manufacturing activities among our own operations and those of suppliers and subcontractors, and in August 2001 we announced our intention to shift our manufacturing activity to Wisconsin and
close our facility in Switzerland by the end of the calendar year.

Most
of our products incorporate components that are available from only one or limited sources. Key components that are sole-sourced include application specific
integrated circuits ("ASICs"), storage products, especially RAID-based products, and certain cable and memory products. We have chosen to deal with sole sources in these cases because of
unique technologies, economic advantages or other factors. But reliance on single or limited source vendors involves several risks, including the possibility of shortages of key components. During the
first half of fiscal 2001 we experienced substantial shipment constraints due primarily to an industry-wide shortage of ceramic packaging for ASICs. Risks also include long lead times,
reduced control over delivery schedules, and the possibility of charges for excess and obsolete inventory.

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We also have single sources for less critical components, such as peripherals, communications controllers and power supplies, and monitors and chassis. We believe that in most cases
we could develop alternative sources for these components if necessary. However, unexpected reductions, interruptions or price increases would, at least in the short term, adversely affect our
results.

Many
of our suppliers are located outside the United States, with a high concentration located in Japan. Pricing from these suppliers can be strongly affected by such factors as
protectionist measures and changes in currency exchange rates. In addition, the markets for memory chips (DRAMs, SRAMs and VRAMs), which are a significant component of our overall systems
costs, tend to be highly volatile both in terms of pricing and availability.

Competition

The computer industry is highly competitive and is known for rapid technological advances. These advances result in frequent new product introductions, short
product life cycles and increased new product capabilities, typically representing significant price/performance improvements. The principal competitive factors for us are product features,
price/performance, networking capabilities, product quality and reliability, ease of use, capabilities of the system software, availability of applications software, customer support, product
availability, corporate reputation and price. Significant discounting from list price has been the norm.

Our
principal competitors are Compaq, Dell, Hewlett-Packard, IBM and Sun Microsystems, all of which are far larger companies with much greater resources.

Proprietary Rights and Licenses

We own and have applied for a significant number of U.S. patents, and will continue to protect our inventions with patents in the United States and abroad. We
also hold various U.S. and foreign trademarks.

As
is customary in our industry, we license from third parties a wide range of software, including the UNIX and Linux operating systems, for internal use and use by our customers.

Our
business will be affected by our success in protecting proprietary information and obtaining necessary licenses. Litigation or changes in the interpretation of intellectual
property laws could expand or reduce the extent to which we or our competitors are able to protect intellectual property or could require significant changes in product design. The computer industry
has seen a substantial increase in litigation with respect to intellectual property matters, and we have been engaged in several intellectual property lawsuits both as plaintiff and defendant.
Although no such proceedings were pending as of June 30, 2001, we expect that litigation of this sort will reoccur from time to time.

Employees

As of June 30, 2001, we had 5,956 regular employees, including approximately 300 regular employees who had been notified of their termination under the
fiscal 2001 restructuring plan, compared with 6,726 at June 30, 2000. In July 2001, we announced our intention to further reduce the size of our workforce by another 10-15%
to align our expenses with the reduced levels of business experienced during fiscal 2001. Our future success will depend, in part, on our ability to continue to retain and motivate highly qualified
technical, marketing and management personnel. We have never had a work stoppage, and no employees are represented by a labor union. We have workers' councils where required by European Union or other
applicable laws. We believe that our employee relations are good.

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Corporate Data

SGI was originally incorporated as a California corporation in November 1981, and reincorporated as a Delaware corporation in January 1990.

ITEM 2. PROPERTIES

We believe that we currently have sufficient facilities to conduct our operations into the foreseeable future and may close or further consolidate existing
facilities during the next fiscal year. We lease sales, service, R&D, and administrative offices worldwide and have principal corporate and manufacturing facilities in the following locations:

CaliforniaOur corporate offices and primary R&D and administrative operations are located in Mountain View,
California, where we lease a total of about 1,080,536 square feet. Our principal facilities include: a four building, 518,000 square foot leased campus facility completed in fiscal 1997 on 22 acres of
leased land and a campus facility with 2 R&D buildings occupied in early fiscal 2000, totaling approximately 224,000 square feet of leased space on 13 acres of leased land. We also lease seven other
buildings near our Mountain View headquarters, comprising approximately 339,000 square feet.

Minnesota and WisconsinWe own and lease manufacturing, service and R&D facilities of about 360,000 square feet in
Chippewa Falls, Wisconsin and sales, administrative and R&D facilities of about 342,000 square feet in Eagan, Minnesota.

SwitzerlandOur European manufacturing and support center near Neuchatel, Switzerland is located in an owned facility,
consisting of about 170,000 square feet. We expect to close this facility by the end of December 2001.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Note 21 to Consolidated Financial Statements in Part II, Item 8 of this
Form 10-K, which information is hereby incorporated by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Executive Officers of the Registrant

The executive officers of SGI and their ages as of August 31, 2001 are as follows:

|Name              |  | Age |  | Position and Principal Occupation                    |  | Executive
Officer
Since
|----------------- |  | --- |  | ---------------------------------------------------- |  | -----------------------
|Robert R. Bishop  |  | 58  |  | Chairman, Chief Executive Officer and Director       |  | 1999                   
|Warren Pratt      |  | 48  |  | Executive Vice President and Chief Operating Officer |  | 2000                   
|Sandra M. Escher  |  | 41  |  | Senior Vice President and General Counsel            |  | 1999                   
|Eng Lim Goh, PhD. |  | 41  |  | Senior Vice President and Chief Technology Officer   |  | 2000                   
|Jan Silverman     |  | 51  |  | Senior Vice President, Marketing                     |  | 2001                   
|Jeffrey Zellmer   |  | 41  |  | Senior Vice President and Chief Financial Officer    |  | 2000                   

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Executive
officers of SGI are elected annually by the Board of Directors and serve at the Board's discretion. There are no family relationships among any directors, nominees for
director or executive officers of SGI.

Mr. Bishop
was appointed Chairman and Chief Executive Officer of SGI in the fall of 1999. From July 1995 to February 1999, he was the Chairman of the Board of
Silicon Graphics World Trade Corporation.

Mr. Pratt
was appointed Chief Operating Officer of SGI in May of 2001. He has held a variety of general and engineering management positions at SGI since 1992 and was made
Executive Vice President of Engineering and Manufacturing in May of 2000. Prior to that and beginning in 1998, he served as President and General Manager of Alias/Wavefront.

Ms. Escher
was made Senior Vice President and General Counsel in May of 2001. She was appointed Vice President and General Counsel in April 1999. She joined SGI in
July 1993 as Securities Counsel and served as the Director of Corporate Legal Services between September 1996 and April 1999.

Dr. Goh
was appointed Senior Vice President and Chief Technology Officer in May of 2001. He was made Vice President and Chief Technology Officer in October 2000 and Vice
President of global systems engineering in October of 1999. He joined SGI in 1990 and has held a variety of systems engineering positions since that time.

Mr. Silverman
was appointed Senior Vice President, Marketing in April of 2001. He joined SGI in May of 1999 as Vice President of server marketing. Prior to joining SGI, he held
a number of marketing director and product management positions, including the head of marketing for Internet imaging operations at HP from September 1996 through April 1999.

Mr. Zellmer
became Senior Vice President and Chief Financial Officer of SGI in July of 2001. He was made Vice President, Corporate Controller in July 2000. He has held a
variety of financial management positions at SGI and its predecessor MIPS Computer Systems since 1988.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

SGI's common stock is traded on the New York Stock Exchange under the symbol SGI. The following table sets forth, for the periods indicated, the high, low, and
close prices for the Common Stock as
reported on the NYSE. Prices for periods after June 20, 2000 reflect the impact on SGI's stock price of the spin-off of our majority interest in MIPS Technologies, Inc.
("MTI").

Price Range for Common Stock

|               |  | Fiscal 2001 |      | Fiscal 2000
|-------------- |  | ----------- | ---- | -----------
|
|First Quarter  |  | $           | 3.56 |            
|Second Quarter |  | $           | 3.12 |            
|Third Quarter  |  | $           | 3.56 |            
|Fourth Quarter |  | $           | 1.02 |            

SGI
had 6,817 stockholders of record as of June 30, 2001. We have not paid any cash dividends on our common stock. As a result of our accumulated deficit position and
restrictions in certain debt instruments, we do not anticipate paying cash dividends to common stockholders.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information has been derived from the audited consolidated financial statements. The information set forth in the table below
is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"
and the consolidated financial statements and related footnotes included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the
information presented below.

|                                                                 |                                     | Years ended June 30 |          
|---------------------------------------------------------------- | ----------------------------------- | ------------------- | ---------
|
|
|Operating Data:                                                  |                                     |                     |          
|Total Revenue                                                    |                                     | $                   | 1,854,461
|Costs and expenses:                                              |                                     |                     |          
|                                                                 | Cost of revenue                     |                     |          
|                                                                 | Research and development            |                     |          
|                                                                 | Selling, general and administrative |                     |          
|                                                                 | Other operating expense(1)          |                     |          
|                                                                 |                                     |                     |          
|Operating (loss) income                                          |                                     |                     | (448,135 
|Interest and other income (expense), net(2)                      |                                     |                     | (18,020  
|                                                                 |                                     |                     |          
|(Loss) income before income taxes                                |                                     | $                   | (466,155 
|                                                                 |                                     |                     |          
|Net (loss) income                                                |                                     | $                   | (493,043 
|                                                                 |                                     |                     |          
|Net (loss) income per share:                                     |                                     |                     |          
|                                                                 | Basic                               |                     | $        
|                                                                 | Diluted                             |                     | $        
|Shares used in the calculation of net (loss) income per share:   |                                     |                     |          
|                                                                 | Basic                               |                     |          
|                                                                 | Diluted                             |                     |          
|Balance Sheet Data:                                              |                                     |                     |          
|Cash, cash equivalents and marketable and restricted investments |                                     | $                   | 202,960  
|Working (deficiency)capital                                      |                                     |                     | (41,884  
|Total assets                                                     |                                     |                     | 1,283,029
|Long-term debt and other                                         |                                     |                     | 412,720  
|Stockholders' (deficit) equity                                   |                                     |                     | (25,283  
|Statistical Data:                                                |                                     |                     |          
|Number of employees                                              |                                     |                     | 5,956    
|Long-term debt and other/total capitalization                    |                                     |                     | 107      

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The past three fiscal years for SGI have seen declining revenues and unprofitable operations as we have felt the impact of technologies and product families in
transition, management and employee turnover, strong competition and the slowdown in the economy. During fiscal 2001, we took several major steps to refocus our operations, including the restructuring
of our overall operations and the discontinuation of our Pentium® III processor-based product line. We also continued to manage significant reductions in operating expenses compared with
fiscal 2000 levels. While these steps are all-important parts of our plan to restore growth and profitability, in the short-term they had a pronounced impact on our fiscal 2001
financial results.

The
following tables and discussion present certain financial information on a comparative basis. During the third and fourth quarters of fiscal 2000, respectively, we sold our Cray
product line and distributed our remaining interest in MTI through a spin-off. We believe it more relevant if certain current fiscal year results (revenue, gross margin, interest and
other, and operating expenses other than restructuring activity) are compared with pro forma fiscal 2000 and 1999 results. The pro forma results for the twelve-month periods of fiscal 2000 and 1999
used throughout this discussion are adjusted to exclude the results of operations of the Cray product line and MTI.

Results of Operations

|                                         |  | Years ended June 30, |       | Pro forma Years Ended June 30, |  
|---------------------------------------- |  | -------------------- | ----- | ------------------------------ | -
|
|
|Total revenue                            |  | $                    | 1,854 |                                | $
|Cost of revenue                          |  |                      | 1,248 |                                |  
|                                         |  |                      |       |                                |  
|Gross profit                             |  |                      | 607   |                                |  
|Gross profit margin                      |  |                      | 32.7  | %                              |  
|Total operating expenses                 |  |                      | 1,055 |                                |  
|                                         |  |                      |       |                                |  
|Operating loss                           |  |                      | (448  | )                              |  
|Interest and other (expense) income, net |  |                      | (18   | )                              |  
|                                         |  |                      |       |                                |  
|(Loss) income before income taxes        |  | $                    | (466  | )                              | $
|                                         |  |                      |       |                                |  
|Net (loss) income                        |  | $                    | (493  | )                              | $
|                                         |  |                      |       |                                |  
|Net (loss) income per share-basic        |  | $                    | (2.59 | )                              | $
|                                         |  |                      |       |                                |  
|Net (loss) income per share-diluted      |  | $                    | (2.59 | )                              | $
|                                         |  |                      |       |                                |  

Revenue

The following discussion of revenue is based on the results of our reportable segments as described in Note 17 to the Consolidated Financial Statements.
Total revenue is principally derived from three

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reportable segments: Servers, Visual Workstations and Global Services, which were determined based on factors such as customer base, homogeneity of products, technology, delivery channels and other
factors.

Total
revenue in fiscal 2001 decreased $206 million or 10% compared with pro forma fiscal 2000, and pro forma fiscal 2000 decreased $284 million or 12% compared with pro
forma fiscal 1999. These declines reflect strong competition from much larger companies and other factors discussed below that affected particular product families.

The
following table presents the percentage of total revenue by reportable segment:

|                    |  | Years ended June 30, |     | Pro forma Years Ended June 30, |  
|------------------- |  | -------------------- | --- | ------------------------------ | -
|
|
|Servers             |  | $                    | 700 |                                | $
|% of total revenue  |  |                      | 38  | %                              |  
|Visual Workstations |  | $                    | 362 |                                | $
|% of total revenue  |  |                      | 19  | %                              |  
|Global Services     |  | $                    | 682 |                                | $
|% of total revenue  |  |                      | 37  | %                              |  
|Other               |  | $                    | 110 |                                | $
|% of total revenue  |  |                      | 6   | %                              |  

Fiscal
2001 Server revenue decreased $143 million or 17% compared with pro forma fiscal 2000. The decrease primarily reflects lower revenue levels within our Origin brand
scalable server business and our Onyx graphics system business primarily due to the limited availability in the first half of fiscal 2001 of the industry-standard ceramic packaging used in ASICs for
our Origin and Onyx 3000 systems and the slowdown in the economy which affected overall shipping patterns. On a pro forma basis, fiscal 2000 Server revenue decreased $178 million or 17%
compared with fiscal 1999. The decrease primarily reflects lower revenue within our Origin brand scalable server business due to a mature product line for which the next generation Origin 3000 family
of high-performance servers were introduced in the first quarter of fiscal 2001. On a pro forma basis, our Onyx graphics systems revenue also declined during fiscal 2000 compared with
fiscal 1999, due to a mature product line for which the next generation Onyx 3000 family of graphics systems were introduced in the first quarter of fiscal 2001. We also believe fiscal 2000 revenue
for both our Origin and Onyx servers was also adversely impacted by manufacturing process issues that delayed delivery of our R12000 400-megahertz processors. We began
receiving shipments of these processors during the fourth quarter of fiscal 2000.

Fiscal
2001 Visual Workstation revenue decreased $138 million or 28% compared with pro forma fiscal 2000. The decrease in revenue is primarily attributable to the declining
UNIX workstation market, especially within the O2 product family. On a pro forma basis, fiscal 2000 Visual Workstation revenue decreased $147 million or 23% compared with fiscal 1999. These
decreases reflected the declining UNIX workstation market and the disappointing sales performance of our visual workstations based on the Windows NT® operating system introduced in the
second half of fiscal 1999. In light of the disappointing sales performance of our proprietary architecture Silicon Graphics® 320 and Silicon Graphics® 540 visual workstations,
we decided to discontinue this product family in favor of products with more industry standard architecture and recorded charges to cost of revenue during fiscal 2000 related to this transition. See
"Gross Profit Margin" and "Operating Expenses."

Global
Services revenue is comprised of hardware and software support and maintenance, professional services and remanufactured systems sales. Fiscal 2001 Global Services revenue
increased $82 million or 14% compared with pro forma fiscal 2000. The increase in revenue is primarily

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attributable to the growth of business within our professional services organization as well as increases in remanufactured systems sales. On a pro forma basis, fiscal 2000 revenue increased
$53 million or 10% compared with fiscal 1999. The increase reflects the impact of our investment in our professional services businesses as well as increases in the level of our remanufactured
systems business, offset in part by a decline in our traditional customer support revenue.

Other
revenue is principally comprised of our operating units that are not reportable segments, including the product and service revenue of our application software subsidiary,
Alias/Wavefront.

Total
revenue by geographic area for fiscal 2001, 2000 and 1999 was as follows (in millions):

|Area          |  | 2001 |       | 2000 |   | 1999  |  | Pro forma
2000 |       | Pro forma
1999
|------------- |  | ---- | ----- | ---- | - | ----- |  | -------------- | ----- | --------------
|Americas      |  | $    | 1,008 |      | $ | 1,314 |  | $              | 1,536 |               
|Europe        |  |      | 437   |      |   | 551   |  |                | 754   |               
|Rest of World |  |      | 409   |      |   | 466   |  |                | 459   |               
|              |  |      |       |      |   |       |  |                |       |               
|Total revenue |  | $    | 1,854 |      | $ | 2,331 |  | $              | 2,749 |               
|              |  |      |       |      |   |       |  |                |       |               

Geographic
revenue as a percentage of total revenue for fiscal 2001, 2000 and 1999 was as follows:

|Area          |  | 2001 |   | 2000 |   | 1999 |   | Pro forma
2000 |   | Pro forma
1999 |  
|------------- |  | ---- | - | ---- | - | ---- | - | -------------- | - | -------------- | -
|Americas      |  | 54   | % | 56   | % | 56   | % | 57             | % | 57             | %
|Europe        |  | 24   | % | 24   | % | 27   | % | 24             | % | 28             | %
|Rest of World |  | 22   | % | 20   | % | 17   | % | 19             | % | 15             | %

The
increase in Rest of World business in both fiscal 2001 and 2000 primarily reflects increased sales in Japan as a percentage of total revenue.

Our
consolidated backlog at June 30, 2001 was $209 million, down from $298 million at June 30, 2000. Backlog for both the Servers and Visual Workstations
segments of our business were impacted by the slowdown in the current economic environment, offset in part by a slight increase in our professional services business.

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Gross Profit Margin

Cost of product and other revenue includes costs related to product shipments, including materials, labor, overhead and other direct or allocated costs
involved in their manufacture or delivery. Costs associated with non-recurring engineering revenue are included in research and development expense. Cost of service revenue includes all
costs incurred in the support and maintenance of our products, as well as costs to deliver professional services.

Our
overall gross profit margin increased to 32.7% in fiscal 2001 compared with 32.1% in pro forma fiscal 2000. Gross profit margin for fiscal 2001 includes a $19 million
charge for inventory costs related to the discontinuation of the Pentium III processor-based product line. Without these charges, gross margin for fiscal 2001 would have been 33.7%.
Gross profit margin for fiscal 2000 includes certain adjustments related to our Silicon Graphics 320 and 540 visual workstations including charges of approximately $46 million for third party
manufacturing contract cancellations and purchase commitments and for excess product and demonstration inventory related to our Silicon Graphics 320 and 540 visual workstations. Also, during fiscal
2000, we charged $21 million to cost of service revenue for future unrecoverable visual workstation support costs. In addition, we recorded a $15 million charge to cost of service
revenue for estimated warranty related costs associated with the Cray T90 supercomputer product line and $18 million for the write-down of excess spares. Without these
adjustments, our gross profit margin for fiscal 2000 would have been 37.0%.

Gross
margin for fiscal 2001 was affected by the limited availability of certain components in the first and second quarters of fiscal 2001 which affected shipping patterns and was a
factor in causing a higher percentage of revenue to come from lower margin products.

Operating Expenses

|                                    |  | 2001 |     | 2000 |   | 1999 |   | Proforma
2000 |     | Proforma
1999 |  
|----------------------------------- |  | ---- | --- | ---- | - | ---- | - | ------------- | --- | ------------- | -
|
|Research and development            |  | $    | 236 |      | $ | 301  |   | $             | 380 |               | $
|% of total revenue                  |  |      | 13  | %    |   | 13   | % |               | 14  | %             |  
|Selling, general and administrative |  | $    | 717 |      | $ | 785  |   | $             | 908 |               | $
|% of total revenue                  |  |      | 39  | %    |   | 34   | % |               | 33  | %             |  
|Other                               |  | $    | 102 |      | $ | 103  |   | $             | (15 | )             | $
|% of total revenue                  |  |      | 6   | %    |   | 4    | % |               | (1  | %)            |  

Our
total fiscal 2001 operating expenses decreased $58 million or 5% compared with pro forma fiscal 2000 and pro forma fiscal 2000 decreased $93 million or 8% compared
with pro forma fiscal 1999. Fiscal 2001 operating expenses included $102 million of charges for restructuring and impairment and
$18 million of charges as a result of the implementation of an Enterprise Resource Planning ("ERP") system and costs associated with a business reorganization. Pro forma fiscal 2000 operating
expenses included a net charge of $103 million for estimated restructuring and impairment charges. Pro forma fiscal 1999 operating expenses included a $14 million reduction to the
restructuring costs we estimated at the end of fiscal 1998.

Research and developmentResearch and development spending decreased $17 million or 7% in fiscal 2001 compared
with pro forma fiscal 2000 and, on a pro forma basis decreased $86 million or 25% in fiscal 2000 compared with fiscal 1999. The fiscal 2001 decrease reflects reductions in headcount as well as
more concentrated research and development efforts. The pro forma fiscal 2000 decrease reflects reductions in our investment in Windows NT-based visual workstation development as we
transition to more industry standard architectures, as well as reductions in our investment in UNIX workstation development as the market for UNIX workstations continues to shrink.

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Selling, general and administrativeSelling, general and administrative expenses decreased $40 million or 5% in
fiscal 2001 compared with pro forma fiscal 2000, and on a pro forma basis decreased $125 million or 14% in fiscal 2000 compared with fiscal 1999. The fiscal 2001 decrease reflects reduced
headcount as a result of restructuring activities and attrition, significantly reduced commission and outside service expenses and the impact of our overall expense control measures aimed at bringing
operating expenses more in line with revenues. The decrease was partially offset by $18 million of charges as a result of the implementation of an ERP System and costs associated with a
business reorganization. The fiscal 2000 decrease reflects the impact of that year's restructuring actions including lower compensation expense, reduced occupancy costs and overall general expense
control. Marketing expenses decreased significantly, particularly in corporate programs.

Other operating expenseOther operating expense for fiscal 2001 represents a charge for estimated restructuring of $88
million and charges of $20 million associated with the impairment of assets, partially offset by adjustments to previously recorded restructuring charges of $6 million. Other operating expense for
fiscal 2000 represents a net charge for estimated restructuring costs of $103 million. Other operating expense for fiscal 1999 includes a $14 million reduction to the restructuring costs we estimated
at the end of fiscal 1998. As a result of these restructuring actions, we anticipate cash outflows of $37 million through fiscal 2002 for severance and related charges and canceled contracts and $43
million through fiscal 2010 for facilities related expenditures. See Note 3 to the Consolidated Financial Statements, "Other Operating Expense," for further information regarding these
activities.

Interest and Other

Interest ExpenseInterest expense increased 4% in fiscal 2001 compared with fiscal 2000 and declined 16% in fiscal 2000
compared with fiscal 1999. The 16% decline in interest expense from fiscal 1999 to fiscal 2000 was primarily due to a reduction in long-term borrowings of $6 million.

Interest Income and Other, NetInterest income and other, net includes interest income on our cash investments, gains
and losses on other investments, and other non-operating items. Interest income and other, net for fiscal 2001 of $2 million decreased $6 million from pro forma fiscal 2000
and, on a pro forma basis, increased $2 million in fiscal 2000 from fiscal 1999. Interest income and other, net for fiscal 2001 includes an $83 million write-off of a private investment,
a $50 million gain on the sale of marketable investments, a $24 million gain related to the sale of the Cray product line, and an $8 million gain on the sale of corporate real
estate. Significantly lower cash balances in fiscal 2001 compared with fiscal 2000 also contributed to a decrease in interest income. The increase in interest and other income, net on a pro forma
basis in fiscal 2000 compared with fiscal 1999 is primarily attributable to the write-down of investments in certain technology companies in fiscal 1999 that did not recur in fiscal 2000,
offset in part by the loss on the sale of our Cray product line in fiscal 2000 as well as a decrease in interest income due to significantly lower cash balances in fiscal 2000.

Provision for Income Taxes

In fiscal 2001, we made a provision for income taxes totaling $27 million, which comprised of federal, state, and foreign jurisdictional taxes currently
payable. We did not recognize a benefit for our fiscal 2001 loss, since the resulting deferred tax asset does not meet the realizability criteria under SFAS No. 109.

Although
we also incurred a loss for fiscal 2000, we made a provision for income taxes totaling $448 million. Included in this provision was $46 million in taxes
currently payable in federal, state, and foreign jurisdictions and a cumulative change in accounting method charge of $93 million related to our intention to no longer permanently invest
accumulated earnings attributable to certain foreign affiliates which manufacture in foreign jurisdictions. We intend to utilize such earnings to satisfy liquidity

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requirements in the US and other jurisdictions in which we operate. Also included in this provision was a $369 million increase in the valuation allowance against deferred tax assets which, due
to the distribution of MTI in a manner that was tax-free for SGI in the fourth quarter of fiscal 2000, no longer met the realizability criteria under SFAS No. 109. Offsetting these
charges was a reduction of $67 million in previously provided income tax reserves related to certain exposures that were no longer necessary given the increase in the valuation allowance
against our net deferred tax assets.

Recent Accounting Pronouncements

In July 2001, FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations", or "SFAS 141", and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", or "SFAS 142". SFAS 141 requires the use of the purchase method for all business combinations
initiated after June 30, 2001, and provides new criteria for determining whether an acquired intangible asset should be recognized separately from goodwill. SFAS 142 eliminates the
amortization of goodwill and replaces it with an impairment only model. Upon adoption, goodwill related to acquisitions completed before the date of adoption would be subject to the new provisions of
SFAS 141; amortization of any remaining book value of goodwill would cease and the new impairment-only approach would apply. The impairment-only approach does not apply
to the treatment of intangible assets. The provision of SFAS 141 and SFAS 142 will be effective for fiscal years beginning after December 15, 2001. We will adopt SFAS 141
as of July 1, 2001 and SFAS 142 as of July 1, 2002, and do not believe such adoption will have a material impact on our results of operations, financial position, or cash flows.

Financial Condition

At June 30, 2001, cash and cash equivalents and marketable investments totaled $126 million compared with $258 million at June 30,
2000. Also, included in the balance sheet at June 30, 2001 and June 30, 2000 is approximately $77 million and $126 million, respectively, of restricted investments.
Restricted investments at June 30, 2001 consist of short and long-term investments held under a security agreement or pledged as collateral against letters of credit.

Operating
activities used $282 million in cash for fiscal 2001, compared with using $76 million in fiscal 2000 and providing $145 million in fiscal 1999. To
present cash flows from operating activities, net (loss) income for each of the past three years had to be adjusted for certain significant items that did not either provide or use cash. Fiscal 2001
net loss is adjusted to remove the impact of a $83 million non-cash charge for the write-off of an investment in a private company and a $50 million gain on the
sale of marketable investments that is reflected as a cash flow from investing activity. Included in fiscal 2000 adjustments is a $369 million increase in our valuation allowance against our
remaining deferred tax asset and a $93 million tax charge related to repatriating accumulated foreign earnings. Partially offsetting these charges is a $67 million reduction in
previously provided income taxes related to certain exposures that were no longer necessary given the increase in the valuation allowance against our deferred tax assets. Fiscal 1999 net income is
adjusted to remove the impact of the $273 million gain on the sale of a portion of our interest in MTI stock that is reflected as a cash flow from investing activities and $27 million in
non-cash charges for the write-off of investments in certain technology companies.

In
addition to the adjustments noted above, the negative operating cash flow in fiscal 2001 was partially due to approximately $9 million in cash payments for severance and
contractual obligations related to restructuring activities. These activities are expected to result in future cash outlays of approximately $79 million, the majority of which will occur in the
first half of fiscal 2002 and will be funded through through cash and cash equivalents.

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Investing activities, other than changes in our marketable and restricted investments, provided $194 million in cash during fiscal 2001. The principal investing activity during
fiscal 2001 was the sale of certain corporate real estate for total cash proceeds of $278 million. These proceeds were partially offset by capital expenditures, including capitalized costs
associated with our global ERP system. Investing activities, other than changes in our marketable and restricted investments and MTI transactions, consumed $349 million in cash during fiscal
2000 and $261 million during fiscal 1999. The principal investing activity during fiscal 2000 was for the acquisition of capital equipment and our election to exercise an option to purchase
five buildings on our Mountain View campus for approximately $125 million that had been held under an off-balance sheet financing arrangement. In addition, cash was reduced by
$84 million as result of the spin-off of MTI which is no longer included in our consolidated balance sheet. Investing activities in fiscal 1999 primarily related to the acquisition
of capital equipment and spare parts as well as $35 million to fund a portion of an investment in a private company.

Financing
activities over the past three years have included the issuance of common stock under employee stock purchase and option plans, the repurchase of common stock and the
repayment of debt. Our board of directors has authorized the repurchase of up to 27.5 million shares of common stock to mitigate the dilutive effect of the stock plans. Since commencement of this
repurchase program in 1996 we have repurchased 27.4 million shares of common stock at a cost of $439 million. During fiscal 2001, we settled the equity forward contracts under which we were committed
to buy an aggregate of 6.0 million shares of common stock for approximately $104 million. No additional repurchases are planned for fiscal 2002.

During
the third quarter of fiscal 2001, we obtained an asset-based credit facility. Available credit is determined monthly based on 85% of eligible accounts receivable, up to a
maximum of $75 million. To date, we have used $43 million of this line to secure a letter of credit. The facility is currently secured by U.S. accounts receivable and inventory, the
pledge of certain intellectual property and a $7 million cash deposit. The credit facility also contains financial and other covenants. During the first quarter of fiscal 2002, we were not in
compliance with the financial covenants relating to EBITDA for the fourth quarter of fiscal 2001 and daily unrestricted cash balances and have obtained a waiver from the lender of these defaults. In
the event we are not able to comply with the financial and other covenants of this facility in the future, or there is a material adverse change impairing our ability to repay the outstanding balance,
the facility may be declared to be in default. If a default is declared and not waived, it would have a significant impact on our working capital.

We
have incurred net losses and negative cash flows from operations during each of the past two fiscal years. Primarily as a result of net losses, our operating activities consumed
$282 million in cash during fiscal 2001. At June 30, 2001, our principal sources of liquidity included cash and cash equivalents and unrestricted marketable investments of $126 million. Because
our cash levels fluctuate significantly during the quarter, and especially given the uncertainties of the current business climate, we have been actively working to improve our liquidity situation.
Actions that have been taken and as to which
discussions are in progress include cutting our operating expense levels to reduce cash consumed in operations, and raising cash through licensing and sales transactions involving real estate,
intellectual property and other assets not deemed core to our business. Of course, re-establishing profitable operations is our ultimate goal. While a forecast of future events is inherently
uncertain, we believe that the combination of our current resources and cash generated from our planned licensing and sales transactions and our fiscal 2002 operating plan, will provide sufficient
funding to enable the Company to meet its obligations through at least June 30, 2002. We are committed to the successful execution of our business turnaround, and will take steps if necessary
to further restructure our business operations to reduce expenses. The failure to execute successfully on this program, if combined with a failure to achieve our planned-for operating results or
significant changes in the terms

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of our relationships with key suppliers, could result in our not having adequate liquidity to manage our business.

Risks That Affect Our Business

SGI operates in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of these
risks.

Working Capital Requirements.Primarily as a result of net losses, our operating activities consumed
$282 million in cash during fiscal 2001. Unrestricted cash and marketable investments declined from $258 million at June 30, 2000, to $126 million at June 30, 2001,
despite the receipt of $367 million from the sale of non-operating assets during that period. Because our cash levels fluctuate significantly during the quarter, and especially
given the uncertainties of the current business climate, we have been actively working to improve our liquidity situation. Actions that have been taken and as to which discussions are in progress
include cutting our operating expense levels to reduce cash consumed in operations, and raising cash through licensing and sales transactions involving real estate, intellectual property and other
assets not deemed core to our business. The failure to execute successfuly on this program, if combined with a failure to achieve our planned-for operating results or significant changes in the terms
of our relationships with key suppliers, could result in our not having adequate liquidity to manage our business.

Given
our credit rating, if we should need to obtain short-term borrowings, there can be no assurance that such borrowings would be available or could be obtained at
reasonable rates. The inability to obtain such borrowings could have a material adverse impact on our operations, financial condition and liquidity.

We
have an asset-based credit facility that may be declared to be in default if we fail to meet certain financial and other covenants. The facility is currently secured by U.S.
accounts receivable and
inventory, the pledge of certain intellectual property and a $7 million cash deposit. The credit facility also contains financial and other covenants. During the first quarter of fiscal 2002,
we were not in compliance with the financial covenants relating to EBITDA for the fourth quarter of fiscal 2001 and daily unrestricted cash balances and have obtained a waiver from the lender of these
defaults. In the event we are not able to comply with the financial and other covenants of this facility in the future, or there is a material adverse change impairing our ability to repay the
outstanding balance, the facility may be declared to be in default. If a default is declared and not waived, it would have a significant impact on our working capital.

Impact of Business Climate and Recent Developments.SGI's business was hampered throughout fiscal 2001 by a weakening
business climate that affected the willingness of customers globally to make substantial investments in information technology. It is too early to assess the extent to which the events of
September 11 have exacerbated these trends, except that some adverse impact on SGI's results for the quarter ended September 30, 2001 is expected. If the medium-term effect is to further
depress the business climate, and if shortfalls in sales to private sector customers are not offset by increased sales to government customers, especially in the national defense and intelligence
areas, then SGI would fail to achieve its planned-for operating results, which will further weaken SGI's financial condition.

Expense Reduction Program.SGI has had declining revenue and has been unprofitable on an operating basis for each of
the past four fiscal years. While our operating expenses, excluding other operating expenses, have declined substantially over the last two years on a pro forma basis, they have declined at a slower
rate than revenues. During the fourth quarter of fiscal 2001, we announced and began to implement restructuring actions with the objective of reducing our operating expenses and restoring long-term
profitability to SGI. These actions resulted in aggregate charges of $88 million and

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were broad-based, covering virtually all aspects of our products, operations and processes. In July 2001, we announced our intention to further reduce the size of our workforce by another 10-15% to
align our expenses with the reduced levels of business experienced during fiscal 2001. We have also taken steps to begin the shut-down of our manufacturing facility in Switzerlandif the
transition of all manufacturing to our facility in Chippewa Falls is not completed in an expeditious and efficient manner, we could experience problems shipping systems to our customers. While our
objective is to reduce our costs in a manner that will not have a material impact on revenue levels, there is no assurance that this will be achieved or that we will successfully reduce our operating
expenses in a timely manner and to a level sufficient to become breakeven or cash positive in fiscal 2002.

Implementation of Global IT System.SGI implemented a global system for ERP at the start of fiscal 2002. During the
September quarter, we have experienced delays and inaccuracies in order entry, shipment, billing and financial reporting. While the functioning of the system has continuously improved during
this period, our operations have been affected by the transition to the new system and disruption to our business activity and cash flows could occur if the system does not perform as expected.

New Products.Our ability to meet our objectives for fiscal 2002 and beyond is highly dependent on the success of new
products. We operate in a highly competitive, quickly changing environment, and our future depends on our ability to develop and introduce new products in a timely fashion. If we are unable to develop
new products that our customers will buy, our business and operating results will be adversely affected. Any extended failure to meet these objectives could affect not only our ability to ship our
backlog but to continue to attract new orders.

Dependence On Partners and Suppliers.Our business has always involved close collaboration with partners and suppliers.
However, many elements of our current business strategy, including the longer-term addition of the Intel 64-bit architecture and additional outsourcing of manufacturing, will
increase our dependence on Intel and other partners, and on our manufacturing partners and other component suppliers. Our business could be adversely affected, for example, if Intel fails to meet
product release schedules, if we experience supply constraints such as those that have existed during this fiscal year, or if we experience any other interruption or delay in the supply chain. The
competitiveness of our system products, particularly our servers, is significantly affected by the availability on our platform of third-party software applications that are important to customers in
our target markets. Our ability to work with our software partners to ensure porting of these applications to our IRIX operating system and, in the future, to Linux, is a key factor to our business
success.

Employees.Our success depends on our ability to continue to attract, retain and motivate highly qualified technical,
marketing and management personnel, who are in great demand. The uncertainties surrounding SGI's business prospects have increased the challenges of retaining world-class talent. We recently announced
our plans to implement further restructuring actions that are scheduled to occur during the first quarter of fiscal 2002. As we work through this process, there is no guarantee that we will not lose
highly qualified employees.

Product Development and Introduction.Our continued success depends on our ability to develop and rapidly bring to
market technologically complex and innovative products. Product transitions are a recurring part of our business. A number of risks are inherent in this process.

The
development of new technology and products is increasingly complex and uncertain, which increases the risk of delays. The introduction of new computer systems requires close
collaboration and continued technological advancement involving multiple hardware and software design teams, internal and external manufacturing teams, outside suppliers of key components such as
semiconductor and storage products and outsourced manufacturing partners. The failure of any one of these elements could cause our new products to fail to meet specifications or to miss the aggressive
timetables that we

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establish. There is no assurance that acceptance of our new systems will not be affected by delays in this process. As noted above, our ability to successfully attract and retain key technical,
marketing and
management personnel in a competitive hiring environment has a direct impact on our ability to maintain our product development timetables.

Short
product life cycles place a premium on our ability to manage the transition to new products. We often announce new products in the early part of a quarter while the product is
in the final stages of development and testing, and seek to manufacture and ship the product in volume during the same quarter. Our results could be adversely affected by such factors as development
delays, the release of products to manufacturing late in any quarter, quality or yield problems experienced by suppliers, variations in product costs and excess inventories of older products and
components. In addition, some customers may delay purchasing existing products in anticipation of new product introductions.

Most
products are upgraded during their product life cycle. The ability to upgrade products in a timely fashion is necessary to compete in the computer industry. Delay in introducing
updates and upgrades can adversely affect acceptance and demand for product.

Dual Platform Strategy.We have announced product roadmaps for both the server and workstation businesses that will,
over the next five years, supplement our products based on the MIPS processor architecture with products based on the Intel processor architecture, and from the IRIX operating system to Linux and
Windows NT. This process will involve our supporting both architectures indefinitely in order to provide flexibility and support to our customers. Risks associated with this strategy include
uncertainty among employees, customers and partners, potential customer defection and higher operating expenses. There can be no assurance that we will introduce the new products required for these
transitions as planned, successfully support our customer and partner base as they adopt these new products or otherwise manage this process in a way that will allow us to recover from this
uncertainty.

Period To Period Fluctuations.Our operating results may fluctuate for a number of reasons. Delivery cycles are
typically short, other than for large-scale server products. A little over half of each quarter's product revenue results from orders booked and shipped during the third month, and disproportionately
in the latter half of that month. These factors make the forecasting of revenue inherently uncertain. Because we plan our operating expenses, many of which are relatively fixed in the short term, on
expected revenue, even a relatively small revenue shortfall may cause a period's results to be substantially below expectations. Such a revenue shortfall could arise from any number of factors,
including lower than expected demand, supply constraints, delays in the availability of new products, transit interruptions, overall economic conditions, the California energy situation or natural
disasters. Demand can also be adversely affected by product and technology transition announcements by SGI or our competitors. The timing of customer acceptance of certain large-scale server products
may also have a significant effect on periodic operating results. Margins are heavily influenced by mix considerations, including geographic concentrations, the mix of product and service revenue, and
the mix of server and desktop product revenue including the mix of configurations within these product categories.

Our
results have typically followed a seasonal pattern, with stronger sequential growth in the second and fourth fiscal quarters, reflecting the buying patterns of our customers.

The
present uncertainty in the economy has impacted the timing of buying decisions of our customers. Unless and until the economic environment becomes more positive it will be
difficult for us to experience growth in revenue.

Our
stock price, like that of other technology companies, is subject to significant volatility. If revenue or earnings in any quarter fail to meet the investment community's
expectations, there could

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be an immediate impact on our stock price. The stock price may also be affected by broader market trends unrelated to our performance.

Competition.The computer industry is highly competitive, with rapid technological advances and constantly improving
price/performance. Most of our competitors have substantially greater technical, marketing and financial resources and, in some segments, a larger installed base of customers and a wider range of
available applications software. Competition may result in significant discounting and lower gross margins.

Impact Of Government Customers.A significant portion of our revenue is derived from sales to the U.S. government, either directly by
us or through system integrators and other resellers. Sales to the government present risks in addition to those involved in sales to commercial customers, including potential disruptions due to
appropriation and spending patterns and the government's reservation of the right to cancel contracts for its convenience.

A
portion of our business requires security clearances from the United States government. We have implemented measures to maintain our clearances in light of the fact that our CEO,
Robert Bishop, is not a United States citizen. However, these arrangements are subject to customer review and approval and periodic review by the Defense Security Service of the Department of Defense.
Any disruption or limitation in our ability to do business with the United States government could have an adverse impact on SGI.

Export Regulation.Our sales to foreign customers are subject to export regulations. Sales of many of our
high-end products require clearance and export licenses from the U.S. Department of Commerce under these regulations. The Departments of Commerce and Justice and the Swiss authorities are
currently conducting civil and criminal investigations into SGI's compliance with the export regulations in connection with several export sales to Tier 3 countries. We believe that these matters will
be resolved without a significant adverse effect on our business. However, there is no assurance that these matters will not have an unforeseen outcome that could impair the conduct of our business
with the U.S. government or our sales outside the United States.

Our
international sales would also be adversely affected if such regulations were tightened, or if they are not modified over time to reflect the increasing performance of our
products.

Intellectual Property.We routinely receive communications from third parties asserting patent or other rights covering
our products and technologies. Based upon our evaluation, we may take no action or may seek to obtain a license. In any given case there is a risk that a license will not be available on terms that we
consider reasonable, or that litigation will ensue. We expect that, as the number of hardware and software patents issued continues to increase, and as competition in the markets we address
intensifies, the volume of these intellectual property claims will also increase.

New York Stock Exchange Listing.The listing rules of the New York Stock Exchange generally require that listed
securities trade at a minimum share price of $1.00 per share when averaged over a 30 trading day period. On August 1, 2001, SGI was notified by the exchange that it was not in compliance with
this criterion and requiring that this failure to meet the listing standards be addressed prior to February 14, 2002. If the Common Stock price fails to rise above this minimum threshold and if
SGI fails to take action, such as a reverse stock split, to address this issue, the Common Stock could be delisted from the exchange, which would impair the liquidity available to holders of the
Common Stock.

21

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our financial position is routinely subjected to a variety of risks, including market risk associated with interest rate
movements and currency rate movements on non-U.S. dollar denominated assets and liabilities, as well as collectibility of accounts receivable. 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.

For
purposes of specific risk analysis, we use sensitivity analysis to determine the impact that market risk exposures may have on the fair values of our debt and financial
instruments. The financial instruments included in the sensitivity analysis consist of all of our cash and cash equivalents, marketable investments, short-term and long-term
debt and all derivative financial instruments. Currency forward contracts and currency options constitute our portfolio of derivative financial instruments.

To
perform 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. We compute the market values for interest risk based on the present value of future cash flows as impacted by the changes in rates attributable to the market risk being
measured. We selected the discount rates used for the present value computations based on market interest rates in effect at June 30, 2001 and 2000. We computed the market values for foreign
exchange risk based on spot rates in effect at June 30, 2001 and 2000. The market values that result from these computations are compared to the market values of these financial instruments at
June 30, 2001 and 2000. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.

The
results of the sensitivity analysis at June 30, 2001 and 2000 are as follows:

Interest
Rate Risk: A percentage point decrease in the levels of interest rates with all other variables held constant would result in a decrease in the aggregate fair values of our
financial instruments by $3 million and $6 million at June 30, 2001 and 2000, respectively. A percentage point increase in the levels of interest rates with all other variables
held constant would result in an increase in the aggregate fair values of our financial instruments by $3 million and $6 million, respectively.

Foreign
Currency Exchange Rate Risk: A 10% strengthening of foreign currency exchange rates against the U.S. dollar with all other variables held constant would result in a decrease
in the fair values of our financial instruments by $13 million at June 30, 2001 and June 30, 2000. A 10% weakening of foreign currency exchange rates against the U.S. dollar with
all other variables held constant would result in an increase in the fair values of our financial instruments by $9 million at June 30, 2001 and $12 million at June 30,
2000.

The
financial instruments measured in the foreign currency exchange rate sensitivity analysis are used in our hedging program to reduce our overall corporate exposure to changes in
exchange rates to an immaterial amount.

22

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|Index to Consolidated Financial Statements |                                                                      | Page                                         
|------------------------------------------ | -------------------------------------------------------------------- | ---------------------------------------------
|Financial Statements:                      |                                                                      |                                              
|                                           | Report of Ernst & Young LLP, Independent Auditors                    |                                              
|                                           | Consolidated Statements of Operations                                |                                              
|                                           | Consolidated Balance Sheets                                          |                                              
|                                           | Consolidated Statements of Cash Flows                                |                                              
|                                           | Consolidated Statements of Stockholders' (Deficit) Equity            |                                              
|                                           | Notes to Consolidated Financial Statements                           |                                              
|Financial Statement Schedule:              |                                                                      |                                              
|                                           | For each of the three fiscal years in the period ended June 30, 2001 |                                              
|                                           |                                                                      | Schedule IIValuation and qualifying accounts



23

---

Report of Ernst & Young LLP, Independent Auditors

To
the Board of Directors and Stockholders of Silicon Graphics, Inc.

We
have audited the accompanying consolidated balance sheets of Silicon Graphics, Inc. as of June 30, 2001 and 2000, and the related consolidated statements of
operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended June 30, 2001. Our audits also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silicon Graphics, Inc. at
June 30, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.



Palo
Alto, California
October 9, 2001

24

---



CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                               |                                     | Years ended June 30,     |         
|-------------------------------------------------------------- | ----------------------------------- | ------------------------ | --------
|
|
|Revenue:                                                       |                                     |                          |         
|                                                               | Product and other revenue           |                          | $       
|                                                               | Service revenue                     |                          |         
|                                                               |                                     |                          |         
|                                                               |                                     | Total revenue            |         
|Costs and expenses:                                            |                                     |                          |         
|                                                               | Cost of product and other revenue   |                          |         
|                                                               | Cost of discontinued product line   |                          |         
|                                                               | Cost of service revenue             |                          |         
|                                                               | Research and development            |                          |         
|                                                               | Selling, general and administrative |                          |         
|                                                               | Other operating expense             |                          |         
|                                                               |                                     |                          |         
|                                                               |                                     | Total costs and expenses |         
|                                                               |                                     |                          |         
|Operating loss                                                 |                                     |                          | (448,135
|Gain on sale of a portion of SGI interest in MTI               |                                     |                          |        
|Interest expense                                               |                                     |                          | (19,807 
|Interest income and other, net                                 |                                     |                          | 1,787   
|                                                               |                                     |                          |         
|(Loss) income before income taxes                              |                                     |                          | (466,155
|Provision for income taxes                                     |                                     |                          | 26,888  
|                                                               |                                     |                          |         
|Net (loss) income                                              |                                     | $                        | (493,043
|                                                               |                                     |                          |         
|Net (loss) income per share:                                   |                                     |                          |         
|                                                               | Basic                               |                          | $       
|                                                               |                                     |                          |         
|                                                               | Diluted                             |                          | $       
|                                                               |                                     |                          |         
|Shares used in the calculation of net (loss) income per share: |                                     |                          |         
|                                                               | Basic                               |                          |         
|                                                               |                                     |                          |         
|                                                               | Diluted                             |                          |         
|                                                               |                                     |                          |         

The accompanying notes are an integral part of these consolidated financial statements.

25

---

CONSOLIDATED BALANCE SHEETS

|                                                |                                                                                                                                                       | At June 30,                          |          
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------
|
|
|Assets:                                         |                                                                                                                                                       |                                      |          
|Current assets:                                 |                                                                                                                                                       |                                      |          
|                                                | Cash and cash equivalents                                                                                                                             |                                      | $        
|                                                | Short-term marketable investments                                                                                                                     |                                      |          
|                                                | Short-term restricted investments                                                                                                                     |                                      |          
|                                                | Accounts receivable, net of allowance for doubtful accounts of $20,068 in 2001; $12,383 in 2000                                                       |                                      |          
|                                                | Inventories                                                                                                                                           |                                      |          
|                                                | Prepaid expenses                                                                                                                                      |                                      |          
|                                                | Other current assets                                                                                                                                  |                                      |          
|                                                |                                                                                                                                                       |                                      |          
|                                                |                                                                                                                                                       | Total current assets                 |          
|                                                | Restricted investments                                                                                                                                |                                      |          
|                                                | Property and equipment, net of accumulated depreciation and amortization                                                                              |                                      |          
|                                                | Other assets                                                                                                                                          |                                      |          
|                                                |                                                                                                                                                       |                                      |          
|                                                |                                                                                                                                                       | $                                    | 1,283,029
|                                                |                                                                                                                                                       |                                      |          
|Liabilities and Stockholders' (Deficit) Equity: |                                                                                                                                                       |                                      |          
|Current liabilities:                            |                                                                                                                                                       |                                      |          
|                                                | Accounts payable                                                                                                                                      |                                      |          
|                                                | Accrued compensation                                                                                                                                  |                                      |          
|                                                | Income taxes payable                                                                                                                                  |                                      |          
|                                                | Other current liabilities                                                                                                                             |                                      |          
|                                                | Deferred revenue                                                                                                                                      |                                      |          
|                                                | Current portion of restructuring charge                                                                                                               |                                      |          
|                                                | Current portion of long-term debt                                                                                                                     |                                      |          
|                                                |                                                                                                                                                       |                                      |          
|                                                |                                                                                                                                                       | Total current liabilities            |          
|Long-term debt                                  |                                                                                                                                                       |                                      | 289,289  
|Other liabilities                               |                                                                                                                                                       |                                      | 123,431  
|                                                |                                                                                                                                                       |                                      |          
|                                                |                                                                                                                                                       | Total liabilities                    |          
|Commitments and contingencies                   |                                                                                                                                                       |                                      |          
|Stockholders' (deficit) equity:                 |                                                                                                                                                       |                                      |          
|                                                | Preferred stock, $.001 par value; issuable in series, 2,000,000 shares authorized, share issued and outstanding: none in 2001; 17,500 in 2000         |                                      |          
|                                                | Common stock, $.001 par value, and additional paid-in capital; 500,000,000 shares authorized; shares issued: 192,434,545 in 2001; 188,016,158 in 2000 |                                      |          
|                                                | Accumulated deficit                                                                                                                                   |                                      |          
|                                                | Treasury stock, at cost: 6,100,877 shares in 2001; 1,540,501 shares in 2000                                                                           |                                      |          
|                                                | Accumulated other comprehensive (loss) income                                                                                                         |                                      |          
|                                                |                                                                                                                                                       |                                      |          
|                                                |                                                                                                                                                       | Total stockholders' (deficit) equity |          
|                                                |                                                                                                                                                       |                                      |          
|                                                |                                                                                                                                                       | $                                    | 1,283,029
|                                                |                                                                                                                                                       |                                      |          

The accompanying notes are an integral part of these consolidated financial statements.

26

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                  | Years ended June 30 |                                                    
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------- | ---------------------------------------------------
|
|
|Cash Flows From Operating Activities:                                                              |                                                  |                     |                                                    
|Net (loss) income                                                                                  |                                                  | $                   | (493,043                                           
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |                                                  |                     |                                                    
|                                                                                                   | Depreciation and amortization                    |                     |                                                    
|                                                                                                   | (Gain) loss on sale of Cray product line         |                     |                                                    
|                                                                                                   | Gain on sale of a portion of SGI interest in MTI |                     |                                                    
|                                                                                                   | Gain on sale of long-term investments            |                     |                                                    
|                                                                                                   | Gain on sale of corporate real estate            |                     |                                                    
|                                                                                                   | Loss on investment in private company            |                     |                                                    
|                                                                                                   | Restructuring and impairment charges, net        |                     |                                                    
|                                                                                                   | Changes in deferred tax assets and liabilities   |                     |                                                    
|                                                                                                   | Other                                            |                     |                                                    
|Changes in operating assets and liabilities:                                                       |                                                  |                     |                                                    
|                                                                                                   | Accounts receivable                              |                     |                                                    
|                                                                                                   | Inventories                                      |                     |                                                    
|                                                                                                   | Accounts payable                                 |                     |                                                    
|                                                                                                   | Other assets and liabilities                     |                     |                                                    
|                                                                                                   |                                                  |                     |                                                    
|                                                                                                   |                                                  | Total adjustments   |                                                    
|                                                                                                   |                                                  |                     |                                                    
|                                                                                                   |                                                  |                     | Net cash (used in) provided by operating activities
|Cash Flows From Investing Activities:                                                              |                                                  |                     |                                                    
|Marketable investments:                                                                            |                                                  |                     |                                                    
|                                                                                                   | Purchases                                        |                     |                                                    
|                                                                                                   | Sales                                            |                     |                                                    
|                                                                                                   | Maturities                                       |                     |                                                    
|Purchases of restricted investments                                                                |                                                  |                     | (500,830                                           
|Proceeds from the maturities of restricted investments                                             |                                                  |                     | 445,947                                            
|Spin-off of interest in MTI                                                                        |                                                  |                     |                                                   
|Proceeds from the sale of a portion of SGI interest in MTI                                         |                                                  |                     |                                                   
|Proceeds from the sale of corporate real estate                                                    |                                                  |                     | 278,186                                            
|Capital expenditures                                                                               |                                                  |                     | (139,010                                           
|Decrease (increase) in other assets                                                                |                                                  |                     | 55,176                                             
|                                                                                                   |                                                  |                     |                                                    
|                                                                                                   |                                                  |                     |                                                    
|Cash Flows From Financing Activities:                                                              |                                                  |                     |                                                    
|Issuance of debt                                                                                   |                                                  |                     | 93                                                 
|Payments of debt principal                                                                         |                                                  |                     | (5,150                                             
|Sale of SGI common stock                                                                           |                                                  |                     | 16,120                                             
|Restricted investments used to purchase SGI common stock                                           |                                                  |                     | 104,439                                            
|Repurchase of SGI common stock                                                                     |                                                  |                     | (104,439                                           
|Sale of MTI common stock                                                                           |                                                  |                     |                                                   
|Cash dividends-preferred stock                                                                     |                                                  |                     | (392                                               
|                                                                                                   |                                                  |                     |                                                    
|                                                                                                   |                                                  |                     |                                                    
|                                                                                                   |                                                  |                     |                                                    
|Net (decrease) increase in cash and cash equivalents                                               |                                                  |                     | (128,682                                           
|Cash and cash equivalents at beginning of year                                                     |                                                  |                     | 251,811                                            
|                                                                                                   |                                                  |                     |                                                    
|Cash and cash equivalents at end of year                                                           |                                                  | $                   | 123,129                                            
|                                                                                                   |                                                  |                     |                                                    

The accompanying notes are an integral part of these consolidated financial statements.

27

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

|                                              |                                                                                                                                      | Three years ended June 30, 2001                                                                   |                           
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------- | --------------------------
|
|
|Balance at June 30, 1998                      |                                                                                                                                      | $                                                                                                 | 16,998                    
|                                              | Components of comprehensive income:                                                                                                  |                                                                                                   |                           
|                                              |                                                                                                                                      | Net income                                                                                        |                           
|                                              |                                                                                                                                      | Currency translation adjustment                                                                   |                           
|                                              |                                                                                                                                      | Change in unrealized loss on available-for- sale investments, net of tax of $12                   |                           
|                                              |                                                                                                                                      |                                                                                                   |                           
|                                              |                                                                                                                                      |                                                                                                   | Total comprehensive income
|                                              | Common stock issued under employee plans including related tax benefits (36 shares)                                                  |                                                                                                   |                           
|                                              | Convertible preferred stock, Series A preferred dividends                                                                            |                                                                                                   |                           
|                                              | Purchase (12,112 shares) and issuance (7,097 shares) of treasury stock under employee plansnet                                      |                                                                                                   |                           
|                                              | Common stock issued by MTI                                                                                                           |                                                                                                   |                           
|                                              | Other                                                                                                                                |                                                                                                   |                           
|                                              |                                                                                                                                      |                                                                                                   |                           
|Balance at June 30, 1999                      |                                                                                                                                      |                                                                                                   | 16,998                    
|                                              | Components of comprehensive income:                                                                                                  |                                                                                                   |                           
|                                              |                                                                                                                                      | Net loss                                                                                          |                           
|                                              |                                                                                                                                      | Currency translation adjustment                                                                   |                           
|                                              |                                                                                                                                      | Change in unrealized gain on available-for- sale investments, net of tax of $18,065               |                           
|                                              |                                                                                                                                      | Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges |                           
|                                              |                                                                                                                                      |                                                                                                   |                           
|                                              |                                                                                                                                      |                                                                                                   | Total comprehensive loss  
|                                              | Convertible preferred stock, Series A preferred dividends                                                                            |                                                                                                   |                           
|                                              | Purchase (2,132 shares) and issuance (7,602 shares) of treasury stock under employee plansnet                                       |                                                                                                   |                           
|                                              | Common stock issued by MTI                                                                                                           |                                                                                                   |                           
|                                              | Spin-off of interest in MTI                                                                                                          |                                                                                                   |                           
|                                              |                                                                                                                                      |                                                                                                   |                           
|Balance at June 30, 2000                      |                                                                                                                                      |                                                                                                   | 16,998                    
|                                              | Components of comprehensive income:                                                                                                  |                                                                                                   |                           
|                                              |                                                                                                                                      | Net loss                                                                                          |                           
|                                              |                                                                                                                                      | Currency translation adjustment                                                                   |                           
|                                              |                                                                                                                                      | Change in unrealized gain on available-for- sale investments, net of tax of $(1,026)              |                           
|                                              |                                                                                                                                      | Reclassification adjustment of accumulated unrealized gain related to the sale of investments     |                           
|                                              |                                                                                                                                      | Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges |                           
|                                              |                                                                                                                                      |                                                                                                   | Total comprehensive loss  
|                                              | Convertible preferred stock, Series A preferred dividends                                                                            |                                                                                                   |                           
|                                              | Purchase (160,134 shares) and issuance (1,599,886 shares) of treasury stock and (6,538,671) of common stock under employee plansnet |                                                                                                   |                           
|                                              | Purchase of 6,000,000 shares of treasury stock under equity forward arrangements                                                     |                                                                                                   |                           
|Conversion of preferred stock to common stock |                                                                                                                                      |                                                                                                   | (16,998                   
|                                              |                                                                                                                                      |                                                                                                   |                           
|Balance at June 30, 2001                      |                                                                                                                                      |                                                                                                   |                          
|                                              |                                                                                                                                      |                                                                                                   |                           

The accompanying notes are an integral part of these consolidated financial statements.

28

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations

SGI is a leader in high-performance computing and advanced graphics solutions. Our broad range of visual computing systems deliver advanced 3D
graphics and computing capabilities for engineering and creative professionals. Our servers help our customers to solve their most challenging technical computing problems, and are increasingly being
deployed in strategic business analysis, internet data center and media serving applications.

Our
products were manufactured in Wisconsin and Switzerland during fiscal 2001 (See Note 3, Other Operating Expense). We distribute our products through our direct sales force,
as well as through indirect channels including resellers and distributors. Product and other revenue consists primarily of revenue from computer system and software product shipments, as well as the
sale of software distribution rights, system leasing, technology licensing agreements and non-recurring engineering contracts. Service revenue results from customer support and maintenance
contracts, as well as from delivery of professional services.

We
have incurred net losses and negative cash flows from operations during each of the past two fiscal years. Primarily as a result of net losses, our operating activities consumed
$282 million in cash during fiscal 2001. Unrestricted cash and marketable investments declined from $258 million at June 30, 2000, to $126 million at June 30, 2001.
We have a working capital deficiency of $42 million and a stockholders' deficit of $25 million at June 30, 2001. Because our cash levels fluctuate significantly during the
quarter, and especially given the uncertainties of the current business climate, we have been actively working to improve our liquidity situation. Actions that have been taken include cutting our
operating expense levels to reduce cash consumed in operations, and raising cash through licensing and sales transactions involving real estate, intellectual property and other assets not deemed core
to our business. Of course, re-establishing profitable operations is our ultimate goal. While a forecast of future events is inherently uncertain, we believe that the combination of our current
resources and cash generated from our fiscal 2002 operating plan and licensing and sales transactions will provide sufficient funding to enable the Company to meet its obligations through at least
June 30, 2002. We are committed to the successful execution of our operating plan and business turnaround, and will take steps if necessary to further restructure our business operations to
reduce expenses.

Note 2. Summary of Significant Accounting Policies

Principles of ConsolidationThe consolidated financial statements include the accounts of SGI and our
wholly-and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Foreign Currency TranslationWe translate the assets and liabilities of our foreign subsidiaries stated in local
functional currencies to U.S. dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates of exchange in effect during the period. Gains and
losses from currency translation are included in stockholders' equity. Currency transaction gains or losses are recognized in interest income and other, net and, net of hedging gains or losses, have
not been significant to our operating results in any period.

Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

29

---

Cash Equivalents and Marketable and Restricted InvestmentsCash equivalents consist of high quality money market
instruments with maturities of 90 days or less at the date of purchase. Short-term marketable investments and restricted investments consist of both high quality money market
instruments and high quality debt securities with maturities of one year or less, and are stated at fair value. Other marketable investments consist primarily of high quality debt securities with
maturities greater than one year and less than two years, and are stated at fair value. At June 30, 2001 and 2000, our cash equivalents and marketable investments are all classified as
available-for-sale. At June 30, 2001, our restricted investments are classified as available-for-sale but are pledged as collateral against
letters of credit or held under a security agreement. At June 30, 2000 our restricted investments were pledged as collateral against letters of credit and an equity forward purchase
arrangement. Restricted investments are held in SGI's name by major financial institutions.

The
cost of securities when sold is based upon specific identification. We include realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities in interest income and other, net. We include unrealized gains and losses (net of tax) on
securities classified as
available-for-sale in accumulated other comprehensive (loss) income, a component of stockholders' (deficit) equity.

Fair Values of Financial InstrumentsThe carrying values of short-term debt and cash equivalents
approximate fair value due to the short period of time to maturity. Fair values of marketable investments, long-term debt, foreign exchange forward contracts and currency options are based
on quoted market prices or pricing models using current market rates.

Derivative Financial InstrumentsWe use derivatives to moderate the financial market risks of our business operations.
We use derivative products to hedge the foreign currency market exposures underlying certain assets and liabilities and commitments related to customer transactions. Our accounting policies for these
instruments are based on our designation of such instruments as hedging transactions. We designate an instrument as a hedge based in part on its effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions.

For
derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified
portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to
variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Other
Comprehensive Income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are
designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in Other Comprehensive Income as part of the cumulative translation adjustment to the extent
it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period.

The
effectiveness test for derivatives used to hedge the underlying economic exposure is determined by using the forward-to-forward rate comparison for
currency forward contracts which makes same-currency hedges perfectly effective. For currency option contracts, the effectiveness is assessed based on changes in the option's intrinsic
value plus the effect of discounting. As a result, the change in the volatility value of the contract is excluded from the assessment of the hedge effectiveness and immediately recognized in earnings.

30

---

Equity Instruments Indexed to SGI's Common StockWe record the proceeds received from the sale of equity instruments
and amounts paid upon the purchase of equity instruments as a component of stockholders' equity. Subsequent changes in the fair value of the equity instrument contracts are not recognized. We have the
ability to determine whether the contracts are settled in cash or stock. If the contracts are ultimately settled in cash, the amount of cash paid or received is recorded as a component of
stockholders' equity.

InventoriesManufacturing inventories are stated at the lower of cost (first-in, first-out) or
market. Demonstration systems are stated at cost less depreciation generally based on an eighteen-month life.

Property and EquipmentProperty and equipment is stated at cost, and depreciation is computed using the
straight-line method. Useful lives of two to five years are used for machinery and equipment and furniture and fixtures; leasehold improvements are amortized over the shorter of their
useful lives or the term of the lease. Our buildings are depreciated over twenty-five to forty-five years and improvements over eight to fifteen years.

Other AssetsIncluded in other assets are spare parts that are generally amortized on a straight-line basis
over the course of their respective useful lives ranging from two to five years and investments in certain technology companies that are carried at either market value or the lower of cost or market
depending on whether the company is publicly traded. Also included in other assets is goodwill associated with the acquisition of Silicon Graphics World Trade Corporation in fiscal 1991 which is
currently amortized on a straight-line basis over a period of twenty years.

Revenue RecognitionWe recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. Certain of our product sales are accounted for as multiple-element arrangements when the
elements represent a separate earnings process and the fair values are determinable. We recognize product revenue upon shipment and transfer of title. If we have an obligation to install our product,
the fair value of the installation effort is recognized when the installation service is completed. Sales of certain high performance systems may be made on the basis of contracts that include
acceptance criteria. In these instances, we recognize revenue (net of trading allowances) upon acceptance by the customer or independent distributor.

We
recognize operating system software fees when we ship the product, provided that we have no additional significant performance obligations. We recognize application software fees
when we have delivered the product, provided that we have no additional significant performance obligations. For each arrangement, we determine whether evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until all of the criteria are met.

We
generally recognize royalty revenue, under technology agreements, in the quarter in which we receive a report from a licensee detailing the shipments of products incorporating our
intellectual
property components. We recognize engineering services, which are performed on a best efforts basis, as revenue when we have completed the defined milestones and the milestone payment is probable of
collection.

Revenue
related to future commitments under service contracts is deferred and recognized ratably over the related contract term.

Shipping and Handling CostsShipping and handling costs are classified as a component of cost of sales.

Product WarrantyWe provide at the time of sale for the estimated cost to warrant our products against defects in
materials and workmanship for a period of up to one year on UNIX systems and up to three years on Windows NT systems.

31

---

Advertising CostsWe account for advertising costs as expense in the period in which they are incurred. Advertising
expense for the years ended June 30, 2001, 2000 and 1999 was $30 million, $25 million and $49 million, respectively.

Per Share DataBasic earnings per share is based on the weighted effect of all common shares issued and outstanding,
and is calculated by dividing net (loss) income by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income, adjusted for the effect,
if any, from assumed conversion of all potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earnings per share calculation plus the number
of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.

Stock-Based CompensationWe account for stock-based employee compensation arrangements under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations.

Long Lived AssetsIn accordance with the provisions of Statement of Financial Accounting Standards 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), we review long-lived assets, including property and equipment,
acquired technology rights, goodwill, and other intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully
recoverable. Under SFAS 121, an impairment loss would be recognized when undiscounted future cash flows expected to
result from the use of the asset and its eventual disposition is less than the carrying amount. Long lived assets and certain identifiable intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, such as a significant industry downturn, significant decline in the
market value of the Company, or a significant decline in projected future cash flow for an operating segment. Determination of recoverability is based on an estimate of undiscounted future cash flows
from the use of the asset and its eventual disposition. Measurement of impairment charges for long-lived assets and certain identifiable intangible assets that management expects to hold
and use are based on the fair value of such assets. Long lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

Capitalized SoftwareIn fiscal 2001, we adopted Statement of Position ("SOP") No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." Internal use software costs capitalized during fiscal 2001 amounted to $28 million and related to our global ERP
system. With the adoption of SOP 98-1, we began capitalizing certain costs incurred to acquire or create internal use software, principally related to software coding, designing system
interfaces, installation and testing of the software. Capitalized costs are amortized over periods ranging from 3 to 5 years.

ReclassificationsWe have reclassified certain prior year amounts on the Consolidated Balance Sheets, Consolidated
Statements of Operations, Consolidated Statements of Cash Flows and Notes to Consolidated Financial Statements to conform to the current year presentation.

Recent Accounting PronouncementsIn June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations", or "SFAS 141", and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", or "SFAS 142". SFAS 141 requires the use of the purchase method for all business combinations initiated after June 30, 2001, and provides new criteria for
determining whether an acquired intangible asset should be recognized separately from goodwill. SFAS 142 eliminates the amortization of goodwill and replaces it with an impairment only model.
Upon adoption, goodwill related to acquisitions completed before the date of adoption would be subject to the new provisions of

32

---

SFAS 141; amortization of any remaining book value of goodwill would cease and the new impairment-only approach would apply. The impairment-only approach does not apply
to the treatment of intangible assets. The provision of SFAS 141 and SFAS 142 will be effective for fiscal years beginning after December 15, 2001. We will adopt SFAS 141
as of July 1, 2001 and SFAS 142 as of July 1, 2002, and do not believe such adoption will have a material impact on our results of operations, financial position, or cash flows.

Note 3. Other Operating Expense

Other operating expense is as follows (in thousands):

Years ended June 30,2001

2000

1999Restructuring and impairment charges

$
102,052

$
102,861

$
(14,000
)Merger-related expenses








(1,107
)$
102,052

$
102,861

$
(15,107
)


RestructuringIn the second quarter of fiscal 1998, we announced and began to implement a restructuring program aimed
at bringing our expenses more in line with the current revenue levels and restoring long-term profitability to SGI. These actions resulted in aggregate charges of $144 million
(before the effect of the adjustments noted below). The process of developing this program continued during the balance of fiscal 1998 and included a reevaluation of our core competencies, technology
roadmap and business model, as well as development of our fiscal 1999 operating plan. During the first quarter of fiscal 2000, we announced and began to implement supplemental restructuring actions
consistent with the objectives of the foregoing fiscal 1999 plan. These actions resulted in aggregate charges of $145 million (before the effect of the adjustments noted below). Both
restructuring programs were broad-based and covered virtually all aspects of our products, operations and processes. The combined fiscal 2000 and fiscal 1998 restructuring actions resulted in the
elimination of approximately 2,300 positions, writing down certain operating, vacating certain leased facilities and canceling certain contracts.

During
fiscal 1999 and 2000, respectively, we revised downward by $14 million and $7 million, our estimate of the total costs associated with the fiscal 1998 actions.
The adjustment primarily reflects lower than estimated severance and related charges attributable to higher than expected attrition, as well as lower per person costs. To a lesser extent, we also
adjusted estimated costs of contract cancellations, operating asset write-downs and exiting certain facilities.

Fiscal
2000 restructuring and impairment actions were comprised of operating asset write downs of $27 million for fixed assets and evaluation units, prepaid license agreements
and other intangible assets associated with the end of life of our Silicon Graphics 320 and Silicon Graphics 540 visual workstations
and certain high-end graphics development projects that were canceled. Third party contract cancellation charges associated with the fiscal 1999 actions totaled $8 million. We
planned to vacate approximately 1,500,000 square feet of leased sales and administrative facilities throughout the world, with lease terms expiring through fiscal 2004. We estimated this would require
ongoing lease payments of $26 million until subleases could be arranged and incurring $7 million in exit costs, including costs to restore facilities to original condition. In addition,
an impairment charge of $11 million was recorded for the abandonment of leasehold and other fixed assets associated with the facility closures.

During
the second through fourth quarters of fiscal 2000, we lowered our estimate of the total costs associated with the fiscal 2000 restructuring activities described above. As a
result, a cumulative adjustment of approximately $35 million has been recorded in fiscal 2000. The adjustment primarily reflects far more favorable settlements of lease obligations attributable
to extremely high demand for facilities in Mountain View, California. It also reflected our new approach to structuring our field

33

---

organization. The adjustment further reflects lower than estimated severance and related charges attributable to higher than expected attrition and lower per person costs. Estimated costs of contract
cancellations were also adjusted due to favorable settlements.

During
the first quarter of fiscal 2001, we again lowered our estimate of the total costs associated with the fiscal 2000 restructuring activities and recorded an adjustment of
$6 million. The adjustment primarily reflected lower than estimated facilities closure costs due to negotiating better than anticipated sublease arrangements. As of March 31, 2001, all
estimated positions were eliminated and all severance-related charges were paid. The remaining facilities related accrual balance of approximately $2 million at June 30, 2001 is expected
to result in cash expenditures through fiscal 2004.

During
the fourth quarter of fiscal 2001, we announced and began to implement additional restructuring actions with the objective of further reducing our operating expenses and
restoring long-term profitability to SGI. These actions resulted in aggregate charges of $88 million and were broad-based and covered virtually all aspects of our products,
operations and processes. Fiscal 2001 restructuring actions resulted in the elimination of approximately 1,000 positions, across all levels and functions, of which roughly 700 of the positions have
been eliminated as of June 30, 2001. Severance payments and related charges of $45 million consist primarily of salary and expected payroll taxes, extended medical benefits, statutory
legal obligations and outplacement services. Third party contract cancellation charges associated with the fiscal 2001 actions totaled $2 million. Our plans include vacating approximately
3,000,000 square feet of leased sales and administrative facilities throughout the world, with lease terms expiring through April 2010. We estimate this will require ongoing lease payments of
$32 million and $9 million in exit costs, including costs to restore facilities to their original condition. The remaining fiscal 2001 accrual balance of approximately $79 million
at June 30, 2001 is expected to result in cash expenditures through fiscal 2002 for severance and related charges and canceled contracts and through fiscal 2010 for facilities related
expenditures.

ImpairmentAs a result of the fiscal 2001 restructuring activities described above, we wrote down approximately
$10 million of fixed assets, primarily associated with leasehold improvements and associated furniture and fixtures held for disposal. We wrote down approximately $6 million related to
canceled projects and demonstration units as a result of the decision to discontinue the IA32 product line. In addition, we also recorded approximately $4 million in impairments for internally
developed software projects discontinued as a result of the functionality provided by the new ERP system. The fair value and remaining carrying value of all of these assets at June 30, 2001 was
immaterial.

34

---

The following table depicts the restructuring and impairment activity in fiscal 1999, 2000 and 2001 (in thousands):

|Category                                           |            | Severance
and
Related
Charges |         | Canceled
Contracts |   | Vacated
Facilities |        | Other |         | Impairment
Charges |   | Total  |  
|-------------------------------------------------- | ---------- | ----------------------------- | ------- | ------------------ | - | ------------------ | ------ | ----- | ------- | ------------------ | - | ------ | -
|Balance at June 30, 1999                           |            | $                             | 5,218   |                    | $ |                   |        | $     | 1,049   |                    | $ | 2,166  |  
|Additionsfiscal 2000 restructuring and impairment |            |                               | 65,820  |                    |   | 8,468              |        |       | 32,509  |                    |   |       |  
|Adjustments: decrease                              |            |                               | (13,010 | )                  |   | (3,285             | )      |       | (18,829 | )                  |   | (2,166 | )
|Expenditures:                                      |            |                               |         |                    |   |                    |        |       |         |                    |   |        |  
|                                                   | Cash       |                               |         | (54,763            | ) |                    | (5,183 | )     |         | (8,289             | ) |        | 
|                                                   | Non-cash   |                               |         |                   |   |                    |       |       |         |                   |   |        | 
|Balance at June 30, 2000                           |            | $                             | 3,265   |                    | $ |                   |        | $     | 6,440   |                    | $ |       |  
|Additionsfiscal 2001 restructuring and impairment |            |                               | 45,136  |                    |   | 1,923              |        |       | 41,490  |                    |   |       |  
|Adjustments:                                       |            |                               |         |                    |   |                    |        |       |         |                    |   |        |  
|                                                   | Increase   |                               |         |                   |   |                    |       |       |         | 3,619              |   |        | 
|                                                   | (decrease) |                               |         | (2,590             | ) |                    |       |       |         | (3,631             | ) |        | 
|Expenditures:                                      |            |                               |         |                    |   |                    |        |       |         |                    |   |        |  
|                                                   | Cash       |                               |         | (9,428             | ) |                    | (706   | )     |         | (3,880             | ) |        | 
|                                                   | Non-cash   |                               |         | (233               | ) |                    |       |       |         | (756               | ) |        | 
|Balance at June 30, 2001                           |            | $                             | 36,150  |                    | $ | 1,217              |        | $     | 43,282  |                    | $ |       |  

During
the first quarter of fiscal 2002, we announced and began to implement supplemental restructuring actions consistent with the objective of the foregoing fiscal 2001 plan. See
Note 22 "Subsequent Event (unaudited)" for further information.

Merger-related expensesThe 1999 amount represents an adjustment to previously estimated merger-related expenses.
Merger-related expenses were incurred in connection with the June 1996 acquisition of Cray Research, Inc. ("Cray") and consist principally of costs associated with the integration of SGI
and Cray information systems, accounting processes and marketing and human resources activities.

35

---

Note 4. Earnings Per Share

Years ended June 30,2001

2000

1999(in thousands, except per share amounts)Net (loss) income

$
(493,043
)
$
(829,544
)
$
53,829Less preferred stock dividends


(392
)

(525
)

(525
)Net (loss) income available to common stockholders

$
(493,435
)
$
(830,069
)
$
53,304Weighted average shares outstanding-basic


190,338


183,528


186,374Employee stock options and restricted shares








3,053Weighted average shares outstanding-diluted


190,338


183,528


189,427Net (loss) income per share:Basic

$
(2.59
)
$
(4.52
)
$
0.29Diluted

$
(2.59
)
$
(4.52
)
$
0.28Potentially dilutive securities excluded from computations because they are anti-dilutive


8,643


10,244


8,843


Note 5. Financial Instruments

Cash Equivalents and Marketable and Restricted InvestmentsThe following table summarizes by major security type the
fair value of SGI's cash equivalents and marketable and restricted investments at June 30, 2001 and 2000 (in thousands):

2001

2000Money market funds

$
68,465

$
189,915Certificates of deposit and time deposits


79,014


91,770U.S. commercial paper


817


60,908Total


148,296


342,593Less amounts classified as cash equivalents


(68,465
)

(209,915
)Total marketable and restricted investments

$
79,831

$
132,678


Gross
realized gains and losses on sales and unrealized gains and losses on our available-for-sale securities were not significant in fiscal 2001, 2000, or
1999.

Derivative Instruments and Hedging Activities

Risk ManagementIn the normal course of business, our financial position is routinely subjected to a variety of
risks, including market risk associated with interest rate movements and currency rate movements on non-U.S. dollar denominated assets and liabilities. We regularly assess risks and have
established policies and business practices to protect against the adverse effects of these and other potential exposures. We use derivatives to moderate the financial market risks of our business
operations by hedging the foreign currency market exposures underlying certain assets, liabilities and for commitments related to customer transactions. All of our hedges currently qualify as cash
flow hedges. We do not use derivatives for trading purposes.

Cash Flow HedgesCash flow hedges are hedges of forecasted transactions or of the variability of cash flows to be received or paid
related to a recognized asset or liability. We purchase currency options and currency forward contracts generally expiring within one year as hedges of anticipated sales

36

---

that are denominated in foreign currencies. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such transactions will be adversely affected by
changes in exchange rates. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a
component of Other Comprehensive Income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The amount in accumulated Other Comprehensive
Income as of June 30, 2001 will be reclassified into earnings within the next twelve months.

Accumulated Derivative Gains or LossesThe following table summarizes activity in Other Comprehensive Income related to derivatives
classified as cash flow hedges held by us during the period from July 1 through June 30 of the following fiscal periods (in thousands):

2001

2000Opening balance

$
(2,661
)
$
Reclassified into earnings from Other Comprehensive Income, net


(7,251
)

(7,283
)Changes in fair value of derivatives, net


10,634


4,622Unrealized gain (loss) on derivative instruments included in Other Comprehensive Income

$
722

$
(2,661
)


The
effect on earnings for the fiscal periods presented relating to the ineffectiveness of hedging activities was not material.

Fair Value of Financial InstrumentsThe carrying amounts and estimated fair values of SGI's financial instruments at
June 30, 2001 and 2000 are summarized as follows (in thousands):

2001

2000Carrying
Amount

Fair Value

Carrying
Amount

Fair ValueCash and cash equivalents

$
123,129

$
123,129

$
251,811

$
251,811Marketable investments


79,831


79,831


132,678


132,678Debt instruments


339,983


181,284


354,296


247,875Currency forward contracts


626


626


(3,413
)

(3,413
)Currency options


402


402


(3,773
)

(3,773
)


Note 6. Sale of Cray Product Line.

On March 31, 2000, we completed the sale of our Cray product line to Tera Computer Company ("Tera"). We received approximately $15 million in
cash, a $35 million promissory note due in three equal quarterly installments beginning June 30, 2000 and 1 million shares of unregistered Tera common stock, valued at
approximately $6.5 million at March 31, 2000. As a result of this transaction, approximately 750 employees transferred to Tera. Based upon the net asset value of the assets sold and the
liabilities assumed at March 31, 2000 and the costs and expenses incurred in connection with the transaction, we recorded as other income an overall gain of approximately $16 million
from the transaction. However, the consolidated financial statements at June 30, 2000 include a pre-tax loss on the transaction of approximately $8 million because we
accounted for the promissory note proceeds when
the cash payments were received due to the uncertainty of ultimate collection. Included in the pre-tax loss of $8 million in fiscal 2000 is the first installment against the
promissory note of

37

---

approximately $12 million. The following is a summary of the final determination of the net assets sold and liabilities assumed by Tera on March 31, 2000:

(in millions)Inventories, net

$
25.4Property and equipment, net


10.8Spare parts


29.2Other assets


6.7Product warranty and other accrued liabilities


(34.2
)$
37.9


During
fiscal 2001, we received the remaining $24 million of cash in accordance with the sales agreement, and recognized a pre-tax non-operating gain of that amount in
the period. We also sold 400,000 Tera shares (now called "Cray Incorporated") for gross proceeds of $1 million, recognizing a loss of approximately $2 million. We have included an
unrealized loss of approximately $2 million as a component of accumulated other comprehensive loss on the remaining 600,000 shares held by us.

Note 7. MTI Technologies, Inc.

On July 6, 1998, we closed an initial public offering of the common stock of our MTI subsidiary, a company formed by SGI that designs and develops RISC
based microprocessor intellectual property for embedded systems applications targeting the market for digital consumer products. The offering consisted of SGI's sale of 4,250,000 shares of MTI common
stock for net proceeds of approximately $54 million and MTI's sale of 1,250,000 shares of MTI common stock for net proceeds to MTI of approximately $16 million.

In
April 1999, the outstanding common stock of MTI was recapitalized into Class A and Class B Common Stock to permit a multi-step divestiture of SGI's
ownership interest in MTI. In May 1999, SGI and MTI closed a secondary public offering of 6,680,241 shares of the Class A Common Stock of MTI owned by SGI for net proceeds of
approximately $219 million. We accounted for the MTI transactions in accordance with APB 18, "Equity Method of Accounting for Investments in Common Stock", and the Securities and Exchange
Commission's Staff Accounting Bulletin Topic 5:H. For the offerings of MTI shares held by us, we included the excess of the net proceeds over the carrying value of those shares, or
$273 million, in income in our consolidated statement of operations for fiscal 1999. For the offering of newly issued MTI shares, the net proceeds of $16 million were included in
additional paid-in capital in our consolidated balance sheet.

In
the fourth quarter of fiscal 2000, SGI distributed its remaining interest in MTI through a spin-off effective June 20, 2000. Under the spin-off, SGI
distributed, as a dividend, all of its 25,069,759 shares of Class B Common Stock of MTI to SGI shareholders of record as of June 6, 2000. The distribution of these shares was
tax-free to SGI. Each share of SGI stock received 0.13858 shares of MTI Class B Common Stock. SGI received no consideration in connection with the distribution.

Note 8. Concentration of Credit and Other Risks

Credit RiskFinancial instruments that potentially subject SGI to concentration of credit risk consist principally of
cash, investments, currency forward contracts and trade receivables. We place our investments and transact our currency forward contracts with high-credit-quality counterparties and, by
policy, limit the amount of credit exposure to any one counterparty, and generally do not require collateral. The credit risk on receivables due from counterparties related to currency forward
contracts is immaterial at June 30, 2001 and 2000. We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain reserves for potential credit
losses and such losses have been within our expectations.

38

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ProductionMost of our products incorporate components that are available from only one or from a limited number of
suppliers. Many of these components are custom designed and manufactured, with lead times from order to delivery that can exceed 90 days. Shortages of various essential materials could occur
due to interruption of supply or increased demand in the industry. If we were unable to procure certain such components or sustain our outsourced production capacity, it could affect our ability to
meet demand for our products which would have an adverse effect upon our results.

International OperationsWe derive slightly less than half of our revenue from sales outside the United States. In
addition, many key components are produced outside the United States. Therefore, our results could be negatively affected by such factors as changes in foreign currency exchange rates, trade
protection measures, longer accounts receivable collection patterns, and changes in regional or worldwide economic or political conditions. The risks of our international operations are mitigated in
part by our foreign exchange hedging program and by the extent to which our sales and manufacturing activities are geographically distributed.

Sales
to foreign customers are also subject to export regulations. Sales of many of our high-end products require clearance and export licenses from the U.S. Department of
Commerce under these regulations. Our international sales would be adversely affected if such regulations were tightened, or if they are not modified over time to reflect the increasing performance of
our products. The Departments of Commerce and Justice are currently conducting civil and criminal investigations into SGI's compliance with the export regulations in connection with several export
sales to certain countries. We believe that these matters will be resolved without a significant adverse effect on our business. However, there is no assurance that these matters will not have an
unforeseen outcome that could impair the conduct of our business with the U.S. government or our sales outside the United States.

Note 9. Consolidated Financial Statement Details

Inventories

Inventories at June 30, 2001 and 2000 are as follows (in thousands):

2001

2000Components and subassemblies

$
85,383

$
38,855Work-in-process


32,171


50,051Finished goods


40,092


45,896Demonstration systems


47,506


46,792Total inventories

$
205,152

$
181,594


Property and Equipment

Property and Equipment at June 30, 2001 and 2000 are as follows (in thousands):

2001

2000Land and buildings

$
54,868

$
224,461Machinery and equipment


510,772


586,233Furniture and fixtures


84,313


106,687Leasehold improvements


105,409


133,610755,362


1,050,991Accumulated depreciation and amortization


(486,418
)

(584,265
)Net property and equipment

$
268,944

$
466,726


39

---

In
December 2000, we completed the sale and leaseback transaction of a portion of our corporate real estate holdings in Mountain View, California for approximately
$236 million. As part of the transaction, we leased back specific buildings on our current campus over periods ranging from 2 to 12 years. All of the leases involved in this transaction
are classified as operating leases. As a result of the transaction, we will recognize an overall gain of approximately $63 million, of which $11 million has been recognized during fiscal
2001. The remaining gain will be recognized over the terms of the respective leases and will be recorded as an offset to rent expense. Under the terms of this sales-leaseback arrangement, we are
required to provide the lessor with letters of credit amounting to $43 million. We initially collateralized these letters of credit by way of restricted cash deposits with a financial
institution. We entered into a line of credit arrangement which allows us to utilize these otherwise restricted amounts. This line of credit arrangement is furthur discussed at Note 11.

During
the fourth quarter of fiscal 2001, we sold additional corporate real estate in Mountain View, California for $50 million in cash proceeds, which approximated the
carrying value. These facilities were not leased back by us.

Note 10. Other Assets

Other assets at June 30, 2001 and 2000 are as follows (in thousands):

2001

2000Spare parts

$
80,044

$
98,601Investments


12,841


152,642Software licenses, goodwill and other, net of accumulated amortization of $83,836 in 2001 and $81,057 in 2000


64,675


74,525$
157,560

$
325,768


During
the third quarter of fiscal 2001, we wrote off our investment in a private company due to our determination that an other than temporary decline in the market value of the investment had taken
place. This loss of $83 million is reflected in Interest Income and Other, net in the Consolidated Statement of Operations. During the first and second quarters of fiscal 2001, we sold our
remaining investment in VA Linux Systems Inc. ("VA Linux") for total cash proceeds of $53 million. The investment in VA Linux was originally purchased in June 1999 for
$5 million. The gain is reflected in the Interest Income and Other, net in the Consolidated Statement of Operations.

Note 11. Financing Arrangement

During the third quarter of fiscal 2001, we obtained an asset-based credit facility. Available credit is determined monthly based on 85% of eligible accounts
receivable, up to a maximum of $75 million. To date, we have used $43 million of this line to secure a letter of credit required under the terms of our building sale-leaseback
arrangement (see Note 9). This obligation bears interest payable monthly at the prime rate plus 0.25% (7.0% at June 30, 2001) and the principal amount is due in April 2003. The facility
is currently secured by U.S. accounts receivable and inventory, the pledge of certain intellectual property and a $7 million cash deposit. The credit facility also contains financial and other
covenants. During the first quarter of fiscal 2002, we were not in compliance with the financial covenants relating to EBITDA for the fourth quarter of fiscal 2001 and the $50 million minimum
daily unrestricted cash balance and have obtained a waiver from the lender of these defaults. In the event we are not able to comply with the financial and other covenants of this facility in the
future, or there is a material adverse change impairing our ability to repay the outstanding balance, the facility may be declared to
be in default. If a default is declared and not waived, it would have a significant impact on our working capital.

40

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Note 12. Long Term Debt

Long-term debt at June 30, 2001 and 2000 is as follows (in thousands):

2001

2000Senior Convertible Notes due September 2004 at 5.25%

$
230,591

$
230,591Convertible Subordinated Debentures due February 2011 at 6.125%, net of unamortized discount of $9,493 ($10,106 in 2000)


47,283


46,670Swiss Franc mortgage due June 2017 at 1.70% (4.47% in 2000), which resets quarterly


12,207


15,041Japanese Yen fixed rate loan due December 2001 at 2.06%


48,325


56,770Other


1,577


5,224339,983


354,296Less amounts due within one year


(50,694
)

(4,775
)Amounts due after one year

$
289,289

$
349,521


The
Senior Convertible Notes (the "Senior Notes") are convertible into shares of common stock at a conversion price equal to $18.70 per share. The Senior Notes are redeemable at our
option beginning in 2002, at varying prices based on the year of redemption. The Senior Notes are redeemable at the holder's option in the event of the sale of all, or substantially all, of our common
stock for
consideration other than common stock traded on a U.S. exchange or approved for quotation on the Nasdaq National Market.

In
connection with the Cray acquisition, SGI assumed the Cray Research Convertible Debentures. These debentures are convertible into SGI's common stock at a conversion price of $39.17
per share at any time prior to maturity and may be redeemed at our option at a price of 100%. Prior to our acquisition of Cray, Cray repurchased a portion of the debentures with a face value of
$33 million. The repurchase satisfied the first six required annual sinking fund payments of $6 million originally scheduled for the years 1997 through 2002. In fiscal 2000 and fiscal
1999, we repurchased additional portions of the debentures with a face value of $11 million and $15 million, respectively. These repurchases satisfied the next four required annual
sinking fund payments of $6 million originally scheduled for the years 2003 through 2006. Remaining annual sinking fund payments of $6 million each are scheduled from 2007 to 2010 with a
final maturity payment of $35 million in 2011.

Principal
maturities of long-term debt at June 30, 2001 are as follows (in millions): 2002-$51; 2003-$2; 2004-$1;
2005-$232; 2006-$1 and $62 thereafter.

Note 13. Leasing Arrangements as Lessee

We lease certain of our facilities and some of our equipment under non-cancelable operating lease arrangements.

Future
minimum annual lease payments under operating leases at June 30, 2001 are as follows (in millions): 2002-$52; 2003-$41; 2004-$37;
2005-$35; 2006-$26, and thereafter $130. Future sublease and rental income as of June 30, 2001 are as follows (in millions): 2002- $9; 2003- $7;
2004- $7; 2005- $7; 2006-$2.

Aggregate
operating lease rent expense in fiscal 2001, 2000 and 1999 was (in millions): $53, $57 and $71, respectively. Included in fiscal 2001 rent expense is an offset of
$4 million which relates to our recognition of a portion of our deferred gain on the sales leaseback transaction (see Note 9).

41

---

On August 4, 1999, pursuant to one of our lease agreements, as amended, we exercised our option to purchase five buildings on our Mountain View campus for a purchase price of
approximately $125 million. The purchase of these buildings was completed in September 1999.

In
December 2000, we completed the sale of a portion of our corporate real estate in Mountain View, California (see Note 5). As part of the transaction, we leased back
specific buildings on our current campus over periods ranging from 2 to 12 years. All of the leases involved in this transaction are classified as operating leases. As of June 30, 2001
we have a deferred gain of $52 million on the sale leaseback transaction which will be recognized over the terms of the respective leases as an offset to the respective rent expense.

Note 14. Stockholders' Equity

Preferred Stock TransactionsOn March 1, 2001, NKK Corporation ("NKK"), which owned 17,500 shares of
Series A convertible preferred stock, elected to convert its remaining shares into our common stock. As a result of the conversion, NKK received 3,829,321 shares of common stock, calculated by
dividing the original issuance price by the then-current price of the common stock. The market value of these shares was $4.57 per share at the point of conversion. Prior to conversion,
the preferred stock paid a 3% cumulative annual dividend on the original issuance price of $1,000 per share, had preference upon liquidation equal to $1,000 per share and had aggregate voting rights
equivalent to 1,400,000 shares of common stock.

Stock Award PlansWe have various stock award plans which provide for the grant of incentive and nonstatutory stock
options and the issuance of restricted stock to employees and certain other persons who provide consulting or advisory services to SGI. We grant incentive stock options with an exercise price of no
less than the fair market value on the date of grant. The board of directors determines the prices of nonstatutory stock option grants and restricted stock. There were no discounted stock options,
consultant or advisory grants granted during fiscal 2001. Under the plans, options and restricted stock generally vest over a fifty-month period from the date of grant. On August 8, 2000, a
special restricted bonus was granted that vested in one year.

In
addition, we had a Directors' Stock Option Plan which allowed for the grant of nonstatutory stock options to nonemployee directors at an exercise price of no less than the fair
market value at the date of grant. The Directors' Stock Option Plan expired in July 2000, therefore all future grants to directors will be made pursuant to one of the existing employee stock
option plans. On the date of the annual stockholder's meeting, each eligible director was granted an option to purchase an additional 20,000 shares of common stock. These options generally vested in
installments over a two -year period.

At
June 30, 2001, 2000 and 1999, there were 14,641,134, 20,905,393 and 18,437,793 options available for grant, respectively, and there were 1,146,024, 467,878 and 820,625
shares of restricted stock, respectively, subject to repurchase.

42

---

Activity under all of the stock award plans was as follows:

|                       |                   | 2001       |            | 2000 |      | 1999
|---------------------- | ----------------- | ---------- | ---------- | ---- | ---- | ----
|
|Balance at July 1      |                   | 23,827,668 |            | $    | 6.78 |     
|                       | Options granted   |            | 19,734,021 |      | $    | 3.62
|                       | Options exercised |            | (1,563,748 | )    | $    | 0.92
|                       | Options forfeited |            |           |      |      |    
|                       | Options canceled  |            | (8,775,356 | )    | $    | 7.14
|                       |                   |            |            |      |      |     
|Balance at June 30     |                   | 33,222,585 |            | $    | 5.08 |     
|                       |                   |            |            |      |      |     
|Exercisable at June 30 |                   | 18,827,210 |            | $    | 5.57 |     
|                       |                   |            |            |      |      |     

Additional
information about options outstanding at June 30, 2001 is as follows:

|                |  | Options Outstanding |  |   |       | 
|--------------- |  | ------------------- |  | - | ----- | 
|
|
|
|$1.05 - $3.50   |  | 14,720,835          |  | $ | 3.33  | 
|$3.53 - $5.74   |  | 7,892,892           |  | $ | 5.09  | 
|$5.87 - $9.99   |  | 10,188,162          |  | $ | 7.09  | 
|$10.05 - $37.49 |  | 420,696             |  | $ | 17.85 | 
|                |  |                     |  |   |       | 
|                |  | 33,222,585          |  | $ | 5.08  | 

In
conjunction with the June 20, 2000 spin-off of our remaining interest in MTI to SGI stockholders, we adjusted the exercise price of outstanding
stock options under the criteria set forth in the Emerging Issues Task Force 90-9, "Changes to Fixed Employee Stock Option Plans as a result of Equity Restructuring." As a result of this
adjustment, the weighted average exercise price of the 24.5 million outstanding stock options changed from $11.22 to $6.41.

Employee Stock Purchase PlanWe have an employee stock purchase plan under which eligible employees may purchase stock
at 85% of the lower of the closing prices for the stock at the beginning
of a twenty four-month offering period or the end of each six-month purchase period. The purchase periods generally begin in May and November. Purchases are limited to 10% of
each employee's compensation. At June 30, 2001, we had issued 32,663,725 shares under the plan and we have reserved 1,871 shares for future issuance.

Subsequent
to June 30, 2001 the Board approved an increase in the number of shares reserved for future issuance for the Employee Stock Purchase Plan and the non-executive
equity incentive plan, resulting in 3,973,680 and 4,998,125 shares, respectively, available for future issuances.

Grant Date Fair ValuesThe weighted average estimated fair value of employee stock options granted at grant date market
prices during fiscal 2001, 2000 and 1999 was $2.06, $4.40 and $5.18, per share, respectively. The weighted average exercise price of employee stock options granted at grant date market prices during
fiscal 2001, 2000 and 1999 was $3.59, $10.48 and $12.14 per share, respectively. There were no employee stock options granted at below grant date market prices during fiscal 2001 and 1999. The
weighted average estimated fair value of employee stock options granted at below grant date market prices during fiscal 2000 was $6.44 per share. The weighted average exercise price of employee stock
options granted at below grant date market prices during fiscal 2000 was $5.29. The weighted average fair value of restricted stock granted during fiscal 2001, 2000 and 1999 was $4.46, $9.00 and
$12.51 per share, respectively. The weighted average estimated fair value of shares granted under the Stock Purchase Plan during fiscal 2001, 2000 and 1999 was $1.59, $2.69 and $4.97 per share,
respectively.

43

---



We
estimated the weighted average fair value of options granted at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

Employee Stock Options

Stock Purchase Plan SharesYears ended June 30,2001

2000

1999

2001

2000

1999Expected life (in years)

1.4

1.5

1.9

0.4

0.5

0.5Risk-free interest rate

5.10
%
5.57
%
5.26
%
5.22
%
5.45
%
4.97
%Volatility

0.81

0.79

0.71

0.93

0.78

0.56Dividend yield

0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%


Pro Forma InformationWe have elected to follow APB 25 in accounting for our employee stock options. Under APB 25, we
recognize no compensation expense in our financial statements except in connection with the grant of restricted stock for nominal consideration and unless the exercise price of our employee stock
options is less than the market price of the underlying stock on the grant date. Total compensation expense recognized in our financial statements for stock-based awards under APB 25 for fiscal 2001,
2000 and 1999 was $6 million, $7 million and $5 million, respectively.

We
determined the following pro forma information regarding net income and earnings per share as if we had accounted for our employee stock options and employee stock purchase plan
under the fair value method prescribed by Statement of Financial Accounting Standards No. 123. For purposes of pro forma disclosures, the estimated fair value of the stock awards is amortized
to expense over the vesting periods. The pro forma information is as follows (in thousands, except per share amounts):

Years ended June 30,2001

2000

1999Pro forma net loss

$
(542,976
)
$
(880,868
)
$
(13,696
)Pro forma net loss per share:Basic

$
(2.85
)
$
(4.80
)
$
(0.08
)Diluted

$
(2.85
)
$
(4.80
)
$
(0.08
)


Stockholder Rights PlanWe have a stockholder rights plan which provides existing stockholders with the right to
purchase one one-thousandth (0.001) preferred share for each share of common stock held in the event of certain changes in SGI's ownership. The rights plan may serve as a deterrent to
certain abusive takeover tactics which are not in the best interests of stockholders.

Stock Repurchase ProgramDuring fiscal 1996, our board of directors authorized a program to repurchase up to
27.5 million shares of our common stock in open market or in private transactions, option or other forward transactions and other potential methods. We have repurchased 27,396,400 shares of
common stock at a cost of $439 million since commencement of the repurchase program. During fiscal 2001, we settled our remaining equity forward instrument under which we were committed to
repurchase an aggregate of 6.0 million shares of common stock at an aggregate cost of $104 million. At June 30, 2001 these equity forward contracts were secured in part by
collateral, reflected in our financial
statements as restricted investments. As of June 30, 2001, 56,200 shares remained available for our use under this stock repurchase program.

Common Shares ReservedWe have reserved in the aggregate 28,429,869 shares of common stock issuable upon conversion of
the Senior Notes and Convertible Subordinated Debentures, as well as shares issuable under our stock award and purchase plans.

44

---

Note 15. Comprehensive Income

The components of accumulated other comprehensive (loss) income, net of tax, are as follows:

Years ended June 30,2001

2000(in thousands)Unrealized (loss) gain on available-for-sale investments

$
(2,472
)
$
30,699Unrealized gain (loss) on derivative instruments designated and qualifying as cash flow hedges


722


(2,661
)Foreign currency translation adjustments


(21,125
)

(9,472
)Accumulated other comprehensive (loss) income

$
(22,875
)
$
18,566


Note 16. Income Taxes

The components of (loss) income before income taxes are as follows (in thousands):

Years ended June 30,2001

2000

1999United States

$
(341,479
)
$
(367,033
)
$
10,699International


(124,676
)

(14,851
)

115,022$
(466,155
)
$
(381,884
)
$
125,721


The
provision for income taxes consists of the following (in thousands):

Years ended June 30,2001

2000

1999Federal:Current

$
6,111

$
(33,528
)
$
(44,972
)Deferred





352,757


58,618State:Current


1,300


3,821


93Deferred





58,260


5,455Foreign:Current


19,477


29,492


38,244Deferred





36,858


14,454$
26,888

$
447,660

$
71,892


45

---

The
provision for income taxes reconciles to the amounts computed by applying the statutory federal rate to income (loss) before income taxes as follows (in thousands):

Years ended June 30,2001

2000

1999Tax at U.S. federal statutory rate

$
(163,154
)
$
(133,659
)
$
44,003State taxes, net of federal tax benefit


845


40,353


3,606Effect of change in investment policy with respect to undistributed earnings of certain foreign affiliates





92,972


Net operating loss with no tax benefit


162,352


152,202


14,705Foreign tax credits with no tax benefit


19,477


25,868


4,020Increase (reduction) in tax contingencies





(67,000
)

Valuation allowance on net deferred tax assets





329,965


Other


7,368


6,959


5,558Provision for income taxes

$
26,888

$
447,660

$
71,892


During
the fourth quarter of the year ended June 30, 2000, we changed our intention to permanently invest accumulated earnings attributable to certain foreign affiliates which
manufacture in foreign jurisdictions. The effect of this change in investment policy resulted in a provision for deferred U.S. and foreign income taxes of approximately $93 million.

In
addition, during the fourth quarter of the year ended June 30, 2000, we recorded an additional valuation allowance of approximately $331 million related to U.S. and
foreign tax effects associated with prior year net operating loss and tax credit carryforwards and temporary differences not currently deductible. A valuation allowance for the state tax effect of
similar items in the amount of $38 million, net of federal benefit, increased the provision for state taxes in the fourth quarter. Such increases in
the valuation allowance were required since the underlying deferred tax assets no longer met the realizability criteria under SFAS No. 109.

46

---

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities at June 30, 2001 and 2000 are as
follows (in thousands):

2001

2000Deferred tax assets:Net operating loss carryforwards

$
559,044

$
423,047General business credit carryforwards


63,000


63,000Depreciation


36,963


37,659Inventory valuation


49,245


68,969Reserves not currently deductible


47,329


23,812Other


163,759


127,429Subtotal


919,340


743,916Valuation allowance


(826,893
)

(632,324
)Total deferred tax assets


92,447


111,592Deferred tax liabilities:Foreign taxes on unremitted foreign earnings, net of related U.S. tax liability


52,727


86,320Other


39,720


43,302Total deferred tax liabilities


92,447


129,622Total

$


$
(18,030
)


At
June 30, 2001, we had gross deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $919 million. The gross deferred tax
assets are offset by a valuation allowance of $827 million and deferred tax liabilities of $92 million. The valuation allowance of $827 million
includes $25 million attributable to benefits of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital.

At
June 30, 2001, we had United States federal and foreign jurisdictional net operating loss carryforwards of approximately $1,249 million and $174 million,
respectively. The federal losses will begin expiring in fiscal year 2007 and the foreign losses will begin expiring in fiscal year 2002. At June 30, 2001, we also had general business credit
carryovers of approximately $46 million for United States federal tax purposes, which will begin expiring in fiscal year 2002.

Note 17. Segment Information

SGI is a leader in high-performance computing, complex data management and visualization solutions, offering powerful servers and visual
workstations. We have three reportable segments: Visual Workstations, Servers and Global Services. Reportable segments are determined based on several factors including customer base, homogeneity of
products, technology, delivery channels and other factors. The CEO evaluates performance and allocates resources to each of these segments based on profit or loss from operations before interest and
taxes. The CEO has been identified as the Chief Operating Decision Maker as defined by Statement of Financial Accounting Standards 131.

The
Server segment's current products include Silicon Graphics® Onyx2® and the next generation Onyx 3000 family of graphics systems, the SGI Origin 200 family
of servers, the SGI 1000 family of servers and the Origin 2000 and Origin 3000 family of high-performance servers. Fiscal 2000 results include the Cray product line that was
sold to Tera in the third quarter of fiscal 2000. Fiscal 1999 and 2000 results include the Cray product line that was sold to Cray Inc., formerly Tera, in the third quarter of fiscal 2000. See
Note 6, "Sale of Cray Product Line", for further information. Our servers are high-performance multi-purpose computers designed to be the market leaders in technical computing
applications, empowering insight in key industries such as manufacturing, government, entertainment,

47

---

communications, energy, science and education. Our servers also have a growing presence in the commercial market with an emphasis on strategic business analysis, internet applications and digital
media serving. In addition, our servers are used as storage management servers for managing very large data repositories that contain company critical information. These products are distributed
through our direct sales force, as well as through indirect channels including resellers and distributors.

The
Visual Workstation segment's products include the Silicon Graphics O2, the Silicon Graphics Octane, and the Silicon Graphics® Octane2 visual workstations
based upon the MIPS microprocessor and the IRIX operating system and the Silicon Graphics 230, Silicon Graphics®330, Silicon Graphics®550, and the Silicon Graphics
Zx10 visual workstations based upon the Intel microprocessor and the Windows NT and Red Hat® Linux operating systems. During the fourth quarter of fiscal 2000, a decision
was made to end of life the Silicon Graphics 230, Silicon Graphics 330, Silicon Graphics 550, and the Silicon Graphics Zx10 visual workstations. Fiscal 1999 and 2000 results include the Silicon
Graphics 320 and 540 visual workstations based upon the Intel microprocessor and the Windows NT operating system which were discontinued in favor of more industry standard architectures. Our visual
workstations are used in a variety of applications including computer-aided design, medical imaging, 3D animation, broadcast, modeling and simulation. These products are distributed through our direct
sales force, as well as through indirect channels including resellers and distributors.

The
Global Services segment supports our computer hardware and software products and provides professional services to help customers realize the full value of their information
technology investments. Our professional services organization provides technology consulting, education, communication and entertainment services.

In
addition to the aforementioned reportable segments, expenses of the sales and marketing, manufacturing, finance and administration groups are allocated to the operating units and
are included in the results reported. The revenue and related expenses of our wholly-owned software subsidiary Alias/Wavefront, as well as certain corporate-level operating expenses are not allocated
to operating units and are included in "Other" in the reconciliation of reported revenue and operating profit. In addition, the revenue and related expenses of MTI, a designer of
high-performance processors and related intellectual property that was a majority-owned subsidiary until SGI distributed its interest in MTI to its shareholders through a
spin-off effective June 20, 2000, are also included in "Other" in the reconciliation of reported revenue and operating profit.

We
do not identify or allocate assets or depreciation by operating segment, nor does the CEO evaluate segments on these criteria. Operating units do not sell product to each other,
and accordingly, there is no inter-segment revenue to be reported. The accounting policies for segment reporting are the same as those described in Note 2, Summary of Significant Accounting
Policies.

48

---

Information on reportable segments is as follows in the years ended June 30, (in thousands):

|                                              |                                                                                                                                                                 | Servers |           | Visual
Workstations |   | Global
Services |        
|--------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | --------- | ------------------- | - | --------------- | -------
|2001:                                         |                                                                                                                                                                 |         |           |                     |   |                 |        
|Revenue from external customers               |                                                                                                                                                                 | $       | 699,911   |                     | $ | 362,407         |        
|Segment (loss) profit                         |                                                                                                                                                                 | $       | (245,625  | )                   | $ | (119,257        | )      
|Significant items:                            |                                                                                                                                                                 |         |           |                     |   |                 |        
|                                              | Charges for contract cancellations and inventory and future support costs related to the discontinuance of Pentium 3-based product line                         |         | $         |                    |   | $               | 13,864 
|2000:                                         |                                                                                                                                                                 |         |           |                     |   |                 |        
|Revenue from external customers               |                                                                                                                                                                 | $       | 946,452   |                     | $ | 500,404         |        
|Segment loss                                  |                                                                                                                                                                 | $       | (163,395  | )                   | $ | (148,750        | )      
|Significant items:                            |                                                                                                                                                                 |         |           |                     |   |                 |        
|                                              | Charges for contract cancellations and inventory and future support costs related to the discontinuance of the Silicon Graphics 320 and 540 visual workstations |         | $         |                    |   | $               | (46,453
|Vector supercomputer warranty-related Charges |                                                                                                                                                                 | $       |          |                     | $ |                |        
|Write-off of excess spares                    |                                                                                                                                                                 | $       |          |                     | $ |                |        
|1999:                                         |                                                                                                                                                                 |         |           |                     |   |                 |        
|Revenue from external customers               |                                                                                                                                                                 | $       | 1,217,965 |                     | $ | 647,182         |        
|Segment (loss) profit                         |                                                                                                                                                                 | $       | (44,790   | )                   | $ | (235,895        | )      
|Significant items:                            |                                                                                                                                                                 |         |           |                     |   |                 |        
|                                              | Asset valuation adjustments                                                                                                                                     |         | $         |                    |   | $               | (16,000

Reconciliation
to SGI as reported (in thousands):

Years ended June 30,2001

2000

1999Revenue:Total reportable segments

$
1,744,638

$
2,125,061

$
2,547,509Other


109,823


206,073


201,448Total SGI consolidated

$
1,854,461

$
2,331,134

$
2,748,957Operating loss:Total reportable segments

$
(335,612
)
$
(312,607
)
$
(166,770
)Other


7,895


53,772


24,519Restructuring


(82,328
)

(102,861
)

14,000Write-down of impaired long-lived assets


(19,724
)




Enterprise Resource Planning implementation expense


(14,477
)




Business reorganization costs


(3,889
)




Merger-related expenses








1,107Total SGI consolidated

$
(448,135
)
$
(361,696
)
$
(127,144
)


No
single customer represented 10% or more of our total revenue in any period presented.

Geographic
revenue for the following three years ended June 30, is based on the location of the customer. Long-lived assets include all non-current
assets except long-term restricted and other

49

---

long-term investments and net long-term deferred tax assets. Geographic information is as follows (in thousands):

|              |       | Revenue |           | Long-lived Assets
|------------- | ----- | ------- | --------- | -----------------
|
|Americas      |       | $       | 1,008,135 |                  
|Europe        |       |         | 436,979   |                  
|Rest of World |       |         | 409,347   |                  
|              |       |         |           |                  
|              | Total |         | $         | 1,854,461        
|              |       |         |           |                  

Note 18. Benefit Plans

401(k) Retirement Savings PlanWe provide a 401(k) investment plan covering substantially all of our U.S. employees.
The plan provides for a minimum 25% Company match of an employee's contribution up to a specified limit, but allows for a larger matching subject to certain regulatory limitations. The Company's
matching contributions for fiscal 2001, 2000 and 1999, were $4 million, $5 million and $6 million, respectively.

Deferred Compensation PlanWe have a Non-Qualified Deferred Compensation Plan that allows eligible
executives and directors to defer a portion of their compensation. The deferred compensation, together with Company matching amounts and accumulated earnings, is accrued but unfunded. Such deferred
compensation is distributable in cash and amounted to approximately $4 million at June 30, 2001 and 2000. A participant may elect to receive such deferred amounts in one payment or in
annual installments no sooner than two years following each annual election. Participant contributions are always 100% vested and our matching contributions vest as directed by the board of directors.
There have been no matching contributions to date.

Note 19. Related Party Transactions

We have from time to time engaged in significant transactions with related parties in the ordinary course of business. Total revenue for the years ended
June 30, 2001, 2000 and 1999 included, in the aggregate, sales to related parties in the amount of $12 million, $34 million and $49 million, respectively. Purchases and
aggregate amounts receivable from and amounts payable to such related parties were immaterial at June 30, 2001, 2000 and 1999.

Note 20. Consolidated Statement of Cash Flows

Other adjustments to reconcile net (loss) income to net cash from operating activities include the write-off of long-lived assets, the
write-off of purchased intangibles and goodwill and accrual of compensation expense related to employee stock awards. The effect of exchange rate changes on cash balances are not material
for any of the periods presented.

Supplemental
disclosures of cash flow information (in thousands):

Years ended June 30,2001

2000

1999Cash paid during the year for:Interest

$
17,500

$
18,100

$
21,100Income taxes, net of refunds

$
16,300

$
40,000

$
(42,000
)


50

---

Supplemental
schedule of noncash investing and financing activities (in thousands):

Years ended June 30,2001

2000

1999Conversion of Preferred stock to common stock

$
16,998

$


$
Exchange of property and equipment and accounts receivable for minority interest investment in private company

$


$
3,700

$
37,600


Note 21. Contingencies

We are defending the lawsuits described below. We believe we have good defenses to the claims in each of these lawsuits and we are defending each of them
vigorously.

We
are defending putative securities class action lawsuits filed in the U.S. District Court for the Northern District of California and in California Superior Court for the County of
Santa Clara in December 1997 and January 1998 alleging that SGI and certain of its officers made material misrepresentations and omissions during the period from July to
October 1997. In September 2001, we reached a settlement of both the federal and state class actions, which includes the issuance of 8 million shares of SGI common stock to the
settlement class. The settlement is subject to preliminary and final approval from the federal court.

We
also have been defending a securities class action lawsuit involving Alias Research Inc., which was pending when we acquired Alias in June 1995. The Alias case, which
was filed in 1991 in the U.S. District Court for the District of Connecticut, alleges that Alias and a former officer and director made material misrepresentations and omissions during the period from
May 1991 to April 1992. In April 2001, plaintiffs and defendant reached an understanding that resolves this litigation. The settlement document has been completed and the Company
has fully accrued for this amount; however, Court approval of the settlement is required before this action is complete.

We
are also defending a claim for violation of provisions of the California Labor Code and a claim for violation of the Federal Fair Labor Standards Act (FLSA). After Defendant
removed the case to federal court based on the existence of a federal question, plaintiff dismissed the FLSA claim and the matter was remanded to state court. On April 23, 2001, plaintiff filed
a further amended complaint adding a representative action under California Business and Professions Code section 17200.

The
U.S. Departments of Commerce and Justice are currently conducting civil and criminal investigations into SGI's compliance with export regulations in connection with several export
sales to Tier 3 countries. See "Risks That Affect Our BusinessExport Regulation."

We
routinely receive communications from third parties asserting patent or other rights covering our products and technologies. Based upon our evaluation, we may take no action or we
may seek to obtain a license. There can be no assurance in any given case that a license will be available on terms we consider reasonable, or that litigation will not ensue.

We
are not aware of any pending disputes, including those described above, that would be likely to have a material adverse effect on SGI's financial condition, results of operations
or liquidity. However, our evaluation of the likely impact of these pending disputes could change in the future.

Note 22. Subsequent Events (unaudited)

During the first quarter of fiscal 2002, we announced and began to implement additional restructuring actions in an effort to further reduce our operating
expenses and restore long-term profitability. These actions are expected to result in the elimination of approximately 800 positions across all levels and functions. In addition, we will vacate leased
administrative facilities at two

51

---

locations. We will record aggregate charges of approximately $32 million in the first quarter of fiscal 2002 related to these actions. We also announced our intention to consolidate our
manufacturing activity in Wisconsin and close our manufacturing facility in Switzerland by the end of December 2001.

Note 23. Selected Quarterly Financial Data (Unaudited)

|                                                      |                                     | Fiscal 2001 |         
|----------------------------------------------------- | ----------------------------------- | ----------- | --------
|
|
|Total revenue                                         |                                     | $           | 431,500 
|Costs and expenses:                                   |                                     |             |         
|                                                      | Cost of revenue                     |             |         
|                                                      | Research and development            |             |         
|                                                      | Selling, general and administrative |             |         
|                                                      | Other operating expense(1)          |             |         
|                                                      |                                     |             |         
|Operating Loss                                        |                                     |             | (207,120
|Interest and other income (expense), net(2)           |                                     |             | (8,488  
|Loss before income taxes                              |                                     |             | (215,608
|                                                      |                                     |             |         
|Net loss                                              |                                     | $           | (231,844
|                                                      |                                     |             |         
|Net loss per share:                                   |                                     |             |         
|                                                      | Basic                               |             | $       
|                                                      | Diluted                             |             | $       
|Shares used in the calculation of net loss per share: |                                     |             |         
|                                                      | Basic                               |             |         
|                                                      | Diluted                             |             |         

|                                                               |                                     | Fiscal 2000 |         
|-------------------------------------------------------------- | ----------------------------------- | ----------- | --------
|
|
|Total revenue                                                  |                                     | $           | 534,051 
|Costs and expenses:                                            |                                     |             |         
|                                                               | Cost of revenue                     |             |         
|                                                               | Research and development            |             |         
|                                                               | Selling, general and administrative |             |         
|                                                               | Other operating expense(3)          |             |         
|                                                               |                                     |             |         
|Operating income (loss)                                        |                                     |             | (59,095 
|Interest and other income (expense), net(4)                    |                                     |             | 4,226   
|Income (loss) before income taxes                              |                                     |             | (54,870 
|                                                               |                                     |             |         
|Net income (loss)                                              |                                     | $           | (607,591
|                                                               |                                     |             |         
|Net income (loss) per share:                                   |                                     |             |         
|                                                               | Basic                               |             | $       
|                                                               | Diluted                             |             | $       
|Shares used in the calculation of net income (loss) per share: |                                     |             |         
|                                                               | Basic                               |             |         
|                                                               | Diluted                             |             |         

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52

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53

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Schedule II

Valuation and Qualifying Accounts and Reserves
(in thousands)

|                         |                               |  |   | Additions |  | Deductions |         | 
|------------------------ | ----------------------------- |  | - | --------- |  | ---------- | ------- | 
|
|Year ended June 30. 1999 |                               |  |   |           |  |            |         | 
|                         | Accounts receivable allowance |  | $ | 17,463    |  | $          | 351     | 
|                         | Warranty Accrual              |  |   | 32,732    |  |            | 36,111  | 
|                         | Deferred tax asset allowance  |  |   | 90,705    |  |            | 13,511  | 
|Year ended June 30, 2000 |                               |  |   |           |  |            |         | 
|                         | Accounts receivable allowance |  |   | 15,407    |  |            | 2,964   | 
|                         | Warranty Accrual              |  |   | 38,620    |  |            | 56,158  | 
|                         | Deferred tax asset allowance  |  | $ | 105,364   |  | $          | 525,979 | 
|Year ended June 30, 2001 |                               |  |   |           |  |            |         | 
|                         | Accounts receivable allowance |  |   | 12,383    |  |            | 10,334  | 
|                         | Warranty Accrual              |  |   | 27,879    |  |            | 22,398  | 
|                         | Deferred tax asset allowance  |  | $ | 632,324   |  | $          | 174,079 | 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

PART III

Certain information required by Part III is omitted from this Report in that the we filed our definitive proxy statement pursuant to
Regulation 14A (the "2001 Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated
herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning our directors required by this Item is incorporated by reference to the information set forth in the 2001 Proxy Statement on pages 3
through 5' under the heading "Proposal No. 1Election of DirectorsDirectors and Nominee for Director."

The
information concerning executive officers and family relationships required by this Item is incorporated by reference to the section in Part I hereof entitled "Executive
Officers of the Registrant."

The
information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, required by this Item is incorporated by reference to information
set forth on page 12 of the 2001 Proxy Statement under the heading "Executive Officer CompensationCompliance with Section 16(a) of the Exchange Act."

54

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ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to information set forth in the 2001 Proxy Statement on page 5 under the headings "Proposal
No. 1Election of DirectorsCompensation Committee Interlocks and Insider Participation" and "Director Compensation"; on pages 10 through 12 under the
headings "Executive Officer CompensationSummary Compensation Table", "Option Grants in Fiscal 2001" and "Option Exercises in Fiscal Year 2001 and Fiscal
Year-End Option Values"; on pages 7 through 9 under the heading "Report of the Compensation and Human Resources Committee of the Board of Directors"; and on page 14 under the heading
"Company Stock Price Performance Graph".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the information set forth in the 2001 Proxy Statement on pages 1 and 2 under the headings
"Information Concerning Solicitation and VotingRecord Date and Principal Share Ownership" and "Voting and Solicitation" and on page 7 under the heading "Other
InformationSecurity Ownership of Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the information set forth in the 2001 Proxy Statement on pages 12 and 13 under the
heading "Certain Transactions."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



Schedule

Description

PageII

Valuation and Qualifying Accounts

54




55

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|3.1.1 | (7)   | Restated Certificate of Incorporation of the Company.                                                                                                                                  
|----- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1.2 | (10)  | Certificate of Designation of the Series E Preferred Stock filed June 13, 1995.                                                                                                        
|3.2   |       | Bylaws of the Company, as amended.                                                                                                                                                     
|4.1   | (13)  | Indenture dated February 1, 1986 between Cray Research, Inc. and Manufacturers Hanover Trust Company, as Trustee.                                                                      
|4.2   | (13)  | First Supplemental Indenture dated June 30, 1996 between the Company, Cray Research, Inc., and Chemical Bank (formerly Manufacturers Hanover Trust Company).                           
|4.3   | (16)  | Indenture dated as of September 1, 1997 between the Company and State Street Bank and Trust Company of California, N.A., as Trustee.                                                   
|9.1   | (10)  | Voting and Exchange Trust Agreement between the Company and Montreal Trust Company of Canada dated June 15, 1995.                                                                      
|10.1  | (1)   | Software Agreement dated as of January 4, 1986, as supplemented June 6, 1986, and Sublicensing Agreement dated as of June 9, 1986 between the Company and AT&T Information Systems Inc.
|10.2  | (2)   | Software License Agreement dated January 24, 1986, between the Company and AT&T Information Systems Inc.                                                                               
|10.3  | (4)   | Form of Indemnification Agreement entered into between the Company and its directors, executive officers and certain other agents.                                                     
|10.4  | (4)   | Form of Indemnification Agreement entered into between the Company and its executive officers and certain other agents. (Revised)                                                      
|10.5  | (17)  | Form of Employment Continuation Agreement entered into by the Company with its executive officers, as amended and restated as of November 14, 1997.                                    
|10.6  | (15)* | 1984 Incentive Stock Option Plan, as amended, and amended form of Incentive Stock Option Agreement.                                                                                    
|10.7  | (7)*  | Directors' Stock Option Plan and form of Stock Option Agreement as amended as of October 31, 1994.                                                                                     
|10.8  | (14)* | 1985 Stock Incentive Program, as amended.                                                                                                                                              
|10.9  | (4)*  | 1986 Incentive Stock Option Plan, as amended, and amended forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement.                                           
|10.10 | (3)*  | 1987 Stock Option Plan and form of Stock Option Agreement.                                                                                                                             
|10.11 | (14)* | Amended and Restated 1989 Employee Benefit Stock Plan and form of stock option agreement.                                                                                              
|10.12 | (14)* | 1993 Long-Term Incentive Stock Plan, as amended, and form of stock option agreement.                                                                                                   
|10.13 |       | 1996 Supplemental Non-Executive Equity Incentive Plan, as amended, and form of stock option agreement.                                                                                 
|10.14 | (13)* | Employee Stock Purchase Plan, as amended as of October 30, 1996.                                                                                                                       
|10.15 | (18)* | 1998 Employee Stock Purchase Plan                                                                                                                                                      
|10.16 | (6)*  | Non-Qualified Deferred Compensation Plan dated as of September 9, 1994.                                                                                                                
|10.17 | (16)* | Addendum to the Non-Qualified Deferred Compensation Plan.                                                                                                                              
|10.18 | (8)*  | Alias Research Inc.'s 1988 Employee Share Ownership Plan Option Agreement.                                                                                                             
|10.19 | (8)*  | Alias Research Inc.'s 1989 Employee Share Ownership Plan Option Agreement.                                                                                                             
|10.20 | (8)*  | Alias Research Inc.'s 1990 Employee Share Ownership Plan and standard forms of Option Agreements.                                                                                      
|10.22 | (8)*  | Alias Research Inc.'s 1994 Stock Plan and standard forms of Option Agreements.                                                                                                         
|10.22 | (9)*  | Wavefront Technologies, Inc. 1990 Stock Option Plan with standard form of Option Agreement.                                                                                            
|10.23 | (11)* | Cray Research, Inc. 1989 Non-Employee Directors' Stock Option Plan and form of stock option agreement.                                                                                 

56

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|10.24 | (19)* | Loan and Security Agreement between the Company and Foothill Capital Corporation and Bank of America,N.A. dated April 10, 2001.                         
|----- | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|10.25 |       | Second Amendment to Loan and Security Agreement between the Company and Foothill Capital Corporation and Bank of America, N.A. dated September 27, 2001.
|10.26 |       | Employment letter between Harold Covert and the Company dated as of April 25, 2001.                                                                     
|21.1  |       | List of Subsidiaries.                                                                                                                                   
|23.1  |       | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                     

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57

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NONE

Trademarks used in the Form 10-K

Silicon Graphics, IRIX, Onyx, O2, Octane, Onyx and Onyx2 are registered trademarks, and CXFS, FailSafe, GIGAchannel, InfiniteReality3, NUMAflex, SGI, SGI
Graphics Cluster, Origin, Reality Center, Octane2, Silicon Graphics Zx10, VPro and XFS are trademarks, of Silicon Graphics, Inc. Alias and Alias Studio are trademarks of Alias\Wavefront, a
division of Silicon Graphics Limited. Maya is a registered trademark of Silicon Graphics, Inc., and exclusively used by Alias\Wavefront, a division of Silicon Graphics Limited.

MIPS
is a registered trademark and R12000 is a trademark of MIPS Technologies, Inc. used under license by Silicon Graphics, Inc. Cray is a registered trademark and Cray
T90 is a trademark of Cray, Inc. UNIX is a registered trademark of the OPEN GROUP, in the United States and other countries. Windows and Windows NT are registered trademarks of Microsoft
Corporation. Intel and Pentium are registered trademarks and Itanium is a trademark of Intel Corporation. Linux is a registered trademark of Linus Torvalds. Red Hat is a registered trademark of Red
Hat, Inc. Hitachi Freedom Storage Lightening 9960 is a trademark of Hitachi America, Ltd. in the U.S. and other countries. Macintosh is a registered trademark of Apple Computer, Inc,
registered in the United States and other counties.

58

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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.

|Dated: October 15, 2001 |  | SILICON GRAPHICS, INC.
|----------------------- |  | ----------------------
|                        |  | By:                   

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.

|Signature                               |  | Title                                                                                          |  | Date            
|--------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----------------
|                                        |  |                                                                                                |  |                 
|/s/ROBERT R. BISHOPRobert R. Bishop     |  | Chairman, Chief Executive Officer and Director (Principal Executive Officer)                   |  | October 15, 2001
|/s/JEFFREY V. ZELLMERJeffrey V. Zellmer |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | October 15, 2001
|/s/RICHARD KRAMLICHRichard Kramlich     |  | Director                                                                                       |  | October 15, 2001
|/s/JAMES A. MCDIVITTJames A. McDivitt   |  | Director                                                                                       |  | October 15, 2001

59

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                             
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2            |  | Bylaws of the Company, as amended.                                                                                                                      
|10.13          |  | 1996 Supplemental Non-Executive Equity Incentive Plan, as amended, and form of stock option agreement.                                                  
|10.25          |  | Second Amendment to Loan and Security Agreement between the Company and Foothill Capital Corporation and Bank of America, N.A. dated September 27, 2001.
|10.26          |  | Employment letter between Harold Covert and the Company dated as of April 25, 2001.                                                                     
|21.1           |  | List of Subsidiaries.                                                                                                                                   
|23.1           |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                     

60

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