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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended June 27, 2003.
|- | ------------------------------------------------------------------------------------------------------------------------------
|o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period
 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 ý    No o

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." ý

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

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
December 27, 2002 on the New York Stock Exchange, was approximately $216 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 29, 2003, the registrant had 210,589,850 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for registrant's Annual Meeting of Stockholders to be held December 2, 2003 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, future profitability, our expectations for new product
introductions and market conditions, our liquidity and capital resources, our belief that we have sufficient capital to meet our requirements for fiscal 2004, headcount reductions and the expected
impact on our business of legal proceedings and government 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; risks related to liquidity and the adequacy of our capital resources; ability to achieve profitable operations or limit losses; 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; risks related to the acceptance of new products, including the SGI® Altix family of servers
and superclusters, and storage offerings based on our CXFS shared file system; risks related to dependence on our partners and suppliers; risks related to market perceptions regarding
proprietary versus open standard technologies; risks related to foreign operations (including weak or disrupted economies, unfavorable currency movements and export compliance issues); risks
associated with implementation of new business practices, processes and information systems; uncertainties arising from claims and litigation; 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.

ITEM 1. BUSINESS

General

SGI is a leading provider of products, services and solutions for use in high-performance computing, storage and visualization. We sell highly
scalable servers, advanced visualization systems, desktop workstations, storage solutions and a range of software products which enable our customers in the scientific, technical and creative
communities to solve their most challenging problems and provide them with strategic and competitive advantages in their marketplace. We also offer a range of services and solutions, including
professional services, Reality Center® immersive visualization centers, customer support and education. These products and services are targeted primarily towards five market segments:
Government and Defense, Science, Manufacturing, Energy, and Media.

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Products

SGI® systems are designed specifically to meet the needs of the scientific, technical and creative marketplaces. SGI systems utilize either the
IRIX® operating system, which is a proprietary enhanced version of UNIX® based upon the MIPS® RISC microprocessor, or the Linux® operating system based
upon Intel® Itanium® 2 microprocessors. Both the MIPS/IRIX and Intel/Linux-based product lines feature our innovative SGI NUMA architecture and provide unique
levels of performance and scalability to our customers.

Scalable ServersThe SGI Origin® family of high-performance servers includes
the Origin 3000 and Origin 300 series of systems. The Origin family of servers features the SGI NUMA architecture and IRIX operating system, as well as SGI® NUMAflex, which
allows customers to configure systems to meet their unique needs by constructing systems of modular components or "bricks". These bricks can be CPU, storage, or input/output ("I/O") components, which
can be configured independently within each system. The modularity of the NUMAflex approach enables the computer system to meet the exact requirements of the customer, while maintaining optimum
flexibility in meeting changing needs over time. The SGI® Altix 3000 family of superclusters and servers also features the SGI NUMA architecture and is based on the Linux
operating system. Altix systems achieve high performance through the combination of the proven NUMAflex approach, the flexibility of open source
computing and the power of up to 64 Itanium 2 processors in a single node. Altix systems of up to 128 processors each can be clustered together, a supercluster, to create supercomputers that are among
the most powerful in the world today.

Advanced Graphics SystemsFor more than 20 years, Silicon Graphics has been synonymous with
the most powerful and advanced computer graphics capabilities in the industry. Today, the SGI® Onyx® family of products continues that tradition, providing the greatest
resolution, the most realism and the highest levels of performance in the industry. The Onyx family of systems is built on the same high-bandwidth SGI NUMA architecture as the Origin and
Altix servers and features our industry-leading SGI® Onyx4 UltimateVision graphics. Onyx series systems integrate high-performance computing, data
management, and high-performance visualization into a single system.

SGI® Reality Center®environments are powered by SGI Onyx family systems and enable groups of decision makers to
visualize complex data in an interactive manner. Customers around the world have used Reality Center environments to increase production from oil reserves, design safer cars, interpret complex
scientific data and generally enable real-time decision support by immersing decision-makers in high quality, high-resolution and interactive environments.

Visual Area NetworkingIn January 2002, SGI introduced a new concept called Visual Area
Networking that enables customers to access, manipulate and visualize data over a standard network on their client computer using the massive I/O, compute and real-time rendering
capabilities of an SGI Onyx. This means that individuals or teams can visualize data using "thin clients" that would not normally be able to access or display such a large amount of data. Visual Area
Networking also facilitates collaboration between teams of remote users, since all the data is located at a central point, but multiple users can interactively manipulate and visualize the data. This
new technology is particularly applicable to oil and gas discovery, manufacturing and defense applications.

Desktop SystemsOur Silicon Graphics Fuel and Tezro families of MIPS
processor and IRIX operating system-based desktop workstations each feature advanced 3D graphics and powerful integrated imaging capabilities. Silicon Graphics Fuel workstations are
cost-effective single-processor systems, while the single-, dual- or quad-processor Tezro systems are targeted at users who require advanced visualization
capability and the most powerful 64-bit computing available in a desktop system.

SAN and Data ManagementCustomers across the high-performance computing ("HPC") markets
desire ever increasing performance from their servers, creating a parallel need to manage massive

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amounts
of data generated by these servers. To address the problem of managing such large amounts of complex data, SGI has developed a series of products and solutions to help customers access and
utilize their data in a more efficient manner, resulting in better workflow management, faster cycle times, and higher levels of access, 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. SGI offers storage area network solutions based on tightly integrating our CXFS shared filesystem, along with SGI's FailSafe® high-availability software and
Data Migration Facility ("DMF") for hierarchical storage management. SGI also offers network-attached storage through a range of file-serving solution bundles.

AliasOur Alias subsidiary (formerly, Alias/Wavefront) 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 is based in Toronto, Canada, with sales offices and distribution worldwide.

Marketing, Sales, and Distribution

We sell our system products and solutions through both a direct sales force and indirect channel partners. In fiscal year 2003 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 other countries, we work through an SGI authorized distributor.

Our
indirect channel partners include service providers, systems integrators, value-added resellers, independent software vendors, distributors and master resellers.

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 both our IRIX and Linux platforms.

Our
Solutions Finance organization works with customers to arrange third party financing for products and services, and assists its financial partners in the remarketing of
off-lease systems.

Information
with respect to international operations and export sales may be found in Note 7 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.

Technology Solutions

The quality and reliability of our products and our understanding of our customer's technical and business challenges is critical to our success. SGI's Technology
Solutions portfolio offers system solution engineering services, professional and managed services, and traditional customer support and education. We provide customer support services online, through
SGI global support centers and through authorized local service providers in countries where SGI does not have a local office. International distributors also provide training and support for products
sold by them. We typically provide a standard hardware warranty against defects in materials and workmanship for periods of up to three years.

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Research and Development

We are concentrating our research and development efforts on products and technologies that we believe hold the highest growth potential, including global shared
memory system architectures, visualization and storage. Our strategy is to derive maximum leverage from these efforts by using a foundation of industry-standard components such as the Intel Itanium
family of microprocessors and the Linux operating systems. We also continue to invest, although at a lower rate than in the past, both on a percentage and absolute dollar basis, in our own MIPS
microprocessors and IRIX operating system. There are no assurances that we will maintain or create sufficient differentiation to achieve and sustain a competitive advantage.

During
fiscal 2003, 2002 and 2001, we spent approximately $171 million, $177 million and $236 million, respectively, on research and development that represented
approximately 18% of total revenue in fiscal 2003 and 13% of total revenue in both fiscal 2002 and 2001. 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 revenue. However, declines in total revenue over the last several fiscal years
have led us to 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.

During
fiscal 2002, we closed our manufacturing facility located in Switzerland and relocated these manufacturing activities in our main manufacturing facility located in Chippewa Falls,
Wisconsin. We continually evaluate the allocation of manufacturing activities among our own operations and those of suppliers and subcontractors.

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"), microprocessors, 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.
Risks also include limited bargaining flexibility, long lead times, reduced control over delivery schedules, and the possibility of charges for excess and obsolete inventory.

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 operating
results.

Certain
of our suppliers are located outside the United States. Pricing from these suppliers can be strongly affected by such factors as trade protection measures and changes in currency
exchange rates. In addition, the markets for memory chips (DRAMs and SRAMs), which are a significant component of our overall systems cost, can be 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, product quality and reliability, ease

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of
use, capabilities of the system software, availability of third party applications software, customer support, product availability, corporate reputation and price. Significant discounting from
list price has been the norm in the industry.

Our
principal competitors are IBM, Hewlett-Packard, NEC, Cray, Sun Microsystems and, in some markets, Dell. Our unique market focus on technical and creative users provides advantages in
being able to design our systems specifically for these users. Our competitors, however, are generally far larger companies with much greater resources. As our Linux-based systems business grows, the
list of competitors may grow commensurate with the increased market opportunity. Specifically, Dell and other PC vendors market products that can be clustered together to produce systems that may
compete with our mid-range products.

Proprietary Rights and Licenses

We own and have applied for more than 500 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 operating system, 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 27, 2003, we are in discussions with several parties that have asserted intellectual property infringement claims and we expect that litigation of this sort
will reoccur from time to time. See "Risks That Affect Our Business".

Employees

As of June 27, 2003, we had 3,714 regular employees compared with 4,443 at June 28, 2002. In August 2003, we effected a reduction in force that is
expected to eliminate about 600 positions. 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.

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

SGI owns and leases sales, service, R&D, and administrative offices worldwide and has its principal facilities in California, Wisconsin and Minnesota. Our
corporate headquarters and certain R&D operations are located in Mountain View, California, where we lease a total of about 868,000 square feet. Our primary manufacturing facility is located in
Chippewa Falls, Wisconsin, where we own and lease about 449,000 square feet for manufacturing, service and R&D activities. We also have leased sales, administrative and R&D facilities of about 85,000
square feet in Eagan, Minnesota.

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As
a result of restructuring over the last several years, we also own and lease additional space that we do not currently expect to use in our operations. We own a facility consisting of
about 170,000 square feet in Cortaillod, Switzerland that was used until December 2001 as our European manufacturing site. This property is currently being offered for sale. A portion of this
facility (about 87,000 square feet) is leased to a third party company with an option to purchase. We also lease 3 other buildings near our Mountain View headquarters (about 154,000 square feet) and
an additional 31 facilities worldwide (about 231,000 square feet), under leases that expire through fiscal 2010. The anticipated costs associated with these facilities, net of estimated
sublease income, have been accrued in prior restructuring charges. See Note 3 to the Consolidated Financial Statements.

On
July 10, 2003, we announced that we had entered into an arrangement to sublease our Amphitheatre Technology Center campus in Mountain View, California. We will relocate our
headquarters to our nearby Crittenden Technology Center campus, where we will lease additional space. In combination, these actions will substantially reduce our facilities occupancy costs beginning
in fiscal 2005. For additional information regarding this sublease agreement and further restructuring actions that affect leased facilities see Note 23 to the Consolidated Financial
Statements.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Note 22 to the 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, 2003 are as follows:

|Name               |  | Age |  | Position and Principal Occupation                        |  | Executive
Officer
Since
|------------------ |  | --- |  | -------------------------------------------------------- |  | -----------------------
|Robert R. Bishop   |  | 60  |  | Chairman, Chief Executive Officer and Director           |  | 1999                   
|Warren Pratt       |  | 50  |  | Executive Vice President and Chief Operating Officer     |  | 2000                   
|Steve Coggins      |  | 54  |  | Senior Vice President, Europe, Middle East & Africa      |  | 2001                   
|Sandra M. Escher   |  | 43  |  | Senior Vice President and General Counsel                |  | 1999                   
|Eng Lim Goh, PhD.  |  | 43  |  | Senior Vice President and Chief Technology Officer       |  | 2000                   
|Kathy Lanterman    |  | 43  |  | Vice President and Corporate Controller                  |  | 2002                   
|Bill La Rosa       |  | 57  |  | Senior Vice President, Intercontinental Field Operations |  | 2002                   
|Anthony K. Robbins |  | 43  |  | Senior Vice President, North American Field Operations   |  | 2002                   
|Jan Silverman      |  | 53  |  | Senior Vice President, Strategic Technology Initiatives  |  | 2001                   
|Jeffrey Zellmer    |  | 43  |  | Senior Vice President and Chief Financial Officer        |  | 2000                   

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. From 1986 to 1995, he was President 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 1991 and was made
Executive Vice

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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.

Mr. Coggins
was appointed Senior Vice President, Europe, the Middle East and Africa, of SGI in July 2001. Prior to joining SGI, he was senior vice president and general
manager of Amdahl Europe. He had been employed by Amdahl Corporation, including five years as the marketing director of Amdahl Europe, since 1977.

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, Vice
President of global systems engineering in October of 1999, and a Chief Scientist in December 1998. He joined SGI in September 1989 and has held a variety of systems engineering positions since that
time.

Ms. Lanterman
became Vice President, Corporate Controller in April 2002. She joined SGI in July 2001 as Assistant Controller. Prior to joining SGI, she consulted as
a project manager at various high-tech companies including Hewlett-Packard, SGI, Fujitsu PC and Logitech. She was a consultant to SGI from April 1999 until she was hired in 2001,
working on projects including the implementation of our global Enterprise Resource Planning ("ERP") system and the Cray divestiture.

Mr. La
Rosa joined SGI in September 2001 as Senior Vice President, Intercontinental (Asia Pacific and Latin America) Field Operations. Prior to joining SGI, he was senior
vice president, worldwide sales, of CommVault Systems, Inc. in 2001. Prior to that, Mr. La Rosa held several executive positions in U.S. and international sales and marketing with IBM
between 1992 and 2000. Before joining IBM, he was President of American Motion Systems, CEO of Lead Group International and held a number of US- and internationally-based executive
management and technical positions at GE from 1967 to 1986.

Mr. Robbins
was made Senior Vice President, North American Field Operations of SGI in July 2001. He was appointed Vice President, U.S. Federal Systems in 1997 and President
of SGI's Silicon Graphics Federal subsidiary upon its formation in September 1999. He has held a variety of sales and sales management positions at SGI since 1991.

Mr. Silverman
was appointed Senior Vice President, Strategic Technology Initiatives in August 2003. Prior to that, he 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 Hewlett-Packard 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.

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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.

Price Range for Common Stock

|               |  | Fiscal 2003 |      | Fiscal 2002
|-------------- |  | ----------- | ---- | -----------
|
|First Quarter  |  | $           | 0.82 |            
|Second Quarter |  | $           | 0.57 |            
|Third Quarter  |  | $           | 1.12 |            
|Fourth Quarter |  | $           | 1.06 |            

SGI
had 6,173 stockholders of record as of June 27, 2003. 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.

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 |         
|------------------------------------------- | ------------------------------------- | ----------- | --------
|
|
|Operating Data:                             |                                       |             |         
|Total revenue                               |                                       | $           | 961,748 
|Costs and expenses:                         |                                       |             |         
|                                            | Cost of revenue                       |             |         
|                                            | Research and development              |             |         
|                                            | Selling, general and administrative   |             |         
|                                            | Other operating expense (recovery)(1) |             |         
|                                            |                                       |             |         
|Operating loss                              |                                       |             | (131,409
|Interest and other income (expense), net(2) |                                       |             | (24,558 
|                                            |                                       |             |         
|(Loss) income before income taxes           |                                       | $           | (155,967
|                                            |                                       |             |         
|Net (loss) income                           |                                       | $           | (129,704
|                                            |                                       |             |         
|                                            |                                       |             |         

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|Net (loss) income per share:                                   |         |   |          |         |   |         |         |   |           |         |   |           |         |   |           |        
|-------------------------------------------------------------- | ------- | - | -------- | ------- | - | ------- | ------- | - | --------- | ------- | - | --------- | ------- | - | --------- | -------
|                                                               | Basic   |   | $        | (0.64   | ) | $       | (0.24   | ) | $         | (2.59   | ) | $         | (4.52   | ) | $         | 0.29   
|                                                               | Diluted |   | $        | (0.64   | ) | $       | (0.24   | ) | $         | (2.59   | ) | $         | (4.52   | ) | $         | 0.28   
|Shares used in the calculation of net (loss) income per share: |         |   |          |         |   |         |         |   |           |         |   |           |         |   |           |        
|                                                               | Basic   |   |          | 201,424 |   |         | 194,974 |   |           | 190,338 |   |           | 183,528 |   |           | 186,374
|                                                               | Diluted |   |          | 201,424 |   |         | 194,974 |   |           | 190,338 |   |           | 183,528 |   |           | 189,427
|Balance Sheet Data:                                            |         |   |          |         |   |         |         |   |           |         |   |           |         |   |           |        
|Cash, cash equivalents and unrestricted investments            |         | $ | 141,276  |         | $ | 218,180 |         | $ | 126,107   |         | $ | 258,081   |         | $ | 688,143   |        
|Restricted investments                                         |         |   | 36,728   |         |   | 44,689  |         |   | 76,853    |         |   | 126,408   |         |   | 94,226    |        
|Working capital (deficiency)                                   |         |   | 1,489    |         |   | 94,665  |         |   | (41,884   | )       |   | 58,781    |         |   | 869,980   |        
|Total assets                                                   |         |   | 649,854  |         |   | 910,119 |         |   | 1,283,029 |         |   | 1,839,211 |         |   | 2,788,257 |        
|Long-term debt and other                                       |         |   | 383,341  |         |   | 427,812 |         |   | 412,720   |         |   | 385,133   |         |   | 387,005   |        
|Stockholders' (deficit) equity                                 |         |   | (164,891 | )       |   | (54,641 | )       |   | (25,283   | )       |   | 592,550   |         |   | 1,424,199 |        
|Statistical Data:                                              |         |   |          |         |   |         |         |   |           |         |   |           |         |   |           |        
|Number of employees                                            |         |   | 3,714    |         |   | 4,443   |         |   | 5,956     |         |   | 6,726     |         |   | 9,191     |        

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

Introduction

The following tables and discussion present certain financial information on a comparative basis. SGI has had declining revenue and has been unprofitable on an
operating basis for each of the past six fiscal years as we have felt the impact of the slowdown in the economy, strong competition from much larger companies, technologies and product families in
transition and management and employee turnover. As part of our plan to restore growth and profitability to SGI, we have restructured our overall operations, sustained gross margin levels despite a
decline in revenue and significantly reduced our on-going operating expenses. Although we made some progress in fiscal 2003, we have continued to

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experience
lower revenues and significant operating losses. We will continue to focus on actions intended to improve revenue levels, reduce expenses and restore long-term growth and
profitability.

Results of Operations

|                                         |  | Years ended |      
|---------------------------------------- |  | ----------- | -----
|
|
|Total revenue                            |  | $           | 962  
|Cost of revenue                          |  |             | 573  
|                                         |  |             |      
|Gross profit                             |  |             | 389  
|Gross profit margin                      |  |             | 40.4 
|Total operating expenses                 |  |             | 520  
|                                         |  |             |      
|Operating loss                           |  |             | (131 
|Interest and other (expense) income, net |  |             | (25  
|                                         |  |             |      
|Loss before income taxes                 |  |             | (156 
|                                         |  |             |      
|Net loss                                 |  | $           | (130 
|                                         |  |             |      
|Net loss per share-basic and diluted     |  | $           | (0.64
|                                         |  |             |      

Revenue

The following discussion of revenue is based on the results of our reportable segments as described in Note 18 to the Consolidated Financial Statements.
Total revenue is principally derived from three reportable segments: Servers, Workstations and Global Services, which were determined based on factors including customer base, homogeneity of products,
technology, delivery channels and other factors. Effective for fiscal 2002, we reorganized our Global Services segment and removed the remanufactured systems sales from this segment. Revenue from
remanufactured systems is included in the servers and workstations segments. Fiscal 2001 amounts have been reclassified to conform to the fiscal 2003 and 2002 presentation.

Total
revenue in fiscal 2003 decreased $379 million or 28% compared with fiscal 2002, and fiscal 2002 revenue decreased $513 million or 28% compared with fiscal 2001. The
decline in revenue from both fiscal 2002 to fiscal 2003 and from fiscal 2001 to fiscal 2002 reflected the continued economic slowdown, a significant downturn in IT spending, strong competition from
much larger companies, the impact of changing SGI Japan's status to a distribution model and other factors discussed below that affected particular product families. The decline in revenue from fiscal
2001 to fiscal 2002 also reflected the impact of discontinuing certain visualization workstations based on Pentium® III microprocessors. Revenue for fiscal 2002 included a
one-time receipt of $63 million from Microsoft resulting from an agreement involving a patent cross-license and the transfer of certain of SGI's intellectual property rights. We
expect certain of the factors mentioned above to continue to have an adverse impact on our future revenue levels. See "Risks That Affect Our Business."

12

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The
following table presents total revenue by reportable segment:

|                   |  | Years ended |    
|------------------ |  | ----------- | ---
|
|
|Servers            |  | $           | 367
|% of total revenue |  |             | 38 
|Workstations       |  | $           | 151
|% of total revenue |  |             | 16 
|Global Services    |  | $           | 383
|% of total revenue |  |             | 40 
|Other              |  | $           | 61 
|% of total revenue |  |             | 6  

Fiscal
2003 Server revenue (which includes visualization systems, high-performance servers and integrated storage solutions) decreased $150 million or 29% compared
with fiscal 2002. The decline was primarily noted within the high-performance server family and to a lesser extent within the visualization systems product family. These declines reflect
delays in the acquisition of
technology by private sector businesses concerned about the economy as well as competitive factors including processor speeds, the suitability of low-cost cluster solutions for certain
application segments, and the timing of releases of key software applications on the IRIX operating system. Reduced volumes, lower average selling prices caused by a mix shift away from richer
configuration systems and the introduction of the Altix 3000 family of servers, sold at a lower price point than the Origin family of servers, contributed to the decline in
high-performance server revenue compared with fiscal 2002. Although volumes increased slightly, a shift in mix from the high-end visualization systems to the
lower-end visualization systems with a lower average selling price contributed to the decline in visualization system revenue. Fiscal 2002 Server revenue decreased $231 million or
31% compared with fiscal 2001. The decrease primarily reflected declines across all product families within this segment. This decline was primarily attributable to concerns about the slowdown in the
economy that were causing private sector businesses to delay the acquisition of technology wherever possible. Fiscal 2002 Server revenue levels were also affected by competitive factors, including
processor speeds, improvements in commodity graphics performance, the suitability of low-cost cluster solutions for certain application segments, and the late release of key software
applications on the IRIX operating system. See "Risks That Affect Our Business."

Fiscal
2003 Workstation revenue decreased $86 million or 36% compared with fiscal 2002. The decrease was primarily attributable to the continuing decline in the overall UNIX
workstation market. The decline reflected reduced volumes as we completed the end of life of our O2® and Octane® families of visual workstations, partially offset by volume
increases associated with the introduction of our Silicon Graphics Fuel® visual workstation in fiscal 2003. Declines in workstation revenue were also partially offset by increases in
workstation overall average selling prices as the product mix shifted from the lower-end O2 workstations with lower average selling prices to Octane and Fuel workstations with higher
average selling prices. Fiscal 2002 Workstation revenue decreased $160 million or 40% compared with fiscal 2001. The decrease was primarily attributable to the continuing decline in the overall
UNIX workstation market. In addition, during the fourth quarter of fiscal 2001, we announced the discontinuance of certain workstations based upon Intel 32-bit microprocessors, the impact
of which also contributed to the year over year decline in Workstation revenue.

Global
Services revenue is comprised of hardware and software support and maintenance and professional services. Fiscal 2003 Global Services revenue decreased $74 million or 16%
compared with fiscal 2002. This decline was primarily attributable to a reduction in our traditional customer support revenue that is being affected by lower selling prices for new contracts compared
with existing contracts, coupled with a decline in the overall installed base reflecting lower system sales volumes in

13

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recent
periods. Professional Services revenue, which includes SGI product, third party product, SGI consulting services and SGI maintenance services, also declined slightly due to the same factors
influencing the decline in Server, Workstation and Global Services revenue. Fiscal 2002 Global Services revenue decreased $141 million or 24% compared with fiscal 2001. This decrease was
primarily attributable to declines in our Professional Services revenue as a result of the restructuring of our service organization as well as declines in traditional customer support revenue as a
result of lower system sales.

Other
revenue is generally comprised of our operating units that are not reportable segments, including the product and service revenue of our application software subsidiary, Alias.
Fiscal 2003 other revenue decreased $69 million or 53% principally due to the absence of a transaction similar to the fiscal 2002 receipt of $63 million from Microsoft resulting from an
intellectual property agreement involving a patent cross-license and the transfer of certain of SGI's intellectual property rights. Revenue from Alias remained relatively consistent in fiscal 2003
compared to fiscal 2002. Fiscal 2002 other revenue increased $19 million or 17% compared with fiscal 2001. The increase was primarily due to the receipt of $63 million from Microsoft,
offset in part by a decline in Alias revenue.

Total
revenue by geographic area for fiscal 2003, 2002 and 2001 was as follows (in millions):

|              |  | Years ended
|------------- |  | -----------
|
|Area          |  |            
|Americas      |  | $          
|Europe        |  |            
|Rest of World |  |            
|Total revenue |  | $          

Geographic
revenue as a percentage of total revenue for fiscal 2003, 2002, and 2001 was as follows:

|              |  | Years ended |  
|------------- |  | ----------- | -
|
|Area          |  |             |  
|Americas      |  | 63          | %
|Europe        |  | 25          | %
|Rest of World |  | 12          | %

The
fluctuation in geographic revenue as a percentage of total revenue between Europe and Rest of World business in fiscal 2003 compared with fiscal 2002 was primarily due to a decline
in revenue generated in Japan caused by an overall economic decline in the Japanese economy and the impact of no longer consolidating the financial results of SGI Japan, as a result of our sale of a
majority interest in that company. The fluctuation in geographic revenue as a percentage of total revenue between the Americas and Rest of World business in fiscal 2002 compared with fiscal 2001 was
primarily due to the impact of no longer consolidating the revenue of SGI Japan. A decrease in sales in the Asia Pacific region in fiscal 2002 compared to fiscal 2001 also contributed to the decline
in Rest of World revenue as a percentage of total revenue.

Our
consolidated backlog at June 27, 2003 was $140 million, down from $159 million at June 28, 2002. Backlog is comprised of committed purchase orders for
products and professional services deliverable within three to nine months, depending on the product family. Backlog declined in both the Americas and Europe, offset slightly by a minor increase in
Rest of World. From a segment standpoint, the decline was primarily noted in the workstation segment as the overall UNIX workstation market continues to decline, offset in part by an increase in
Server backlog, primarily for high-performance servers and integrated storage solutions, and backlog for professional services.

14

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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.

Overall
gross profit margin decreased from 43% in fiscal 2002 to 40% in fiscal 2003. Included in fiscal 2002 results was $63 million in revenue recognized from the Microsoft
intellectual property agreement recorded at 100% margin which accounted for 2.8 percentage points of the change in gross margin from fiscal 2002 to fiscal 2003. Operationally, we were able to
sustain gross profit margins in fiscal 2003 compared with fiscal 2002 due to our continued improvements in manufacturing efficiencies and procurement practices. Fiscal 2003 product and other gross
profit margin, excluding the Microsoft revenue noted above, declined 2.3 percentage points compared with fiscal 2002. This decline was primarily due to unfavorable product mix and lower
volumes, offset in part by favorable manufacturing variances resulting from improved efficiencies in material procurement. Fiscal 2003 service gross profit margin improved 5.2 percentage points
despite declining revenue levels primarily due to the restructuring of the service organization in fiscal 2002.

Overall
gross profit margin increased to 43% in fiscal 2002 compared with 33% in fiscal 2001. Included in fiscal 2002 results was $63 million in revenue recognized from the
Microsoft intellectual property agreement recorded at 100% margin which accounted for 2.8 percentage points of the change in gross margin from fiscal 2001 to fiscal 2002. The remaining
improvement in gross margin in fiscal 2002 was primarily attributable to decreases in manufacturing overhead expense in the second half of fiscal 2002 due to the closure of our manufacturing facility
in Switzerland, the completion of the restructuring that was announced in the first quarter of fiscal 2002, and a higher margin product mix. The restructuring included the closure of our manufacturing
facility in Switzerland and the reorganization of our services business, which has had a significant impact on the increase in our service margins. Gross margin improvements in fiscal 2002 were offset
slightly due to deconsolidating SGI Japan during the second quarter of fiscal 2002, which negatively affects gross margin. See "Impact of SGI Japan Transaction."

Operating Expenses

|                                    |  | Years ended |    
|----------------------------------- |  | ----------- | ---
|
|
|Research and development            |  | $           | 171
|% of total revenue                  |  |             | 18 
|Selling, general and administrative |  | $           | 319
|% of total revenue                  |  |             | 33 
|Other                               |  | $           | 30 
|% of total revenue                  |  |             | 3  

Total
fiscal 2003 operating expenses decreased $151 million or 23% compared with fiscal 2002. Fiscal 2003 operating expenses included $30 million of charges for
restructuring and asset impairment costs. The significant decline in operating expenses was due to an overall expense reduction program aimed at bringing expenses in line with lower revenue levels.
Total fiscal 2002 operating expenses decreased $383 million or 36% compared with fiscal 2001. Fiscal 2002 operating expenses included $44 million of charges for restructuring and asset
impairment costs. Fiscal 2001 operating expenses included $102 million of charges for restructuring and asset impairment and $18 million of charges as a result of the implementation of
an ERP system and costs associated with a business reorganization.

15

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Research and developmentFiscal 2003 research and development spending decreased $6 million or 3% compared with fiscal
2002. The fiscal 2003 decrease reflects a 7% decline in headcount and an overall reduction in research and development activities as a result of continued restructuring actions in order to align
expenses with lower revenue levels. Research and development spending decreased $59 million or 25% in fiscal 2002 compared with fiscal 2001. The fiscal 2002 decrease reflected similar factors.

Selling, general and administrativeFiscal 2003 selling, general and administrative expenses decreased $131 million or
29% compared with fiscal 2002. This decrease in operating expenses resulted primarily from a 14% decline in headcount as a result of restructuring and personnel attrition, and the impact of our
overall expense control measures aimed at bringing operating expenses more in line with revenues. Selling, general and administrative expenses decreased $267 million or 37% in fiscal 2002
compared with fiscal 2001. The fiscal 2002 decrease reflected 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.

Other operating expenseOther operating expense for fiscal 2003 represented a charge for estimated restructuring of
$29 million and charges of $3 million associated with the impairment of assets, partially offset by $2 million of adjustments to previously recorded restructuring charges. Other
operating expense for fiscal 2002 represented a charge for estimated restructuring of $46 million and charges of $12 million associated with the impairment of assets, partially offset by
adjustments to previously recorded restructuring charges of $13 million. Other operating expense for fiscal 2001 represented a charge for estimated restructuring of $88 million and
charges of $20 million associated with the impairment of assets, partially offset by $6 million of adjustments to previously recorded restructuring charges. As a result of these
restructuring actions, we anticipate cash outflows of $7 million through fiscal 2004 for severance and related charges and $25 million through fiscal 2010 for facilities related
expenditures, net of estimated sublease income. See Note 3, "Other Operating Expense," for further information regarding these activities And Note 23 to the Consolidated Financial
Statements for restructuring activities initiated in August 2003.

Interest and Other

|                                     |  | Years ended |        
|------------------------------------ |  | ----------- | -------
|
|
|Interest Expense                     |  | $           | (27,143
|                                     |  |             |        
|Foreign exchange gain (loss)         |  | $           | 2,078  
|Miscellaneous income (expense)       |  |             | (974   
|Investment gain (loss)               |  |             | (2,981 
|Interest income                      |  |             | 4,462  
|                                     |  |             |        
|Total Interest income and other, net |  | $           | 2,585  
|                                     |  |             |        

Interest ExpenseInterest expense increased 18% in fiscal 2003 compared with fiscal 2002 primarily due to the full year
impact of higher interest rates on our Yen-based loan, which was restructured in mid-fiscal 2002, as well as interest expense resulting from the inclusion of a prior year tax refund in taxable income.
Interest expense increased 16% in fiscal 2002 compared with fiscal 2001 primarily due to a full year of interest expense associated with our financing arrangement (see Note 11) and higher
interest associated with the reset interest rate on our restructured Yen-based loan compared with fiscal 2001 (see Note 6).

16

---

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 2003 included the receipt of $2 million associated with an investment tax
credit refund, $2 million in minority interest income related to our interest in SGI Japan, a $2.5 million impairment charge against an investment held at cost and a $6 million
overall loss on the sale of certain parcels of land that occurred throughout the fiscal year. Interest income and other, net for fiscal 2002 included a $64 million gain from the sale of 60% of
our interest in SGI Japan recognized in the second quarter of fiscal 2002, a charge of $24 million for the settlement of a securities class action lawsuit involving a payment of
$4 million in cash and the issuance of 8 million shares of common stock and a $4 million loss on the sale of a building recognized in the first quarter of fiscal 2002.

Provision for Income Taxes

Our net benefit for income taxes for fiscal 2003 totaled $26 million and arose principally from the reassessment of our global tax exposures as well as the
receipt of income tax refunds related to prior fiscal years. We did not recognize a benefit for our fiscal 2003 loss, since the resulting deferred tax asset does not meet the criteria for realization
under SFAS No. 109.

Our
net benefit for income taxes for fiscal 2002 totaled $36 million, which arose principally from a change in the U.S. income tax laws, which resulted in additional U.S. income
tax refunds related to the operating results of fiscal 2001. Partially offsetting this federal income tax benefit are various provisions for income taxes payable in state and foreign jurisdictions. We
did not recognize a benefit for our fiscal 2002 loss, since the resulting deferred tax asset does not meet the realizability criteria under SFAS No. 109.

At
June 27, 2003, we had gross deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $804 million. The gross deferred tax assets
are offset by a valuation allowance of $727 million and deferred tax liabilities of $79 million. The valuation allowance of $727 million includes $23 million attributable
to benefits of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital.

At
June 27, 2003, we had United States federal, state, and foreign jurisdictional net operating loss carryforwards of approximately $1.3 billion, $333 million and
$200 million, respectively. The federal losses will begin expiring in fiscal year 2010, the state losses will begin expiring in fiscal 2005, and the foreign losses will begin expiring in fiscal
year 2004. At June 27, 2003, we also had general business credit carryovers of approximately $43 million for United States federal tax purposes, which will begin expiring in fiscal year
2004, and state R&D credits of $29 million, which do not have fixed expiration dates.

Impact of SGI Japan Transaction

During the second quarter of fiscal 2002, we sold a 60% equity interest in SGI Japan to NEC and NEC Soft. This transaction affected our fiscal 2002 results in
several ways. As a minority shareholder, we no longer consolidate the financial results of SGI Japan. We also recognize revenue based on the contractual distribution price of products sold to SGI
Japan, which for the initial term of our distribution agreement is based on historical pricing. Gross margins are negatively affected by the shift to distributor pricing, which is lower than the price
to ultimate customers, offset to some extent by the amortization of the deferred revenue of $10 million that was allocated to the estimated fair value of the exclusive distribution agreement.
This deferred revenue is being recognized as revenue over the three-year period beginning in the third quarter of fiscal 2002.

17

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Financial Condition

At June 27, 2003, cash and cash equivalents and marketable investments totaled $141 million compared with $218 million at June 28,
2002. Also, included in the balance sheet at June 27, 2003 and June 28, 2002 is approximately $37 million and $45 million, respectively, of restricted investments.
Restricted investments at June 27, 2003 and June 28, 2002 consist of short- and long-term investments pledged as collateral against bank credit facilities. The decrease in
cash and cash equivalents compared with the prior year is primarily the result of our fiscal 2003 operating and investing activities. Fiscal 2002 cash and cash equivalents and marketable investments
increased by $88 million due principally to the sale 60% of our interest in SGI Japan and corporate real estate assets and the $63 million in revenue generated from the Microsoft
transaction, which along with strong working capital management, offset a $101 million loss from operations.

Primarily
as a result of net losses, operating activities used $42 million in cash in fiscal 2003, compared with using $13 million and $282 million in fiscal 2002
and 2001, respectively. Operating cash flows for fiscal 2002 benefited from $63 million in revenue from the Microsoft intellectual property agreement that was received in the first quarter. To
present cash flows from operating activities, net loss for each of the past three years had to be adjusted for certain significant items. Fiscal 2003 net loss was adjusted to remove the impact of the
$30 million restructuring charge. Fiscal 2002 net loss is adjusted to remove
the impact of the $45 million restructuring charge and a gain of $64 million from the sale of the 60% interest in SGI Japan that was reflected as a cash flow from investing activities.
Fiscal 2001 net loss is adjusted to remove the impact of the $102 million restructuring charge, a non-cash charge of $83 million for the write-off of an
investment in a private company and a gain of $50 million on the sale of marketable investments that is reflected as a cash flow from investing activities.

The
negative operating cash flow in fiscal 2003 was partially due to approximately $39 million in cash payments for severance, contractual obligations and facilities obligations
related to restructuring activities. These restructuring actions are expected to result in additional future cash outlays of approximately $32 million, of which approximately $19 million
are projected to occur in fiscal 2004. The negative operating cash flows in both fiscal 2003 and fiscal 2002 were partially offset by a decrease in accounts receivable attributable to lower revenue
levels coupled with increased focus on customer cash collections and decreased inventory levels. Due to enhanced visibility provided through our global ERP system, we have been able to improve cash
management programs to more effectively manage the timing of collections and disbursements within normal business cycles. As a result of these programs, our days sales outstanding improved from an
average of 74 days in fiscal 2001 to 61 and 50 days in fiscal 2002 and fiscal 2003, respectively. Our investments in inventory have decreased in the past two fiscal years as our revenue
levels have declined. Inventory turnover improved 31% and 5% in fiscal 2003 and fiscal 2002, respectively, compared with the prior periods.

Investing
activities, other than changes in our marketable and restricted investments, consumed $36 million in cash during fiscal 2003. The principal investing activities during
fiscal 2003 consisted of increases in prepaid software licenses, equity income resulting from our investment in SGI Japan and capital expenditures of $19 million, offset in part by
$8 million in proceeds received from the sale of land. Investing activities, other than changes in our marketable and restricted investments, provided $78 million in cash during fiscal
2002. The principal investing activity during fiscal 2002 was the sale of a 60% interest in SGI Japan for proceeds of $91 million and the sale of corporate real estate and other assets for
proceeds of $29 million. These proceeds were offset in part by capital expenditures of $28 million in fiscal 2002. 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 $139 million of capital expenditures, including capitalized costs associated with our global ERP system.

18

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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. Financing activities during fiscal 2003 consumed $8 million compared with using $5 million during fiscal 2002 and providing $11 million during fiscal 2001. Principal
financing activities during the fiscal 2003 included $11 million in debt payments, partially offset by $3 million in proceeds from the sale of common stock through the employee stock
purchase plan and employee stock options. The principal financing activity during fiscal 2002 included the retirement of a $13 million mortgage on our manufacturing facility in Switzerland and
the non-cash restructuring of the yen
denominated debt from $50 million to $37 million in the second quarter in conjunction with the sale of a majority equity interest in SGI Japan.

We
have incurred net losses and negative cash flows from operations during each of the past several fiscal years. At June 27, 2003, our principal sources of liquidity included
unrestricted cash and marketable investments of $141 million, down from $218 million at June 28, 2002. For the year ended June 27, 2003, we used $42 million in cash
from operations. We expect to continue to consume cash from operations through the first half of fiscal 2004. We also experience significant intra-quarter fluctuations in our cash levels due to timing
differences between our payments to vendors and our collections from customers, with the result that our cash balances are generally at their highest point at the end of each quarter and significantly
lower at other times. As a result, we continue to focus on expense controls and working capital efficiencies to maintain adequate levels of unrestricted cash within each quarter. We also are exploring
alternatives for generating additional cash through financing transactions and dispositions of non-core assets. For example, in September 2003 we completed the sale of our facility in
Cortaillod, Switzerland for net cash proceeds of approximately $10.5 million.

We
are committed to our goal of re-establishing profitable operations and positive cash flow. While a forecast of future events is inherently uncertain, we believe that the
combination of our current resources and cash expected to be generated from our fiscal 2004 financial plan will be sufficient to meet our financial obligations through fiscal 2004. If we experience a
material shortfall versus our plan for fiscal 2004, we will take all appropriate actions to ensure the continued operation of our business and to mitigate any negative impact on our profitability and
cash reserves. We have a range of actions we can take to achieve this outcome, including but not limited to expense-related actions such as further reductions in headcount-related expenses, additional
consolidation of administrative functions, re-evaluation of our global distribution model, and delayed implementation of information systems initiatives. We also can take actions to
generate cash by selling non-core businesses, licensing intellectual property, seeking funding from marketing partners and key government customers, and seeking further equity or debt
financing from strategic partners or financial sources. See "Risks That Affect Our Business."

We
have approximately $230 million of 5.25% senior convertible notes that will mature in September 2004. If we are not able to restructure a substantial portion of these
notes to extend the maturity on terms satisfactory to our secured lender by March 2004, our secured credit facility will become due in June 2004. At June 27, 2003, our obligation under
this facility, net of restricted cash collateral, was $25 million.

During
fiscal 2003 we commenced an exchange offer with the goal of exchanging new debt securities maturing in 2009 for the outstanding 2004 notes. Although the exchange offer as amended
was supported by the holders of approximately 71% of the 2004 notes, we did not achieve the 85% participation level upon which the offer was conditioned, and so we withdrew the offer in
August 2003. We are continuing our dialogue with the principal holders with the goal of exchanging a substantial majority of the 2004 notes for notes with a later maturity. It is likely that
these new notes would carry significantly higher interest rates than the 2004 notes and, to the extent that they are convertible obligations, would involve a conversion price close to our recent stock
price of approximately $1.00.

19

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The
nonconvertible notes offered in our recent exchange offer, for example, had an interest rate of 11.75%.

As
of June 27, 2003, future payments due under debt and lease obligations, including facilities vacated as part of our restructuring activities and excluding the benefit of
sublease income on our vacated facilities, are as follows (in thousands):

|Fiscal year ended                                                                   |  | 2004 |        | 2005 |   | 2006    |  | 2007 |        | 2008 |   | Thereafter |  | Total
|----------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- |  | ---- | ------ | ---- | - | ---------- |  | -----
|10% loan payable to SGI Japan due December 2004 (payable in quarterly installments) |  | $    | 16,894 |      | $ | 12,669  |  | $    |       |      | $ |           |  | $    
|5.25% Senior Convertible Notes due September 2004                                   |  |      |       |      |   | 230,591 |  |      |       |      |   |           |  |      
|6.125% Convertible Subordinated Debentures due February 2011                        |  |      |       |      |   |        |  |      |       |      |   | 5,026      |  |      
|Non-cancelable operating leases                                                     |  |      | 49,092 |      |   | 44,513  |  |      | 33,386 |      |   | 27,896     |  |      
|                                                                                    |  |      |        |      |   |         |  |      |        |      |   |            |  |      
|Total                                                                               |  | $    | 65,986 |      | $ | 287,773 |  | $    | 33,386 |      | $ | 32,922     |  | $    
|                                                                                    |  |      |        |      |   |         |  |      |        |      |   |            |  |      

Included
in the above table under non-cancelable operating leases are lease payments associated with our Amphitheatre Technology Center campus for which we entered into an
agreement to sublease on July 10, 2003. In addition, the table does not reflect the lease payments for the space we will relocate to on the Crittenden Technology Center campus. Adjusting for
the impact of this agreement, the non-cancelable operating lease payments, excluding the benefit of any sublease income, would be as follows (in thousands): 2004$49,092;
2005$49,438; 2006$43,225; 2007$37,421; 2008$35,858 and $159,876 thereafter.

Critical Accounting Policies and Estimates

SGI's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate these estimates, including: those related to
customer programs and incentives; product returns; bad debts; inventories; warranty obligations; impairment of long-lived assets and intangibles; and contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

Management
has discussed the development and selection of the following critical accounting policies and estimates with the audit committee of our board of directors and the audit
committee has reviewed our disclosures relating to them.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For all these
policies, we caution that future events often do not develop exactly as forecasted, and that even the best estimates routinely require adjustment.

20

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Revenue Recognition.A majority of our revenue is derived from sales that are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectibility is reasonably assured. Certain revenue is generated from high
performance systems that may include customer acceptance criteria and for which revenue is deferred until such acceptance is obtained. Certain revenue is generated on contracts that are
longer-term in duration. In these instances, we typically recognize revenue as work progresses using the percentage-of-completion method of accounting. A small
portion of our product revenue is derived from product sales that require estimates for sales returns and other allowances at the time of revenue recognition. These estimates are based on historical
information, current economic trends and other factors. If the data used to calculate these estimates does not properly anticipate future returns and allowances, revenue could be misstated. To date,
actual experience has been consistent with our estimates.

Product Warranties.We provide for the estimated cost to warrant our products against defects in materials and workmanship at
the time revenue is recognized. We estimate our warranty obligation based on factors such as product lifecycle analysis and historical experience, and our estimate is affected by data such as product
failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability would be required. On a quarterly basis, these estimates are reviewed and adjusted as considered necessary based on the factors noted above.

Manufacturing Inventory and Spare Parts.We write down our manufacturing inventory for estimated excess, obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. At the end of each quarter, we perform an in depth excess and obsolete analysis of all
manufacturing inventory parts on order and on hand based upon assumptions about future demand and current market conditions. For all spare parts on hand, our analysis is based on assumptions about
product life cycles, historical usage, current production status and installed base. Additional adjustments to manufacturing inventory and parts may be required if actual market conditions are less
favorable than those projected by us during the analyses.

Bad Debts.We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to
make required payments. When we become aware of a specific customer's inability to pay their outstanding obligation for reasons such as a deterioration in their operating results or financial position
or bankruptcy proceedings, we record a specific reserve for bad debt to reduce their receivable to an amount we reasonably believe is collectible. If the financial condition of specific customers were
to change, our estimates of the recoverability of receivables could be further adjusted. We also record allowances for doubtful accounts for all other customers based on a variety of factors including
the length of time the receivables are past due and historical experience. On a quarterly basis, these estimates are reviewed and adjusted as considered necessary based on the criteria noted above.

Restructuring.In recent fiscal years, we have recorded significant accruals in connection with our restructuring programs.
These accruals include estimates of employee separation costs and the settlements of contractual obligations, including lease terminations resulting from our actions. Accruals associated with vacated
facilities and related asset impairments are estimated in accordance with SFAS No. 5, "Accounting for Contingencies". Estimates may be adjusted upward or downward upon occurrence of a future
triggering event. Triggering events may include, but are not limited to, changes in estimated time to sublease, sublease terms and sublease rates. Due to the extended contractual obligations of
certain of these leases and the inherent volatility of commercial real estate markets, we expect to make future adjustments to these vacated facilities accruals.

Income Taxes.Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the
recoverability of certain deferred tax assets, which arise from temporary

21

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differences
and carryforwards. We regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the realization criteria set forth under
SFAS 109, "Accounting for Income Taxes,"and we record a valuation allowance to reduce our
deferred tax assets to the amount that we believe to be more likely than not realizable. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we
determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

Loss Contingencies.We record an obligation for loss contingencies when it is probable that a liability has been incurred and
the amount of the loss is reasonably estimable. Contingent liabilities are often resolved over long time periods and there is a reasonable probability that the ultimate loss will differ from and
perhaps exceed the recorded provision. Estimating probable losses requires analysis of multiple factors that often depend on judgments about the outcome of pending lawsuits and potential actions by
third parties including government agencies.

Long-Term Investments.We hold or have held investments in other companies, which are accounted for under either
the cost method or equity method of accounting and we monitor these investments for indicators of impairment. Some of these investments could be in companies that are publicly traded and have volatile
share prices, while other investments could be in companies that are not publicly traded and therefore the fair value may be difficult to determine. Many of our investments in non-publicly
traded companies represent emerging technology companies which are inherently risky because the markets for the technologies or products they have under development are typically in the early stages
and may never develop. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an
impairment charge is recorded and a new cost
basis for the investment is established. Fair values for investments in public companies are determined using quoted market prices. Fair values for investments in privately-held companies
are estimated based upon factors such as liquidation values, the values of recent rounds of financing, or quoted market prices of comparable public companies. To determine whether a decline in value
is other-than-temporary, we evaluate, among other factors, the duration and extent to which the fair value has been less than the carrying value and the financial health of and
specific prospects for the company.

Other Significant Accounting Policies.Other significant accounting policies not involving the same level of measurement
uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies regarding financial instruments, stock-based compensation and consolidation
require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by
accounting standards setters and regulators. Although no specific conclusions reached by these standards setters appear likely to cause a material change in our accounting policies, outcomes cannot be
predicted with confidence.

Recent Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and

22

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Issue 94-3
relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability
for a cost associated with an exit or disposal activity should be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS 146 is that an entity's commitment to a plan, by
itself, does not create an obligation that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in
Issue 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS146, in certain cases, would be
recognized in future periods as certain events occur rather than up front. The FASB decided that if the benefit arrangement requires employees to render future service beyond a "minimum retention
period," a liability should be recognized as employees render service over the future service period even if the benefit formula used to calculate an employee's termination benefit is based on length
of service. Contract termination costs under SFAS 146 would be recognized and measured at their fair value when an entity terminates the contract in accordance with the contract terms. Contract
costs that will continue to be incurred under a contract for its remaining term without economic benefit to an entity would be recognized and measured at its fair value when the entity ceases using
the right conveyed by the contract, for example, the right to use a leased property. Under SFAS 146, a liability for future lease obligations, reduced by actual or estimated sublease rentals,
would be recognized and measured at its fair value at the cease-use date, rather than being accrued at the date of an entity's commitment to an exit plan under
Issue 94-3. We adopted the provisions of SFAS 146 in connection with restructuring activities initiated after December 31, 2002.

In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which clarifies the requirements for a guarantor's accounting and disclosures of certain guarantees issued and outstanding. This Interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Consistent with the Interpretation, we have adopted the requirements in this
Annual Report on Form 10-K.
The adoption of Interpretation 45 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition & Disclosure"an Amendment of SFAS
No. 123. This Statement provides three alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both the annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The new disclosure requirements of SFAS 148 related to interim financial information are effective for financial
reports containing condensed financial statements for interim periods beginning after December 15, 2002. Consistent with the Statement, we have adopted all disclosure requirements in this
Form 10-K.

In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". The Interpretation
establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. Interpretation 46 applies to any business
enterprise, both public and private, that has a

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controlling
interest, contractual relationship or other business relationship with a variable interest entity. The provisions of Interpretation No. 46 are effective immediately for all variable
interests in variable interest entities created after January 31, 2003 and no later than the first fiscal period beginning after June 15, 2003 for all variable interests in variable
interest entities created before February 1, 2003. The adoption of Interpretation 46 did not have a material impact on our consolidated financial position, results of operations or cash flows.
If we enter into any such arrangement with a variable interest entity in the future, our consolidated financial position or results of operations may be adversely impacted.

In
March 2003, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on accounting for
arrangements involving the delivery or performance of multiple products, services and/or rights to use assets. Specifically, EITF 00-21 addresses: (1) how to determine whether an
arrangement with multiple deliverables contains more than one unit of accounting, and (2) how the arrangement consideration should be measured and allocated among the separate units of
accounting. The provisions of Issue 00-21 are effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of
EITF 00-21 will not have a material impact on our results of operations or financial position.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". The
Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Most of the provisions of SFAS 149
should be applied prospectively. We believe the adoption of SFAS 149 will have no impact on our results of operations or financial position.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards
for how an entity classifies and measures certain financial instruments with both the characteristics of a liability and equity. The Statement requires that an issuer classify a financial instrument
that is within its scope as a liability, while many of these instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We believe the adoption of SFAS 150 will have no impact on our
results of operations or financial position.

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.

We have recently introduced a number of new products, including the SGI Altix product family, but we cannot assure you they will achieve
market acceptance.In January 2003, we introduced the SGI Altix family of servers and superclusters based on the Intel® Itanium® 2
processor and the Linux® operating system. Risks associated with this new product line include dependence on Intel in terms of price, supply, performance, and product roadmaps; the
availability of Linux applications optimized for the 64-bit Itanium platform or our scalable systems architecture; acceptance of the Linux operating system in demanding environments; and
competition from other suppliers of Intel-based servers. There can be no assurance that this new product line will achieve market acceptance or provide significant incremental revenue. In
July 2003, we introduced new highly scalable visualization products.Our ability to achieve future revenue growth will depend significantly on the market success of these products. If one or
more of the product lines were to fail in the market, it could have an adverse effect on our business.

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We are concentrating our R&D investments.As an increasing percentage of our R&D and marketing budget
is devoted to potential growth areas, including the SGI Altix family, visualization and storage, a declining amount both in percentage and absolute terms is being devoted to the traditional MIPS/IRIX
products, which continue to supply the bulk of our revenue. Managing this transition without unduly compromising the competitiveness of the MIPS/IRIX family and the quality of support received by
customers will be key to our success. There can be no assurance that this transition will not impair our customer relationships and our competitive position.

We have been incurring losses and consuming cash in our operations and must reverse these trends and generate cash from other sources in
fiscal 2004.We have incurred net losses and negative cash flows from operations during each of the past several fiscal years. At June 27, 2003, our
principal sources of liquidity included unrestricted cash and marketable investments of $141 million, down from $218 million at June 28, 2002. We expect to continue to consume
cash from operations through the first half of fiscal 2004. Due to the significant intra-quarter fluctuations in our cash levels that result from timing differences between our payments to vendors and
our collections from customers, our cash levels tend to be at their highest at the end of the quarter. As a result, we continue to focus on expense controls and working capital efficiencies to
maintain adequate cash levels. We also are exploring alternatives for generating cash through financing transactions and dispositions of non-core assets and will consider a range of
alternatives in the event of a material revenue shortfall. See "Financial Condition." If we fail to reduce the cash consumption from operations and to generate cash from these other sources on a
timely basis, or if the cash requirements of our business change as the result of changes in terms from vendors or other causes, we could no longer have the cash resources required to run our
business.

We must restructure most or all of our senior convertible notes before their maturity in
September 2004.We have approximately $231 million of 5.25% senior convertible notes that will mature in September 2004. Following our
withdrawal in August 2003 of an exchange offer for the notes, we are continuing our dialogue with the principal holders with the goal of exchanging a substantial majority of the 2004 notes for
bonds with a later maturity. We cannot assure that we will be able to complete this restructuring at all or on terms that will be favorable to our shareholders or us. It is likely that these new bonds
would carry significantly higher interest rates than the 2004 bonds and, to the extent that they are convertible obligations, would involve a conversion price close to our recent stock price of
approximately $1.00. The nonconvertible bonds offered in our recently withdrawn exchange offer, for example, carried an interest rate of 11.75%. Our secured credit facility will become due and payable
in June 2004 if the restructuring of the 2004 notes is not completed by March 2004 on terms satisfactory to our secured lender.

We may not be able to obtain additional capital when needed.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. This facility matures in April 2005, subject to acceleration upon various events of default or
the failure to successfully extend the maturity of of our senior convertible notes due September 2004 on terms satisfactory to the secured lender on or before March 5, 2004. The facility
is secured by our U.S. and Canadian accounts receivable, U.S. inventory and equipment, the pledge of certain intellectual property and $10 million cash collateral. We also deposit additional
cash when eligible accounts receivable and other collateral, which fluctuate within the quarter, are below the level needed to secure our letters of credit. At June 27, 2003, this facility was
secured by a total of $21 million cash collateral. We obtained waivers of compliance with the covenants of the facility from the lenders in the first, third and fourth quarters of fiscal 2003
and the second, third and fourth quarters of fiscal 2002. If we are not able to comply with the financial and other covenants of this facility 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 or if the facility matures and is not renewed, we may not be able to
obtain alternative sources of financing on acceptable terms.

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In
the future, we may need to obtain additional financing to fund our business or repay our debt, and there can be no assurance that financing will be available in amounts or on terms
acceptable to us. In addition, if funds are raised through further incurrence of debt, our operations and finances may become subject to further restrictions and we may be required to limit our
service or product development activities or other operations, or otherwise modify our business strategy. If we obtain additional funds by selling any of our equity securities or if we issue equity
derivative securities in connection with obtaining debt financing, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity
securities may have rights, preferences or privileges senior to the common stock.

We may become involved in intellectual property disputes.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. We are in discussions with
several parties that have asserted intellectual property infringement claims. 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.

In
addition, our increasing visibility as a supplier of Linux-based systems and as a participant in the open source software movement increases our risk of becoming embroiled in the
intellectual property disputes concerning these subjects, such as the current widely reported litigations between SCO Group on the one hand and IBM and Red Hat on the other. We recently received a
notice from SCO Group stating its intention to terminate our fully paid license to certain UNIX-related code, under which we distribute our IRIX operating system, on the basis that we have
breached the terms of such license. We believe that the SCO Group's allegations are without merit and that our fully paid license is nonterminable. Nonetheless, there can be no assurance that this
dispute with SCO Group will
not escalate into litigation, which could have a material adverse effect on SGI, or that SCO Group's intellectual property claims will not impair the market acceptance of the Linux operating system.

We are increasingly dependent 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 recent addition of scalable servers based on Itanium 2 processors and the Linux
operating system, 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, 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 to Linux is a key factor to our business success.

We are dependent on sales to the U.S. government.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. The U.S. government can typically terminate or modify its contracts with us at any time for its convenience. Any
disruption or limitation in our ability to do business with the U.S. Government could have an adverse impact on SGI.

A
portion of our business requires security clearances from the U.S. government. We have implemented measures to maintain our clearances in light of the fact that our Chairman and Chief

26

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Executive
Officer, Robert Bishop, is an Australian citizen. These arrangements are subject to periodic review by customer agencies and the Defense Security Service of the Department of Defense.

Our business experiences period-to-period fluctuations in operating
results.Our operating results may fluctuate for a number of reasons. Delivery cycles, other than those for large-scale server products, are typically short. 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, military or terrorist actions, or natural disasters. Demand can also be adversely affected by concerns specifically
associated with our financial health, and 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 revenue levels, mix considerations, including geographic concentrations, the mix of product and service revenue, and the mix of server and desktop product revenue as well as the
mix of configurations within these product categories.

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

Many of our international sales require export licenses.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. 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.

In
December 2002 we reached agreements with the U.S. Departments of Commerce and Justice to settle civil and criminal export licensing issues related to the sale of four deskside
computers in 1996 to a Russian government laboratory, as well as administrative claims related to sales to other countries. Although there can be no assurance that the settlement will not have an
adverse effect on our U.S. government business, we do not believe the settlement should have a significant impact on revenues or important customer relationships.

The
Swiss authorities are investigating compliance with their export regulations in connection with exports from the Swiss manufacturing facility we closed during the second quarter of
fiscal 2002. We believe that this matter will be resolved without a significant adverse effect on our business, operating results or financial condition.

We may not be able to develop and introduce new products on a timely basis.Meeting our objectives
for the future will require that our recently introduced products achieve success in the marketplace and that we succeed in the timely development and introduction of more successful new 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 manufacturing teams, outside suppliers of key components such as semiconductors
and outsource manufacturing partners. The failure of any one of these elements could cause our products under development to fail to meet specifications or to miss the aggressive timetables that we
establish. There

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is
no assurance that development or acceptance of our new systems will not be affected by delays in this process.

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.

Downward fluctuations in the price of our common stock may cause our common stock to be delisted.On
October 24, 2002 we were notified by the New York Stock Exchange that we were not in compliance with its requirement that listed securities trade at a minimum per share price of $1.00 averaged
over a thirty day trading period. Our stock price subsequently recovered, but if it were to decline again and not recover, the NYSE could terminate the listing of our common stock. As of
September 23, 2003, the 30-day trading average of our stock was $1.04. Declines in the price of our common stock may be caused by our failure to meet the investment community's
expectations for quarterly revenue or earnings or by broader market trends unrelated to our performance. Delisting would adversely affect the liquidity and market price of our common stock.

We operate in a highly competitive industry.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. They also generally have a larger
installed base of customers and a wider range of available applications software. Competition may result in significant discounting and lower gross margins.

We may not be able to retain and attract qualified employees.Our success depends on our ability to
continue to attract, retain and motivate highly qualified technical, sales and marketing and management personnel. The uncertainties surrounding our business prospects and our continuing restructuring
actions have increased the challenges of retaining world-class talent. We implemented further restructuring actions during fiscal 2003 and the first quarter of fiscal 2004. As we continue to work
through the turnaround process, there is no guarantee that we will not lose highly qualified employees or that we will be able to hire highly qualified candidates as new skills are needed.

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 the 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.

Our
exposure to interest rate risk relates primarily to our investment portfolio and our convertible subordinated notes. Fixed rate securities and borrowings may have their fair market
value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in
interest rates.

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The
primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we
invest our excess cash in high quality money market instruments and debt instruments and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize
the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three years.

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 27, 2003. We computed the market values for foreign exchange
risk based on spot rates in effect at June 27, 2003. The market values that result from these computations are compared to the market values of these financial instruments at June 27,
2003. 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 27, 2003 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 increase in the aggregate fair values of our
financial instruments by $3 million at June 27, 2003. A percentage point increase 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 $2 million at June 27, 2003.

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 $6 million June 27, 2003. 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 $5 million at June 27, 2003.

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
foreign currency exchange rates.

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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 27, 2003 |                                                          
|                              |                                                                      |                                                          

All
other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements and related footnotes.

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Report of Ernst & Young LLP, Independent Auditors

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

We
have audited the accompanying consolidated balance sheets of Silicon Graphics, Inc. as of June 27, 2003 and June 28, 2002, and the related consolidated statements
of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended June 27, 2003. 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 27, 2003 and June 28, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 27, 2003, in conformity
with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

/s/
ERNST & YOUNG LLP

Palo
Alto, California
September 29, 2003

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CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                       |                                     | Years Ended              |         
|---------------------------------------------------------------------- | ----------------------------------- | ------------------------ | --------
|
|
|Revenue:                                                               |                                     |                          |         
|                                                                       | Product and other revenue           |                          | $       
|                                                                       | Service revenue                     |                          |         
|                                                                       |                                     |                          |         
|                                                                       |                                     | Total revenue            |         
|Costs and expenses:                                                    |                                     |                          |         
|                                                                       | Cost of product and other revenue   |                          |         
|                                                                       | Cost of service revenue             |                          |         
|                                                                       | Cost of discontinued product line   |                          |         
|                                                                       | Research and development            |                          |         
|                                                                       | Selling, general and administrative |                          |         
|                                                                       | Other operating expense             |                          |         
|                                                                       |                                     |                          |         
|                                                                       |                                     | Total costs and expenses |         
|                                                                       |                                     |                          |         
|Operating loss                                                         |                                     |                          | (131,409
|Interest expense                                                       |                                     |                          | (27,143 
|Interest income and other, net                                         |                                     |                          | 2,585   
|                                                                       |                                     |                          |         
|Loss before income taxes                                               |                                     |                          | (155,967
|(Benefit) provision for income taxes                                   |                                     |                          | (26,263 
|                                                                       |                                     |                          |         
|Net loss                                                               |                                     | $                        | (129,704
|                                                                       |                                     |                          |         
|Net loss per sharebasic and diluted                                   |                                     | $                        | (0.64   
|                                                                       |                                     |                          |         
|Shares used in the calculation of net loss per sharebasic and diluted |                                     |                          | 201,424 
|                                                                       |                                     |                          |         

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

32

---

CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                           | June 27,
2003               |         | June 28,
2002 |         
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | ------------- | --------
|
|Assets:                                |                                                                                                                                                           |                             |         |               |         
|Current assets:                        |                                                                                                                                                           |                             |         |               |         
|                                       | Cash and cash equivalents                                                                                                                                 |                             | $       | 140,836       |         
|                                       | Short-term marketable investments                                                                                                                         |                             |         | 440           |         
|                                       | Short-term restricted investments                                                                                                                         |                             |         | 35,298        |         
|                                       | Accounts receivable, net of allowance for doubtful accounts of $8,421 in 2003 and $12,548 in 2002                                                         |                             |         | 133,166       |         
|                                       | Inventories                                                                                                                                               |                             |         | 71,426        |         
|                                       | Prepaid expenses                                                                                                                                          |                             |         | 10,471        |         
|                                       | Other current assets                                                                                                                                      |                             |         | 41,256        |         
|                                       |                                                                                                                                                           |                             |         |               |         
|                                       |                                                                                                                                                           | Total current assets        |         |               | 432,893 
|                                       | Restricted investments                                                                                                                                    |                             |         | 1,430         |         
|                                       | Property and equipment, net of accumulated depreciation and amortization                                                                                  |                             |         | 108,062       |         
|                                       | Other assets                                                                                                                                              |                             |         | 107,469       |         
|                                       |                                                                                                                                                           |                             |         |               |         
|                                       |                                                                                                                                                           | $                           | 649,854 |               | $       
|                                       |                                                                                                                                                           |                             |         |               |         
|Liabilities and Stockholders' Deficit: |                                                                                                                                                           |                             |         |               |         
|Current liabilities:                   |                                                                                                                                                           |                             |         |               |         
|                                       | Accounts payable                                                                                                                                          |                             | $       | 76,507        |         
|                                       | Accrued compensation                                                                                                                                      |                             |         | 38,916        |         
|                                       | Income taxes payable                                                                                                                                      |                             |         | 22,666        |         
|                                       | Other current liabilities                                                                                                                                 |                             |         | 109,147       |         
|                                       | Deferred revenue                                                                                                                                          |                             |         | 149,434       |         
|                                       | Current portion of restructuring charge                                                                                                                   |                             |         | 17,840        |         
|                                       | Current portion of long-term debt                                                                                                                         |                             |         | 16,894        |         
|                                       |                                                                                                                                                           |                             |         |               |         
|                                       |                                                                                                                                                           | Total current liabilities   |         |               | 431,404 
|Long-term debt                         |                                                                                                                                                           |                             | 291,956 |               |         
|Other liabilities                      |                                                                                                                                                           |                             | 91,385  |               |         
|                                       |                                                                                                                                                           |                             |         |               |         
|                                       |                                                                                                                                                           | Total liabilities           |         |               | 814,745 
|Commitments and contingencies          |                                                                                                                                                           |                             |         |               |         
|Stockholders' deficit:                 |                                                                                                                                                           |                             |         |               |         
|                                       | Common stock, $.001 par value, and additional paid-in capital; 500,000,000 shares authorized; shares issued: 204,590,129 in 2003 and 199,762,254 in 2002; |                             |         | 1,467,798     |         
|                                       | Accumulated deficit                                                                                                                                       |                             |         | (1,606,049    | )       
|                                       | Treasury stock, at cost: 618,350 shares in 2003 and 1,124,392 shares in 2002;                                                                             |                             |         | (6,715        | )       
|                                       | Accumulated other comprehensive loss                                                                                                                      |                             |         | (19,925       | )       
|                                       |                                                                                                                                                           |                             |         |               |         
|                                       |                                                                                                                                                           | Total stockholders' deficit |         |               | (164,891
|                                       |                                                                                                                                                           |                             |         |               |         
|                                       |                                                                                                                                                           | $                           | 649,854 |               | $       
|                                       |                                                                                                                                                           |                             |         |               |         

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

33

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                            |                                                        | Years Ended       |                                                    
|--------------------------------------------------------------------------- | ------------------------------------------------------ | ----------------- | ---------------------------------------------------
|
|
|Cash Flows From Operating Activities:                                       |                                                        |                   |                                                    
|Net loss                                                                    |                                                        | $                 | (129,704                                           
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                        |                   |                                                    
|                                                                            | Depreciation                                           |                   |                                                    
|                                                                            | Amortization                                           |                   |                                                    
|                                                                            | Gain on sale of 60% interest in SGI Japan              |                   |                                                    
|                                                                            | Gain on sale of Cray product line                      |                   |                                                    
|                                                                            | Gain on sale of long-term investments                  |                   |                                                    
|                                                                            | (Gain) loss on sale of corporate real estate           |                   |                                                    
|                                                                            | Loss on write-down of investments in private companies |                   |                                                    
|                                                                            | Restructuring and impairment charges, net              |                   |                                                    
|                                                                            | Other                                                  |                   |                                                    
|Changes in operating assets and liabilities:                                |                                                        |                   |                                                    
|                                                                            | Accounts receivable                                    |                   |                                                    
|                                                                            | Inventories                                            |                   |                                                    
|                                                                            | Accounts payable                                       |                   |                                                    
|                                                                            | Accrued compensation                                   |                   |                                                    
|                                                                            | Deferred revenue                                       |                   |                                                    
|                                                                            | Other assets and liabilities                           |                   |                                                    
|                                                                            |                                                        |                   |                                                    
|                                                                            |                                                        | Total adjustments |                                                    
|                                                                            |                                                        |                   |                                                    
|                                                                            |                                                        |                   | Net cash used in operating activities              
|Cash Flows From Investing Activities:                                       |                                                        |                   |                                                    
|Marketable investments:                                                     |                                                        |                   |                                                    
|                                                                            | Purchases                                              |                   |                                                    
|                                                                            | Maturities                                             |                   |                                                    
|Purchases of restricted investments                                         |                                                        |                   | (194,707                                           
|Proceeds from the maturities of restricted investments                      |                                                        |                   | 203,703                                            
|Proceeds from the sale of interest in SGI Japan                             |                                                        |                   |                                                   
|Proceeds from the sale of corporate real estate and other assets            |                                                        |                   | 7,653                                              
|Capital expenditures                                                        |                                                        |                   | (18,544                                            
|(Increase) decrease in other assets                                         |                                                        |                   | (25,055                                            
|                                                                            |                                                        |                   |                                                    
|                                                                            |                                                        |                   | Net cash (used in) provided by investing activities
|Cash Flows From Financing Activities:                                       |                                                        |                   |                                                    
|Issuance of debt                                                            |                                                        |                   |                                                   
|Payments of debt principal                                                  |                                                        |                   | (10,777                                            
|Sale of SGI common stock                                                    |                                                        |                   | 3,240                                              
|Restricted investments used to purchase SGI common stock                    |                                                        |                   |                                                   
|Repurchase of SGI common stock                                              |                                                        |                   |                                                   
|Cash dividends-preferred stock                                              |                                                        |                   |                                                   
|                                                                            |                                                        |                   |                                                    
|                                                                            |                                                        |                   | Net cash (used in) provided by financing activities
|                                                                            |                                                        |                   |                                                    
|Net (decrease) increase in cash and cash equivalents                        |                                                        |                   | (72,466                                            
|Cash and cash equivalents at beginning of year                              |                                                        |                   | 213,302                                            
|                                                                            |                                                        |                   |                                                    
|Cash and cash equivalents at end of year                                    |                                                        | $                 | 140,836                                            
|                                                                            |                                                        |                   |                                                    

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

34

---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

|                                                                           |                                                                                                                                                | Three years ended June 27, 2003                                                                   |                         
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------
|
|
|Balance at June 30, 2000                                                   |                                                                                                                                                | $                                                                                                 | 16,998                  
|                                                                           | Components of comprehensive loss:                                                                                                              |                                                                                                   |                         
|                                                                           |                                                                                                                                                | 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 common stock (6,538,671 shares) under employee stock plansnet |                                                                                                   |                         
|                                                                           | Purchase of 6,000,000 shares of treasury stock under equity forward arrangements                                                               |                                                                                                   |                         
|                                                                           | Conversion of preferred stock to common stock                                                                                                  |                                                                                                   |                         
|                                                                           |                                                                                                                                                |                                                                                                   |                         
|Balance at June 30, 2001                                                   |                                                                                                                                                |                                                                                                   |                        
|                                                                           | Components of comprehensive loss:                                                                                                              |                                                                                                   |                         
|                                                                           |                                                                                                                                                | Net loss                                                                                          |                         
|                                                                           |                                                                                                                                                | Currency translation adjustment                                                                   |                         
|                                                                           |                                                                                                                                                | Change in unrealized gain on available-for-sale investments, net of tax of $(66)                  |                         
|                                                                           | 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                                                                          |                         
|                                                                           | Issuance of treasury stock (4,974,487 shares) under employee stock plansnet                                                                   |                                                                                                   |                         
|                                                                           | Issuance of common stock (2,400,000 shares) for settlement of securities class action lawsuit                                                  |                                                                                                   |                         
|                                                                           |                                                                                                                                                |                                                                                                   |                         
|Balance at June 28, 2002                                                   |                                                                                                                                                |                                                                                                   |                        
|                                                                           |                                                                                                                                                |                                                                                                   |                         
|                                                                           | Components of comprehensive loss:                                                                                                              |                                                                                                   |                         
|                                                                           |                                                                                                                                                | Net loss                                                                                          |                         
|                                                                           |                                                                                                                                                | Currency translation adjustment                                                                   |                         
|                                                                           |                                                                                                                                                | Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges |                         
|                                                                           |                                                                                                                                                |                                                                                                   |                         
|                                                                           |                                                                                                                                                |                                                                                                   | Total comprehensive loss
|                                                                           | Common stock reserved for issuance (5,600,000 shares) for settlement of securities class action lawsuit                                        |                                                                                                   |                         
|Issuance of treasury stock (506,042 shares) under employee stock plansnet |                                                                                                                                                |                                                                                                   |                        
|                                                                           |                                                                                                                                                |                                                                                                   |                         
|Balance at June 27, 2003                                                   |                                                                                                                                                | $                                                                                                 |                        
|                                                                           |                                                                                                                                                |                                                                                                   |                         

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

35

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations

SGI is a leader in high-performance computing, visualization and storage. We sell highly scalable servers, advanced visualization systems, desktop
workstations, storage solutions and a range of software products which enable our customers in the scientific, technical and creative communities to solve their most challenging problems and provide
them with strategic and competitive advantages in their marketplace. We also offer a range of technical solutions, including professional services, Reality Center immersive visualization centers,
customer support and education. These products and services are targeted primarily towards five market segments: Government and Defense, Science, Manufacturing, Energy, and Media.

Our
products were manufactured in Wisconsin during fiscal 2003 and in both Wisconsin and Switzerland during fiscal 2002 and 2001. During the first half of fiscal 2002, we consolidated
our manufacturing operations with the closure of our manufacturing facility in Switzerland. We distribute our products through our direct sales force, as well as through indirect channels including
resellers, distributors and system integrators. 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 four fiscal years, and had working capital of $1.5 million at June 27, 2003. Our
unrestricted cash and marketable investments at June 27, 2003 were $141 million, down from $218 million at June 28, 2002. While a forecast of future events is inherently
uncertain, we believe that the combination of our current resources and cash expected to be generated from our fiscal 2004 financial plan will be sufficient to meet our financial obligations through
fiscal 2004.

We
are committed to our goal of reestablishing profitable operations and positive cash flow. If we experience a material shortfall versus our plan for fiscal 2004, we will take all
appropriate actions to
ensure the continued operation of our business and to mitigate any negative impact on our profitability and cash reserves. We have a range of actions we can take to achieve this outcome, including but
not limited to expense-related actions such as further reductions in headcount-related expenses, additional consolidation of administrative functions, re-evaluation of our global
distribution model, and delayed implementation of information systems initiatives. We also can take actions to generate cash by selling non-core businesses, licensing intellectual
property, seeking funding from marketing partners and key government customers, and seeking further equity or debt financing from strategic partners or financial sources. See "Risks That Affect Our
Business."

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of ConsolidationBeginning in fiscal 2002, SGI changed to a 52-53 week
fiscal year ending on the last Friday in June. For fiscal 2003 and 2002, the fiscal year ended on June 27 and June 28, respectively. For fiscal years prior to 2002, the fiscal year ended
on June 30. The consolidated financial statements include the accounts of SGI and our wholly-and majority-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications of prior year amounts have been made to conform with the current year presentation.

Foreign Currency TranslationHistorically, the functional currency of a majority of our foreign subsidiaries' was their local
currency and, at the end of every period, their financial statements were translated to the U.S. dollar at the rates of exchange in effect at the end of the period with the resulting translation
adjustments recorded directly to accumulated other comprehensive (loss) income, a

36

---

separate
component of stockholders' (deficit) equity. Effective December 29, 2001, we changed the functional currency of all but a few of our foreign subsidiaries from their respective local
currency to the U.S. dollar due to the subsidiaries' operations becoming less self-contained and more integrated within our U.S. business. Accordingly, we 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, except for inventory, property, plant and
equipment and certain other assets, which are remeasured at their historical exchange rates. Revenues and expenses are translated using rates of exchange in effect during the period, except for those
expenses related to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains and losses from currency translation are included in stockholders' (deficit)
equity. For the year ended June 27, 2003, 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 accounting principles generally accepted in the
United States 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.

Cash Equivalents and Marketable and Restricted InvestmentsCash equivalents consist of high credit 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 credit quality money market
instruments and high credit quality debt securities with maturities of one year or less, and are stated at fair value. At June 27, 2003 and June 28, 2002, our cash equivalents and
marketable investments are all classified as available-for-sale. At June 27, 2003 and June 28, 2002, our restricted investments are classified as
available-for-sale but are pledged as collateral against letters of credit or held under a security agreement. 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

37

---

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 (loss) 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 (loss) 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.

InventoriesManufacturing inventories are stated at the lower of cost (first-in, first-out) or
market. Demonstration sytems 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 depreciated on a straight-line basis
over the course of their respective useful lives ranging from two to five years and equity investments in certain technology companies that are carried at either market value or the lower of cost or
market. Our investment in SGI Japan comprised the majority of our total equity investments for fiscal years 2003 and 2002. Also included in other assets is goodwill associated with the acquisition of
Silicon Graphics World Trade Corporation in fiscal 1991 which, prior to our
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," on June 29, 2002, was being amortized on a straight-line basis over a period of 20 years.

Revenue RecognitionWe recognize product revenue under SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. The product is considered
delivered to the customer (including distributors, channel partners and resellers) once it has been shipped, and title and risk of loss have transferred. 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
defer the fair value of products that have been shipped to the customer but for which the appropriate revenue recognition criteria (e.g. customer acceptance) have not yet been met. Certain system
sales may be made on contracts that are longer-term in duration. In these instances, we typically recognize revenue using the percentage-of-completion method of
accounting. We recognize revenue as work progresses based on the percentage that incurred costs to date bear to estimated total costs. We reduce product revenue for certain stock rotation and price
protection rights that may occur under contractual arrangements we have with resellers.

In
certain situations, we enter into multiple-element revenue arrangements where we are obligated to deliver multiple products and/or services. A typical multiple-element arrangement
includes SGI product, third party product, SGI consulting services and SGI maintenance services. Under these

38

---

transactions,
we currently allocate revenue to be earned under the arrangement among the various elements based on their relative fair value. Effective with the implementation of EITF
00-21 "Revenue Arrangements with Multiple Deliverables," we will further determine evidence of fair value by reference to prices charged for components on a stand-alone basis to our
existing customer base or to prices charged by third parties for the separate sale of similar items. We recognize revenue related to the delivered products or services when: 1) the product or
service revenue criteria noted above are met; 2) there is objective evidence of fair value for each of the undelivered products or services; 3) any undelivered products or services are
not essential to the functionality of the delivered product or services; and 4) payment for the delivered products or services is not contingent upon delivery of the remaining products or
services.

We
recognize service revenue when persuasive evidence of an arrangement exists, the service has been rendered, the price is fixed or determinable, and collectibility is reasonably
assured. Revenue related to future commitments under service contracts is deferred and recognized ratably over the related contract term. Consulting and installation revenue is recognized when the
service has been performed.

We
recognize stand-alone software revenue in accordance with AICPA Statement of Position ("SOP") No. 97-2,"Software Revenue Recognition", as amended by SOP
98-9, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is probable. Operating system software revenue is recognized when we ship the product and the revenue recognition criteria for product revenue have been met. If any of
these criteria are not met, or the transaction is not on a stand-alone basis, revenue recognition is deferred until all 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. The report is generally received on a one-quarter lag basis from when the royalty revenues were earned.

We
recognize engineering services revenue, where the service is performed on a best efforts basis, when we have completed the defined milestones and the milestone payment is probable of
collection.

Shipping and Handling CostsShipping and handling costs are classified as a component of cost of sales. Customer payments of
shipping and handling costs are recorded as product and other revenue.

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

GuaranteesWe enter into four categories of guarantees, namely financial guarantees, performance guarantees, indemnifications
and indirect guarantees of the indebtedness of others.



39

---



Advertising CostsWe account for advertising costs as expense in the period in which they are incurred. Advertising expense
for fiscal years 2003, 2002 and 2001 was $3 million, $4 million and $30 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 CompensationAt June 27, 2003, we have both stock-based employee and non-employee director
compensation plans, which are described more fully in Note 15. We have elected to continue to follow the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations for these plans.

The
following table illustrates the effect on net loss and net loss per share as if we had applied the fair value recognition provisions of FASB Statement No. 123, as amended by
SFAS 148, to stock-based employee compensation:

|                                                 |                                                                                                                | Years ended |         
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------- | ----------- | --------
|
|
|Net lossas reported                             |                                                                                                                | $           | (129,704
|Additions:                                       |                                                                                                                |             |         
|                                                 | Stock-based employee compensation expense, net of tax effect, included in net loss above                       |             | $       
|Deductions:                                      |                                                                                                                |             |         
|                                                 | Stock-based employee compensation expense determined under fair value method for all awards, net of tax effect |             | $       
|Pro forma net loss                               |                                                                                                                | $           | (139,152
|Net loss per sharebasic and dilutedas reported |                                                                                                                | $           | (0.64   
|Net loss per sharebasic and dilutedpro forma   |                                                                                                                | $           | (0.69   

The
pro forma information above may not be representative of the effects on potential pro forma effects on results for future years.

Long Lived AssetsIn accordance with the provisions of SFAS No.144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", we review long-lived assets classified as "held and used", including property and equipment, assets under capital leases, long term prepaid assets and other
intangible assets subject to amortization for impairment whenever events or changes in business circumstances, such as a significant industry downturn or a significant decline in projected future cash

40

---

flow
for an operating segment, indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 144, an impairment loss would be recognized when the sum of its estimated
future undiscounted cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. In accordance with the SFAS 144 provisions, we
classify long lived assets as "held for sale" only when all of the criteria for a qualifying plan of sale are met and reassess their "fair value less cost to sell" each reporting period. We classify
long lived assets to be disposed of other than by sale as "held and used" until they are actually disposed and report them at the lower of the carrying amount or fair value less costs to sell.

Capitalized SoftwareIn accordance with SOP No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", we capitalize 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 included in property and equipment (see Note 8) and are amortized over periods ranging from 3 to 5 years.

Recent Accounting PronouncementsIn June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between Statement 146 and Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement
146 requires that a liability for a cost associated with an exit or disposal activity should be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as
generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS 146 is that an entity's
commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit
costs in Issue 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS146, in certain cases, would be
recognized in future periods as certain events occur rather than up front. The FASB decided that if the benefit arrangement requires employees to render future service beyond a "minimum retention
period" a liability should be recognized as employees render service over the future service period even if the benefit formula used to calculate an employee's termination benefit is based on length
of service. Contract termination costs under SFAS 146 would be recognized and measured at their fair value when an entity terminates the contract in accordance with the contract terms. Contract
costs that will continue to be incurred under a contract for its remaining term without economic benefit to an entity would be recognized and measured at its fair value when the entity ceases using
the right conveyed by the contract, for example, the right to use a leased property. Under SFAS 146, a liability for future lease obligations, reduced by actual or estimated sublease rentals,
would
be recognized and measured at its fair value at the cease-use date, rather than being accrued at the date of an entity's commitment to an exit plan under Issue 94-3. We adopted
the provisions of SFAS 146 in connection with the restructuring activities initiated after December 31, 2002.

In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which clarifies the requirements for a guarantor's accounting and disclosures of certain guarantees issued and outstanding. This Interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end.

41

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The
disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Consistent with the Interpretation, we
have adopted the requirements in this Annual Report on Form 10-K. The adoption of Interpretation 45 did not have a material impact on our consolidated financial position, results of
operations or cash flows.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition & Disclosure"an Amendment of SFAS
No. 123. This Statement provides three alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both the annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The new disclosure requirements of SFAS 148 related to interim financial information are effective for financial
reports containing condensed financial statements for interim periods beginning after December 15, 2002. Consistent with the Statement, we have adopted all disclosure requirements in this
Form 10-K.

In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". The Interpretation
establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. Interpretation 46 applies to any business
enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a variable interest entity. The provisions of Interpretation
No. 46 are effective immediately for all variable interests in variable interest entities created before February 1, 2003 and no later than the first fiscal period beginning after
June 15, 2003 for all variable interests in variable interest entities created before February 1, 2003. The adoption of Interpretation 46 did not have a material impact on our
consolidated financial position, results of operations or cash flows. If we enter into any such arrangement with a
variable interest entity in the future, our consolidated financial position or results of operations may be adversely impacted.

In
March 2003, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on accounting for
arrangements involving the delivery or performance of multiple products, services and/or rights to use assets. Specifically, EITF 00-21 addresses: (1) how to determine whether an
arrangement with multiple deliverables contains more than one unit of accounting, and (2) how the arrangement consideration should be measured and allocated among the separate units of
accounting. The provisions of Issue 00-21 are effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of
EITF 00-21 did not have a material impact on our results of operations or financial position.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS No.133, "Accounting for Derivative Instruments and
Hedging Activities". The Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Most of its
provisions should be applied prospectively. We believe the adoption of SFAS 149 will have no impact on our results of operations or financial position.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards
for how an entity classifies and measures certain financial instruments with both the characteristics of a liability and equity. The Statement requires that an issuer classify a financial instrument
that is within its scope as a liability, while many of these instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We believe that the adoption of FASB 150 will not have a material
impact on our results of operations or financial position.

42

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Note 3. Other Operating Expense

Other operating expense is as follows (in thousands):

|                                     |  | Years ended
|------------------------------------ |  | -----------
|
|Restructuring and impairment charges |  | $          

RestructuringIn the first quarter of fiscal 2000, we announced and began to implement a restructuring program to better
align our expenses with expected revenue levels. These actions resulted in aggregate charges of $145 million (before the effect of the adjustments noted below). This restructuring program
included a re-evaluation of our core competencies, technology roadmap and business model, as well as development of our fiscal 2001 operating plan and covered virtually all aspects of our
products, operations and processes. The fiscal 2000 actions resulted in the elimination of approximately 1,100 positions, writing down certain operating assets, vacating certain leased facilities and
canceling certain contracts. Severance payments and related charges of $66 million consisted primarily of salary and expected payroll taxes, extended medical benefits, statutory legal
obligations and outplacement services.

Fiscal
2000 restructuring actions also were comprised of vacating 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 $7 million in exit costs, including costs to
restore vacated facilities to their original condition.

During
fiscal 2000, we also reduced by $7 million our prior estimate of the total costs associated with a similar restructuring initiated in fiscal 1998. This adjustment primarily
reflected a decrease in severance and related charges resulting from higher attrition and lower per person costs than we had estimated. During the second through fourth quarters of fiscal 2000, we
further lowered our estimate of the total costs associated with the fiscal 2000 restructuring activities described above. As a result, a cumulative reversal of approximately $37 million was
recorded in fiscal 2000. This decrease related primarily to lease obligations, as we were able to settle these obligations on far more favorable terms than we had estimated due to extremely high
demand at that time for facilities in Mountain View, California. 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, we had eliminated all the positions covered by our estimate and paid all severance-related charges incurred in the fiscal 2000 restructuring.

During
the fourth quarter of fiscal 2001, we announced and began to implement additional restructuring actions to further reduce our operating expenses to be better aligned with expected
revenue levels. 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, all of which were eliminated as of March 29, 2002. Severance payments and
related charges of $45 million consisted primarily of salary and expected payroll taxes, extended medical benefits, statutory legal obligations and outplacement services. The cancellation of
contracts associated with the fiscal 2001 actions resulted in charges of $2 million. Our plans included vacating approximately 3,000,000 square feet of leased sales and administrative
facilities throughout the world, with lease terms expiring through April 2010. We estimated this would require ongoing lease payments of $32 million and $9 million in exit costs,
including costs to restore facilities to their original condition. During the fourth quarter of fiscal 2002, we lowered our estimate of the total costs associated with the fiscal 2001 restructuring
activities and recorded an adjustment of $5 million. The adjustment primarily reflected lower than estimated

43

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severance
and related costs primarily due to the sale of our 60% interest in SGI Japan which resulted in a smaller reduction in staff than originally anticipated. As of December 27, 2002, all
severance related charges were paid in relation to the fiscal 2001 restructuring. During fiscal 2003, we further lowered our estimate of the facilities costs related to the fiscal 2001 restructuring
activities and recorded an adjustment of $2.5 million, which principally reflected re-negotiated sublease deals and lower rental rates.

During
fiscal 2002, we announced and began to implement additional restructuring actions consistent with the objective of the fiscal 2001 restructuring. These actions resulted in
aggregate charges of $46 million and the elimination of approximately 1,000 positions across all levels and functions, all of which were eliminated as of June 28, 2002. Severance
payments and related charges of $37 million consisted 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 2002 actions totaled $3 million. Our plans included vacating approximately 176,000 square feet of administrative facilities
throughout the world, with lease terms expiring through fiscal 2007. We estimated this would require ongoing lease payments of $5 million. Our plans also included consolidating our
manufacturing activity in Wisconsin and closing our manufacturing facility in Switzerland, which were completed in December 2001. During the fourth quarter of fiscal 2002, we lowered our
estimate of the total costs associated with the fiscal 2002 restructuring activities and recorded an adjustment of $1 million, which reflected lower than estimated severance and related costs.
During the second quarter of fiscal 2003 we further reduced our estimate of severance and related charges associated with the fiscal 2002 restructuring and recorded an adjustment of
$0.7 million, which reflected lower than estimated severance and related costs attributable to higher than expected attrition. As of March 28, 2003, all severance related charges were
paid in relation to the fiscal 2002 restructuring and we determined that the remaining severance accrual associated with the fiscal 2002 restructuring activities was unnecessary and recorded an
adjustment of approximately $0.8 million. The adjustment primarily reflected lower than estimated severance and related costs attributable to higher than expected attrition and lower per person
costs.

During
the fourth quarter of fiscal 2002, we announced and began to implement additional restructuring actions (fiscal 2003 restructuring plan) in an effort to further reduce our
operating expense to be better aligned with expected revenue levels. These actions resulted in aggregate charges of $4 million and elimination of approximately 100 positions across all levels
and functions. In the first quarter of fiscal 2003 we continued the restructuring actions under the plan initiated in the fourth quarter of fiscal 2002. These actions resulted in additional aggregate
charges of $8 million and the elimination of approximately 150 positions across all levels and functions. Severance payments and related charges of $5 million consisted primarily of
salary and expected payroll taxes, extended medical benefits, statutory legal obligations and outplacement services. Our plans included vacating approximately 52,000 square feet of leased facilities
in the US, with lease terms expiring through fiscal 2007, which require ongoing lease payments of $3 million, net of $1 million of estimated sublease income.

During
the second quarter of fiscal 2003, we continued implementing restructuring activities under the fiscal 2003 restructuring plan. These actions resulted in aggregate charges of
$7 million and the elimination of approximately 90 positions across all levels and functions in our overseas offices. Severance payments and related charges of $5 million consisted
primarily of salary and expected payroll taxes, extended medical benefits, statutory legal obligations and outplacement services. Our plans included vacating approximately 8,000 square feet of leased
sales and administrative facilities throughout the world, with lease terms expiring through fiscal 2009. We estimated it would require ongoing lease payments of $2 million, net of
$2 million of estimated sublease income.

During
the third quarter of fiscal 2003, we initiated additional restructuring activities under the fiscal 2003 restructuring plan. These actions resulted in aggregate charges of
$4 million and elimination

44

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of
approximately 130 positions across all levels and functions. Severance payments and related charges of $4 million consisted primarily of salary and expected payroll taxes, extended medical
benefits, statutory legal obligations and outplacement services. These actions were accounted for in accordance with the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities", which is effective for exit or disposal activities initiated after December 31, 2002. All restructuring activities prior to December 31, 2002 were accounted for
in accordance with the provisions of EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." All restructuring activities after December 31, 2002 are accounted for in accordance with the provisions of SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities".

During
the latter part of the fourth quarter of fiscal 2003, we announced and began to implement additional restructuring activities that will be referred to as the fiscal 2004
restructuring plan. These actions resulted in aggregate charges of $10 million and elimination of approximately 324 positions across all levels and functions, which we believe allow us
potential future annual savings of $12 million in cost of goods sold and $20 million in operating expenses. Severance payments and related charges of $9 million consist primarily
of salary and expected payroll taxes, extended medical benefits, statutory legal obligations and outplacement services. Third party contracts cancellation charges and outside consulting associated
with the fiscal 2004 restructuring plan totaled $0.2 million. Our plans included
vacating approximately 6,400 square feet of administrative facilities overseas, with lease terms expiring through fiscal 2004. We estimated this would require ongoing lease payments of
$0.2 million. During the fourth quarter of fiscal 2003, we reclassified a previously recorded liability included in other liabilities to restructuring. Also in conjunction with this leased
facility, we recorded a $7 million adjustment which largely reflected the reversal of sublease income previously expected. We also increased our estimate of severance and related charges
associated with the fiscal 2003 restructuring overseas and recorded an adjustment of $2 million, which reflected higher than estimated severance and related costs and unfavorable fluctuations
in foreign exchange rates.

The
remaining restructuring accrual balance of approximately $32 million at June 27, 2003 is expected to result in cash expenditures of approximately $7 million
through the third quarter of fiscal 2004 for severance and related charges, and approximately $25 million through fiscal 2010 for facilities related expenditures, net of estimated sublease
income of $4 million.

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 Pentium III product line. In addition, we also recorded approximately $4 million in impairment charges
for internally developed software projects that were discontinued in fiscal 2002 as a result of the functionality provided by the new enterprise resource planning system. The fair value and remaining
carrying value of all of these assets at June 30, 2001 was immaterial.

As
a result of the fiscal 2002 restructuring activities described above, we wrote down approximately $12 million of fixed assets held for disposal which included a
$7 million write-down for our Switzerland manufacturing facility that was closed during the second quarter.

As
a result of the fiscal 2003 restructuring activities described above, we wrote down approximately $2 million of fixed assets, which included leasehold improvements and
associated furniture and fixtures held for disposal in the closed offices and buildings. In addition, we recorded approximately $3 million in impairment charges for the Switzerland
manufacturing facility as a result of the fair value reassessment by an independent third party. For further information regarding the sale of the manufacturing facility in Switzerland, see
Note 23 to the Consolidated Financial Statements.

45

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The following table depicts the restructuring and impairment activity in fiscal 2003, 2002 and 2001 (in thousands):

|Category                                           |               | Severance
and
Related Charges |        | Canceled
Contracts |   | Vacated
Facilities |        | Impairment
Charges |        | Total   |  
|-------------------------------------------------- | ------------- | ----------------------------- | ------ | ------------------ | - | ------------------ | ------ | ------------------ | ------ | ------- | -
|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 |         | $
|                                                   |               |                               |        |                    |   |                    |        |                    |        |         |  
|Additionsfiscal 2002 restructuring and impairment |               |                               | 37,440 |                    |   | 3,224              |        |                    | 4,899  |         |  
|Adjustments:                                       |               |                               |        |                    |   |                    |        |                    |        |         |  
|                                                   | Increase      |                               |        |                   |   |                    |       |                    |        |        |  
|                                                   | (decrease)    |                               |        | (6,430             | ) |                    |       |                    |        | (6,172  | )
|Expenditures:                                      |               |                               |        |                    |   |                    |        |                    |        |         |  
|                                                   | Cash          |                               |        | (57,982            | ) |                    | (3,023 | )                  |        | (20,438 | )
|                                                   | Non-cash      |                               |        |                   |   |                    |       |                    |        | 6,172   |  
|                                                   |               |                               |        |                    |   |                    |        |                    |        |         |  
|Balance at June 28, 2002                           |               | $                             | 9,178  |                    | $ | 1,418              |        | $                  | 27,743 |         | $
|                                                   |               |                               |        |                    |   |                    |        |                    |        |         |  
|Additionsfiscal 2003 restructuring and impairment |               |                               | 22,759 |                    |   | 207                |        |                    | 5,558  |         |  
|Adjustments:                                       |               |                               |        |                    |   |                    |        |                    |        |         |  
|Increase                                           |               |                               | 550    |                    |   |                   |        |                    |       |         |  
|(decrease)                                         |               |                               |       |                    |   |                   |        |                    | (2,544 | )       |  
|Reclassification:                                  |               |                               |        |                    |   |                    |        |                    |        |         |  
|                                                   | Cash          |                               |        |                   |   |                    |       |                    |        | 6,179   |  
|                                                   | Non-cash      |                               |        |                   |   |                    |       |                    |        |        |  
|Expenditures:                                      |               |                               |        |                    |   |                    |        |                    |        |         |  
|                                                   | Cash          |                               |        | (25,296            | ) |                    | (1,612 | )                  |        | (12,288 | )
|                                                   | Non-cash      |                               |        |                   |   |                    |       |                    |        |        |  
|                                                   |               |                               |        |                    |   |                    |        |                    |        |         |  
|Balance at June 27, 2003                           |               | $                             | 7,191  |                    | $ | 13                 |        | $                  | 24,648 |         | $
|                                                   |               |                               |        |                    |   |                    |        |                    |        |         |  

In
accordance with SFAS No. 146, effective January 1, 2003, the total amount of severance and related charges, cancelled contracts and facilities for each reportable
segment incurred in the fiscal 2003 and subject to provisions of SFAS 146 are presented in the following table (in thousands):

|Additionsfiscal 2003 restructuring |  | Servers |       | Workstations |   | Global
Services |  | Total
|----------------------------------- |  | ------- | ----- | ------------ | - | --------------- |  | -----
|Severance and Related Charges       |  | $       | 5,358 |              | $ | 2,241           |  | $    
|Canceled Contracts                  |  | $       | 69    |              | $ | 28              |  | $    
|Vacated Facilities                  |  | $       | 77    |              | $ | 32              |  | $    

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Note 4. Loss Per Share

|                                                                                          |  | Years ended |         
|----------------------------------------------------------------------------------------- |  | ----------- | --------
|
|
|Net loss                                                                                  |  | $           | (129,704
|Less preferred stock dividends                                                            |  |             |        
|                                                                                          |  |             |         
|Net loss available to common stockholders                                                 |  | $           | (129,704
|                                                                                          |  |             |         
|Weighted average shares outstandingbasic and diluted                                     |  |             | 201,424 
|                                                                                          |  |             |         
|Net loss per sharebasic and diluted                                                      |  | $           | (0.64   
|                                                                                          |  |             |         
|Potentially dilutive securities excluded from computations because they are anti-dilutive |  |             | 17,727  

Note 5. Financial Instruments

Cash Equivalents and Marketable and Restricted InvestmentsThe following table summarizes by major security type the fair
value of our cash equivalents and marketable and restricted investments at June 27, 2003 and June 28, 2002 (in thousands):

|                                            |                                             | 2003 |        | 2002   |  
|------------------------------------------- | ------------------------------------------- | ---- | ------ | ------ | -
|Money market funds                          |                                             | $    | 1,220  |        | $
|Time deposits                               |                                             |      | 39,814 |        |  
|U.S. commercial paper                       |                                             |      | 734    |        |  
|                                            |                                             |      |        |        |  
|                                            | Total                                       |      |        | 41,768 |  
|Less amounts classified as cash equivalents |                                             |      | (4,600 | )      |  
|                                            |                                             |      |        |        |  
|                                            | Total marketable and restricted investments |      | $      | 37,168 |  
|                                            |                                             |      |        |        |  

Gross
realized gains and losses on sales and unrealized gains and losses on our available-for-sale securities were not significant in any one fiscal period
presented.



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 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

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affected
by changes in exchange rates. The amount in accumulated Other Comprehensive Income as of June 27, 2003 will be reclassified to operations within the next twelve months.

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

|                                                                                        |  | 2003 |        | 2002 |  
|--------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | -
|Opening balance                                                                         |  | $    | (1,969 | )    | $
|Reclassified into earnings from other comprehensive loss, net                           |  |      |       |      |  
|Changes in fair value of derivatives, net                                               |  |      | 1,588  |      |  
|                                                                                        |  |      |        |      |  
|Unrealized loss on derivative instruments included in other comprehensive (loss) income |  | $    | (381   | )    | $
|                                                                                        |  |      |        |      |  

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
our financial instruments
at June 27, 2003 and June 28, 2002 are summarized as follows (in thousands):

|                           |  | 2003 |         | 2002 |  
|-------------------------- |  | ---- | ------- | ---- | -
|
|Cash and cash equivalents  |  | $    | 140,836 |      | $
|Marketable investments     |  |      | 37,168  |      |  
|Debt instruments           |  |      | 308,850 |      |  
|Currency forward contracts |  |      | (355    | )    |  
|Currency options           |  |      | (270    | )    |  

Note 6. Sale of Interest in SGI Japan

On November 9, 2001, NEC Corporation and its publicly held affiliate, NEC Soft, acquired 40% and 20% respectively, of SGI Japan for an aggregate purchase
price of 11.5 billion Japanese yen, yielding approximately $91 million in net proceeds. The net proceeds exceeded 60% of the net book value of SGI Japan at the purchase date by
approximately $68 million. The total gain in this transaction, after recognition of the debt reduction and transaction-related costs, was approximately $74 million. We recognized a gain
of approximately $64 million in other income during the quarter ended December 28, 2001. Because SGI Japan, under an exclusive distribution agreement, received a discount in excess of
the discount provided to another major distributor of SGI, the remaining $10 million of the overall gain on the sale was designated as deferred revenue to be recognized over three years as we
fulfill product orders from SGI Japan under the long-term exclusive distribution agreement to supply SGI equipment, services and solutions in Japan. Our best estimate of the fair value of
the future incremental discount was based on projected future product sales of SGI Japan through a combination of historical and forward-looking information. Also as part of this transaction, SGI's
current yen-denominated debt held by a financial institution, which would have otherwise matured in December 2001, was restructured and is now owed to SGI Japan, maturing in
quarterly installments from September 2002 through December 2004. The result of this debt restructuring was to reduce the outstanding balance at December 28, 2001 from
$50 million to $37 million (See Note 13). SGI's debt is secured by its remaining ownership interest in SGI Japan. Effective November 10, 2001, SGI no longer consolidates
SGI Japan's results in its financial statements but instead records its proportionate share of SGI Japan's earnings as non-operating income in accordance with APB 18, "The

48

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Equity
Method of Accounting for Investments in Common Stock." Due to the timing of receipt of financial reporting information from SGI Japan, these entries are recorded on a quarter lag.

Note 7. 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 counter-parties and, by policy,
limit the amount of credit exposure to any one counter-party. The credit risk on receivables due from counter-parties related to currency forward contracts is immaterial at June 27, 2003 and
June 28, 2002. 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.

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 that would have an adverse effect upon our results.

International OperationsWe derive over one-third of our revenue from sales outside the United States. Therefore,
our results could be 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. However, the risks of our international operations are mitigated in part by our foreign exchange hedging program and by the extent to which our sales are
geographically distributed.

Export ComplianceOur 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. 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 Swiss authorities are investigating compliance with their export regulations in connection with exports
from the Swiss manufacturing facility that we closed during the second quarter of fiscal 2002. We believe that this matter will be resolved without a significant adverse effect on our business.

Note 8. Consolidated Financial Statement Details

Inventories

Inventories at June 27, 2003 and June 28, 2002 are as follows (in thousands):

|                             |  | 2003 |        | 2002
|---------------------------- |  | ---- | ------ | ----
|Components and subassemblies |  | $    | 39,939 |     
|Work-in-process              |  |      | 8,897  |     
|Finished goods               |  |      | 12,000 |     
|Demonstration systems        |  |      | 10,590 |     
|                             |  |      |        |     
|Total inventories            |  | $    | 71,426 |     
|                             |  |      |        |     

49

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Property and Equipment

Property and equipment at June 27, 2003 and June 28, 2002 are as follows (in thousands):

|                                                         |  | 2003 |          | 2002 |  
|-------------------------------------------------------- |  | ---- | -------- | ---- | -
|Land and buildings                                       |  | $    | 66,101   |      | $
|Machinery and equipment (including capitalized software) |  |      | 415,437  |      |  
|Furniture and fixtures                                   |  |      | 48,712   |      |  
|Leasehold improvements                                   |  |      | 46,080   |      |  
|                                                         |  |      |          |      |  
|                                                         |  |      | 576,330  |      |  
|Accumulated depreciation and amortization                |  |      | (468,268 | )    |  
|                                                         |  |      |          |      |  
|Net property and equipment                               |  | $    | 108,062  |      | $
|                                                         |  |      |          |      |  

Note 9. Other Assets

Other assets at June 27, 2003 and June 28, 2002 are as follows (in thousands):

|                                                                                                              |  | 2003 |         | 2002
|------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ----
|Spare parts, net of accumulated depreciation of $75,493 in 2003 and $88,331 in 2002                           |  | $    | 44,505  |     
|Investments                                                                                                   |  |      | 20,655  |     
|Software licenses, goodwill and other, net of accumulated amortization of $79,249 in 2003 and $71,466 in 2002 |  |      | 42,309  |     
|                                                                                                              |  |      |         |     
|                                                                                                              |  | $    | 107,469 |     
|                                                                                                              |  |      |         |     

Note 10. Goodwill

At June 29, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for acquired
goodwill and other intangible assets, including the elimination of goodwill amortization, to be replaced with periodic evaluation of goodwill for impairment. The identification of our reporting units
was determined per the guidelines in SFAS 142 and is consistent with our reportable segments as discussed in Note 18 to the Consolidated Financial Statements". We completed step one of
the transitional goodwill impairment test as of December 27, 2002 and the annual goodwill impairment test as of June 27, 2003 and found no impairment. Since no impairment was found, no
further testing of goodwill is necessary unless there is evidence of further impairment or events or changes in circumstances occur by the end of fiscal 2004 that would reduce the fair value of the
reporting units containing goodwill below their carrying amounts. At June 27, 2003, we had goodwill with a carrying value of approximately $13 million. In accordance with
SFAS 142, the results for the fiscal years ended June 28, 2002 and June 30, 2001 have not been restated. The

50

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following
table discloses a reconciliation of reported net loss and basic and diluted net loss per share to the amounts adjusted for exclusion of goodwill amortization:

|                                              |                                               | Years ended |      
|--------------------------------------------- | --------------------------------------------- | ----------- | -----
|
|
|                                              | Reported net loss                             |             | $    
|Add:                                          |                                               |             |      
|                                              | Goodwill, net of tax                          |             |      
|                                              |                                               |             |      
|                                              | Adjusted net loss                             |             | $    
|                                              |                                               |             |      
|Reported net loss per sharebasic and diluted |                                               | $           | (0.64
|Add:                                          |                                               |             |      
|                                              | Goodwill, net of tax                          |             |      
|                                              |                                               |             |      
|                                              | Adjusted net loss per sharebasic and diluted |             | $    
|                                              |                                               |             |      

Note 11. Financing Arrangement

During fiscal 2002 and through March 2003, available credit under our asset-based credit facility was determined monthly based on 85% of eligible accounts
receivable. We did not use this facility for cash borrowings, but rather to support letters of credit we are required to provide as security under certain lease obligations. This obligation bore
interest payable monthly at the prime rate plus 0.25% for cash advances and at 3.25% for letters of credit. During this period of time, the facility was secured by the pledge of our U.S. accounts
receivable and inventory, certain intellectual property and a $7 million cash deposit. We also deposited additional cash when eligible accounts receivable, which fluctuate within the quarter,
were below the level needed to secure our letters of credit. The credit facility also contained financial and other covenants. We obtained waivers of compliance with the covenants of this facility
from the lenders in the first and third quarters of fiscal 2003 and the second, third and fourth quarters of fiscal 2002.

During
the fourth quarter of fiscal 2003, we renewed our asset-based credit facility for a two-year term maturing in April 2005. In the event we are unable to extend the maturity of our
senior convertible notes due 2004 on terms satisfactory to our secured lender on or before March 5, 2004, the facility will mature in June 2004. This facility is also subject to acceleration
upon various events of default. The renewed facility is secured by U.S. and Canadian accounts receivable, U.S. inventory and equipment, the pledge of certain intellectual property and a
$10 million cash deposit. Available credit under our asset-based credit facility is determined monthly based on 85% of eligible accounts receivable and an inventory collateral calculation based
on the terms of the agreement. We have not used this facility for cash borrowings, but rather to support letters of credit, including letters of credit we are required to provide as security under
certain lease obligations. We are currently using our full capacity under this line to secure $46 million in letters of credit. This obligation bears interest payable monthly at the prime rate
plus 0.25% (4.5% at June 27, 2003) for cash advances and at 2.0% for letters of credit. We deposit additional cash collateral when the eligible accounts receivable and other collateral, which
fluctuates within the quarter, is below the level needed to secure our letters of credit. At June 27, 2003, the credit facility was secured by a total of $21 million cash collateral,
which is included as a component of Short-term Restricted Investments. The credit facility contains financial and other covenants similar in nature to that of the previous facility. We
obtained a waiver of compliance with the covenants of this facility from the lender in the first, third and fourth quarters of fiscal 2003. 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 affecting our ability to repay the outstanding

51

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balance,
the facility may be declared to be in default. If a default is declared and not waived it could have a significant impact on our working capital. See "Risks That Affect Our Business".

Note 12. Guarantees

SGI, as the guarantor, enters into four categories of guarantees, namely financial guarantees, performance guarantees, indemnifications and indirect guarantees of
the indebtedness of others.

Financial
guarantees include contracts that contingently require us to make payments to the beneficiary of the guarantee based on changes in an underlying variable (e.g. a specified
interest rate, security price or other variable) that is related to an asset, liability or equity security of the guaranteed party. Currently, we have issued guarantees: to cover rent on leased
facilities and equipment; in favor of government authorities and certain other parties to cover liabilities associated with the importation of goods; and to support payments in advance of future
delivery on our goods and services. The majority of our guarantees within this category have terms no greater than one year.

Performance
guarantees include contracts that contingently require us to make payments to the beneficiary of the guarantee based on another entity's failure to perform under an
obligating agreement. We had no outstanding performance guarantees at June 27, 2003 that are subject to the disclosure requirements of FIN 45.

Indemnifications
include agreements that contingently require us to make payments to an indemnified party based on changes in an underlying variable (e.g. a specified interest rate,
security price or other variable) that is related to an asset, liability, or an equity security of the indemnified party. Indemnifications include agreements to indemnify the guaranteed party for an
adverse judgement in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law. Currently, we have issued indemnifications to
cover potential exposure related to the imposition of additional taxes. The term of an indemnification is based on the length of time required to settle the dispute.

Indirect
guarantees include agreements between SGI and a lender requiring us to transfer funds to the lender upon the occurrence of specified events. Indirect guarantees include SGI's
guarantee of our subsidiary's debt to a third party and our subsidiary's guarantee of the debt owed to a third party by either SGI or another subsidiary of SGI. This category of guarantees has terms
that are consistent with those of the debt agreements.

The
following table discloses our obligations under guarantees as of June 27, 2003 (in thousands):

|                     |       | Maximum Potential Amount
of Future Payments |        | Assets Held as Collateral
|-------------------- | ----- | ------------------------------------------- | ------ | -------------------------
|Financial guarantees |       | $                                           | 54,580 |                          
|Indemnifications     |       |                                             | 1,983  |                          
|Indirect guarantees  |       |                                             | 6,098  |                          
|                     |       |                                             |        |                          
|                     | Total |                                             | $      | 62,661                   
|                     |       |                                             |        |                          

The
following table depicts product warranty activity during fiscal 2003 (in thousands):

|Balance at June 28, 2002 |  | $ | 8,958   |  
|------------------------ |  | - | ------- | -
|New warranties issued    |  |   | 10,804  |  
|Warranty activity        |  |   | (13,310 | )
|Changes in estimates     |  |   | 259     |  
|                         |  |   |        
|Balance at June 27, 2003 |  | $ | 6,711   |  
|                         |  |   |        

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Note 13. Long-Term Debt

Long-term debt at June 27, 2003 and June 28, 2002 was as follows (in thousands):

|                                                                                                                        |  | 2003 |         | 2002 |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | -
|Senior Convertible Notes due September 2004 at 5.25%                                                                    |  | $    | 230,591 |      | $
|Convertible Subordinated Debentures due February 2011 at 6.125%, net of unamortized discount of $8,097 ($8,825 in 2002) |  |      | 48,679  |      |  
|Japanese Yen fixed rate loan due in quarterly installments through December 2004 at 10.00%(1)                           |  |      | 29,563  |      |  
|Other                                                                                                                   |  |      | 17      |      |  
|                                                                                                                        |  |      |         |      |  
|                                                                                                                        |  |      | 308,850 |      |  
|Less amounts due within one year                                                                                        |  |      | (16,894 | )    |  
|                                                                                                                        |  |      |         |      |  
|Amounts due after one year                                                                                              |  | $    | 291,956 |      | $
|                                                                                                                        |  |      |         |      |  

---

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 fiscal 1996 acquisition of Cray Research Inc., SGI assumed the Convertible Subordinated 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 approximately $6 million originally scheduled for fiscal
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 approximately $6 million originally scheduled for fiscal years 2003 through 2006. Remaining annual sinking fund
payments of approximately $5 million in fiscal 2007 and approximately $6 million each from fiscal 2008 to 2010 are scheduled, with a final maturity payment of approximately
$35 million in 2011.

Principal
maturities of long-term debt at June 27, 2003 are as follows (in millions): 2004$17; 2005$243; 2006$0;
2007$5; 2008$6 and $46 thereafter.

Note 14. 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 27, 2003 are as follows (in millions): 2004$49; 2005$45; 2006$33;
2007$28; 2008$26, and thereafter$106. Included in these lease payments are amounts related to restructuring activities at June 27, 2003 as follows:
2004$11; 2005$10; 2006$5; 2007$1; 2008$1; and thereafter$1. Future sublease and rental income as of June 27, 2003
are as follows (in millions): 2004$4; 2005$4; 2006$2; 2007$1; 2008$1; and thereafter$8, of which $4 million relates
to restructuring.

53

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Aggregate
operating lease rent expense in fiscal 2003, 2002 and 2001 was $35 million, $45 million and $53 million, respectively. Included in fiscal 2003, 2002 and
2001 rent expense is an offset of $5 million, $6 million and $4 million, respectively, which relates to recognition of a portion of our deferred gain on the sale leaseback
transaction completed in December 2000 involving our Amphitheatre and Crittenden Technology Center campuses in Mountain View, California. As of June 27, 2003, we have a remaining
deferred gain of $37 million on the sale leaseback transaction that will be recognized over the terms of the respective leases as an offset to rent expense.

On
July 10, 2003, we announced that we had entered into an agreement to sublease our Amphitheatre Technology Center campus in Mountain View, California. We will relocate our
headquarters to our nearby Crittenden Technology Center campus, where we will lease additional space. In combination, these actions will substantially reduce our occupancy costs. For additional
information regarding this sublease agreement see Note 24to the Consolidated Financial Statements.

Note 15. Stockholders' Equity

Preferred Stock TransactionsThere were no preferred stock transactions in fiscal 2003 or 2002. On 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 that provide for the grant of incentive and nonstatutory stock options
and the issuance of restricted stock awards to members of our Board of Directors and employees. The Board of Directors determines the exercise price and vesting schedule for all stock option grants
and restricted stock awards. All stock options granted in fiscal 2001 through 2003 had an exercise price of no less than the fair market value on the date of grant. No restricted stock awards were
granted during fiscal 2003 and 2002 while 175,000 were granted in fiscal 2001.

Stock
options granted to employees typically vest over a 25-month or 50-month period from the date of grant. Options granted to newly-hired employees generally
also include a 10-month initial waiting period before they may be exercised. Restricted stock awards generally vest in four annual installments. Under the directors' compensation program,
members of the Board of Directors receive an initial stock option grant on appointment to the Board which vests over a two year period, and an additional option grant annually which is fully vested on
the date of grant.

At
the end of fiscal 2003, 2002 and 2001, there were 11,042,542, 16,362,551 and 14,641,134 options available for grant, respectively, and there were 97,500, 175,408 and 1,146,024 shares
of restricted stock, respectively, subject to repurchase.

54

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

|                                    |                   | 2003       |            | 2002 |      | 2001
|----------------------------------- | ----------------- | ---------- | ---------- | ---- | ---- | ----
|
|Balance at beginning of fiscal year |                   | 34,419,589 |            | $    | 3.73 |     
|                                    | Options granted   |            | 10,034,800 |      | $    | 1.43
|                                    | Options exercised |            | (852,215   | )    | $    | 0.56
|                                    | Options forfeited |            |           |      |      |    
|                                    | Options canceled  |            | (5,429,291 | )    | $    | 4.95
|                                    |                   |            |            |      |      |     
|Balance at end of fiscal year       |                   | 38,172,883 |            | $    | 3.02 |     
|                                    |                   |            |            |      |      |     
|Exercisable at end of fiscal year   |                   | 27,498,427 |            | $    | 3.50 |     
|                                    |                   |            |            |      |      |     

Additional
information about options outstanding at June 27, 2003 is as follows:

|             |  | Options Outstanding |  | Options Exercisable
|------------ |  | ------------------- |  | -------------------
|
|$0.42$0.57  |  | 8,467,791           |  | $                  
|$0.62$2.98  |  | 11,858,218          |  | $                  
|$2.99$6.12  |  | 15,890,527          |  | $                  
|$6.30$37.49 |  | 1,956,347           |  | $                  
|             |  |                     |  |                    
|$0.42$37.49 |  | 38,172,883          |  | $                  
|             |  |                     |  |                    

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. Purchases under this plan were suspended in April 2003, when the shares available for purchase were exhausted. Purchase periods will not resume until additional
shares are approved for issuance under the plan by the shareholders.

At
June 27, 2003, we had issued a total of 20,275,430 shares over the life of the plan, including 4,006,072 shares issued during fiscal 2003, and we have 592 shares in reserve for
future issuance under the plan. Both scheduled purchases during fiscal 2003 were pro-rated to allocate the shares available for purchase among the participants; employees used 26% and 30%,
respectively, of their payroll contributions toward purchasing shares and the remainder of their contribution was returned to them.

Grant Date Fair ValuesThe weighted average estimated fair value of employee stock options granted at grant date market
prices during fiscal 2003, 2002, and 2001 was $1.07, $0.55, and $2.06 per share, respectively. The weighted average exercise price of employee stock options granted at grant date market prices during
fiscal 2003, 2002 and 2001 was $1.43, $0.87, and $3.59 per share, respectively. The weighted average fair value of restricted stock granted during fiscal 2001 was $4.46 per share. The weighted average
estimated fair value of shares granted under the Stock Purchase Plan during fiscal 2003, 2002, and 2001 was $0.61, $1.16, and $1.59 per share, respectively.

55

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

|                         |  | Employee Stock
Options |   | Stock Purchase Plan
Shares |  
|------------------------ |  | ---------------------- | - | -------------------------- | -
|
|Expected life (in years) |  | 0.02                   |   | 0.02                       |  
|Risk-free interest rate  |  | 1.10                   | % | 3.00                       | %
|Volatility               |  | 1.1                    |   | 1.02                       |  
|Dividend yield           |  | 0                      | % | 0                          | %

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 2003,
2002, and 2001 was $0.3 million, $2 million, and $6 million, respectively.

The
pro forma information regarding net loss and net loss per share as if we had accounted for our employee stock options and employee stock purchase plan under the fair value method
prescribed by SFAS 123 is presented in Note 2 to the Consolidated Financial Statements.

Stock Repurchase ProgramDuring 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. We recorded the proceeds received from the sale of equity instruments and amounts
paid upon the purchase of equity instruments as a component of stockholders' (deficit) equity. Subsequent changes in the fair value of the equity instrument contracts were not recognized. We had the
ability to determine whether the contracts were settled in cash or stock.

Note 16. Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax, are as follow (in thousands):

|                                                                                        |  | Years ended |        
|--------------------------------------------------------------------------------------- |  | ----------- | -------
|
|                                                                                        |  | $           |       
|Unrealized loss on derivative instruments designated and qualifying as cash flow hedges |  | $           | (381   
|Foreign currency translation adjustments                                                |  |             | (19,544
|                                                                                        |  |             |        
|Accumulated other comprehensive loss                                                    |  | $           | (19,925
|                                                                                        |  |             |        

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Note 17. Income Taxes

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

|              |  | Years ended |         
|------------- |  | ----------- | --------
|
|United States |  | $           | (146,651
|International |  |             | (9,316  
|              |  |             |         
|              |  | $           | (155,967
|              |  |             |         

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

|         |          | Years ended
|-------- | -------- | -----------
|
|Federal: |          |            
|         | Current  |            
|         | Deferred |            
|State:   |          |            
|         | Current  |            
|         | Deferred |            
|Foreign: |          |            
|         | Current  |            
|         | Deferred |            
|         |          |            
|         |          | $          
|         |          |            

The
(benefit from) 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 |        
|------------------------------------------------- |  | ----------- | -------
|
|Tax at U.S. federal statutory rate                |  | $           | (54,588
|State taxes, net of federal tax benefit           |  |             | (1,810 
|Net operating loss with no tax benefit            |  |             | 53,956 
|Change in U.S. federal tax law                    |  |             |       
|Net foreign taxes with no tax benefit (detriment) |  |             | (19,027
|Earnings subject to foreign taxes at lower rates  |  |             | (4,958 
|Other                                             |  |             | 164    
|                                                  |  |             |        
|(Benefit from) provision for income taxes         |  | $           | (26,263
|                                                  |  |             |        

As
a result of the enactment of the Job Creation and Worker Assistance Act of 2002, which provided for additional U.S. federal operating loss carryback claims from the year ended
June 30, 2001, we recognized additional tax benefits of approximately $42 million in the third quarter of the year ended June 28, 2002.

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The
tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities at June 27, 2003 and June 28, 2002
are as follows (in thousands):

|                          |                                                                                 | 2003                           |   | 2002    |         
|------------------------- | ------------------------------------------------------------------------------- | ------------------------------ | - | ------- | --------
|Deferred tax assets:      |                                                                                 |                                |   |         |         
|                          | Net operating loss carryforwards                                                |                                | $ | 527,283 |         
|                          | General business credit carryforwards                                           |                                |   | 63,605  |         
|                          | Inventory valuation                                                             |                                |   | 43,053  |         
|                          | Reserves not currently deductible                                               |                                |   | 43,130  |         
|                          | Other                                                                           |                                |   | 127,191 |         
|                          |                                                                                 |                                |   |         |         
|                          |                                                                                 | Subtotal                       |   |         | 804,262 
|                          |                                                                                 | Valuation allowance            |   |         | (726,957
|                          |                                                                                 |                                |   |         |         
|                          | Total deferred tax assets                                                       |                                |   | 77,305  |         
|                          |                                                                                 |                                |   |         |         
|Deferred tax liabilities: |                                                                                 |                                |   |         |         
|                          | Foreign taxes on unremitted foreign earnings, net of related U.S. tax liability |                                |   | 75,891  |         
|                          | Other                                                                           |                                |   | 2,768   |         
|                          |                                                                                 |                                |   |         |         
|                          |                                                                                 | Total deferred tax liabilities |   |         | 78,659  
|                          |                                                                                 |                                |   |         |         
|                          | Total                                                                           |                                | $ | (1,354  | )       
|                          |                                                                                 |                                |   |         |         

At
June 27, 2003, we had gross deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $804 million. The gross deferred tax assets
are offset by a valuation allowance of $727 million and deferred tax liabilities of $79 million. The valuation allowance of $727 million includes $23 million attributable
to benefits of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital.

At
June 27, 2003, we had United States federal, state, and foreign jurisdictional net operating loss carryforwards of approximately $1,251 million, $333 million, and
$200 million, respectively. The federal losses will begin expiring in fiscal year 2010, the state losses will begin expiring in fiscal 2005, and the foreign losses will begin expiring in fiscal
year 2004. At June 27, 2003, we also had general business credit carryovers of approximately $43 million for United States federal tax purposes, which will begin expiring in fiscal year
2004, and state R&D credits of $29 million which can be carried forward indefinitely.

Note 18. Segment Information

SGI is a leading provider of products, services and solutions for use in high-performance computing, visualization and storage. We sell highly
scalable servers, advanced visualization systems, desktop workstations, storage solutions and a range of software products which enable our customers in the scientific, technical and creative
communities to solve their most challenging problems and provide them with strategic and competitive advantages in their marketplace. We also offer a range of technical solutions, including
professional services, Reality Center immersive visualization centers, customer support and education. These products and services are targeted primarily towards five market segments: Government and
Defense, Science, Manufacturing, Energy and Media.

The
Server segment's current products include visualization systems, high-performance servers and integrated storage solutions. The Server segment's systems include the SGI
Onyx family of graphics systems and the SGI Altix and Origin families of high-performance servers. This segment also includes prior generations of graphics systems and
high-performance servers available through our Remarketed Products Group. Our servers are high-performance supercomputing systems designed for technical computing applications.
Our servers are also used as storage management servers for managing very

58

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large
data repositories that contain critical information and media servers for video on demand, media streaming and broadcast television applications. These products are distributed through our
direct sales force, as well as through indirect channels including resellers and distributors.

The
Workstation segment's current products include the Silicon Graphics Fuel and Octane2 workstations along with prior generations of workstations available through our
Remarketed Products Group. During the fourth quarter of fiscal 2002, a decision was made to end of life the Silicon Graphics® 750 system based upon the new Intel Itanium processor and
first-generation Intel Itanium architecture. This product shipped through the end of fiscal 2002. During the fourth quarter of fiscal 2001, 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 based upon the Intel microprocessor and
the Windows NT® and Red Hat® Linux® operating systems. These products were shipped through the first quarter of fiscal 2002. Our workstations are used in a variety
of applications including computer-aided design, medical imaging, 2D and 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 and
managed services. Effective for fiscal 2002, we reorganized our Global Services segment and removed the Remarketed Products Group from this segment. Revenue from remanufactured systems is included in
either the servers and visual workstations reportable segments based on the nature of the system sold. Prior period amounts have been reclassified to conform to current period presentation.

We
evaluate each of these segments based on profit or loss from operations before interest and taxes.

Expenses
of the research and development, sales and marketing, manufacturing, finance and administration groups are allocated to the reportable segments and are included in the results
reported. The revenue and related expenses of our wholly-owned software subsidiary Alias, as well as certain corporate-level revenue and expenses are not allocated and are 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 do we evaluate segments on these criteria. Operating segments 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 to the Consolidated Financial Statements.

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Information
on reportable segments is as follows for fiscal 2003, 2002, and 2001 (in thousands):

|                                |                                                                                                                                           | Servers |          | Visual
Workstations |   | Global
Services |        
|------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------- | ------------------- | - | --------------- | -------
|2003:                           |                                                                                                                                           |         |          |                     |   |                 |        
|Revenue from external customers |                                                                                                                                           | $       | 366,668  |                     | $ | 150,960         |        
|Segment (loss) profit           |                                                                                                                                           | $       | (120,182 | )                   | $ | (74,648         | )      
|2002:                           |                                                                                                                                           |         |          |                     |   |                 |        
|Revenue from external customers |                                                                                                                                           | $       | 516,720  |                     | $ | 237,668         |        
|Segment (loss) profit           |                                                                                                                                           | $       | (122,263 | )                   | $ | (79,917         | )      
|2001:                           |                                                                                                                                           |         |          |                     |   |                 |        
|Revenue from external customers |                                                                                                                                           | $       | 747,698  |                     | $ | 397,297         |        
|Segment (loss) profit           |                                                                                                                                           | $       | (219,029 | )                   | $ | (124,143        | )      
|Significant items:              |                                                                                                                                           |         |          |                     |   |                 |        
|                                | Charges for contract cancellations and inventory and future support costs related to the discontinuance of Pentium III-based product line |         | $        |                    |   | $               | (13,864

Reconciliation
to SGI as reported (in thousands):

|                                                    |  | Years ended |         
|--------------------------------------------------- |  | ----------- | --------
|
|Revenue:                                            |  |             |         
|Total reportable segments                           |  | $           | 900,427 
|Other                                               |  |             | 61,321  
|                                                    |  |             |         
|Total SGI consolidated                              |  | $           | 961,748 
|                                                    |  |             |         
|Operating loss:                                     |  |             |         
|Total reportable segments                           |  | $           | (91,892 
|Other                                               |  |             | (9,471  
|Restructuring                                       |  |             | (25,131 
|Write-down of impaired long-lived assets            |  |             | (4,915  
|Enterprise Resource Planning implementation expense |  |             |        
|Business reorganization costs                       |  |             |        
|                                                    |  |             |         
|Total SGI consolidated                              |  | $           | (131,409
|                                                    |  |             |         

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

Geographic
revenue for the fiscal years 2003, 2002, and 2001 is based on the location of the customer. Long-lived assets at the end of fiscal 2003, 2002, and 2001 include all
non-current assets except long-term restricted and other long-term investments and net long-term deferred tax assets. Geographic information is as
follows (in thousands):

|              |       | Revenue |         | Long-lived Assets
|------------- | ----- | ------- | ------- | -----------------
|
|Americas      |       | $       | 609,279 |                  
|Europe        |       |         | 237,873 |                  
|Rest of World |       |         | 114,596 |                  
|              |       |         |         |                  
|              | Total |         | $       | 961,748          
|              |       |         |         |                  

60

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Note 19. Benefit Plans

401(k) Retirement Savings Plan.We 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 2003, 2002 and 2001, were approximately $3 million, $3 million and $4 million, respectively.

Deferred Compensation Plan.We 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 $3 million as of June 27, 2003, $2 million as of June 28, 2002 and $4 million as of June 30, 2001. 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 20. 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 fiscal years ended
2003, 2002 and 2001 included, in the aggregate, sales to related parties in the amounts of $32 million, $28 million and $12 million, respectively. In fiscal 2003 and 2002, related
party sales were primarily to SGI Japan which is not a consolidated subsidiary following the sale of a majority equity interest by SGI to NEC and NEC Soft during fiscal 2002. Total purchases from
related parties for the years ended June 27, 2003 and June 28, 2002 amounted to $3 million and $13 million, respectively, and were insignificant for fiscal 2001. Aggregate
amounts receivable from and amounts payable to such related parties were immaterial at June 27, 2003, June 28, 2002, and June 30, 2001.

Note 21. Consolidated Statement of Cash Flows

Other adjustments to reconcile net loss to net cash from operating activities include the write-off of long-lived assets 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
|------------------------------ | ---------------------------- | -----------
|
|Cash paid during the year for: |                              |            
|                               | Interest                     |            
|                               | Income taxes, net of refunds |            

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

|                                              |  | Years ended
|--------------------------------------------- |  | -----------
|
|Settlement of shareholder lawsuit             |  | $          
|Conversion of preferred stock to common stock |  | $          

61

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Note 22. Contingencies

In
September 2001, we reached a settlement of securities class action lawsuits that were 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 former officers made material misrepresentations and omissions during the
period from July to October 1997. The settlement, which involved a payment of $4 million in cash and the issuance of 8 million shares of SGI common stock to the settlement class,
received final court approval on January 3, 2002. Accordingly, we recorded a charge of approximately $24 million ($20 million of which was non-cash) in the nine months
ended March 29, 2002 in interest income (expense) other, net. Approximately 2.4 million shares were issued in January 2002 in satisfaction of plaintiffs' attorneys' fees and the
remaining shares were issued in July 2003.

In
June 2002, we reached an agreement to resolve the claims asserted in a lawsuit originally filed asCollette Sweeney v. Silicon Graphics, Inc. and
Does 1-50, inclusive, CV 790199,on June 5, 2000 in the Superior Court for the County of Santa Clara, State of California, and later dismissed by the
plaintiffs but refiled as a representative action under California Business and Professions Code section 17200 by the plaintiffs' original counsel. The lawsuit asserts claims for violations of
provisions of the California Labor Code and California Wage Orders. The settlement agreement outlines a process for identifying and resolving claims from members of the represented class. Once this
process is
complete, the complaint will be dismissed. We currently expect to complete this process in 2003. However, we do not expect all claims to be resolved through this process.

In
October 2002, the Internal Revenue Service completed its examination of our U.S. income tax returns for fiscal years ended 1996 through 1999 and proposed certain adjustments.
We are contesting these adjustments and believe that adequate amounts have been provided for adjustments that may ultimately result from these examinations.

SCO
Group, the successor to AT&T as the owner of certain UNIX system V intellectual property and as our licensor, has publicly claimed that certain elements of the Linux operating system
infringe SCO Group's intellectual property rights. We have received a letter from SCO Group alleging that, as a result of our activities related to the Linux operating system, we are in breach of the
fully-paid license under which we distribute our IRIX operating system. The letter purports to terminate our UNIX System V license effective October 14, 2003.

We
believe that the SCO Group's allegations are without merit and that our fully paid license is nonterminable. There can be no assurance that this dispute with SCO Group will not
escalate into litigation, which could have a material adverse effect upon SGI, or that SCO Group's intellectual property claims, which include a widely-publicized litigation against IBM Corporation,
will not impair the market acceptance of the Linux operating system.

We
also 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. We are in discussions with several parties that have asserted intellectual property infringement claims. 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 our financial condition, results of operations or
liquidity. However, our evaluation of the likely impact of these pending disputes could change in the future.

62

---

Note 23. Subsequent Events

On July 10, 2003, we announced that we had agreed to sublease our Amphitheatre Technology Center campus in Mountain View, California. We will relocate our
headquarters to our nearby Crittenden
Technology Center campus, where we will lease additional space. In combination, the lease transactions are expected to result in a net reduction in our facilities occupancy costs of $14 million
to $17 million per year beginning in fiscal 2005. We began to vacate the Amphitheatre campus in July 2003 and plan to complete the relocation by August 2004. During the transition
period, we expect to incur incremental cash outflows of $1 million to $3 million associated with the move and to recognize additional non-cash charges as we exit the
Amphitheatre facility and over the term of the sublease. The incremental charges that will flow through restructuring for the net sublease loss and accretion of the deferred gain on the Amphitheatre
Technology Center campus will total approximately $71 million over the next 10 years, of which approximately $22 million will be recorded in fiscal 2004.

On
August 27, 2004, we also announced and began to implement additional restructuring actions in an effort to further reduce our operating expense and better align expenses with
revenue targets for fiscal 2004. These actions are expected to result in the elimination of approximately 600 additional positions across all levels and functions. We expect to record aggregate
charges of approximately $20 million in the first half of fiscal 2004 related to these actions. This charge will principally consist of severance costs paid over the next several months, and as
a result does not represent a significant incremental cash expenditure.

In
September 2003, we sold the manufacturing facility in Cortaillod, Switzerland, that was closed in December 2001. We will receive approximately $10.5 million in net cash
proceeds, resulting in a loss on the sale of approximately $500 thousand.

Note 24. Selected Quarterly Financial Data (Unaudited)

|                                                      |                                     | Fiscal 2003 |        
|----------------------------------------------------- | ----------------------------------- | ----------- | -------
|
|
|Total revenue                                         |                                     | $           | 240,165
|Costs and expenses:                                   |                                     |             |        
|                                                      | Cost of revenue                     |             |        
|                                                      | Research and development            |             |        
|                                                      | Selling, general and administrative |             |        
|                                                      | Other operating expense(1)          |             |        
|                                                      |                                     |             |        
|Operating loss                                        |                                     |             | (34,484
|Interest and other (expense) income, net              |                                     |             | (14,155
|Loss before income taxes                              |                                     |             | (48,639
|                                                      |                                     |             |        
|Net loss                                              |                                     | $           | (36,648
|                                                      |                                     |             |        
|Net loss per sharebasic and diluted:                 |                                     | $           | (0.18  
|                                                      |                                     |             |        
|Shares used in the calculation of net loss per share: |                                     |             |        
|                                                      | Basic and diluted                   |             |        

63

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|                                                               |                                     | Fiscal 2002 |        
|-------------------------------------------------------------- | ----------------------------------- | ----------- | -------
|
|
|Total revenue                                                  |                                     | $           | 284,501
|Costs and expenses:                                            |                                     |             |        
|                                                               | Cost of revenue                     |             |        
|                                                               | Research and development            |             |        
|                                                               | Selling, general and administrative |             |        
|                                                               | Other operating expense(2)          |             |        
|                                                               |                                     |             |        
|Operating loss                                                 |                                     |             | (24,237
|Interest and other (expense) income, net(3)                    |                                     |             | (10,961
|(Loss) income before income taxes                              |                                     |             | (35,198
|                                                               |                                     |             |        
|Net (loss) income                                              |                                     | $           | (36,690
|                                                               |                                     |             |        
|Net (loss) income per sharebasic:                             |                                     | $           | (0.18  
|Net (loss) income per sharediluted:                           |                                     | $           | (0.18  
|                                                               |                                     |             |        
|Shares used in the calculation of net (loss) income per share: |                                     |             |        
|                                                               | Basic                               |             |        
|                                                               | Diluted                             |             |        

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES



64

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PART III

Certain information required by Part III is omitted from this Report in that we filed our definitive proxy statement pursuant to Regulation 14A (the
"2003 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 2003 Proxy 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 in the 2003 Proxy Statement under the heading "Executive Officer CompensationCompliance with Section 16(a) of the Exchange Act."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to information set forth in the 2003 Proxy Statement under the headings "Proposal
No. 1Election of DirectorsCompensation Committee Interlocks and Insider Participation" and "Director Compensation"; "Executive Officer
CompensationSummary Compensation Table", "Option Grants in Fiscal 2003" and "Option Exercises in Fiscal Year 2003 and Fiscal Year-end Option Values";
"Report of the
Compensation and Human Resources Committee of the Board of Directors"; and "Company Stock Price Performance Graph".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference to the information set forth in the 2003 Proxy Statement under the headings "Information
Concerning Solicitation and VotingRecord Date and Principal Share Ownership" and "Voting and Solicitation" and 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 2003 Proxy Statement under the heading "Certain
Transactions."

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference to the information set forth in the 2003 Proxy Statement under the heading "Proposal
No. 3Ratification of Appointment of Independent Auditors."

65

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



Notes
to Consolidated Financial Statements

Report
of Ernst & Young LLP, Independent Auditors

Schedule

Description

PageII

Valuation and Qualifying Accounts

72




| | 3.1.1   |  | Restated Certificate of Incorporation of the Company.                                                                                                                                  
| | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.2(12) |  | Bylaws of the Company, as amended.                                                                                                                                                     
| | 4.1(8)  |  | Indenture dated February 1, 1986 between Cray Research, Inc. and Manufacturers Hanover Trust Company, as Trustee.                                                                      
| | 4.2(8)  |  | First Supplemental Indenture dated June 30, 1996 between the Company, Cray Research, Inc., and Chemical Bank (formerly Manufacturers Hanover Trust Company)                            
| | 4.3     |  | 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(7)  |  | Voting and Exchange Trust Agreement between the Company and Computershare 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.                                                                               
| |         |  |                                                                                                                                                                                        

66

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| | 10.3(3)    |  | Form of Indemnification Agreement entered into between the Company and its executive officers and certain other agents. (Revised)                                                                                    
| | ---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.4(10)*  |  | Directors' Stock Option Plan and form of Stock Option Agreement as amended as of April 23, 1997.                                                                                                                     
| | 10.5(9)*   |  | 1985 Stock Incentive Program, as amended.                                                                                                                                                                            
| | 10.6(9)*   |  | Amended and Restated 1989 Employee Benefit Stock Plan and form of stock option agreement.                                                                                                                            
| | 10.7 (15)* |  | 1993 Long-Term Incentive Stock Plan, as amended, and form of stock option agreement.                                                                                                                                 
| | 10.8(10)*  |  | 1996 Supplemental Non-Executive Equity Incentive Plan, as amended, and form of stock option agreement.                                                                                                               
| | 10.9(12)*  |  | 1998 Employee Stock Purchase Plan.                                                                                                                                                                                   
| | 10.10(5)*  |  | Non-Qualified Deferred Compensation Plan dated as of September 9, 1994.                                                                                                                                              
| | 10.11(10)* |  | Addendum to the Non-Qualified Deferred Compensation Plan.                                                                                                                                                            
| | 10.12(6)*  |  | Alias Research Inc.'s 1994 Stock Plan and standard forms of Option Agreements.                                                                                                                                       
| | 10.13(7)*  |  | Wavefront Technologies, Inc. 1990 Stock Option Plan with standard form of Option Agreement.                                                                                                                          
| | 10.14(14)  |  | Intellectual Property Security Agreement between the Company and Foothill Capital Corporation dated November 9, 2001.                                                                                                
| | 10.15(14)  |  | Loan Agreement between the Company, Silicon Graphics World Trade B.V. and SGI Japan, Ltd. as of November 2001 and related Pledge Agreement.                                                                          
| | 10.16*(14) |  | Letter Agreement between Warren Pratt and the Company, as amended as of November 2001.                                                                                                                               
| | 10.17*(14) |  | Amended and Restated Promissory Note in the principal amount of $250,000 as of April 2001.                                                                                                                           
| | 10.18(14)  |  | Pledge Agreement between Warren Pratt and the Company dated September 27, 2000.                                                                                                                                      
| | 10.19*(14) |  | Amended and Restated Promissory Note in the principal amount of $500,000 as of April 2001.                                                                                                                           
| | 10.20(14)  |  | Letter Agreement between Jeffrey Zellmer and the Company, as amended as of October 2001.                                                                                                                             
| | 10.21*(14) |  | Letter Agreement between Sandra Escher and the Company, effective October 2001.                                                                                                                                      
| | 10.22(14)  |  | Consulting Agreement between Arthur L. Money and Silicon Graphics, Inc. dated June 1, 2002.                                                                                                                          
| | 10.23(16)  |  | Amendment No 1. dated April 11, 2003, to the Amended and Restated Loan and Security between the Company and Foothill Capital Corporation and the Bank of America, N.A. dated September 24, 2002.                     
| | 10.24      |  | Amendment No 2. including Waiver dated September 17, 2003, to the Amended and Restated Loan and Security between the Company and Foothill Capital Corporation and the Bank of America, N.A. dated September 24, 2002.
| |            |  |                                                                                                                                                                                                                      

67

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| | 21.1 |  | List of Subsidiaries.                                                                                                                                              
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 23.1 |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                 
| | 31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                 
| | 31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                 
| | 32   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert R. Bishop and Jeffrey V. Zellmer.

---

68

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A
Form 8-K was filed on April 21, 2003 in connection with Regulation FD disclosures and the filing of exhibits relating to the announcement of the Company's
financial results for the quarter ended March 28, 2003 and the renewal of the Company's asset based credit facility.

A
Form 8-K was filed on May 22, 2003 in connection with Regulation FD disclosures relating to the announcement of a reduction in force.

A
Form 8-K was filed on June 10, 2003 in connection with Regulation FD disclosures relating to meetings with investors.

Trademarks used in the Form 10-K

Silicon Graphics, SGI, O2, Octane, Onyx, Origin, FailSafe, IRIX and Reality Center are registered trademarks, and Altix, CXFS, NUMAflex, Onyx4, UltimateVision,
Silicon Graphics Fuel, Tezro, Octane2, and Silicon Graphics Zx10 are trademarks of Silicon Graphics, Inc. in the U.S. and/or other countries worldwide. Alias Studio is a trademark of Alias
Systems, a division of Silicon Graphics Limited. Maya is a registered trademark of Silicon Graphics, Inc., and exclusively used by Alias Systems, a division of Silicon Graphics Limited.

MIPS
is a registered of MIPS Technologies, Inc. used under license by Silicon Graphics, Inc. UNIX is a registered trademark of The Open Group, in the U. S. and other
countries. Windows and Windows NT are registered trademarks of Microsoft Corporation in the United States and /or other countries. Intel, Pentium and Itanium are registered trademarks of Intel
Corporation or its subsidiaries in the United States and other countries. Linux is a registered trademark of Linus Torvalds. Red Hat is a registered trademark of Red Hat, Inc. in the United
States and other countries. Macintosh is a registered trademark of Apple Computer, Inc, registered in the United States and other countries.

69

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SIGNATURES

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

|                          |  | SILICON GRAPHICS, INC.
|------------------------- |  | ----------------------
|Dated: September 29, 2003 |  | 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)    |  | September 29, 2003
|/s/JEFFREY V. ZELLMERJeffrey V. Zellmer |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer) |  | September 29, 2003
|/s/KATHY A. LANTERMANKathy A. Lanterman |  | Vice President & Corporate Controller (Principal Accounting Officer)            |  | September 29, 2003
|/s/LEWIS S. EDELHEITLewis S. Edelheit   |  | Director                                                                        |  | September 29, 2003
|/s/JAMES A. MCDIVITTJames A. McDivitt   |  | Director                                                                        |  | September 29, 2003
|/s/ARTHUR L. MONEYArthur L. Money       |  | Director                                                                        |  | September 29, 2003
|                                        |  |                                                                                 |  |                   

70

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|/s/ANTHONY R. MULLERAnthony R. Muller       |  | Director |  | September 29, 2003
|------------------------------------------- |  | -------- |  | ------------------
|/s/CHARLES A. STEINBERGCharles A. Steinberg |  | Director |  | September 29, 2003
|/s/ROBERT M. WHITERobert M. White           |  | Director |  | September 29, 2003

71

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Schedule II

Valuation and Qualifying Accounts and Reserves

|Description              |                               | Balance at
Beginning of
Period |   | Charged to Costs
and Expenses |  | Other |         | Write-offs/
Other |   | Balance at
End
of Period
|------------------------ | ----------------------------- | ------------------------------ | - | ----------------------------- |  | ----- | ------- | ----------------- | - | ------------------------
|Year ended June 30, 2001 |                               |                                |   |                               |  |       |         |                   |   |                         
|                         | Accounts receivable allowance |                                | $ | 12,383                        |  | $     | 10,334  |                   | $ |                        
|                         | Warranty Accrual              |                                | $ | 27,879                        |  | $     | 22,398  |                   | $ | (2,457)                 
|                         | Deferred tax asset allowance  |                                | $ | 632,324                       |  | $     | 192,836 |                   | $ | 1,733                   
|Year ended June 28, 2002 |                               |                                |   |                               |  |       |         |                   |   |                         
|                         | Accounts receivable allowance |                                | $ | 20,068                        |  | $     | 4,443   |                   | $ |                        
|                         | Warranty Accrual              |                                | $ | 21,360                        |  | $     | 13,173  |                   | $ | (1,083)                 
|                         | Deferred tax asset allowance  |                                | $ | 826,893                       |  | $     |        |                   | $ | (1,761)                 
|Year ended June 27, 2003 |                               |                                |   |                               |  |       |         |                   |   |                         
|                         | Accounts receivable allowance |                                | $ | 12,548                        |  | $     | 3,160   |                   | $ | (1,138)                 
|                         | Warranty Accrual              |                                | $ | 8,958                         |  | $     | 10,804  |                   | $ |                        
|                         | Deferred tax asset allowance  |                                | $ | 699,950                       |  | $     | 26,758  |                   | $ | 249                     

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