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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 28, 2002.

|o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|- | -----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 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." 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
August 30, 2002 on the New York Stock Exchange as reported in The Wall Street Journal, was approximately $203 million. Shares of voting stock held by each executive officer and director
and by each person who owns 5% or more of any class of registrant's voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of August 31, 2002, the registrant had outstanding 199,811,029 shares of Common Stock.

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PART I

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

These
forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking
statements. Such risks and uncertainties include, among other things: adverse changes in general economic or business conditions; adverse changes in the specific markets for our products, including
expected rates of growth and decline in our current markets; ability to achieve profitable operations 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; inability to
effectively implement our product strategies, including the introduction of a complementary server line based on the Intel processor and the Linux operating system, and the enhancement of our storage
offerings through differentiated software offerings; risks related to dependence on our partners and suppliers; 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; litigation involving export compliance,
intellectual property or other issues; and other factors including those listed under the heading "Risks That Affect Our Business."

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

The
following tables and discussion present certain financial information on a comparative basis. During the third and fourth quarters of fiscal 2000, respectively, we sold our
Cray® product line and distributed our remaining interest in MIPS Technologies, Inc. ("MTI") through a spin-off. We believe it more relevant if certain fiscal 2001
results (revenue, gross margin and operating expenses other than restructuring activity) are compared with pro forma fiscal 2000. The pro forma results for the twelve-month periods of fiscal 2000 used
throughout this discussion are adjusted to exclude the results of operations of the Cray product line and MTI.

ITEM 1. BUSINESS

General

SGI is a leading provider of products, services and solutions for use in high-performance computing, visualization and the management of large-scale
complex data. 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

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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.

Products

SGI® systems are designed specifically to meet the needs of the scientific, technical and creative marketplaces. SGI systems utilize the
IRIX® operating system, which is an enhanced version of UNIX® and feature MIPS® RISC microprocessors. In calendar 2003, SGI will expand the server line to include
systems that run on Intel® Itanium 2 processors and the Linux® operating system in addition to those that run on MIPS and IRIX. 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 feature 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, and 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.

Advanced Graphics SystemsFor 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 servers and features our
industry-leading InfiniteReality4 graphics. SGI Onyx 3000 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. By immersing decision-makers in high quality, high-resolution and interactive environments, customers around the world have used this technology to
increase production from oil reserves, design safer cars, interpret complex scientific data and generally enable real-time decision support.

Visual Area NetworkingIn January 2002, SGI introduced a radically 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® O2®, Silicon Graphics Fuel
and Silicon Graphics Octane® families of MIPS processor and IRIX operating system-based desktop workstations each feature advanced 3D graphics and powerful integrated imaging
capabilities. Silicon Graphics O2 workstations are single-processor systems with a unique architecture that is particularly well-suited to image processing applications such as medical
imaging and broadcast television graphics, while the

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single-processor Fuel and single- or dual-processor Octane2 systems are targeted at the manufacturing, defense, scientific and energy marketplaces.

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 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 performance, availability, and security.

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

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

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

Marketing, Sales, and Distribution

We sell our system products and solutions through both our direct sales force and indirect channel partners. In fiscal year 2002 direct sales accounted for more
than half of our product revenues. The direct sales and support organization operates throughout the United States and in all significant international markets. We also have channel partners in almost
all the countries in which we have a presence; in others, we work through an SGI authorized distributor.

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

Information
with respect to international operations and export sales may be found in Note 9 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.

Technical Solutions

The quality and reliability of our products and our understanding of our customer's technical and business challenges is critical to our success. Our SGI
Technical Solutions organization includes systems engineers, solution architects, field service engineers, field product and applications specialists, product support engineers, training specialists,
and administrative support personnel. We also provide customer education through regularly scheduled courses in system software administration, applications programming, and hardware maintenance. We
provide local customer support from offices in North

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America, Western Europe, the Pacific Rim, and certain Latin American countries with spare parts inventories at each location. International distributors provide training and support for products sold
by them. We typically provide a standard "return-to-factory" hardware warranty against defects in materials and workmanship for periods of up to three years.

Research and Development

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

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

During
fiscal 2002, 2001 and 2000, we spent approximately $177 million, $236 million and $301 million, respectively, on research and development that represented
approximately 13% of total revenue in each period. Fiscal 2000 includes research and development associated with the Cray product line and MIPS Technologies, Inc. ("MTI"), which were divested
in the latter part of fiscal 2000. We are committed to continuing innovation and differentiation and as a result will most likely continue to make research and development investments that are above
average for the computer industry as a percentage of revenues. However, declines in total revenue over the last several fiscal years have led us to substantially reduce the absolute level of our
investment in research and development.

Manufacturing

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

During
fiscal 2002, we closed our manufacturing facility located in Switzerland and consolidated 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 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 results.

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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, SRAMs and VRAMs), that are a significant component of our overall systems cost, tend to be highly volatile both in terms of
pricing and availability.

Competition

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

Our
principal competitors are IBM, Hewlett Packard, NEC, Cray and, in some markets, Sun Microsystems. 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.

Proprietary Rights and Licenses

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

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

Our
business will be affected by our success in protecting proprietary information and obtaining necessary licenses. Litigation or changes in the interpretation of intellectual property
laws could expand or reduce the extent to which we or our competitors are able to protect intellectual property or could require significant changes in product design. The computer industry has seen a
substantial increase in litigation with respect to intellectual property matters, and we have been engaged in several intellectual property lawsuits both as plaintiff and defendant. Although no such
proceedings were pending as of June 28, 2002, we expect that litigation of this sort will reoccur from time to time.

Employees

As of June 28, 2002, we had 4,443 regular employees compared with 5,956 at June 30, 2001. Our future success will depend, in part, on our ability to
continue to retain and motivate highly qualified technical, marketing and management personnel. We have never had a work stoppage, and no employees are represented by a labor union. We have workers'
councils where required by European Union or other applicable laws. We believe that our employee relations are good.

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

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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 429,000 square feet for manufacturing, service and R&D activities. We also have leased sales, administrative and R&D facilities of about 241,000 square feet in Eagan, Minnesota.

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 or lease. We also
lease 3 other buildings near our Mountain View headquarters (about 154,000 square feet) and an additional 50 leased facilities worldwide (about 327,000 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 Consolidated Financial
Statements.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Note 22 to Consolidated Financial Statements in Part II, Item 8 of this
Form 10-K, which information is hereby incorporated by reference.

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

None.

Executive Officers of the Registrant

The executive officers of SGI and their ages as of August 31, 2002 are as follows:

|Name              |  | Age |  | Position and Principal Occupation                        |  | Executive
Officer
Since
|----------------- |  | --- |  | -------------------------------------------------------- |  | -----------------------
|Robert Bishop     |  | 59  |  | Chairman, Chief Executive Officer and Director           |  | 1999                   
|Warren Pratt      |  | 49  |  | Executive Vice President and Chief Operating Officer     |  | 2000                   
|Steve Coggins     |  | 53  |  | Senior Vice President, Europe, Middle East & Africa      |  | 2001                   
|Sandra Escher     |  | 42  |  | Senior Vice President and General Counsel                |  | 1999                   
|Eng Lim Goh, PhD. |  | 42  |  | Senior Vice President and Chief Technology Officer       |  | 2000                   
|Kathy Lanterman   |  | 42  |  | Vice President and Corporate Controller                  |  | 2002                   
|Bill LaRosa       |  | 56  |  | Senior Vice President, Intercontinental Field Operations |  | 2001                   
|Anthony Robbins   |  | 42  |  | Senior Vice President, North American Field Operations   |  | 2001                   
|Jan Silverman     |  | 52  |  | Senior Vice President, Marketing                         |  | 2001                   
|Jeffrey Zellmer   |  | 42  |  | 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 non-executive Chairman of the
Board of Silicon Graphics World Trade Corporation.

Mr. Pratt
was appointed Chief Operating Officer of SGI in May 2001. He has held a variety of general and engineering management positions at SGI since 1991 and was made
Executive Vice President of Engineering and Manufacturing in July 2000. Prior to that and beginning in 1998, he served as President and General Manager of SGI's Alias/Wavefront subsidiary.

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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 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 2001. He was made Vice President and Chief Technology Officer in October 2000, Vice
President of Global Systems Engineering in October 1999 and a Chief Scientist in 1998. He joined SGI in 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 HP, 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 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, Marketing in April 2001. He joined SGI in May 1999 as Vice President, Server Marketing. Prior to joining SGI, he
was with Hewlett Packard for ten years and held a number of marketing director, business development and product management positions, including the head of marketing for Internet Imaging Operations
and Director of Internet Solutions.

Mr. Zellmer
became Senior Vice President and Chief Financial Officer of SGI in July 2001. He was appointed Vice President, Corporate Controller in July 2000. Since
1988, he has held a variety of financial management positions at SGI, and MIPS Computer Systems which was acquired by SGI in 1992.

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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 2002 |      | Fiscal 2001
|-------------- |  | ----------- | ---- | -----------
|
|First Quarter  |  | $           | 0.32 |            
|Second Quarter |  | $           | 0.44 |            
|Third Quarter  |  | $           | 2.10 |            
|Fourth Quarter |  | $           | 2.50 |            

SGI
had 6,451 stockholders of record as of June 28, 2002. 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. For example, Item 7 presents certain information on a pro forma basis, reflecting adjustments for certain changes in our business operations in fiscal 2000.

|                                            |                                       | Years ended |          
|------------------------------------------- | ------------------------------------- | ----------- | ---------
|
|
|Operating Data:                             |                                       |             |          
|Total revenue                               |                                       | $           | 1,341,385
|Costs and expenses:                         |                                       |             |          
|                                            | Cost of revenue                       |             |          
|                                            | Research and development              |             |          
|                                            | Selling, general and administrative   |             |          
|                                            | Other operating expense (recovery)(1) |             |          
|                                            |                                       |             |          
|Operating loss                              |                                       |             | (100,761 
|Interest and other income (expense), net(2) |                                       |             | 18,502   
|                                            |                                       |             |          
|(Loss) income before income taxes           |                                       | $           | (82,259  
|                                            |                                       |             |          
|Net (loss) income                           |                                       | $           | (46,323  
|                                            |                                       |             |          

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|Net (loss) income per share:                                   |         |   |         |         |   |           |         |   |           |         |   |           |         |   |           |        
|-------------------------------------------------------------- | ------- | - | ------- | ------- | - | --------- | ------- | - | --------- | ------- | - | --------- | ------- | - | --------- | -------
|                                                               | Basic   |   | $       | (0.24   | ) | $         | (2.59   | ) | $         | (4.52   | ) | $         | 0.29    |   | $         | (2.47  
|                                                               | Diluted |   | $       | (0.24   | ) | $         | (2.59   | ) | $         | (4.52   | ) | $         | 0.28    |   | $         | (2.47  
|Shares used in the calculation of net (loss) income per share: |         |   |         |         |   |           |         |   |           |         |   |           |         |   |           |        
|                                                               | Basic   |   |         | 194,974 |   |           | 190,338 |   |           | 183,528 |   |           | 186,374 |   |           | 186,149
|                                                               | Diluted |   |         | 194,974 |   |           | 190,338 |   |           | 183,528 |   |           | 189,427 |   |           | 186,149
|Balance Sheet Data:                                            |         |   |         |         |   |           |         |   |           |         |   |           |         |   |           |        
|Cash, cash equivalents and unrestricted investments            |         | $ | 218,180 |         | $ | 126,107   |         | $ | 258,081   |         | $ | 688,143   |         | $ | 736,720   |        
|Restricted investments                                         |         |   | 44,689  |         |   | 76,853    |         |   | 126,408   |         |   | 94,226    |         |   |          |        
|Working capital (deficiency)                                   |         |   | 94,665  |         |   | (41,884   | )       |   | 58,781    |         |   | 869,980   |         |   | 968,700   |        
|Total assets                                                   |         |   | 910,119 |         |   | 1,283,029 |         |   | 1,839,211 |         |   | 2,788,257 |         |   | 2,964,706 |        
|Long-term debt and other                                       |         |   | 427,812 |         |   | 412,720   |         |   | 385,133   |         |   | 387,005   |         |   | 403,522   |        
|Stockholders' (deficit) equity                                 |         |   | (54,641 | )       |   | (25,283   | )       |   | 592,550   |         |   | 1,424,199 |         |   | 1,464,512 |        
|Statistical Data:                                              |         |   |         |         |   |           |         |   |           |         |   |           |         |   |           |        
|Number of employees                                            |         |   | 4,443   |         |   | 5,956     |         |   | 6,726     |         |   | 9,191     |         |   | 10,286    |        

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

Introduction

SGI has had declining revenue and has been unprofitable on an operating basis for each of the past five 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 took several major steps in both fiscal 2002 and 2001 to refocus our operations. We restructured our overall operations, including closing our manufacturing operations in
Switzerland and consolidating operations in Wisconsin, reorganizing our services business, discontinuing our Pentium® III-based product line, resulting in noticeable
improvements in our gross margins as a percentage of revenues. We also continued to manage significant reductions in operating expenses over the last two fiscal years

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compared with fiscal 2000 levels. These changes substantially reduced the scope of our operating losses in fiscal 2002. To further improve our financial condition during fiscal 2002, we generated
more than $150 million in cash from licensing and sales transactions involving assets including real estate, intellectual property, and a majority equity position in SGI Japan. While
substantial progress was made in fiscal 2002, we continue to focus on actions intended to restore long-term growth and profitability.

The
following tables and discussion present certain financial information on a comparative basis. During the third and fourth quarters of fiscal 2000, respectively, we sold our Cray
product line and distributed our remaining interest in MTI through a spin-off. We believe it more relevant if certain fiscal year 2001 results (revenue, gross margin, interest and other,
and operating expenses other than restructuring activity) are compared with pro forma fiscal 2000 results. The pro forma results for the twelve-month period of fiscal 2000 used throughout this
discussion are adjusted to exclude the results of operations of the Cray product line and MTI.

Results of Operations

|                                         |  | Years ended |       | Pro forma year ended |  
|---------------------------------------- |  | ----------- | ----- | -------------------- | -
|
|
|Total revenue                            |  | $           | 1,341 |                      | $
|Cost of revenue                          |  |             | 770   |                      |  
|                                         |  |             |       |                      |  
|Gross profit                             |  |             | 571   |                      |  
|Gross profit margin                      |  |             | 42.6  | %                    |  
|Total operating expenses                 |  |             | 672   |                      |  
|                                         |  |             |       |                      |  
|Operating loss                           |  |             | (101  | )                    |  
|Interest and other (expense) income, net |  |             | 19    |                      |  
|                                         |  |             |       |                      |  
|Loss before income taxes                 |  |             | (82   | )                    |  
|                                         |  |             |       |                      |  
|Net loss                                 |  | $           | (46   | )                    | $
|                                         |  |             |       |                      |  
|Net loss per share-basic and diluted     |  | $           | (0.24 | )                    | $
|                                         |  |             |       |                      |  

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, Visual 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 visual workstations reportable segments. Prior year amounts have been restated to conform to current year presentation.

Total
revenue in fiscal 2002 decreased $513 million or 28% compared with fiscal 2001, and fiscal 2001 revenue decreased $206 million or 10% compared with pro forma fiscal
2000. 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. The decline in revenue from fiscal 2001 to fiscal 2002 reflects a general economic slowdown and a significant downturn in IT spending, strong competition from much
larger companies and products based on processors with higher peak performance benchmarks, the impact of no longer consolidating the revenue of SGI Japan, the discontinuance of certain visualization
workstations based on Pentium III microprocessors, and other factors discussed below that affected particular product families. We expect

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certain of the factors mentioned above to continue to have an adverse impact on our revenue levels going forward. See "Risks That Affect Our Business."

The
following table presents total revenue by reportable segment with prior year segments restated to reflect current year presentation:

|                    |  | Years ended |     | Pro forma year ended |  
|------------------- |  | ----------- | --- | -------------------- | -
|
|
|Servers             |  | $           | 517 |                      | $
|% of total revenue  |  |             | 38  | %                    |  
|Visual Workstations |  | $           | 237 |                      | $
|% of total revenue  |  |             | 18  | %                    |  
|Global Services     |  | $           | 457 |                      | $
|% of total revenue  |  |             | 34  | %                    |  
|Other               |  | $           | 130 |                      | $
|% of total revenue  |  |             | 10  | %                    |  

Fiscal
2002 Server revenue (which includes Onyx, Visual Area Network and Storage products) decreased $231 million or 31% compared with fiscal 2001. The decrease primarily reflects
declines across all product families within this segment, namely visualization systems, high-performance servers and integrated storage solutions. This decline is primarily attributable to
concern about the slowdown in the economy that is causing private sector businesses to delay the acquisition of technology wherever possible. Fiscal 2001 Server revenue decreased $34 million or
4% compared with pro forma fiscal 2000. This decline primarily reflects lower revenue levels within our Origin brand scalable server business and our Onyx graphics system business. Limited
availability in the first half of fiscal 2001 of the industry-standard ceramic packaging used in ASICs for our Origin and Onyx 3000 systems as well as a slowdown in the economy affected overall
shipping patterns within these businesses. Server revenue levels are 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 timely release of key software applications on the IRIX operating system. See "Risks That Affect Our Business."

Fiscal
2002 Visual Workstation revenue decreased $160 million or 40% compared with fiscal 2001. The decrease is 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 visualization workstations based upon Intel®
32-bit microprocessors, the impact of which also contributed to the year over year decline in Visual Workstation revenue. Fiscal 2001 Visual Workstation revenue decreased
$123 million or 24% compared with pro forma fiscal 2000. The decrease in revenue is primarily attributable to the declining UNIX workstation market, especially within the O2 product family.
Fiscal 2000 results were also adversely impacted by the disappointing sales performance of our visual workstations based on the Windows NT® operating system. In light of the disappointing
sales performance of our proprietary architecture Silicon Graphics® 320 and Silicon Graphics® 540 visual workstations, we decided to discontinue this product family in favor of
products with more industry standard architectures and recorded charges to cost of revenue during fiscal 2000 related to this transition. See "Gross Profit Margin" and "Operating Expenses."

Global
Services revenue is comprised of hardware and software support and maintenance and professional services. Fiscal 2002 Global Services revenue decreased $141 million or 24%
compared with fiscal 2001. This decrease is primarily attributable to declines in our professional services revenue as a result of the restructuring of our service organization and in our traditional
customer support revenue which is being affected by a lower volume of system sales. Fiscal 2001 Global Services revenue

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decreased $8 million or 1% compared with pro forma fiscal 2000. The slight decrease in revenue is primarily attributable to a decline in our traditional customer support revenue, offset in
part by the growth of business within our professional services organization.

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/Wavefront. Fiscal 2002 other revenue includes a one-time 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. Excluding the revenue associated with the one-time receipt of $63 million from Microsoft, Other
revenue decreased $44 million or 40% in fiscal 2002 compared with fiscal 2001, primarily due to a decline in Alias/Wavefront revenue.

Total
revenue by geographic area for fiscal 2002, 2001 and 2000 was as follows (in millions):

|              |  | Years ended |       | Pro forma year ended
|------------- |  | ----------- | ----- | --------------------
|
|Area          |  |             |       |                     
|Americas      |  | $           | 839   |                     
|Europe        |  |             | 306   |                     
|Rest of World |  |             | 196   |                     
|              |  |             |       |                     
|Total revenue |  | $           | 1,341 |                     
|              |  |             |       |                     

Geographic
revenue as a percentage of total revenue for fiscal 2002, 2001 and 2000 was as follows:

|              |  | Years ended |   | Pro forma year ended |  
|------------- |  | ----------- | - | -------------------- | -
|
|Area          |  |             |   |                      |  
|Americas      |  | 63          | % | 54                   | %
|Europe        |  | 23          | % | 24                   | %
|Rest of World |  | 14          | % | 22                   | %

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 is 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 with fiscal 2001 also contributed to the decline in Rest of World
revenue as a percentage of total revenue. The increase in Rest of World business in fiscal 2001 compared with fiscal 2000 primarily reflects increased sales in Japan as a percentage of total revenue.

Our
consolidated backlog at June 28, 2002 was $159 million, down from $209 million at June 30, 2001. Backlog declined across all segments of our business and
across all regions. Backlog is comprised of committed purchase orders for products and professional services deliverable within six to nine months, depending on the product family.

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.

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Our overall gross profit margin increased to 43% in fiscal 2002 compared with 33% in fiscal 2001. Excluding the $63 million in revenue recognized from the Microsoft intellectual
property agreement, gross margin was 40% for fiscal 2002. Gross margin improvements in fiscal 2002 are 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 better 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 the change in SGI Japan's status during the second quarter of fiscal 2002 to a distribution model, which negatively
affects gross margin. See "Impact of SGI Japan Transaction."

Our
overall gross profit margin increased to 33% in fiscal 2001 compared with 32% in pro forma fiscal 2000. Gross profit margin for fiscal 2001 includes a $19 million charge for
inventory costs related to the discontinuation of the Pentium III processor-based product line. Without this charge, gross margin for fiscal 2001 would have been 34%. Gross margin for fiscal 2001 was
affected by the limited availability of certain components in the first and second quarters of fiscal 2001 which affected shipping patterns and was a factor in causing a higher percentage of revenue
to come from lower margin products.

Fiscal
2000 gross profit margin includes certain adjustments related to our Silicon Graphics 320 and 540 visual workstations, including charges of approximately $46 million for
third party manufacturing contract cancellations and purchase commitments and for excess product and demonstration inventory. Also, during fiscal 2000, we charged $21 million to cost of service
revenue for future unrecoverable visual workstation support costs. In addition, we recorded a $15 million charge to cost of service revenue for estimated warranty related costs associated with
the Cray T90 supercomputer product line and $18 million for the write-down of excess spares. Without these adjustments, our gross profit margin for fiscal 2000 would
have been 37%.

Operating Expenses

|                                    |  | Years ended |     | Pro forma year ended |  
|----------------------------------- |  | ----------- | --- | -------------------- | -
|
|
|Research and development            |  | $           | 177 |                      | $
|% of total revenue                  |  |             | 13  | %                    |  
|Selling, general and administrative |  | $           | 450 |                      | $
|% of total revenue                  |  |             | 34  | %                    |  
|Other                               |  | $           | 44  |                      | $
|% of total revenue                  |  |             | 3   | %                    |  

Our
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 impairment costs. The significant decline in operating expenses year over year is due to an overall expense reduction program aimed at bringing expenses in line with lower revenue
levels. Total fiscal 2001 operating expenses decreased $58 million or 5% compared with pro forma fiscal 2000. Fiscal 2001 operating expenses included $102 million of charges for
restructuring and impairment and $18 million of charges as a result of the implementation of an Enterprise Resource Planning ("ERP") system and costs
associated with a business reorganization. Pro forma fiscal 2000 operating expenses included a net charge of $103 million for estimated restructuring and impairment charges.

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Research and developmentFiscal 2002 research and development spending decreased $59 million or 25% compared with
fiscal 2001. The fiscal 2002 decrease reflects overall reduction in headcount as a result of the continued restructuring of the company to align expenses with lower revenue levels. Research and
development spending decreased $17 million or 7% in fiscal 2001 compared with pro forma fiscal 2000. The fiscal 2001 decrease reflects reductions in headcount as well as more concentrated
research and development efforts.

Selling, general and administrativeFiscal 2002 selling, general and administrative expenses decreased $267 million or
37% compared with fiscal 2001. This decrease in operating expenses resulted primarily from lower 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 $40 million or 5% in fiscal 2001 compared with pro forma
fiscal 2000. The fiscal 2001 decrease reflects reduced headcount as a result of restructuring activities and attrition, significantly reduced commission and outside service expenses and the impact of
our overall expense control measures aimed at bringing operating expenses more in line with revenues. The decrease was partially offset by the $18 million of charges as a result of the
implementation of an ERP system and costs associated with a business reorganization.

Other operating expenseOther operating expense for fiscal 2002 represents 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 represents a charge for estimated restructuring of $88 million and charges of $20 million associated with the impairment of assets, partially offset by
adjustments to previously recorded restructuring charges of $6 million. Other operating expense for fiscal 2000 represents a net charge for estimated restructuring costs of $103 million.
As a result of these restructuring actions, we anticipate cash outflows of $11 million through fiscal 2003 for severance and related charges and canceled contracts and $28 million
through fiscal 2010 for facilities related expenditures, net of estimated sublease income. See Note 3 to the Consolidated Financial Statements, "Other Operating Expense," for further
information regarding these activities.

Interest and Other

Interest ExpenseInterest expense increased 16% in fiscal 2002 compared with fiscal 2001 and increased 4% in fiscal 2001
compared with fiscal 2000. The increase in interest expense in fiscal 2002 is primarily
attributable to a full year of interest expense associated with our financing arrangement (see Note 12, "Financing Arrangement") and higher interest associated with the reset interest rate on
the restructured Japan debt as compared with fiscal 2001 (see Note 6, "Sale of Interest in SGI Japan").

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 2002 is primarily comprised of a $64 million gain from the sale of 60% of our
interest in SGI Japan recognized in the second quarter of fiscal 2002, partially offset by 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. Interest
income and other, net for fiscal 2001 includes an $83 million write-off of a private investment, a $50 million gain on the sale of marketable investments, a
$24 million gain related to the sale of the Cray product line, and an $8 million gain on the sale of corporate real estate. Significantly lower cash balances in fiscal 2001 compared with
fiscal 2000 also contributed to a decrease in interest income.

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Provision for Income Taxes

Our net benefit for income taxes for fiscal 2002 totaled $36 million and arose principally from a change in the U.S. income tax laws that resulted in
additional U.S. income tax refunds related to the operating results of fiscal 2001. 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.

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

At
June 28, 2002, we had gross deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $782 million. Gross deferred tax assets are
offset by a valuation allowance of $700 million and deferred tax liabilities of $84 million. The valuation allowance of $700 million includes $23 million attributable to
benefits of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital.

At
June 28, 2002, we had United States federal and foreign jurisdictional net operating loss carryforwards of approximately $1,068 million and $193 million,
respectively. The federal losses will begin expiring in fiscal year 2007 and the foreign losses will begin expiring in fiscal year 2003. At June 28,
2002, we also had general business credit carryovers of approximately $37 million for United States federal tax purposes, which will begin expiring in fiscal year 2003.

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 has 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 which was allocated to the 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.

The
fourth quarter results we announced on July 23, 2002 also reflected the elimination of a $5 million restructuring accrual and a $7 million deferred tax valuation
allowance, which were no longer required following our sale of the majority interest in SGI Japan. We have determined that these reversals are more appropriately recognized in our second quarter
results, and accordingly, have adjusted Note 24 to the Consolidated Financial Statements, "Selected Quarterly Financial Data (unaudited)." The second quarter results are adjusted to reflect the
following changes to our previously reported second quarter results: a $5.5 million decrease in each of other operating expense and operating loss, a $5.5 million increase in income
before taxes, a $12.1 million increase in net income, a $0.07 increase in net income per basic share, and $0.05 increase in net income per diluted share. These adjustments have an offsetting
impact on the previously announced fourth quarter of fiscal 2002 results. These adjustments did not affect our announced operating results (excluding restructuring) for any quarter, did not have a
cash impact and did not change our full fiscal year 2002 results.

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Financial Condition

At June 28, 2002, cash and cash equivalents and marketable investments totaled $218 million compared with $126 million at June 30,
2001. Also, included in the balance sheet at June 28, 2002 and June 30, 2001 is approximately $45 million and $77 million, respectively, of restricted investments.
Restricted investments at June 28, 2002 and June 30, 2001 consist of short and long-term investments pledged as collateral against bank credit facilities. The increase in
cash and cash equivalents over prior year is a result of the company's continued focus on cash management, including a focus on account collections and inventory management. Additionally, cash has
been supplemented by the sale of assets during the fiscal year, including the sale of a 60% interest in SGI Japan.

Primarily
as a result of net losses, operating activities used $13 million in cash for fiscal 2002, compared with using $282 and $76 million in fiscal 2001 and 2000,
respectively. Operating cash flows for fiscal 2002 benefited from $63 million in one-time 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 2002 net loss is adjusted to remove the
impact of a gain of $64 million from the sale of the 60% interest in SGI Japan that is reflected as a cash flow from investing activities. Fiscal 2001 net loss is adjusted to remove the impact
of 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 activity. Included in fiscal 2000 adjustments is an increase of $369 million in our valuation allowance against our remaining deferred tax asset and a
tax charge of $93 million related to repatriating accumulated foreign earnings. Partially offsetting these charges is a reduction of $67 million in previously provided income taxes
related to certain exposures that were no longer necessary given the increase in the valuation allowance against our deferred tax assets.

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 totaling $28 million. Investing activities, other than changes in our marketable and restricted investments, provided $194 million in cash
during fiscal 2001. The principal investing activity during fiscal 2001 was the sale of certain corporate real estate for total cash proceeds of $278 million. These proceeds were partially
offset by capital expenditures, including capitalized costs associated with our global ERP system. Investing activities, other than changes in our marketable and restricted investments consumed
$349 million in cash during fiscal 2000. The principal investing activity during fiscal 2000 was for the acquisition of capital equipment and our election to exercise an option to purchase five
buildings on our Mountain View campus for approximately $125 million that had been held under an off-balance sheet financing arrangement. In addition, cash was reduced by
$84 million in fiscal 2000 as result of the spin-off of MTI that is no longer included in our consolidated balance sheet.

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. 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.

During
the fourth quarter of fiscal 2001, we obtained an asset-based credit facility. Available credit is determined monthly based on 85% of eligible accounts receivable, up to a maximum
of $75 million. To date, we have used $50 million of this line to secure letters of credit. The credit facility matures in April 2003, and we currently intend to renew or replace this
facility at maturity. The facility is currently secured by U.S. accounts receivable and inventory, the pledge of certain intellectual property and a

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$7 million cash deposit. From time to time, we also deposit additional cash, reflected in our restricted cash balances, to secure certain letters of credit or to address fluctuations within
the quarter of eligible
accounts receivable. The credit facility also contains financial and other covenants. We were not in compliance with the financial covenants in the fourth quarter of fiscal 2001 or the second, third
and fourth quarters of fiscal 2002, which were waived by the lenders. In the event we are not able to comply with the financial and other covenants of this facility in the future, or there is a
material adverse change impairing our ability to repay the outstanding balance, the facility may be declared to be in default. If a default is declared and not waived, or if the facility matures and
is not renewed or replaced it could have a significant impact on our working capital.

We
have incurred net losses and negative cash flows from operations during each of the past three fiscal years. Primarily as a result of substantial business restructuring and expense
reductions, we reduced our net loss and cash consumed from operations significantly from fiscal 2001 to fiscal 2002. Through improved operational execution and the sale of non-core assets,
we also improved our cash position substantially during fiscal 2002. At June 28, 2002, our principal sources of liquidity included unrestricted cash and marketable investments of
$218 million, up from $126 million at June 30, 2001. 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 2003 operating plan will provide sufficient funding to enable the Company to meet its obligations during fiscal 2003. We are committed to the successful
execution of our operating plan and business turnaround, and will take steps if necessary to further restructure our business operations to reduce expenses and improve working capital. The failure to
achieve our objectives for fiscal 2003 revenue and operating results or significant changes in the terms of our relationships with key suppliers, could result in our not having adequate liquidity to
manage our business.

Future
payments due under debt and lease obligations as of June 28, 2002 are as follows (in thousands):

|Fiscal year ended                                                              |  | 2003 |        | 2004 |   | 2005   |  | 2006 |         | 2007 |   | Thereafter |  | Total
|------------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ |  | ---- | ------- | ---- | - | ---------- |  | -----
|10% loan payable to SGI Japan due Dec 2004 (payable in quarterly installments) |  | $    | 10,914 |      | $ | 16,773 |  | $    | 12,580  |      | $ |           |  | $    
|5.25% Senior Convertible Notes due Sep 2004                                    |  |      |       |      |   |       |  |      | 230,591 |      |   |           |  |      
|6.125% Convertible Subordinated Debentures due Feb 2011                        |  |      |       |      |   |       |  |      |        |      |   |           |  |      
|Non-cancelable operating leases                                                |  |      | 49,675 |      |   | 46,481 |  |      | 42,388  |      |   | 31,636     |  |      
|                                                                               |  |      |        |      |   |        |  |      |         |      |   |            |  |      
|Total                                                                          |  | $    | 60,589 |      | $ | 63,254 |  | $    | 285,559 |      | $ | 31,636     |  | $    
|                                                                               |  |      |        |      |   |        |  |      |         |      |   |            |  |      

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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 contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be 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 from these estimates under different assumptions or conditions.

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 forecast, and that even the best estimates routinely require adjustment.

Revenue RecognitionA majority of our revenue is derived from product sales which is 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 of our revenue is generated from high
performance systems that may include customer acceptance criteria and for which revenue is deferred until such acceptance is obtained. 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 WarrantiesWe 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.

Bad DebtWe 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.

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Manufacturing and Spares InventoryWe write down our inventory for estimated excess, obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market value. At every balance sheet date, 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 spares inventory on hand, our analysis is based on assumptions about product life cycles,
historical usage, current production status and installed base. Additional adjustments to inventory may be required if actual market conditions are less favorable than those projected by us during the
analysis.

Deferred TaxesWe regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes
or recovered from future taxable income over the next three years, 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.

RestructuringIn 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 Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" ("SFAS 5"). 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.

Loss ContingenciesWe 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 exceed the recorded
provision. Estimating probable losses requires analysis of multiple factors that often depend on judgements about the outcome of pending lawsuits and potential actions by third parties including
government agencies.

Long-term InvestmentsWe 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 impairment on a periodic basis. Some of these companies are publicly traded and have volatile share prices, while
many of these companies 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; the financial health of and
specific prospects for the company; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Other Significant Accounting PoliciesOther 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 judgements on complex matters that are often subject

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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. Also see Note 2 "Summary of Significant
Accounting Policies" which discusses accounting policies that must be selected when there are acceptable alternatives.

Recent Accounting Pronouncements

In June 2001, The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which eliminates the pooling-of-interest method and provides a single-method approach, the purchase method, for the accounting for all business combinations, as
well as new criteria for recognition of intangible assets. SFAS 141 is effective for all business combinations initiated after June 30, 2001. The Company adopted SFAS 141 which
had no impact on our results of operations or financial position.

In
June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes new
standards for goodwill and other intangible assets, including the elimination of goodwill amortization, to be replaced with periodic evaluation of goodwill for impairment. We will adopt
SFAS 142 on June 29, 2002 at which time, we are required to evaluate our existing goodwill and intangible assets and make any necessary reclassifications in order to comply with the new
criteria in SFAS 142. We will then be required to reassess the useful lives of all intangible assets acquired in purchase business combinations, including those reclassified from goodwill, and
make any necessary amortization adjustments by the end of the first interim period after adoption. To the extent that any intangible asset is identified as having an indefinite useful life,
SFAS 142 requires us to test the intangible asset for impairment and recognize any impairment losses as a cumulative effect of change in accounting principle in the first interim period. After
the identification and assessment of intangible assets discussed above, we are required, under SFAS 142, to identify reporting units and assign all related assets and liabilities and goodwill
to the reporting units. We must then complete the two-step transitional goodwill impairment test. The first step, which must be completed within six months of adoption of SFAS 142,
requires us to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent that a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and we are required to complete step two of the transitional goodwill impairment test as soon as possible, but no later than
June 27, 2003. Step two requires us to compare the implied fair value of the reporting unit to its carrying amount as of June 29, 2002. Any transitional impairment loss will be
recognized as a cumulative change in accounting principle in the first interim period. We have not yet completed our analysis to determine the impact, if any, on our financial results. At
June 28, 2002, we had goodwill and intangible assets of $13 million subject to SFAS 142. Amortization expense for goodwill amounted to $1.5 million for the year ended
June 28, 2002. The net impact on the 2003 statement of operations from the adoption of SFAS 142 is expected to be a reduction in amortization of approximately $1.5 million.

In
October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" or
"SFAS 144" that is applicable to financial statements issued for fiscal years beginning after December 15, 2001, with transition provisions for certain matters. The FASB's new rules on
asset impairment supersede FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and provides a
single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of Statement 121, the new rules
significantly change the criteria that would have to be met to classify an asset as held-for-sale. The new rules also will supersede the provisions of APB Opinion 30 with
regard to reporting the effects of a

21

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disposal of a segment of a business and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are
incurred (rather than as of the measurement date as presently required). We adopted SFAS 144 in the second quarter of fiscal 2002.

In
June 2002 the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, 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 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 this Statement 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. This Statement also establishes that fair value is the objective for initial measurement of the liability.
Severance pay under Statement 146, in many cases, would be recognized over time 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. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application
encouraged.

Risks That Affect Our Business

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

Continuing Losses and Impact on Working Capital.In recent years our continuing net losses, resulting
mainly from declining revenues, have consumed cash resources, which we have offset to some extent through improved working capital management and the disposition of non-core assets.
Operating activities consumed $13 million in cash during fiscal 2002, and at June 30, 2002 we had unrestricted cash and marketable investments of $218 million. We believe that the
combination of our current resources and our planned results for fiscal 2003 will provide sufficient funding to allow us to meet our obligations during fiscal 2003. However, because our cash levels
fluctuate significantly during quarters, and especially given the uncertainties of the present business climate, we will continue to focus on expense controls and working capital efficiencies to
improve our liquidity. Because we have fewer opportunities than in the past to generate cash through the sales of non-core assets or other nonrecurring transactions, it will be especially
important that we achieve our planned-for operating results, which will require that we reverse or at least reduce the rate of the revenue declines experienced in recent years. Failure to
achieve our targets could cause significant changes in the terms on which we deal with our suppliers or could otherwise result in our having insufficient liquidity to manage our business.

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

We
have an asset-based credit facility that may be declared to be in default if we fail to meet certain financial and other covenants. The credit facility matures in April 2003 and we
currently intend

22

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to renew or replace this facility at maturity. The facility is currently secured by U.S. accounts receivable and inventory, the pledge of certain intellectual property and a $7 million cash
deposit. From time to time, we also deposit additional cash, reflected in our restricted cash balances, to secure certain letters of credit or to address fluctuations within the quarter of eligible
accounts receivable. The credit facility also contains financial and other covenants. We were not in compliance with the financial covenants in the fourth quarter of fiscal 2001 or the second, third
and fourth quarters of fiscal 2002, which were waived by the lenders. In the event we are not able to comply with the financial and other covenants of this facility in the future, or there is a
material adverse change impairing our ability to repay the outstanding balance, the facility may be declared to be in default. If a default is declared and not waived, or if the facility matures and
is not renewed or replaced it could have a significant impact on our working capital.

Period To Period Fluctuations.Our operating results may fluctuate for a number of reasons. Delivery
cycles are typically short, other than for large-scale server products. 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 product and technology transition announcements by SGI or our competitors. The timing of customer acceptance of certain large-scale server
products may also have a significant effect on periodic operating results. Margins are heavily influenced by mix considerations, including geographic concentrations, the mix of product and service
revenue, and the mix of server and desktop product revenue including the mix of configurations within these product categories.

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

Our
stock price, like that of other technology companies, is subject to significant volatility. If revenue or earnings in any quarter fail to meet the investment community's
expectations, there could be an immediate adverse impact on our stock price. The stock price may also be affected by broader market
trends unrelated to our performance. The listing rules of the NYSE generally require that listed securities trade at a minimum per share price of $1.00 when averaged over a 30 day trading
period. If the Common Stock price fails to rise above this minimum threshold and if SGI fails to take action, such as a reverse stock split, to address this issue, the Common Stock could be delisted
from the exchange, which would impair the liquidity available to holders of the Common Stock.

Product Development and Introduction.Meeting our objectives for fiscal 2003 and beyond will require
the timely development and introduction of 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 and external manufacturing teams, outside suppliers of key components such as
semiconductor and storage products and outsourced manufacturing partners. The failure of any one of these elements could cause our new products to fail to meet specifications or to miss the aggressive
timetables that we establish. There is no assurance that acceptance of our new systems will not be affected by delays in this process. As noted above, our ability to successfully attract and retain
key technical, marketing and

23

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management personnel has a direct impact on our ability to maintain our product development timetables.

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

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

Dependence On Partners and Suppliers.Our business has always involved close collaboration with
partners and suppliers. However, many elements of our current business strategy, including the addition of scalable servers based on Itanium 2 processors and the Linux operating system in the second
half of this fiscal year, 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, in
the future, to Linux, is a key factor to our business success.

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

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

Export Regulation.Our sales to foreign customers are subject to export regulations. Sales of many of
our high-end products require clearance and export licenses from the U.S. Department of Commerce under these regulations. The U.S. Departments of Commerce and Justice are currently
conducting civil and criminal investigations into SGI's compliance with the export regulations in connection with several export sales to Tier 3 countries. We have agreed to waivers of the statutes of
limitations for these matters and are currently in discussion with the authorities concerning a potential resolution. We believe that these matters will be resolved without a significant adverse
effect on our business. There is no assurance, however, that we will reach an acceptable resolution or that the ultimate result would not impair the conduct of our business with the U.S. government or
our sales outside the United States.

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

24

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The
Swiss authorities are also 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 these matters will be resolved without a significant adverse effect on our business.

Employees.Our success depends on our ability to continue to attract, retain and motivate highly
qualified technical, sales, marketing and management personnel. The uncertainties surrounding SGI's business prospects have increased the challenges of retaining world-class talent. We implemented
further restructuring actions during fiscal 2002. 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.

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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 which have declined in market value due to changes
in interest rates.

The
primary objective of our investment activities is to preserve principal while at the same time maximize 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.

25

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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 28, 2002 and June 30, 2001. We computed the market
values for foreign exchange risk based on spot rates in effect at June 28, 2002 and June 30, 2001. The market values that result from these computations are compared to the market values
of these financial instruments at June 28, 2002 and June 30, 2001. 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 28, 2002 and June 30, 2001 are as follows:

Interest
Rate Risk: A percentage point decrease in the levels of interest rates with all other variables held constant would result in a decrease in the aggregate fair values of our
financial instruments by $6 million and $3 million at June 28, 2002 and June 30, 2001, respectively. A percentage point increase in the levels of interest rates with all
other variables held constant would result in an increase in the aggregate fair values of our financial instruments by $6 million and $3 million, respectively.

Foreign
Currency Exchange Rate Risk: A 10% strengthening of foreign currency exchange rates against the U.S. dollar with all other variables held constant would result in a decrease in
the fair values of our financial instruments by $10 million and $13 million at June 28, 2002 and June 30, 2001, respectively. 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 $10 million at June 28, 2002 and
$9 million at June 30, 2001.

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

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 28, 2002 |     
|                              |                                                                      |     

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.

26

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Report of Ernst & Young LLP, Independent Auditors

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

We
have audited the accompanying consolidated balance sheets of Silicon Graphics, Inc. as of June 28, 2002 and June 30, 2001, and the related consolidated statements
of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended June 28, 2002. 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 28, 2002 and June 30, 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 28, 2002, 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
July 23, 2002

27

---



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 discontinued product line   |                          |         
|                                                                       | Cost of service revenue             |                          |         
|                                                                       | Research and development            |                          |         
|                                                                       | Selling, general and administrative |                          |         
|                                                                       | Other operating expense             |                          |         
|                                                                       |                                     |                          |         
|                                                                       |                                     | Total costs and expenses |         
|                                                                       |                                     |                          |         
|Operating loss                                                         |                                     |                          | (100,761
|Interest expense                                                       |                                     |                          | (22,959 
|Interest income and other, net                                         |                                     |                          | 41,461  
|                                                                       |                                     |                          |         
|Loss before income taxes                                               |                                     |                          | (82,259 
|(Benefit) provision for income taxes                                   |                                     |                          | (35,936 
|                                                                       |                                     |                          |         
|Net loss                                                               |                                     | $                        | (46,323 
|                                                                       |                                     |                          |         
|Net loss per sharebasic and diluted                                   |                                     | $                        | (0.24   
|                                                                       |                                     |                          |         
|Shares used in the calculation of net loss per sharebasic and diluted |                                     |                          | 194,974 
|                                                                       |                                     |                          |         

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

28

---

CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                        | June 28,
2002               |         | June 30,
2001 |        
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | ------- | ------------- | -------
|
|Assets:                                |                                                                                                                                                        |                             |         |               |        
|Current assets:                        |                                                                                                                                                        |                             |         |               |        
|                                       | Cash and cash equivalents                                                                                                                              |                             | $       | 213,302       |        
|                                       | Short-term marketable investments                                                                                                                      |                             |         | 4,878         |        
|                                       | Short-term restricted investments                                                                                                                      |                             |         | 43,506        |        
|                                       | Accounts receivable, net of allowance for doubtful accounts of $12,548 in 2002; $20,068 in 2001                                                        |                             |         | 193,992       |        
|                                       | Inventories                                                                                                                                            |                             |         | 109,410       |        
|                                       | Prepaid expenses                                                                                                                                       |                             |         | 18,227        |        
|                                       | Other current assets                                                                                                                                   |                             |         | 48,298        |        
|                                       |                                                                                                                                                        |                             |         |               |        
|                                       |                                                                                                                                                        | Total current assets        |         |               | 631,613
|                                       | Restricted investments                                                                                                                                 |                             |         | 1,183         |        
|                                       | Property and equipment, net of accumulated depreciation and amortization                                                                               |                             |         | 160,282       |        
|                                       | Other assets                                                                                                                                           |                             |         | 117,041       |        
|                                       |                                                                                                                                                        |                             |         |               |        
|                                       |                                                                                                                                                        | $                           | 910,119 |               | $      
|                                       |                                                                                                                                                        |                             |         |               |        
|Liabilities and Stockholders' Deficit: |                                                                                                                                                        |                             |         |               |        
|Current liabilities:                   |                                                                                                                                                        |                             |         |               |        
|                                       | Accounts payable                                                                                                                                       |                             | $       | 92,326        |        
|                                       | Accrued compensation                                                                                                                                   |                             |         | 46,734        |        
|                                       | Income taxes payable                                                                                                                                   |                             |         | 10,369        |        
|                                       | Other current liabilities                                                                                                                              |                             |         | 179,041       |        
|                                       | Deferred revenue                                                                                                                                       |                             |         | 168,283       |        
|                                       | Current portion of restructuring charge                                                                                                                |                             |         | 29,979        |        
|                                       | Current portion of long-term debt                                                                                                                      |                             |         | 10,216        |        
|                                       |                                                                                                                                                        |                             |         |               |        
|                                       |                                                                                                                                                        | Total current liabilities   |         |               | 536,948
|Long-term debt                         |                                                                                                                                                        |                             | 308,631 |               |        
|Other liabilities                      |                                                                                                                                                        |                             | 119,181 |               |        
|                                       |                                                                                                                                                        |                             |         |               |        
|                                       |                                                                                                                                                        | Total liabilities           |         |               | 964,760
|Commitments and contingencies          |                                                                                                                                                        |                             |         |               |        
|Stockholders' deficit:                 |                                                                                                                                                        |                             |         |               |        
|                                       | Preferred stock, $.001 par value; issuable in series, 2,000,000 shares authorized; shares issued and outstanding: none in 2002 and 2001;               |                             |         |              |        
|                                       | Common stock, $.001 par value, and additional paid-in capital; 500,000,000 shares authorized; shares issued: 199,762,254 in 2002; 192,434,545 in 2001; |                             |         | 1,450,829     |        
|                                       | Accumulated deficit                                                                                                                                    |                             |         | (1,466,181    | )      
|                                       | Treasury stock, at cost: 1,124,392 shares in 2002; 6,100,877 in 2001;                                                                                  |                             |         | (17,096       | )      
|                                       | Accumulated other comprehensive loss                                                                                                                   |                             |         | (22,193       | )      
|                                       |                                                                                                                                                        |                             |         |               |        
|                                       |                                                                                                                                                        | Total stockholders' deficit |         |               | (54,641
|                                       |                                                                                                                                                        |                             |         |               |        
|                                       |                                                                                                                                                        | $                           | 910,119 |               | $      
|                                       |                                                                                                                                                        |                             |         |               |        

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

29

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                            |                                                        | Years ended       |                                                    
|--------------------------------------------------------------------------- | ------------------------------------------------------ | ----------------- | ---------------------------------------------------
|
|
|Cash Flows From Operating Activities:                                       |                                                        |                   |                                                    
|Net loss                                                                    |                                                        | $                 | (46,323                                            
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                        |                   |                                                    
|                                                                            | Depreciation                                           |                   |                                                    
|                                                                            | Amortization                                           |                   |                                                    
|                                                                            | Gain on sale of 60% interest in SGI Japan              |                   |                                                    
|                                                                            | (Gain) loss on sale of Cray product line               |                   |                                                    
|                                                                            | Gain on sale of long-term investments                  |                   |                                                    
|                                                                            | Gain on sale of corporate real estate                  |                   |                                                    
|                                                                            | Loss on write-down of investments in private companies |                   |                                                    
|                                                                            | Restructuring and impairment charges, net              |                   |                                                    
|                                                                            | Changes in deferred tax assets and liabilities         |                   |                                                    
|                                                                            | 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                                         |                                                        |                   | (448,984                                           
|Proceeds from the maturities of restricted investments                      |                                                        |                   | 481,147                                            
|Proceeds from the sale of interest in SGI Japan                             |                                                        |                   | 90,705                                             
|Spin-off of interest in MIPS Technologies, Inc. ("MTI")                     |                                                        |                   |                                                   
|Proceeds from the sale of corporate real estate and other assets            |                                                        |                   | 29,400                                             
|Capital expenditures                                                        |                                                        |                   | (27,833                                            
|(Increase) decrease in other assets                                         |                                                        |                   | (14,304                                            
|                                                                            |                                                        |                   |                                                    
|                                                                            |                                                        |                   | Net cash provided by (used in) investing activities
|Cash Flows From Financing Activities:                                       |                                                        |                   |                                                    
|Issuance of debt                                                            |                                                        |                   | 44                                                 
|Payments of debt principal                                                  |                                                        |                   | (13,877                                            
|Sale of SGI common stock                                                    |                                                        |                   | 8,547                                              
|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 increase (decrease) in cash and cash equivalents                        |                                                        |                   | 90,173                                             
|Cash and cash equivalents at beginning of year                              |                                                        |                   | 123,129                                            
|                                                                            |                                                        |                   |                                                    
|Cash and cash equivalents at end of year                                    |                                                        | $                 | 213,302                                            
|                                                                            |                                                        |                   |                                                    

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

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

|                         |                                                                                                                                             | Three years ended June 28, 2002                                                                   |                         
|------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------
|
|
|Balance at June 30, 1999 |                                                                                                                                             | $                                                                                                 | 16,998                  
|                         | Components of comprehensive loss:                                                                                                           |                                                                                                   |                         
|                         |                                                                                                                                             | Net loss                                                                                          |                         
|                         |                                                                                                                                             | Currency translation adjustment                                                                   |                         
|                         |                                                                                                                                             | Change in unrealized gain on available-for-sale investments, net of tax of $18,065                |                         
|                         |                                                                                                                                             | Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges |                         
|                         |                                                                                                                                             |                                                                                                   |                         
|                         |                                                                                                                                             |                                                                                                   | Total comprehensive loss
|                         | Convertible preferred stock, Series A preferred dividends                                                                                   |                                                                                                   |                         
|                         | Purchase (2,132 shares) and issuance (7,602 shares) of treasury stock under employee plans  net                                            |                                                                                                   |                         
|                         | Common stock issued by MTI                                                                                                                  |                                                                                                   |                         
|                         | Spin-off of interest in MTI                                                                                                                 |                                                                                                   |                         
|                         |                                                                                                                                             |                                                                                                   |                         
|Balance at June 30, 2000 |                                                                                                                                             |                                                                                                   | 16,998                  
|                         | Components of comprehensive 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 (6,538,671 shares) of common stock under employee plansnet |                                                                                                   |                         
|                         | Purchase of 6,000,000 shares of treasury stock under equity forward arrangements                                                            |                                                                                                   |                         
|                         | Conversion of preferred stock to common stock                                                                                               |                                                                                                   |                         
|                         |                                                                                                                                             |                                                                                                   |                         
|Balance at June 30, 2001 |                                                                                                                                             |                                                                                                   |                        
|                         | Components of comprehensive income:                                                                                                         |                                                                                                   |                         
|                         |                                                                                                                                             | 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 (4,974,487 shares) of treasury stock under employee plansnet                                                                      |                                                                                                   |                         
|                         | Issuance (2,400,000 shares) of common stock for settlement of securities class action lawsuit                                               |                                                                                                   |                         
|                         |                                                                                                                                             |                                                                                                   |                         
|Balance at June 28, 2002 |                                                                                                                                             | $                                                                                                 |                        
|                         |                                                                                                                                             |                                                                                                   |                         

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations

SGI is a leading provider of products, services and solutions for use in high-performance computing, visualization and the management of large-scale
complex data. 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 and Switzerland during fiscal 2002. 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 three fiscal years. Primarily as a result of net substantial business restructuring and
expense reductions, we reduced our net loss and cash consumed from operations significantly from fiscal 2001 to fiscal 2002. Through improved operational execution and the sale of certain assets, we
also improved our cash position substantially during fiscal 2002. At June 28, 2002, we had unrestricted cash and marketable investments of $218 million, net working capital of
$95 million and stockholders' deficit of $55 million. 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 2003 operating plan will provide sufficient funding to enable the Company to meet its obligations during fiscal 2003. We are committed to the successful
execution of our operating plan and business turnaround, and will take steps if
necessary to further restructure our business operations to reduce expenses and improve working capital.

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 2002, the fiscal year ended on June 28. For prior years, 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.

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 comprehensive income, a 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, with the U.S. dollar as the functional currency for most of our subsidiaries, foreign currency assets and liabilities are remeasured into the U.S. dollar at
end-of-period exchange rates, except for inventory, property, plant and equipment and certain other assets, which are

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remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance
sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in net income or loss. For the year ended June 28, 2002,
Currency transaction gains or losses are recognized in interest income and other, net and, net of hedging gains or losses, were not significant to our operating results.

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 quality money market instruments
and high quality debt securities with maturities of 90 days or less at the date of purchase. Short-term marketable investments and restricted investments consist of both high
quality
money market instruments and high quality debt securities with maturities of one year or less, and are stated at fair value. Other marketable investments consist primarily of high quality debt
securities with maturities greater than one year and less than two years, and are stated at fair value. At June 28, 2002 and June 30, 2001, all our cash equivalents and marketable
investments are classified as available-for-sale. At June 28, 2002 and June 30, 2001, all our restricted investments are classified as
available-for-sale but are pledged as collateral against bank credit facilities. Restricted investments are held in SGI's or its subsidiaries name by major financial
institutions.

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

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

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

For
derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified
portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to
variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other
comprehensive (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

33

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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 systems are stated at cost less depreciation generally based on an 18-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 years and improvements over five to fifteen years.

Other AssetsIncluded in other assets are spare parts that are generally amortized on a straight-line basis over
the course of their respective useful lives ranging from two to five years and investments in certain technology companies that are carried at either market value or the lower of cost or market
depending on whether the company is publicly traded. Also included in other assets is goodwill associated with the acquisition of Silicon Graphics World Trade Corporation in fiscal 1991 which, prior
to our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," beginning in fiscal 2003, was being amortized on a straight-line basis over a period of 20 years.

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

We
recognize operating system software fees when we ship the product, provided that we have no additional significant performance or future obligations. We recognize application software
fees when we have delivered the product, provided that we have no additional significant performance or future obligations.

We
recognize royalty revenue, under technology agreements, in the quarter in which we receive a report from a licensee detailing the shipments of products incorporating our intellectual
property
components. We recognize engineering services, which are performed on a best efforts basis, as revenue when we have completed the defined statement of work milestones, and in specific cases where
contracts or statements of work have required customer notice of acceptance conditions, appropriate acceptance notification is received prior to recognizing those revenues and the milestone payment is
probable of collection.

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

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

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

Advertising CostsWe account for advertising costs as expense in the period in which they are incurred. Advertising expense
for fiscal years 2002, 2001 and 2000 was $4 million, $30 million and $25 million, respectively.

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

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

Long Lived AssetsIn accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", we review long-lived assets, including property and equipment,
acquired technology rights, goodwill, and other intangible assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 121, an impairment loss would be recognized when undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than the carrying amount. Long lived assets and certain identifiable intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, such as a significant industry downturn, significant decline in the
market value of the Company, or a significant decline in projected future cash flow for an operating segment. Determination of recoverability is based on an estimate of undiscounted future cash flows
from the use of the asset and its eventual disposition. Measurement of impairment charges for long-lived assets and certain identifiable intangible assets that management expects to hold
and use are based on the fair value of such assets. Long lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

Capitalized SoftwareIn accordance with Statement of Position ("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. Internal use software costs capitalized during fiscal 2002 and fiscal 2001 relating to our global ERP system amounted to $5 million and
$17 million, respectively. Capitalized costs are included in property and equipment (see Note 10, "Property and Equipment") and are amortized over periods ranging from 3 to
5 years.

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

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Recent Accounting PronouncementsIn June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
eliminates the pooling-of-interest method and provides a single-method approach, the purchase method, for the accounting for all business combinations, as well as new criteria
for recognition of intangible assets. SFAS 141 is effective for all business combinations initiated after June 30, 2001. Our adoption of SFAS 141 had no impact on our results of
operations or financial position.

In
June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes new standards for goodwill and other intangible assets, including the
elimination of goodwill amortization, to be replaced with periodic evaluation of goodwill for impairment. We will adopt SFAS 142 on June 29, 2002, at which time we are required to
evaluate our existing goodwill and intangible assets and make any necessary reclassifications in order to comply with the new criteria in SFAS 142. We will then be required to reassess the
useful lives of all intangible assets acquired in purchase business combinations, including those reclassified from goodwill, and make any necessary amortization adjustments by the end of the first
interim period after adoption. To the extent that any intangible asset is identified as having an indefinite useful life, SFAS 142 requires us to test the intangible asset for impairment and
recognize any impairment losses as a cumulative effect of change in
accounting principle in the first interim period. After the identification and assessment of intangible assets discussed above, we are required, under SFAS 142, to identify reporting units and
assign all related assets and liabilities and goodwill to the reporting units. We must then complete the two-step transitional goodwill impairment test. The first step, which must be
completed within six months of adoption of SFAS 142, requires us to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent that a
reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and we are required to complete step two of the transitional goodwill
impairment test as soon as possible, but no later than June 27, 2003. Step two requires us to compare the implied fair value of the reporting unit to its carrying amount as of June 29,
2002. Any transitional impairment loss will be recognized as a cumulative change in accounting principle in the first interim period. We have not yet completed our analysis to determine the impact, if
any, on our financial results. At June 28, 2002, we had goodwill and intangible assets of $13 million subject to SFAS 142. Amortization expense for goodwill and intangible assets
amounted to $1.5 million for the year ended June 28, 2002. The net impact on the 2003 statement of operations from the adoption of SFAS 142 is expected to be a reduction in
amortization of approximately $1.5 million.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is applicable to financial statements
issued for fiscal years beginning after December 15, 2001, with transition provisions for certain matters. The FASB's new rules on asset impairment supersede SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and provides a single accounting model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules significantly change the criteria that would have to be met to classify an asset as
held-for-sale. The new rules also will supersede the provisions of APB Opinion 30 with regard to reporting the effects of a disposal of a segment of a business and will require
expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred (rather than as of the measurement date as
presently required). We will adopt SFAS 144 as of June 29, 2002 and do not believe such adoption will have a material impact on our results of operations, financial position or cash
flows.

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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 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 SFAS 146 and Issue 94-3 relates to SFAS 146's requirements for recognition
of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity 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,
SFAS 146 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 SFAS 146, in many cases, would be recognized over time 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. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early
application encouraged.

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 aimed at
bringing our expenses more in line with prevailing revenue levels and restoring long-term profitability to SGI. These actions resulted in aggregate charges of $145 million (before
the effect of the adjustments noted below). This restructuring program included a reevaluation of our core competencies, technology roadmap and business model, as well as development of our fiscal
2001 operating plan. This restructuring program 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 incurring $7 million in exit costs, including
costs to restore facilities to original condition.

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

During
the second through fourth quarters of fiscal 2000, we also lowered our estimate of the total costs associated with the fiscal 2000 restructuring activities described above. As a
result, a cumulative

37

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adjustment of approximately $37 million was recorded in fiscal 2000. The adjustment primarily reflects far more favorable settlements of lease obligations attributable to extremely high demand
at that time for facilities in Mountain View, California. It also reflected our new approach to structuring our field
organization. The adjustment further reflects lower than estimated severance and related charges attributable to higher than expected attrition and lower per person costs. Estimated costs of contract
cancellations were also adjusted due to favorable settlements. The remaining fiscal 2000 accrual balance of approximately $4 million is expected to result in cash expenditures through fiscal
2006 for facilities related expenditures.

During
the first quarter of fiscal 2001, we again lowered our estimate of the total costs associated with the fiscal 2000 restructuring activities and recorded an adjustment of
$6 million. The adjustment primarily reflected lower than estimated facilities closure costs due to negotiating better than anticipated sublease arrangements. As of March 31, 2001, all
estimated positions were eliminated and all severance-related charges were paid in relation to the fiscal 2000 restructuring.

During
the fourth quarter of fiscal 2001, we announced and began to implement additional restructuring actions with the objective of further reducing our operating expenses and restoring
long-term profitability to SGI. These actions resulted in aggregate charges of $88 million and were broad-based and covered virtually all aspects of our products, operations and
processes. Fiscal 2001 restructuring actions resulted in the elimination of approximately 1,000 positions, across all levels and functions, 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.
Third party contract cancellation charges associated with the fiscal 2001 actions totaled $2 million. Our plans include vacating approximately 3,000,000 square feet of leased sales and
administrative facilities throughout the world, with lease terms expiring through April 2010. We estimate this will require ongoing lease payments of $32 million and $9 million in
exit costs, including costs to restore facilities to their original condition. 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 severance and related costs primarily due to the sale of our 60%
interest in SGI Japan which resulted in a smaller headcount reduction than originally anticipated. The remaining fiscal 2001 accrual balance of approximately $22 million at June 28, 2002
is expected to result in cash expenditures through fiscal 2010 for facilities related expenditures.

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. Severance payments and related charges of $37 million consist
primarily of salary and expected payroll taxes, extended medical benefits, statutory legal obligations and outplacement services. Third party contract cancellation charges associated with the fiscal
2002 actions totaled $3 million. Our plans include vacating approximately 176,000 square feet of administrative facilities throughout the world, with lease terms expiring through fiscal 2007.
We estimate this will 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 was completed in December 2001 (see "Impairment" below). 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. The remaining fiscal 2002 restructuring accrual balance of
approximately $12 million at June 28, 2002 is expected to result in cash expenditures through fiscal 2003 for severance and related charges and through fiscal 2007 for facilities related
expenditures.

38

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We
expect further reductions in force as well as facility charges in fiscal 2003, the majority of which will be accrued for in the first half of fiscal 2003. See Note 23
"Subsequent Event (unaudited)" for further information.

ImpairmentFiscal 2000 impairment actions were comprised of operating asset write downs of $27 million for fixed
assets and evaluation units, prepaid license agreements and other intangible assets associated with the end of life of our Silicon Graphics 320 and Silicon Graphics 540 visual workstations and certain
high-end graphics development projects that were canceled. In addition, an impairment charge of $11 million was recorded for the abandonment of leasehold and other fixed assets
associated with the facility closures.

As
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 impairments for internally developed software projects that were discontinued in fiscal 2002 as a result
of the functionality provided by the new ERP system. The fair value and remaining carrying value of all of these assets at June 30, 2001 was immaterial.

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

39

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The
following table depicts the restructuring and impairment activity in fiscal 2002, 2001 and 2000 (in thousands):

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

Note 4. Loss Per Share

|                                                                                          |  | Years ended |        
|----------------------------------------------------------------------------------------- |  | ----------- | -------
|
|
|Net loss                                                                                  |  | $           | (46,323
|Less preferred stock dividends                                                            |  |             |       
|                                                                                          |  |             |        
|Net loss available to common stockholders                                                 |  | $           | (46,323
|                                                                                          |  |             |        
|Weighted average shares outstandingbasic and diluted                                     |  |             | 194,974
|                                                                                          |  |             |        
|Net loss per sharebasic and diluted                                                      |  | $           | (0.24  
|                                                                                          |  |             |        
|Potentially dilutive securities excluded from computations because they are anti-dilutive |  |             | 18,090 

40

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Note 5. Financial Instruments

Cash Equivalents and Marketable and Restricted InvestmentsThe following table summarizes by major security type the fair
value of SGI's cash equivalents and marketable and restricted investments at June 28, 2002 and June 30, 2001 (in thousands):

|                                            |                                             | 2002 |          | 2001    |  
|------------------------------------------- | ------------------------------------------- | ---- | -------- | ------- | -
|Money market funds                          |                                             | $    | 122,442  |         | $
|Certificates of deposit and time deposits   |                                             |      | 48,840   |         |  
|U.S. commercial paper                       |                                             |      | 2,735    |         |  
|                                            |                                             |      |          |         |  
|                                            | Total                                       |      |          | 174,017 |  
|Less amounts classified as cash equivalents |                                             |      | (124,450 | )       |  
|                                            |                                             |      |          |         |  
|                                            | Total marketable and restricted investments |      | $        | 49,567  |  
|                                            |                                             |      |          |         |  

Gross
realized gains and losses on sales and unrealized gains and losses on our available-for-sale securities were not significant in fiscal 2002,
2001 or 2000.



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 affected by changes in exchange rates.
The amount in accumulated Other Comprehensive Income as of June 28, 2002 will be reclassified to operations within the next twelve months.

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

|                                                                                               |  | 2002 |        | 2001 |  
|---------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | -
|Opening balance                                                                                |  | $    | 722    |      | $
|Reclassified into earnings from other comprehensive (loss) income, net                         |  |      | 1,470  |      |  
|Changes in fair value of derivatives, net                                                      |  |      | (4,161 | )    |  
|                                                                                               |  |      |        |      |  
|Unrealized (loss) gain on derivative instruments included in other comprehensive (loss) income |  | $    | (1,969 | )    | $
|                                                                                               |  |      |        |      |  

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

41

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Fair Value of Financial InstrumentsThe carrying amounts and estimated fair values of SGI's financial instruments at
June 28, 2002 and June 30, 2001 are summarized as follows (in thousands):

|                           |  | 2002 |         | 2001
|-------------------------- |  | ---- | ------- | ----
|
|Cash and cash equivalents  |  | $    | 213,302 |     
|Marketable investments     |  |      | 49,567  |     
|Debt instruments           |  |      | 318,847 |     
|Currency forward contracts |  |      | 62      |     
|Currency options           |  |      | (1,698  | )   

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, Ltd. 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 (see below) and transaction-related costs, is approximately
$74 million. We recognized a gain of approximately $64 million in other income during the quarter ended December 28, 2001. The remaining $10 million has been recorded as
deferred revenue and will be recognized as revenue over three years as we fulfill product orders from SGI Japan under a long-term exclusive distribution agreement to supply SGI equipment,
services and solutions in Japan. 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, "Long Term Debt"). 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 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. At June 28, 2002, we have a net investment in SGI Japan of approximately $15.7 million recorded in other assets
and have recorded approximately $0.4 million in income from this equity investment.

42

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The following is a summary of the assets and liabilities of SGI Japan that were removed from our consolidated financial statements at November 10, 2001 (in millions):

|Cash                                      |  | $ | 3.0   |  
|----------------------------------------- |  | - | ----- | -
|Accounts receivable, net                  |  |   | 51.2  |  
|Inventories, net                          |  |   | 11.9  |  
|Prepaid expenses and other current assets |  |   | 16.4  |  
|Property and equipment, net               |  |   | 2.3   |  
|Spare parts                               |  |   | 9.2   |  
|Other assets                              |  |   | 15.5  |  
|Accounts payable                          |  |   | (21.8 | )
|Accrued compensation                      |  |   | (8.6  | )
|Deferred revenue                          |  |   | (31.6 | )
|Other current liabilities                 |  |   | (9.1  | )
|Other liabilities                         |  |   | (0.2  | )
|                                          |  |   |      
|                                          |  | $ | 38.2  |  
|                                          |  |   |      

Note 7. Sale of Cray Product Line

On
March 31, 2000, we completed the sale of our Cray product line to Tera Computer Company ("Tera"). We received approximately $15 million in cash, a $35 million
promissory note due in three equal quarterly installments beginning June 30, 2000 and 1 million shares of unregistered Tera common stock, valued at approximately $6.5 million at
March 31, 2000. As a result of this transaction, approximately 750 employees transferred to Tera. Based upon the net asset value of the assets sold and the liabilities assumed at
March 31, 2000 and the costs and expenses incurred in connection with the transaction, we recorded as other income an overall gain of approximately $16 million from the transaction.
However, the consolidated financial statements at June 30, 2000 include a pre-tax loss on the transaction of approximately $8 million because we accounted for the promissory
note proceeds when the cash payments were received due to the uncertainty of ultimate collection. Included in the pre-tax loss of $8 million in fiscal 2000 is the first installment
against the promissory note of approximately $12 million. The following is a summary of the final determination of the net assets sold and liabilities assumed by Tera on March 31, 2000:

|                                               |  | (in millions) |      
|---------------------------------------------- |  | ------------- | -----
|Inventories, net                               |  | $             | 25.4 
|Property and equipment, net                    |  |               | 10.8 
|Spare parts                                    |  |               | 29.2 
|Other assets                                   |  |               | 6.7  
|Product warranty and other accrued liabilities |  |               | (34.2
|                                               |  |               |      
|                                               |  | $             | 37.9 
|                                               |  |               |      

During
fiscal 2001, we received the remaining $24 million of cash in accordance with the sales agreement, and recognized a pre-tax non-operating gain of
that amount in the period. We also sold 400,000 Tera shares (now called "Cray Inc.") for gross proceeds of $1 million, recognizing a loss of approximately $2 million. During fiscal 2002,
we sold the remaining 600,000 shares of Cray Inc. for gross proceeds of approximately $1 million, recognizing a loss of approximately $3 million.

43

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Note 8. MIPS Technologies, Inc.

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

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

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

Note 9. 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 28, 2002 and
June 30, 2001. 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 slightly more than one-third of our revenue from sales outside the United
States. Therefore, our results would be minimally affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns, and
changes in regional or worldwide economic or political conditions. The risks of our international operations are mitigated in part by our foreign exchange hedging program and by the extent to which
our sales 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. The U.S. Departments of Commerce and Justice are currently conducting civil and criminal
investigations into SGI's compliance with the export regulations in

44

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connection with several export sales to Tier 3 countries. We have agreed to waivers of the statutes of limitations for these matters and are currently in discussion with the authorities concerning a
potential resolution. We believe that these matters will be resolved without a significant adverse effect on our business. There is no assurance, however, that we will reach an acceptable resolution
or that the ultimate result would not impair the conduct of our business with the U.S. government or our sales outside the United States. Our international sales would also be adversely affected if
such regulations were tightened, or if they are not modified over time to reflect the increasing performance of our products. The Swiss authorities are also 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 these matters will be resolved without a significant
adverse effect on our business.

Note 10. Consolidated Financial Statement Details

Inventories

Inventories at June 28, 2002 and June 30, 2001 are as follows (in thousands):

|                             |  | 2002 |         | 2001
|---------------------------- |  | ---- | ------- | ----
|Components and subassemblies |  | $    | 70,497  |     
|Work-in-process              |  |      | 19,442  |     
|Finished goods               |  |      | 8,682   |     
|Demonstration systems        |  |      | 10,789  |     
|                             |  |      |         |     
|Total inventories            |  | $    | 109,410 |     
|                             |  |      |         |     

Property and Equipment

Property and equipment at June 28, 2002 and June 30, 2001 are as follows (in thousands):

|                                                         |  | 2002 |          | 2001 |  
|-------------------------------------------------------- |  | ---- | -------- | ---- | -
|Land and buildings                                       |  | $    | 90,416   |      | $
|Machinery and equipment (including capitalized software) |  |      | 457,414  |      |  
|Furniture and fixtures                                   |  |      | 47,807   |      |  
|Leasehold improvements                                   |  |      | 45,299   |      |  
|                                                         |  |      |          |      |  
|                                                         |  |      | 640,936  |      |  
|Accumulated depreciation and amortization                |  |      | (480,654 | )    |  
|                                                         |  |      |          |      |  
|Net property and equipment                               |  | $    | 160,282  |      | $
|                                                         |  |      |          |      |  

In
December 2000, we completed the sale and leaseback transaction of a portion of our corporate real estate holdings in Mountain View, California for approximately
$236 million. As part of the transaction, we leased back specific buildings on our current campus over periods ranging from 2 to 12 years. All of the leases involved in this transaction
are classified as operating leases. As a result of the transaction, we will recognize an overall gain of approximately $63 million, of which $10 million and $11 million has been
recognized during fiscal 2002 and fiscal 2001, respectively. The remaining deferred gain of $42 million will be recognized over the terms of the respective leases and will be recorded as an
offset to rent expense. Under the terms of this sale-leaseback arrangement, we are required to provide the lessor with letters of credit amounting to $38 million at June 28,
2002. We initially collateralized these letters of credit by way of restricted cash deposits with a financial institution. We entered into a line of credit arrangement that allows us to utilize these
otherwise restricted amounts. This line of credit arrangement is further discussed at Note 12.

45

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Note 11. Other Assets

Other assets at June 28, 2002 and June 30, 2001 are as follows (in thousands):

|                                                                                                              |  | 2002 |         | 2001
|------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ----
|Spare parts                                                                                                   |  | $    | 55,548  |     
|Investments                                                                                                   |  |      | 20,628  |     
|Software licenses, goodwill and other, net of accumulated amortization of $71,466 in 2002 and $83,836 in 2001 |  |      | 40,865  |     
|                                                                                                              |  |      |         |     
|                                                                                                              |  | $    | 117,041 |     
|                                                                                                              |  |      |         |     

Note 12. Financing Arrangement

During the fourth quarter of fiscal 2001, we obtained an asset-based credit facility. Available credit is determined monthly based on 85% of eligible accounts
receivable, up to a maximum of $75 million. To date, we have used $50 million of this line to secure letters of credit. This obligation bears interest payable monthly at the prime rate
plus 0.25% (5.0% at June 28, 2002, 7.0% at June 30, 2001) for cash advances and at 3.25% for letters of credit. The credit facility matures in April 2003. The facility is
currently secured by U.S. accounts receivable and inventory, the pledge of certain intellectual property and a $7 million cash deposit. From time to time, we also deposit additional cash,
reflected in our restricted cash balances, to secure certain letters of credit or to address fluctuations within the quarter or eligible accounts receivable. The credit facility also contains
financial and other covenants. We were
not in compliance with the financial covenants in the fourth quarter of fiscal 2001, or the second, third and fourth quarters of fiscal 2002, which have been waived by the lenders. In the event we are
not able to comply with the financial and other covenants of this facility in the future, or there is a material adverse change impairing our ability to repay the outstanding balance, the facility may
be declared to be in default. If a default is declared and not waived, or if the facility matures and is not renewed or replaced, it could have a significant impact on our working capital.

Note 13. Long-Term Debt

Long-term debt at June 28, 2002 and June 30, 2001 is as follows (in thousands):

|                                                                                                                        |  | 2002 |         | 2001 |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | -
|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 $8,825 ($9,493 in 2001) |  |      | 47,951  |      |  
|Swiss Franc mortgage due June 2017 at 1.70% in 2001                                                                     |  |      |        |      |  
|Japanese Yen fixed rate loan due in quarterly installments through December 2004 at 10.00% (1)                          |  |      | 40,267  |      |  
|Japanese Yen fixed rate loan due December 2001 at 2.06%                                                                 |  |      |        |      |  
|Other                                                                                                                   |  |      | 38      |      |  
|                                                                                                                        |  |      |         |      |  
|                                                                                                                        |  |      | 318,847 |      |  
|Less amounts due within one year                                                                                        |  |      | (10,216 | )    |  
|                                                                                                                        |  |      |         |      |  
|Amounts due after one year                                                                                              |  | $    | 308,631 |      | $
|                                                                                                                        |  |      |         |      |  

---

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

46

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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, 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 the years 1997 through
2002. In fiscal 2000 and fiscal 1999, we repurchased additional portions of the debentures with a face value of $11 million and $15 million, respectively. These repurchases satisfied the
next four required annual sinking fund payments of approximately $6 million originally scheduled for the years 2003 through 2006. Remaining annual sinking fund payments of $6 million
each are scheduled from 2007 to 2010 with a final maturity payment of $35 million in 2011.

As
a result of our sale of a 60% interest in SGI Japan (Note 6, "Sale of Interest in SGI Japan"), 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. SGI's debt is collateralized by its remaining
ownership interest in SGI Japan.

Principal
maturities of long-term debt at June 28, 2002 are as follows (in millions): 2003$11; 2004$17; 2005$243;
2006$0; 2007$5 and $52 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 28, 2002 are as follows (in millions): 2003$50; 2004$46; 2005$42;
2006$32; 2007$26, and thereafter- $130. Included in these lease payments are amounts related to restructuring activities at June 28, 2002 as
follows: 2003$9; 2004$7; 2005$6; 2006$3; 2007$1; and thereafter$1. Future sublease and rental income as of
June 28, 2002 are as follows (in millions): 2003$5; 2004$4; 2005$4; and 2006$1.

Aggregate
operating lease rent expense in fiscal 2002, 2001 and 2000 was (in millions) $45, $53 and $57, respectively. Included in fiscal 2002 and 2001 rent expense is an offset of $6
and $4 million, respectively, which relates to our recognition of a portion of our deferred gain on the sales leaseback transaction (See Note 10).

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

Note 15. Stockholders' Equity

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

47

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Stock Award PlansWe have various stock award plans which provide for the grant of incentive and nonstatutory stock options
and the issuance of restricted stock to employees and certain other persons who provide consulting or advisory services to SGI. The board of directors determines the exercise price of incentive and
nonstatutory stock option grants and restricted stock awards. Nonstatutory stock options with an exercise price of no less than the fair market value on the date of grant are granted to new hires and
other employees. Incentive stock options with an exercise price of no less than the fair market value on the date of grant are offered to executives only. There were no discounted stock options or
restricted stock awards granted during fiscal 2002. Four executives received an extension on option vesting and exercisability according to termination contracts. A portion of one executive's
restricted stock award was allowed to vest and was released at the scheduled vest date according to a termination contract. The modifications to these options and awards did not result in any
significant
stock-based compensation expense. Under the plans, options and restricted stock generally vest over a fifty-month period from the date of grant, however, the fiscal 2002 renewal grants vest over a
25-month period.

In
October 2001, each eligible director was granted an option to purchase an additional 20,000 shares of common stock and new board members received their initial grant of 50,000
shares each. All director options were granted with an exercise price equal to the fair market value on the grant date. They will vest in annual installments over a two-year period and
expire in five years.

At
the end of fiscal 2002, 2001 and 2000, there were 16,362,551, 14,641,134 and 20,905,393 options, respectively, available for grant.

At
the end of fiscal 2002, 2001 and 2000, there were 175,408, 1,146,024 and 467,878 shares of restricted stock, respectively, subject to repurchase.

Activity
under all of the stock award plans during fiscal 2002, 2001 and 2000 was as follows:

|                                    |                   | 2002       |             | 2001 |      | 2000
|----------------------------------- | ----------------- | ---------- | ----------- | ---- | ---- | ----
|
|Balance at beginning of fiscal year |                   | 33,222,585 |             | $    | 5.09 |     
|                                    | Options granted   |            | 13,044,170  |      | $    | 0.87
|                                    | Options exercised |            | (1,273,554  | )    | $    | 1.56
|                                    | Options forfeited |            |            |      |      |    
|                                    | Options canceled  |            | (10,573,612 | )    | $    | 4.71
|                                    |                   |            |             |      |      |     
|Balance at end of fiscal year       |                   | 34,419,589 |             | $    | 3.73 |     
|                                    |                   |            |             |      |      |     
|Exercisable at end of fiscal year   |                   | 23,306,452 |             | $    | 4.44 |     
|                                    |                   |            |             |      |      |     

Additional information about options outstanding at June 28, 2002 is as follows:

|             |  | Options Outstanding |  |   |      | 
|------------ |  | ------------------- |  | - | ---- | 
|
|
|
|$0.42$2.10  |  | 10,433,007          |  | $ | 0.64 | 
|$2.12$4.60  |  | 12,862,448          |  | $ | 3.44 | 
|$4.81$6.12  |  | 8,187,757           |  | $ | 5.89 | 
|$6.18$37.49 |  | 2,936,377           |  | $ | 9.96 | 
|             |  |                     |  |   |      | 
|$0.42$37.49 |  | 34,419,589          |  | $ | 3.73 | 
|             |  |                     |  |   |      | 

48

---

Employee Stock Purchase PlanWe have an employee stock purchase plan under which eligible employees
may purchase stock at 85%
of the lower of the closing prices for the stock at the beginning of a twenty four-month offering period or the end of each six-month purchase period. The purchase periods
generally begin in May and November. Purchases are limited to 10% of each employee's compensation.

At
June 28, 2002, we had issued a total of 16,269,358 shares over the life of the Plan, 3,967,554 shares during fiscal 2002, and we have reserved 6,124 shares for future issuance
under the plan. Both scheduled purchases during fiscal 2002 were pro-rated; employees used 56% and 65%, respectively, of their payroll contributions toward purchasing shares and the
remainder of their contribution was returned to them. At July 1, 2002 we increased the Plan under the evergreen provision resulting in 4,006,664 shares for future issuance. This is the last
authorized increase available under this Plan.

Grant Date Fair ValuesThe weighted average estimated fair value of employee stock options granted at grant date market
prices during fiscal 2002, 2001 and 2000 was $0.5530, $2.06 and $4.40 per share, respectively. The weighted average exercise price of employee stock options granted at grant date market prices during
fiscal 2002, 2001 and 2000 was $0.87, $3.59 and $10.48 per share, respectively. There were no employee stock options granted at below grant date market prices during fiscal 2002 or 2001. The weighted
average estimated fair value of employee stock options that were granted at below grant date market prices during fiscal 2000 was $6.44 per share. The weighted average exercise price of employee stock
options granted at below grant date market prices during fiscal 2000 was $5.29. The weighted average fair value of restricted stock granted during fiscal 2001 and 2000 was $4.46 and $9.00 per share,
respectively. The weighted average estimated fair value of shares granted under the Stock Purchase Plan during fiscal 2002, 2001 and 2000 was $1.16, $1.59 and $2.69 per share, respectively.

We
estimated the weighted-average fair value of options granted at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions during
fiscal 2002, 2001 and 2000:

|                         |  | Employee Stock Options |   | Stock Purchase Plan Shares |  
|------------------------ |  | ---------------------- | - | -------------------------- | -
|
|Expected life (in years) |  | 1.3                    |   | 1.4                        |  
|Risk-free interest rate  |  | 3.00                   | % | 5.10                       | %
|Volatility               |  | 1.02                   |   | 0.81                       |  
|Dividend yield           |  | 0.00                   | % | 0.00                       | %

Pro Forma InformationWe have elected to follow APB 25 in accounting for our employee stock options. Under APB 25, we
recognize no compensation expense in our financial statements except in connection with the grant of restricted stock for nominal consideration and unless the exercise price of our employee stock
options is less than the market price of the underlying stock on the grant date. Total compensation expense recognized in our financial statements for stock-based awards under APB 25 for fiscal 2002,
2001 and 2000 was $2 million, $6 million and $7 million, respectively.

We
determined the following pro forma information regarding net loss and 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 No. 123. For purposes of pro forma disclosures, the estimated fair value of

49

---

the stock awards is amortized to expense over the vesting periods. The pro forma information is as follows (in thousands, except per share amounts):

|                              |                   | Years ended |        
|----------------------------- | ----------------- | ----------- | -------
|
|Pro forma net loss            |                   | $           | (59,687
|Pro forma net loss per share: |                   |             |        
|                              | Basic and diluted |             | $      

Stock Repurchase ProgramDuring fiscal 1996, our board of directors authorized a program to repurchase up to
27.5 million shares of our common stock in open market or in private transactions, option or other forward transactions and other potential methods. We have repurchased 27,396,400 shares of
common stock at a cost of $439 million since commencement of the repurchase program. During fiscal 2001, we settled our remaining equity forward instrument under which we were committed to
repurchase an aggregate of 6.0 million shares of common stock at an aggregate cost of $104 million. 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.

Common Stock ReservedWe have reserved in the aggregate 64,575,128 shares of common stock issuable upon conversion of the
Senior Notes and Convertible Subordinated Debentures, as well as shares issuable under our stock award and purchase plans.

Note 16. Comprehensive Loss

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

|                                                                                               |  | Years ended |        
|---------------------------------------------------------------------------------------------- |  | ----------- | -------
|
|Unrealized loss on available-for-sale investments                                              |  | $           |       
|Unrealized (loss) gain on derivative instruments designated and qualifying as cash flow hedges |  |             | (1,969 
|Foreign currency translation adjustments                                                       |  |             | (20,224
|                                                                                               |  |             |        
|Accumulated other comprehensive loss                                                           |  | $           | (22,193
|                                                                                               |  |             |        

Note 17. Income Taxes

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

|              |  | Years ended |         
|------------- |  | ----------- | --------
|
|United States |  | $           | (164,422
|International |  |             | 82,163  
|              |  |             |         
|              |  | $           | (82,259 
|              |  |             |         

50

---

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

|         |          | Years ended |        
|-------- | -------- | ----------- | -------
|
|Federal: |          |             |        
|         | Current  |             | $      
|         | Deferred |             |        
|State:   |          |             |        
|         | Current  |             |        
|         | Deferred |             |        
|Foreign: |          |             |        
|         | Current  |             |        
|         | Deferred |             |        
|         |          |             |        
|         |          | $           | (35,936
|         |          |             |        

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                                                                         |  | $           | (28,791
|State taxes, net of federal tax benefit                                                                    |  |             | 1,713  
|Effect of change in investment policy with respect to undistributed earnings of certain foreign affiliates |  |             |       
|Net operating loss with no tax benefit                                                                     |  |             | 27,985 
|Change in U.S. federal tax law                                                                             |  |             | (42,083
|Foreign tax credits with no tax benefit                                                                    |  |             | 2,083  
|Increase (reduction) in tax contingencies                                                                  |  |             |       
|Valuation allowance on net deferred tax assets                                                             |  |             |       
|Other                                                                                                      |  |             | 3,157  
|                                                                                                           |  |             |        
|(Benefit from) provision for income taxes                                                                  |  | $           | (35,936
|                                                                                                           |  |             |        

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.

During
the fourth quarter of the year ended June 30, 2000, we changed our intention to permanently invest accumulated earnings attributable to certain foreign affiliates which
manufacture in foreign jurisdictions. The effect of this change in investment policy resulted in a provision for deferred U.S. and foreign income taxes of approximately $93 million. During the
fourth quarter of the year ended June 28, 2002, we changed our intention to permanently invest accumulated earnings attributable to certain foreign sales affiliates. The effect of this change
in investment policy resulted in a provision for deferred foreign income taxes of approximately $2 million.

In
addition, during the fourth quarter of the year ended June 30, 2000, we recorded an additional valuation allowance of approximately $331 million related to U.S. and
foreign tax effects associated with prior year net operating loss and tax credit carryforwards and temporary differences not currently deductible. A valuation allowance for the state tax effect of
similar items in the amount of $38 million, net of federal benefit, increased the provision for state taxes in the fourth quarter. Such increases in

51

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the valuation allowance were required since the underlying deferred tax assets no longer met the realizability criteria under SFAS No. 109.

The
tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities at June 28, 2002 and June 30, 2001
are as follows (in thousands):

|                          |                                                                                 | 2002                           |   | 2001    |         
|------------------------- | ------------------------------------------------------------------------------- | ------------------------------ | - | ------- | --------
|Deferred tax assets:      |                                                                                 |                                |   |         |         
|                          | Net operating loss carryforwards                                                |                                | $ | 504,895 |         
|                          | General business credit carryforwards                                           |                                |   | 54,330  |         
|                          | Inventory valuation                                                             |                                |   | 42,246  |         
|                          | Reserves not currently deductible                                               |                                |   | 34,106  |         
|                          | Other                                                                           |                                |   | 146,285 |         
|                          |                                                                                 |                                |   |         |         
|                          |                                                                                 | Subtotal                       |   |         | 781,862 
|                          |                                                                                 | Valuation allowance            |   |         | (699,950
|                          |                                                                                 |                                |   |         |         
|                          | Total deferred tax assets                                                       |                                |   | 81,912  |         
|                          |                                                                                 |                                |   |         |         
|Deferred tax liabilities: |                                                                                 |                                |   |         |         
|                          | Foreign taxes on unremitted foreign earnings, net of related U.S. tax liability |                                |   | 23,733  |         
|                          | Intercompany eliminations                                                       |                                |   | 59,214  |         
|                          | Other                                                                           |                                |   | 734     |         
|                          |                                                                                 |                                |   |         |         
|                          |                                                                                 | Total deferred tax liabilities |   |         | 83,681  
|                          |                                                                                 |                                |   |         |         
|                          | Total                                                                           |                                | $ | (1,769  | )       
|                          |                                                                                 |                                |   |         |         

At
June 28, 2002, we had gross deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $782 million. Gross deferred tax assets are
offset by a valuation allowance of $700 million and deferred tax liabilities of $84 million. The valuation allowance of $700 million includes
$23 million attributable to benefits of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital.

At
June 28, 2002, we had United States federal and foreign jurisdictional net operating loss carryforwards of approximately $1,068 million and $193 million,
respectively. The federal losses will begin expiring in fiscal year 2007 and the foreign losses will begin expiring in fiscal year 2003. At June 28, 2002, we also had general business credit
carryovers of approximately $37 million for United States federal tax purposes, which will begin expiring in fiscal year 2003.

Note 18. Segment Information

SGI is a leading provider of products, services and solutions for use in high-performance computing, visualization and the management of large-scale
complex data. 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 are 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 current visualization
systems include the SGI® Onyx® 300 and the SGI® Onyx® 3000 family of graphics systems. The Server segment's current high-performance servers
include the SGI® Origin® 300 servers and the Origin® 3000 family of

52

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high-performance servers. During the second quarter of fiscal 2002, we announced the end of production of the Silicon Graphics® Onyx2®, the SGI®
Origin® 200 and the Origin® 2000 systems. These systems are now only available through our Remanufactured Products Division. The server segment's current key storage product
offerings include the SGI® TP900, SGI® TP9100 and SGI® TP9400. Fiscal 2000 results include the Cray product line that was sold to Cray Inc., formerly Tera,
in the third quarter of fiscal 2000. See Note 7, "Sale of Cray Product Line", for further information. Our servers are high-performance supercomputing systems designed to be the
market leaders in technical computing applications. In addition, our servers are used as storage management servers for managing very 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
Visual Workstation segment's current products include the Silicon Graphics® 02+, the Silicon Graphics Fuel, and the Silicon
Graphics® Octane2 visual workstations based upon the MIPS® microprocessor and the IRIX® operating system. In addition to the current production
products noted above, the Silicon Graphics® 02® and the Silicon Graphics Octane® are no longer in current production but
are available through our Remanufactured Products Division. 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. Fiscal 2000 results include the Silicon Graphics 320 and 540 visual workstations based upon the Intel microprocessor and the Windows NT operating system that were discontinued in favor of
more industry standard architectures. Our visual workstations are used in a variety of applications including computer-aided design, medical imaging, 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 remanufactured product organization 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 restated 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/Wavefront, 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. Additionally, revenue and related expenses of MTI, a designer of high-performance processors and related
intellectual property, that was a majority-owned subsidiary until SGI distributed its interest in MTI to its shareholders through a spin-off effective June 20, 2000, are also
included in "Other" in the reconciliation of reported revenue and operating profit in fiscal 2000.

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, Summary of Significant Accounting
Policies.

53

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Information on reportable segments is as follows for fiscal 2002, 2001 and 2000 (in thousands):

|                                      |                                                                                                                                                                 | Servers |          | Visual Workstations |   | Global Services |        
|------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------- | ------------------- | - | --------------- | -------
|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
|2000:                                 |                                                                                                                                                                 |         |          |                     |   |                 |        
|Revenue from external customers       |                                                                                                                                                                 | $       | 963,180  |                     | $ | 520,059         |        
|Segment loss                          |                                                                                                                                                                 | $       | (133,612 | )                   | $ | (152,134        | )      
|Significant items:                    |                                                                                                                                                                 |         |          |                     |   |                 |        
|                                      | Charges for contract cancellations and inventory and future support costs related to the discontinuance of the Silicon Graphics 320 and 540 visual workstations |         | $        |                    |   | $               | (46,453
|Vector supercomputer warranty-related |                                                                                                                                                                 |         |          |                     |   |                 |        
|Charges                               |                                                                                                                                                                 | $       |         |                     | $ |                |        
|Write-off of excess spares            |                                                                                                                                                                 | $       |         |                     | $ |                |        

Reconciliation
to SGI as reported (in thousands):

|                                                    |  | Years ended |          
|--------------------------------------------------- |  | ----------- | ---------
|
|Revenue:                                            |  |             |          
|Total reportable segments                           |  | $           | 1,211,178
|Other                                               |  |             | 130,207  
|                                                    |  |             |          
|Total SGI consolidated                              |  | $           | 1,341,385
|                                                    |  |             |          
|Operating loss:                                     |  |             |          
|Total reportable segments                           |  | $           | (98,929  
|Other                                               |  |             | 64,841   
|Restructuring                                       |  |             | (32,958  
|Write-down of impaired long-lived assets            |  |             | (11,515  
|Enterprise Resource Planning implementation expense |  |             | (22,200  
|Business reorganization costs                       |  |             |         
|                                                    |  |             |          
|Total SGI consolidated                              |  | $           | (100,761 
|                                                    |  |             |          

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

Geographic
revenue for the fiscal years ended 2002, 2001 and 2000 is based on the location of the customer. Long-lived assets at the end of fiscal 2002, 2001 and 2000 include
all non-current assets

54

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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      |       | $       | 839,576 |                  
|Europe        |       |         | 306,194 |                  
|Rest of World |       |         | 195,615 |                  
|              |       |         |         |                  
|              | Total |         | $       | 1,341,385        
|              |       |         |         |                  

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 2002, 2001 and 2000, were approximately $3 million, $4 million and $5 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 $2 million and $4 million at June 28, 2002 and 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
2002, 2001 and 2000 included, in the aggregate, sales to related parties in the amounts of $28 million, $12 million, and $34 million, respectively. In fiscal 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 for the year
ended June 28, 2002 included, in the aggregate, purchases from related parties in the amount of $13 million and were immaterial for fiscal 2001 and 2000. Aggregate amounts receivable
from and amounts payable to such related parties were immaterial at June 28, 2002, June 30, 2001 and June 30, 2000.

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, the
write-off of purchased intangibles and goodwill and accrual of compensation expense related to employee stock awards. The effect of exchange rate changes on cash balances are not material
for any of the periods presented.

55

---

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

Note 22. Contingencies

During fiscal 2002, we resolved the pending securities class action lawsuits described below.

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 total charge of approximately $24 million ($20 million non cash) in the nine months ended
March 29, 2002 in Interest income (expense) other, net. Approximately 2.4 million shares have been issued to date in satisfaction of plaintiffs' attorneys' fees and the remaining shares
are expected to be issued later this calendar year, without any further financial impact, as the members of the settlement class are identified.

In
April 2001, we reached an agreement to resolve a securities class action lawsuit involving Alias Research Inc., which was pending when we acquired Alias in
June 1995. The Alias case, which was filed in 1991 in the U.S. District Court for the District of Connecticut, alleged that Alias and a former officer and director made material
misrepresentations and omissions during the period from May 1991 to April 1992. This settlement received final court approval in November 2001.

Also
during fiscal 2002, we reached an agreement on Collette Sweeney v. Silicon Graphics, Inc. and Does 1-50, inclusive, CV 790199, originally filed on June 5,
2000 in the Superior Court for the County of Santa Clara, State of California. Plaintiff filed claims for violation of provisions of the California Labor Code and a claim for violation of the Federal
Fair Labor Standards Act (FLSA). After SGI removed the case to federal court based on the existence of a federal question, Plaintiff dismissed the FLSA claim and the matter was remanded to state
court. On April 23, 2001, Plaintiff filed a further amended complaint adding a representative action under California Business and Professions Code section 17200. On June 21,
2002, the parties entered into a settlement agreement under which the complaint was dismissed as filed by Plaintiff but refiled as a representative action, brought by Plaintiff's counsel. The
settlement outlines a process for resolution of any outstanding claims which is anticipated to be completed by the end of the calendar year 2002. However, there is no assurance that all claims will
necessarily be resolved through this process.

56

---



The U.S. Departments of Commerce and Justice are currently conducting civil and criminal investigations into SGI's compliance with export regulations in connection with several export
sales to Tier 3 countries. We have agreed to waivers of the statutes of limitations for these matters and are currently in discussion with the authorities concerning a potential resolution. There is
no assurance that we will reach an acceptable resolution. See "Risks That Affect Our BusinessExport Regulation."

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

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

Note 23. Subsequent Events (unaudited)

During the first quarter of fiscal 2003, we announced and began to implement additional restructuring actions in an effort to further reduce our operating expense
and restore long-term profitability. These actions are expected to result in the elimination of approximately 200 additional positions across all levels and functions. In addition, we will
vacate all or portions of 15 to 20 leased sales and administration buildings. We will record aggregate charges of approximately $20 million in the first quarter of fiscal 2003 related to these
actions.

Note 24. Selected Quarterly Financial Data (Unaudited)

|                                                               |                                     | Fiscal 2002 |        
|-------------------------------------------------------------- | ----------------------------------- | ----------- | -------
|
|
|Total revenue                                                  |                                     | $           | 284,501
|Costs and expenses:                                            |                                     |             |        
|                                                               | Cost of revenue                     |             |        
|                                                               | Research and development            |             |        
|                                                               | Selling, general and administrative |             |        
|                                                               | Other operating expense(1)          |             |        
|                                                               |                                     |             |        
|Operating loss                                                 |                                     |             | (24,237
|Interest and other (expense) income, net(2)                    |                                     |             | (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                             |             |        

57

---

|                                                                       |                                     | Fiscal 2001 |         
|---------------------------------------------------------------------- | ----------------------------------- | ----------- | --------
|
|
|Total revenue                                                          |                                     | $           | 431,500 
|Costs and expenses:                                                    |                                     |             |         
|                                                                       | Cost of revenue                     |             |         
|                                                                       | Research and development            |             |         
|                                                                       | Selling, general and administrative |             |         
|                                                                       | Other operating expense(3)          |             |         
|                                                                       |                                     |             |         
|Operating loss                                                         |                                     |             | (207,120
|Interest and other (expense) income, net(4)                            |                                     |             | (8,488  
|Loss before income taxes                                               |                                     |             | (215,608
|                                                                       |                                     |             |         
|Net loss                                                               |                                     | $           | (231,843
|                                                                       |                                     |             |         
|Net Loss per sharebasic and diluted:                                  |                                     | $           | (1.20   
|                                                                       |                                     |             |         
|Shares used in the calculation of net loss per sharebasic and diluted |                                     |             | 192,814 

---

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

Not applicable.

58

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

The Board of Directors currently consists of six persons, divided into three classes serving staggered terms of office. Arthur L. Money was appointed a director
in October 2001, Charles A. Steinberg was appointed a director in January 2002 and Robert M. White was appointed a director in August 2002.

|Name                   |  | Class |  | Age |  | Principal Occupation                                                                                                                                   |  | Director
Since
|---------------------- |  | ----- |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------
|Robert R. Bishop       |  | III   |  | 59  |  | Chairman and Chief Executive Officer, Silicon Graphics, Inc.                                                                                           |  | 1993          
|C. Richard Kramlich    |  | I     |  | 67  |  | General Partner, New Enterprise Associates (a venture capital firm)                                                                                    |  | 1984          
|James A. McDivitt      |  | II    |  | 73  |  | Former Senior Vice President, Government Operations and International, Rockwell International Corporation                                              |  | 1987          
|Arthur L. Money        |  | II    |  | 62  |  | Former Assistant Secretary of Defense for Command, Control, Communications and Intelligence and Chief Information Officer of the Department of Defense |  | 2001          
|Charles A. Steinberg   |  | I     |  | 68  |  | Former President, Broadcast and Professional Company of Sony Electronics Inc.                                                                          |  | 2002          
|Robert M. White, Ph.D. |  | III   |  | 63  |  | Director of Data Storage Systems Center and professor at Carnegie Mellon University                                                                    |  | 2002          

Except
as indicated below, each director has been engaged in the principal occupation set forth above during the past five years. There are no family relationships among SGI's directors
or executive officers.

Mr. Bishop
was appointed the Chairman of the Board and Chief Executive Officer of SGI in the fall of 1999. From 1996 to 1999, he was the non-executive Chairman of the
Board of Silicon Graphics World Trade Corporation, and from 1986 to 1995 he was the President of Silicon Graphics World Trade Corporation.

Mr. Kramlich
is also a director of Chalone Inc. and Juniper Networks, Inc.

Mr. McDivitt
was Senior Vice President, Government Operations and International, of Rockwell International Corporation until his retirement in April 1995.

Mr. Money
served as the Assistant Secretary of Defense for Command, Control, Communication and Intelligence (C3I) from October 1999 to April 2001. Prior to his
Senate confirmation in that role, he was the Senior Civilian Official, Office of the ASD (C3I) from February 1998. Mr. Money also served as the Chief Information Officer for the
Department of Defense from 1998 to 2001. From 1996 to 1998, he served as Assistant Secretary of the Air Force for Research, Development and Acquisition, and as CIO
for the Air Force. Prior to his government service, Mr. Money held senior management positions with ESL Inc., a subsidiary of TRW, and the TRW Avionics and Surveillance Group.

Mr. Steinberg
served as President of the Broadcast and Professional Company of Sony Electronics Inc. from March 1988 to June 1999. During that time period, he
also served as Chairman and CEO of two Sony subsidiaries, Sony Trans Com Inc. and Sony Cinema Products Corporation. He currently is an executive advisor to Sony's Strategic Venture Investments
Group and a consultant and advisory board member to other electronics companies and a venture capital company.

59

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Dr. White
currently serves as a director of the Data Storage Systems Center and Professor of Electrical and Computer Engineering at Carnegie Mellon University. He joined Carnegie
Mellon University in 1993. Prior to that, he served as first undersecretary of commerce for technology under President George H. Bush and held senior management positions at Control Data Corporation
and Xerox's Palo Alto Research Center. He is also a director of STMicroelectronics N.V. and Read-Rite Corporation.

Executive Officers

The information concerning executive officers and family relationships required by this Item is incorporated by reference to the section in Part I of our
Annual Report on Form 10-K for the fiscal year ended June 28, 2002 entitled "Executive Officers of the Registrant."

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires SGI's officers and directors, and persons who own more than ten percent of a registered class of SGI's equity
securities, to file reports of ownership on Form 3 and changes in ownership on Forms 4 or 5 with the SEC and the New York Stock Exchange, and to give SGI copies of these filings. Based on the
written representations of its directors and officers and a review of the copies of such forms furnished to SGI during the fiscal year ended June 28, 2002, SGI believes that its officers,
directors and ten percent stockholders complied with all Section 16(a) filing requirements with the exception of one late filing of a Form 4 by Mr. Money reflecting the purchase
of shares on the open market.

60

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ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the cash and equity compensation for the three fiscal years ended June 28, 2002 for Robert R. Bishop, Chief Executive
Officer and each of the four other most highly compensated executive officers of SGI (determined at the end of fiscal 2002).

|                                                                                                               |  |                |  | Annual Compensation
Paid or Accrued(1) |                         | Long Term
Compensation Awards
|-------------------------------------------------------------------------------------------------------------- |  | -------------- |  | -------------------------------------- | ----------------------- | -----------------------------
|
|Robert R. Bishop(5)
Chairman and Chief Executive Officer                                                       |  | 2002
2001
2000 |  | $                                      | 800,000
800,000
692,308 |                              
|Warren C. Pratt
Chief Operating Officer and Executive Vice President                                           |  | 2002
2001
2000 |  | $                                      | 480,031
458,615
361,738 |                              
|Anthony K. Robbins
Senior Vice President, Silicon Graphics, Inc. and President, Silicon Graphics Federal, Inc. |  | 2002
2001
2000 |  | $                                      | 356,528
317,204
253,000 |                              
|Jeffrey V. Zellmer
Senior Vice President and Chief Financial Officer                                           |  | 2002
2001
2000 |  | $                                      | 322,007
242,380
188,672 |                              
|Sandra M. Escher
Senior Vice President and General Counsel                                                     |  | 2002
2001
2000 |  | $                                      | 303,577
217,147
227,251 |                              

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Option Grants in Fiscal 2002

The following table provides details regarding all stock options granted to the named executive officers in fiscal 2002.

|                   |  | Individual Grants(1) |  |      |  |  
|------------------ |  | -------------------- |  | ---- |  | -
|
|
|
|
|Robert R. Bishop   |  | 750,000              |  | 5.78 |  | $
|Warren C. Pratt    |  | 400,000              |  | 3.08 |  | $
|Jeffrey V. Zellmer |  | 200,000              |  | 1.54 |  | $
|Anthony K. Robbins |  | 300,000              |  | 2.31 |  | $
|Sandra M. Escher   |  | 150,000              |  | 1.15 |  | $

---

Option Exercises in Fiscal 2002 and Fiscal Year-End Option Values

|                   |  |   |  |   |   | Number of Unexercised
Options at June 30, 2002 |           | Value of Unexercised
In-the-Money Options at
Fiscal-Year-End(1)
|------------------ |  | - |  | - | - | ---------------------------------------------- | --------- | ---------------------------------------------------------------
|
|
|Robert R. Bishop   |  |  |  | $ |  |                                                | 1,308,634 |                                                                
|Warren C. Pratt    |  |  |  |   |  |                                                | 548,053   |                                                                
|Jeffrey V. Zellmer |  |  |  |   |  |                                                | 171,217   |                                                                
|Anthony K. Robbins |  |  |  |   |  |                                                | 614,087   |                                                                
|Sandra M. Escher   |  |  |  |   |  |                                                | 288,098   |                                                                

---

Director Compensation

Employee directors are not compensated for their service on the Board of Directors.

Each
non-employee director receives a fee of $6,000 per quarter and $2,000 for each Board and Committee meeting attended. These fees reflect an increase effective
October 2000 of $1,000 in the quarterly retainer and meeting fees based on market data. The chair of each committee receives an additional $1,000 for each Committee meeting attended.
Mr. McDivitt and Mr. Money are also compensated on this basis for their service as directors of our federal government sales subsidiary.

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Each
non-employee director is granted an option to purchase 50,000 shares of Common Stock at fair market value on the date on which he or she first becomes a director.
Messrs. Money, Steinberg and White received such options at exercise prices of $0.54, $2.98 and $1.45, respectively. Each incumbent director also receives an annual option grant to purchase
20,000 additional shares of Common Stock at fair market value. These options were granted in October 2001 to Messrs. McDivitt and Kramlich at an exercise price of $0.74 per share. All
options granted to the directors' become exercisable in installments on the first two anniversary dates following the date of grant, so long as the optionee remains a director.

Under
the Silicon Graphics, Inc. Non-Qualified Deferred Compensation Plan, non-employee directors may elect in advance to defer all or a portion of their
cash compensation. Directors that participate in the deferral plan may direct the investment of the assets in their deferral accounts among a variety of mutual funds or may make an irrevocable
election to credit the deferred fees to a stock credit account based on the value of SGI Common Stock. Directors may elect to receive payment of their deferred compensation in a lump sum or in annual
installments over a period not to exceed ten years, except in the case of amounts in the stock credit account, which are distributed in a lump sum based on the value of SGI Common Stock at the time
the director's service terminates.

The
Company also provides a $1,000 per diem reimbursement program for non-employee directors who perform services for the Company outside the scope of normal board duties at
the specific request of the Chief Executive Officer. During fiscal 2002, no director received compensation under this program. In addition, Mr. Money also received $34,575 in fiscal 2002 in
compensation under a consulting contract with our federal government sales subsidiary. The Company plans to revise its arrangements with its independent directors in response to recent legal changes
and pending New York Stock Exchange rule changes.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation and Human Resources Committee during fiscal 2002 were Mr. Kramlich, Mr. McDivitt, Mr. Money and
Mr. Steinberg. No interlocking relationship exists between our Board of Directors or Compensation and Human Resources Committee and the board of directors or compensation committee of any other
company, nor has any such interlocking relationship existed in the past.

63

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REPORT OF THE COMPENSATION  AND HUMAN RESOURCES COMMITTEE  OF THE BOARD OF DIRECTORS

The Compensation and Human Resources Committee of the Board of Directors recommends, subject to the Board's approval, executive compensation and stock option
grants for the Chief Executive Officer. The Committee administers SGI's stock incentive plans and approves stock option grants for all other employees. The Committee is currently composed of four
non-employee directors who have no interlocking relationships as defined by the SEC.

Compensation Philosophy

SGI operates in the highly competitive and rapidly changing high technology industry. The Committee seeks to establish compensation policies that allow SGI
flexibility to respond to changes in its business environment. The goals of SGI's compensation program are to align compensation with SGI's overall business objectives and performance, to foster
teamwork and to enable SGI to attract, retain and reward employees who contribute to its long-term success.

Executive Compensation Components

Compensation for SGI's executive officers generally consists of base salary and annual incentive plans, combined with stock option awards. The Committee assesses
the past performance and anticipated future contribution of each executive officer in establishing the total amount and mix of each element of compensation.

Salary.The salaries of the executive officers, including the Chief Executive Officer, are determined by the Committee with
reference to several surveys of salaries paid to executives with similar responsibilities at comparable companies, primarily in the high technology industry. The peer group for each executive officer
is composed of executives whose responsibilities are similar in scope and content. SGI seeks to set executive compensation levels that are competitive with the average levels of peer group
compensation.

Annual Incentive.The Committee annually reviews and approves an executive incentive plan. A target, expressed as a
percentage of salary, is established for each executive, based on the scope of his or her responsibility. The actual payment amount is computed as a percentage of that target, based on SGI's
performance in achieving specified objectives. For fiscal 2002, these objectives included the achievement by SGI of certain quarterly revenue and operating profit goals. These goals were achieved and
bonuses were paid under this program in the second quarter of fiscal 2002.

Stock Options and Restricted Stock Awards.Stock options and restricted stock awards are designed to align the interests of
executives with the long-term interests of the stockholders. The Committee approves option grants subject to vesting periods to retain executives and encourage sustained contributions. The
exercise price of most options is the market price on the date of grant. Restricted stock awards are also subject to vesting, based generally on the passage of time.

Compensation of the Chief Executive Officer

Robert R. Bishop joined the company in the fall of 1999 as Chairman and Chief Executive Officer at an initial annual base salary of $800,000 and his salary has
remained unchanged. Mr. Bishop participated in the fiscal 2002 executive incentive program described above with a target of 185% of base salary and received a bonus in the second quarter of
fiscal 2002, when the specified financial objectives were achieved. He elected to defer all compensation for fiscal 2000, 2001 and 2002.

64

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In
January 2002, Mr. Bishop was granted an option to purchase 250,000 shares of SGI Common Stock at the market price on that date, vesting over a 25 month period,
and an option to purchase 500,000 shares of SGI Common Stock at the market price on that date, vesting over a 50 month period.

Section 162(m)

SGI is subject to Section 162(m) of the U.S. Internal Revenue Code, adopted in 1993, which limits the deductibility of certain compensation payments to its
executive officers. SGI does not have a policy requiring the Committee to qualify all compensation for deductibility under this provision. The Committee's current view is that any
non-deductible amounts will be immaterial to SGI's financial or tax position, and that SGI derives substantial benefits from the flexibility provided by the current system, in which the
selection and quantification of performance targets are modified from year to year to reflect changing conditions. However, the Committee considers the net cost to SGI in making all compensation
decisions and will continue to evaluate the impact of this provision on its compensation programs.

| |  | COMPENSATION AND HUMAN RESOURCES COMMITTEE                                          
| |  | ------------------------------------------------------------------------------------
| |  | Charles A. Steinberg, Chairman
C. Richard Kramlich
James A. McDivitt
Arthur L. Money

65

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COMPANY STOCK PRICE PERFORMANCE GRAPH  Comparison of Five Year Cumulative Total Return

In accordance with SEC rules, the Company is required to present a table showing a line-graph presentation comparing cumulative five-year
returns on an indexed basis with a broad equity market index and either a nationally recognized industry standard or an index of peer companies selected by the Company. The Company has selected the
S&P 500 Index for the broad equity index and the S&P Computer Hardware Index as an industry standard for the five fiscal year period commencing June 30, 1996 and ending June 28, 2002.
The stock price performance shown on the graph below is not necessarily indicative of future price performance.

GRAPH

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66

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

As of August 31, 2002, the following persons were known by us to be the beneficial owners of more than 5% of any class of our voting securities. As noted
below, this information is based on periodic SEC filings by stockholders and may not reflect current ownership.

|                                                                                                          |  | Class of Securities                        |  | Number of Shares
Beneficially Owned |  | Percent of Class |  | Percent of Total Voting Power
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  | ----------------------------------- |  | ---------------- |  | -----------------------------
|Joseph L. Harrosh(1)
40900 Grimmer Boulevard
Fremont, CA 94538                                            |  | Common Stock                               |  | 13,601,325                          |  | 6.81%            |  | 6.81%                        
|Highfields Capital Management(2)
200 Clarendon Street,
51st Floor
Boston, MA 02117                        |  | Common Stock                               |  | 10,029,720                          |  | 5.02%            |  | 5.02%                        
|Montreal Trust Company of Canada, as Trustee(3)
151 Front Street West, Suite 605
Toronto, Ontario M5J 2N1 |  | Series E Preferred Stock, $0.001 par value |  | 1                                   |  | 100.0%           |  | ..02%                        

---

Security Ownership of Management

The following table sets forth the beneficial ownership of SGI Common Stock as of August 31, 2002, by each director or nominee director, by each of the
current executive officers named in the table

67

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under "Executive Officer Compensation" above, and by all such persons and all current executive officers as a group:

|Name                                                        |  | Number of Shares
Beneficially
Owned(1) |  | Percent of
Common
Stock |  
|----------------------------------------------------------- |  | -------------------------------------- |  | ----------------------- | -
|Robert R. Bishop                                            |  | 5,497,744                              |  | 2.73                    | %
|C. Richard Kramlich                                         |  | 93,380                                 |  | *                       |  
|James A. McDivitt                                           |  | 225,004                                |  | *                       |  
|Arthur L. Money                                             |  | 26,000                                 |  | *                       |  
|Charles A. Steinberg                                        |  | 10,000                                 |  | *                       |  
|Robert M. White                                             |  | 0                                      |  | *                       |  
|Warren C. Pratt                                             |  | 663,804                                |  | *                       |  
|Jeffrey V. Zellmer                                          |  | 237,853                                |  | *                       |  
|Anthony K. Robbins                                          |  | 735,917                                |  | *                       |  
|Sandra M. Escher                                            |  | 342,148                                |  | *                       |  
|All executive officers and directors as a group15 persons) |  | 8,660,194                              |  | 4.24                    | %

---

Equity Compensation Plan Informationas of June 28, 2002

|                                                       |  | Number of shares to be issued on exercise of outstanding options, warrants and rights |  | Weighted average exercise price of outstanding options, warrants and rights |        | Number of shares remaining available for future issuance under equity compensation plans |           
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------------------------- | ----------
|Equity compensation plans approved by stockholders(1)  |  | 16,485,723                                                                            |  | $                                                                           | 4.1921 |                                                                                          | 11,870,533
|Equity compensation plans not approved by stockholders |  | 17,075,862                                                                            |  | $                                                                           | 3.1599 |                                                                                          | 4,342,258 
|                                                       |  |                                                                                       |  |                                                                             |        |                                                                                          |           
|Total                                                  |  | 33,561,585                                                                            |  |                                                                             | 3.6669 |                                                                                          | 16,212,791
|                                                       |  |                                                                                       |  |                                                                             |        |                                                                                          |           

---

68

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Amended and Restated 1996 Supplemental Non-Executive Equity Incentive Plan

The Board approved the 1996 Supplemental Non-Executive Equity Incentive Plan in April 1996, and amended the plan to increase the number of
authorized shares in July 2001. The plan was not submitted to a stockholder vote. Under the plan, stock awards and nonstatutory stock options may be granted to Company employees with a status
below vice-president. Subject to certain adjustments upon a change in capitalization, the maximum aggregate number of shares of common stock of the Company issuable under the plan is
22,500,000 shares. As of June 28, 2002, the number of shares of common stock of the Company issuable under the plan was 4,310,427 shares. The plan will remain in effect until terminated
by the Board. The Compensation and Human Resources Committee is responsible for administering the plan.

The
per share exercise price for the shares issuable is determined by the committee, which has generally been the fair market value of the shares on the date of grant. The options may be
exercised for a period of ten years following the date of grant. However, in the event a holder ceases to be an employee of the Company, such holder may be required to exercise the option or right
prior to the ten year period. Options generally are granted with monthly vesting in 25 or 50 month installments, and options granted to newly hired employees generally are not exercisable for
10 months following the date of hire. Unless otherwise determined by the committee at the time of grant, each option provides that in the event of a change in control of the Company, any
options will become exercisable in full if, within twenty-four months after a change in control of the Company, the option holder's employment is terminated without cause or the option
holder resigns due to certain involuntary relocations or reductions in compensation.

The
Board may amend, alter, suspend or terminate the plan at any time. However, no amendment, alteration, suspension or termination of the plan shall impair the rights of any holder of
an option or right, unless mutually agreed otherwise between the holder and the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Employment Continuation Agreements.SGI has entered into employment continuation agreements with its executive officers with
the goal of encouraging the continued employment of key executives in the event of a potential change in control of SGI. Under the agreements, each executive officer (1) is entitled to a
termination payment equal to two years of his or her compensation if employment with SGI is terminated within 24 months after such a change in control, and (2) is granted full vesting of
options and restricted stock effective after such a change in control.

Executive Loans.During fiscal 2001 and 2002, the Company extended loans to several executive officers. The loans were
intended to provide a retention incentive and were approved by the Compensation and Human Resources Committee of the Board of Directors. Since the loans were extended, federal legislation has been
enacted prohibiting such extensions of credit to executive officers and accordingly, no future extensions of credit will be made by the Company.

The
Company loaned Ms. Escher $280,000 in October 2001. The loan is interest free and will be forgiven in quarterly installments beginning in December 2001 over two
years, subject to her continued employment with SGI, or in full upon termination as a result of death or disability or by the company without cause or upon certain liquidation and bankruptcy events of
the Company. At September 30, 2002, the remaining principal balance of the loan was $140,000. To the extent that Ms. Escher is subject
to income tax as a result of the interest free nature of the loan, the Company has agreed to pay Ms. Escher an amount, which after the imposition of taxes on the amount, will equal the amount
of the income taxes arising due to the interest free nature of the loan.

Mr. Pratt
was made Chief Operating Officer in April 2001. Under his amended employment agreement, the Company has made a commitment to extend credit of up to
$5 million to Mr. Pratt.

69

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Pursuant to this obligation, the Company advanced funds of $2 million in May 2001 and $1 million in May 2002, and is required to advance funds of an additional
$1 million in each of May 2003 and May 2004 subject to Mr. Pratt's continued employment with the Company. The loan is interest free and will be settled at May 2005,
or earlier in the event of a change in control or the termination of Mr. Pratt's employment without cause or for good reason. At the settlement date, Mr. Pratt will pay an amount equal
to (i) the value of his vested stock options and restricted stock held or sold from May 2000 through the settlement date and (ii) if applicable, any change in control payments, up
to the outstanding principal amount. Any remaining amount of the loan will be forgiven. On a termination for cause or resignation without good reason, the principal amount of the loan will be
repayable in full. To the extent that Mr. Pratt is subject to income tax as a result of income being imputed to him due to the interest free nature of the loan, the Company has agreed to pay
Mr. Pratt an amount equal to (i) an amount, which after the imposition of taxes on such amount, will equal the amount of such income tax arising due to the interest free nature of the
loan less (ii) the amount of the actual after-tax income received by Mr. Pratt as a result of investing the proceeds of the loan.

In
September 2000, the Company also made Mr. Pratt two five-year relocation loans secured by his California residence. Mr. Pratt received a $250,000 loan
at an annual interest rate of 6.75% to be repaid in September 2005 or on the earlier sale of the residence or termination of his employment and a $500,000 loan at no interest to be forgiven in
monthly installments over five years subject to continued employment with the Company. Mr. Pratt's maximum aggregate indebtedness to the Company during fiscal 2002 under these loans was
$675,000, and at September 30, 2002 was $584,889. During fiscal 2002, Mr. Pratt also received tax equalization payments in the amount of $52,768 in connection with his service in fiscal
1999 and 2000 as President of the Company's Alias/Wavefront subsidiary in Toronto, Ontario.

Mr. Zellmer
was made Chief Financial Officer in July 2001. As part of his compensation arrangement, the Company loaned Mr. Zellmer $500,000. The loan is interest
free and will be forgiven in quarterly installments beginning in October 2001 over two years, subject to his continued employment with SGI, or in full upon termination as a result of death or
disability or by the Company without cause and upon certain liquidation and bankruptcy vents of the Company. At September 30, 2002, the remaining principal balance of the loan was $250,000. To
the extent that Mr. Zellmer is subject to income tax as a result of the interest free nature of the loan, the Company has agreed to pay Mr. Zellmer an amount, which after the imposition
of taxes on such amount, will equal the amount of such income taxes.

70

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PART IV

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



Schedule

Description

PageII

Valuation and Qualifying Accounts

78




| | 3.1.1(6) |  | Restated Certificate of Incorporation of the Company.                                                                                                                                  
| | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1.2(9) |  | Certificate of Designation of the Series E Preferred Stock filed June 13, 1995.                                                                                                        
| | 3.2(15)  |  | Bylaws of the Company, as amended.                                                                                                                                                     
| | 4.1(11)  |  | Indenture dated February 1, 1986 between Cray Research, Inc. and Manufacturers Hanover Trust Company, as Trustee.                                                                      
| | 4.2(11)  |  | First Supplemental Indenture dated June 30, 1996 between the Company, Cray Research, Inc., and Chemical Bank (formerly Manufacturers Hanover Trust Company).                           
| | 4.3(13)  |  | 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(9)   |  | Voting and Exchange Trust Agreement between the Company and Montreal Trust Company of Canada dated June 15, 1995.                                                                      
| | 10.1(1)  |  | Software Agreement dated as of January 4, 1986, as supplemented June 6, 1986, and Sublicensing Agreement dated as of June 9, 1986 between the Company and AT&T Information Systems Inc.
| | 10.2(2)  |  | Software License Agreement dated January 24, 1986, between the Company and AT&T Information Systems Inc.                                                                               
| |          |  |                                                                                                                                                                                        

71

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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(6)*   |  | Directors' Stock Option Plan and form of Stock Option Agreement as amended as of October 31, 1994.                                                           
| | 10.5(12)*  |  | 1985 Stock Incentive Program, as amended.                                                                                                                    
| | 10.6(3)*   |  | 1986 Incentive Stock Option Plan, as amended, and amended forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement.                 
| | 10.7(12)*  |  | Amended and Restated 1989 Employee Benefit Stock Plan and form of stock option agreement.                                                                    
| | 10.8(12)*  |  | 1993 Long-Term Incentive Stock Plan, as amended, and form of stock option agreement.                                                                         
| | 10.9(15)*  |  | 1996 Supplemental Non-Executive Equity Incentive Plan, as amended, and form of stock option agreement.                                                       
| | 10.10(14)* |  | 1998 Employee Stock Purchase Plan.                                                                                                                           
| | 10.11(5)*  |  | Non-Qualified Deferred Compensation Plan dated as of September 9, 1994.                                                                                      
| | 10.12(13)* |  | Addendum to the Non-Qualified Deferred Compensation Plan.                                                                                                    
| | 10.13(7)*  |  | Alias Research Inc.'s 1994 Stock Plan and standard forms of Option Agreements.                                                                               
| | 10.14(8)*  |  | Wavefront Technologies, Inc. 1990 Stock Option Plan with standard form of Option Agreement.                                                                  
| | 10.15      |  | Amended and Restated Loan and Security Agreement between the Company and Foothill Capital Corporation and the Bank of America, N.A. dated September 24, 2002.
| | 10.16      |  | Intellectual Property Security Agreement between the Company and Foothill Capital Corporation dated November 9, 2001.                                        
| | 10.17      |  | Loan Agreement between the Company, Silicon Graphics World Trade B.V. and SGI Japan, Ltd. as of November 2001 and related Pledge Agreement.                  
| | 10.18*     |  | Letter Agreement between Warren Pratt and the Company, as amended as of November 2001.                                                                       
| | 10.19*     |  | Amended and Restated Promissory Note in the principal amount of $250,000 as of April 2001.                                                                   
| | 10.20      |  | Pledge Agreement between Warren Pratt and the Company dated September 27, 2000.                                                                              
| | 10.21*     |  | Amended and Restated Promissory Note in the principal amount of $500,000 as of April 2001.                                                                   
| | 10.22*     |  | Letter Agreement between Jeffrey Zellmer and the Company, as amended as of October 2001.                                                                     
| | 10.23*     |  | Letter Agreement between Sandra Escher and the Company, effective October 2001.                                                                              
| | 10.24      |  | Consulting Agreement between Arthur L. Money and Silicon Graphics, Inc. dated June 1, 2002.                                                                  
| |            |  |                                                                                                                                                              

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| | 21.1 |  | List of Subsidiaries.                              
| | ---- |  | ---------------------------------------------------
| | 23.1 |  | Consent of Ernst & Young LLP, Independent Auditors.

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Trademarks used in the Form 10-K

Silicon Graphics, Onyx, O2, Octane, Onyx, Onyx2, Origin, IRIX and SGI are registered trademarks, and CXFS, FailSafe, InfiniteReality4, NUMAflex, Reality Center,
Octane2, Silicon

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Graphics Fuel and Silicon Graphics Zx10 are trademarks of Silicon Graphics, Inc. in the U.S. and/or other countries worldwide. Alias and Alias Studio are trademarks of Alias/Wavefront, a
division of Silicon Graphics Limited. Maya is a registered trademark of Silicon Graphics, Inc., and exclusively used by Alias/Wavefront, a division of Silicon Graphics Limited.

MIPS
is a registered of MIPS Technologies, Inc. used under license by Silicon Graphics, Inc.Cray is a registered trademark and
Cray T90 is a trademark of Cray, Inc. UNIX is a registered trademark of The Open Group, in the 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.

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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 25, 2002 |  | 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.

|Name                                      |  | Title                                                                           |  | Date              
|----------------------------------------- |  | ------------------------------------------------------------------------------- |  | ------------------
|                                          |  |                                                                                 |  |                   
|/s/ROBERT R. BISHOPRobert R. Bishop       |  | Chief Executive Officer and Director (Principal Executive Officer)              |  | September 25, 2002
|/s/JEFFREY V. ZELLMERJeffrey V. Zellmer   |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer) |  | September 25, 2002
|/s/KATHY A. LANTERMANKathy A. Lanterman   |  | Vice President and Corporate Controller (Principal Accounting Officer)          |  | September 25, 2002
|/s/C. RICHARD KRAMLICHC. Richard Kramlich |  | Director                                                                        |  | September 25, 2002
|/s/JAMES A. MCDIVITTJames A. McDivitt     |  | Director                                                                        |  | September 25, 2002
|                                          |  |                                                                                 |  |                   

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|/s/ARTHUR L. MONEYArthur L. Money           |  | Director |  | September 25, 2002
|------------------------------------------- |  | -------- |  | ------------------
|/s/CHARLES A. STEINBERGCharles A. Steinberg |  | Director |  | September 25, 2002
|/s/ROBERT M. WHITERobert M. White           |  | Director |  | September 25, 2002

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CERTIFICATIONS

I,
Robert R. Bishop, the principal executive officer of Silicon Graphics, Inc., certify that:

|Dated: September 25, 2002 |  |  |  | /s/ROBERT R. BISHOPRobert R. Bishop Chairman and Chief Executive Officer
|------------------------- |  |  |  | ------------------------------------------------------------------------

I,
Jeffrey V. Zellmer, the principal financial officer of Silicon Graphics, Inc., certify that:

|Dated: September 25, 2002 |  |  |  | /s/JEFFREY V. ZELLMERJeffrey V. Zellmer Senior Vice President and Chief Financial
Officer
|------------------------- |  |  |  | -----------------------------------------------------------------------------------------

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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, 2000 |                               |                                |   |                               |  |       |         |                   |   |                         
|                         | Accounts receivable allowance |                                | $ | 15,407                        |  | $     | 2,964   |                   | $ |                        
|                         | Warranty Accrual              |                                | $ | 38,620                        |  | $     | 56,158  |                   | $ | 295                     
|                         | Deferred tax asset allowance  |                                | $ | 105,364                       |  | $     | 525,979 |                   | $ | 981                     
|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                  

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