<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                             Years Ended June 30
                                       ------------------------------------------------------------------
(in thousands, except per share amounts)     1999         1998         1997         1996(3)      1995

<S>                                    <C>          <C>           <C>          <C>          <C>
Operating Data:
Total revenue                          $2,748,957   $3,100,610   $3,662,601   $2,921,316   $2,228,268
Costs and expenses:
   Cost of revenue                      1,603,250    1,963,551    2,022,546    1,482,439    1,032,059
   Research and development               380,346      459,188      479,101      353,461      247,678
   Selling, general and administrative    907,612    1,068,429    1,038,313      807,830      619,259
   Other operating expense(1)             (15,107)     205,543       10,757      103,193       22,000
                                       ------------------------------------------------------------------
Operating (loss) income                  (127,144)    (596,101)     111,884      174,393      307,272
Interest and other income
  (expense), net(2)                       252,865         (818)     (13,694)      14,395        9,447
                                       ------------------------------------------------------------------
Income (loss) before income taxes         125,721     (596,919)      98,190      188,788      316,719
Net income (loss)                          53,829     (459,627)      78,551      115,037      224,856

Net income (loss) per share:
   Basic                               $     0.29   $    (2.47)  $     0.44    $    0.70    $    1.44
   Diluted                             $     0.28   $    (2.47)  $     0.43    $    0.65    $    1.26
Shares used in the calculation of
   net income (loss) per share:
   Basic                                  186,374      186,149      175,548      162,658      156,437
   Diluted                                189,427      186,149      182,637      175,790      182,837

Balance Sheet Data:
Cash, cash equivalents and
   marketable and restricted
   investments                         $  782,369   $  736,720   $  374,292    $ 456,937    $ 780,012
Working capital                           869,980      968,700    1,229,388      994,817      889,371
Total assets                            2,788,257    2,964,706    3,344,592    3,158,246    2,206,619
Long-term debt and other                  387,005      403,522      419,144      381,490      287,267
Stockholders' equity                    1,424,199    1,464,512    1,839,242    1,675,318    1,346,170

Statistical Data:
Number of employees                         9,191       10,286       10,930       10,485        6,308
Long-term debt and other/
   total capitalization                        21%          22%          19%          19%          18%
                                       ------------------------------------------------------------------
</TABLE>

(1) Fiscal 1999 amount includes a change in previously estimated
    restructuring charges ($14 million). Fiscal 1998 amount includes
    restructuring charges ($144 million), a charge for long-lived asset
    impairment ($47 million) and a write-off of acquired in-process
    technology ($17 million). Fiscal 1997 amount represents merger-related
    expenses. Fiscal 1996 amount includes write-off of acquired in-process
    technology ($98 million) and merger-related expenses. Fiscal 1995 amount
    represents merger-related expenses.

(2) Fiscal 1999 amount includes a $273 million gain on the sale of a portion
    of SGI's interest in MIPS.

(3) Amounts reflect the April 2, 1996 acquisition of Cray which was accounted
    for as a purchase.


10
<PAGE>


QUARTERLY DATA

<TABLE>
<CAPTION>
                                                                    Fiscal 1999 (unaudited)
                                                    ---------------------------------------------------
(in thousands, except per share amounts)               June 30     March 31      Dec. 31     Sept. 30
<S>                                                <C>          <C>           <C>         <C>
Total revenue                                       $  828,603    $ 619,175    $ 684,823    $ 616,356
Costs and expenses:
   Cost of revenue                                     469,901      359,636      394,973      378,740
   Research and development                             87,698       93,331       97,179      102,138
   Selling, general and administrative                 237,105      215,574      222,005      232,928
   Other operating expense(1)                           (1,107)      (6,000)      (8,000)          --
                                                    ---------------------------------------------------
Operating income (loss)                                 35,006      (43,366)     (21,334)     (97,450)
Interest and other income (expense), net(2)            212,493       (7,358)      (3,524)      51,254
                                                    ---------------------------------------------------
Income (loss) before income taxes                      247,499      (50,724)     (24,858)     (46,196)
Net income (loss)                                      157,793      (39,957)     (20,341)     (43,666)

Net income (loss) per share:
   Basic                                             $    0.85    $   (0.21)  $    (0.11)  $    (0.24)
   Diluted                                           $    0.81    $   (0.21)  $    (0.11)  $    (0.24)
Shares used in the calculation of net income
(loss) per share:
   Basic                                               186,197      186,685      186,417      186,329
   Diluted                                             196,839      186,685      186,417      186,329
                                                    ---------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                    Fiscal 1998 (unaudited)
                                                    ---------------------------------------------------
(in thousands, except per share amounts)               June 30     March 31      Dec. 31     Sept. 30
<S>                                                <C>          <C>           <C>         <C>
Total revenue                                       $  773,561    $ 708,291    $ 850,765    $ 767,993
Costs and expenses:
  Cost of revenue                                      542,355      504,282      478,991      437,923
  Research and development                             113,746      111,975      117,113      116,354
  Selling, general and administrative                  304,829      250,917      251,262      261,421
  Other operating expense(3)                            90,320       43,393       52,729       19,101
                                                    ---------------------------------------------------
Operating loss                                        (277,689)    (202,276)     (49,330)     (66,806)
Interest and other income (expense), net                   218         (267)       1,538       (2,307)
                                                    ---------------------------------------------------
Loss before income taxes                              (277,471)    (202,543)     (47,792)     (69,113)
Net loss                                              (220,041)    (152,569)     (31,479)     (55,538)

Net loss per share--basic and diluted               $    (1.17)   $   (0.81)  $    (0.17)  $    (0.31)
Shares used in the calculation of net loss
   per share--basic and diluted                        187,472      187,643      187,874      182,160
                                                    ---------------------------------------------------
</TABLE>

(1) Amounts include a change in previously estimated restructuring charges of
    $8 million in the second quarter and $6 million in the third quarter.

(2) Amounts include a gain on the sale of a portion of SGI's interest in MIPS of
    $54 million in the first quarter and $219 million in the fourth quarter.

(3) Amounts include a $17 million write-off of acquired in-process technology in
    the first quarter; restructuring charges of $53 million, $44 million and
    $47 million in the second, third and fourth quarters, respectively; and a
    $47 million charge for long-lived asset impairment in the fourth quarter.


                                                                              11
<PAGE>

PRICE RANGE OF COMMON STOCK


The Company's Common Stock is traded on the New York Stock Exchange under the
symbol of 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 of Common Stock

<TABLE>
<CAPTION>
                                         Fiscal 1999                            Fiscal 1998
                        -------------------------------------------------------------------------------------
                                    Low         High        Close          Low         High        Close
<S>                         <C>          <C>           <C>          <C>          <C>          <C>
First Quarter               $      9.06  $     15.00   $     9.38   $    15.00   $    30.19   $    26.25
Second Quarter                     7.38        13.94        12.88        11.56        27.50        12.44
Third Quarter                     13.13        20.88        16.69        10.94        16.19        13.94
Fourth Quarter                    11.69        16.63        16.38        11.06        16.38        12.13
                        -------------------------------------------------------------------------------------
</TABLE>

SGI had 8,445 stockholders of record as of June 30, 1999. We have not paid
any dividends on our common stock. We currently intend to retain earnings for
use in our business and do not anticipate paying cash dividends to common
stockholders.


12
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS


THIS ANNUAL REPORT 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, THE BENEFITS
EXPECTED TO RESULT FROM THE TRANSITION OF OUR BUSINESS FROM DECLINING MARKETS TO
GROWTH MARKETS, HEADCOUNT REDUCTIONS, YEAR 2000 ISSUES AND LEGAL PROCEEDINGS. WE
HAVE BASED THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT EXPECTATIONS ABOUT
FUTURE EVENTS.

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;
ADVERSE BUSINESS CONDITIONS; CHANGES IN CUSTOMER ORDER PATTERNS; 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 DEVELOPMENT AND SUCCESSFUL INTRODUCTION OF
STRATEGIC PRODUCTS FOR SPECIFIC MARKETS; INABILITY TO EFFECTIVELY IMPLEMENT
OUR SERVER STRATEGY; RISKS RELATED TO DEPENDENCE ON OUR PARTNERS AND
SUPPLIERS; RISKS RELATED TO FOREIGN OPERATIONS (INCLUDING THE DOWNTURN OF
ECONOMIC TRENDS, UNFAVORABLE CURRENCY MOVEMENTS, AND EXPORT COMPLIANCE
ISSUES); RISKS ASSOCIATED WITH YEAR 2000 REQUIREMENTS; LITIGATION INVOLVING
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 YEAR 2000 COMPLIANCE
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.

INTRODUCTION

The following tables and discussion present certain financial information on
a comparative basis. Our fiscal 1998 results reflect certain charges
attributable to our decision to restructure the business. This decision
followed a reevaluation of our core competencies, technology roadmap and
business model in an effort to bring our expenses more in line with current
revenue levels and restore long-term profitability to SGI. The fiscal 1999
information reflects the results of the restructuring activities we initiated
in fiscal 1998. As we exited fiscal 1999, we concluded that the actions we
had initiated in fiscal 1998 and continued in fiscal 1999 were not sufficient
to deliver the growth and profitability we believe necessary to sustain our
business. The discussion that follows is limited to a discussion of the
historical results of operations and financial condition. See "Risks That
Affect Our Business--Business Transition" for further discussion of our plans
for fiscal 2000 and the future.


                                                                             13
<PAGE>


RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           Years ended June 30
                                                                  ----------------------------------------
<S>                                                               <C>          <C>          <C>
$ in millions                                                          1999         1998         1997

Total revenue                                                     $   2,749    $   3,101    $   3,663
Cost of revenue                                                       1,603        1,964        2,023
                                                                  ----------------------------------------
Gross profit                                                          1,146        1,137        1,640
Gross profit margin                                                      41.7%        36.7%        44.8%
Total operating expenses                                              1,273        1,733        1,528
                                                                  ----------------------------------------
Operating (loss) income                                                (127)        (596)         112
Other income (expense)                                                  253           (1)         (14)
                                                                  ----------------------------------------
Income (loss) before income taxes                                       126         (597)          98
                                                                  ----------------------------------------
Net income (loss)                                                 $      54    $    (460)   $      79
                                                                  ----------------------------------------
Net income (loss) per share-basic                                 $    0.29    $   (2.47)   $    0.44
                                                                  ----------------------------------------
Net income (loss) per share-diluted                               $    0.28    $   (2.47)   $    0.43
                                                                  ----------------------------------------
                                                                  ----------------------------------------
</TABLE>

REVENUE

The following discussion of revenue is based on the results of our reportable
segments as described in Note 16, "Segment Information." Total revenue is
principally derived from three reportable segments: Servers, Visual
Workstations and Global Services, which were determined based on factors such
as customer base, homogeneity of products, technology, delivery channels and
other factors.

Total revenue in fiscal 1999 decreased $352 million or 11% compared with
fiscal 1998 and fiscal 1998 revenue decreased $562 million or 15% compared
with fiscal 1997. These decreases reflect the continuing trends in the
declining vector supercomputer and UNIX-Registration Trademark- workstation
markets which are part of our Server and Visual Workstation segments,
respectively. Decreases were offset in part by growth in our Global Services
segment.

The following table presents the percentage of total revenue by reportable
segment as presented in our performance management system.

<TABLE>
<CAPTION>
                                                                           Years ended June 30
                                                               ------------------------------------------
<S>                                                               <C>          <C>          <C>
$ in millions                                                          1999         1998         1997

Servers                                                           $   1,218    $   1,417    $   1,795
% of total revenue                                                       44%          46%          49%
Visual Workstations                                               $     647    $     865    $   1,112
% of total revenue                                                       24%          28%          30%
Global Services                                                   $     682    $     630    $     571
% of total revenue                                                       25%          20%          16%
Other                                                             $     201    $     188    $     184
% of total revenue                                                        7%           6%           5%
                                                               ------------------------------------------
</TABLE>

Fiscal 1999 Server revenue decreased $199 million or 14% compared with fiscal
1998 and fiscal 1998 Server revenue decreased $378 million or 21% compared
with fiscal 1997. Although our fiscal 1999 Origin-TM- brand scalable server
business returned to growth in fiscal 1999, our vector supercomputer business
declined significantly in both fiscal 1999 and 1998. As we exited fiscal
1999, the vector supercomputer product business represented less than 10% of
total revenue. Our Onyx-Registration Trademark- supercomputer revenue
declined in each of fiscal 1999 and 1998, but the rate of decline slowed in
fiscal 1999 to 6% compared with 24% in fiscal 1998.

Fiscal 1999 Visual Workstation revenue decreased $218 million or 25% compared
with fiscal 1998 and fiscal 1998 Visual Workstation revenue decreased $247
million or 22% compared with fiscal 1997. These decreases reflect the effects
of strong competition in the shrinking UNIX workstation market and, in fiscal
1999, the disappointing sales performance of our visual


14
<PAGE>

workstations based on the Windows NT-Registration Trademark- operating system
introduced in the second half of the fiscal year. See "Risks That Affect Our
Business--Business Transition."

Global Services revenue is comprised of hardware and software support and
maintenance, professional services and remanufactured systems sales. Fiscal
1999 Global Services revenue increased $52 million or 8% compared with fiscal
1998 and fiscal 1998 Global Services revenue increased $59 million or 10%
compared with fiscal 1997. Growth in Global Services revenue reflects the
impact of our investment in our professional services business, as well as
increases in the level of our remanufactured systems business.

Other revenue is principally comprised of our operating units that are not
reportable segments, including the product and service revenue of our
software subsidiary, Alias|Wavefront, and MIPS, our majority-owned subsidiary
that develops and markets microprocessors and related intellectual property.

Total revenue by geographic area for fiscal 1999, 1998 and 1997 was as
follows (in millions):

<TABLE>
<CAPTION>
                                                                  ---------------------------------------
Area                                                                   1999         1998         1997
<S>                                                               <C>          <C>          <C>
Americas                                                          $   1,536    $   1,729    $   2,072
Europe                                                                  754          831          936
Rest of World                                                           459          541          655
                                                                  ---------------------------------------
Total revenue                                                     $   2,749    $   3,101    $   3,663
                                                                  ---------------------------------------
                                                                  ---------------------------------------
</TABLE>


Geographic revenue as a percentage of total revenue for fiscal 1999, 1998 and
1997 was as follows:

<TABLE>
<CAPTION>
                                                                  --------------------------------------
Area                                                                    1999         1998         1997
<S>                                                                     <C>          <C>          <C>
Americas                                                                 56%          56%          57%
Europe                                                                   27%          27%          26%
Rest of World                                                            17%          17%          17%
                                                                  --------------------------------------
</TABLE>

The product revenue decreases we have experienced over the past three years
have been widespread as illustrated by the fact that our geographic revenue
mix remained relatively consistent during that period.

Our consolidated backlog at June 30, 1999 was $376 million, up from $360
million at June 30, 1998, primarily reflecting momentum in our Origin and
Onyx businesses.

GROSS PROFIT MARGIN

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

Our overall gross profit margin increased to 41.7% in fiscal 1999 compared
with 36.7% in fiscal 1998 and our fiscal 1998 gross profit margin declined
compared with our fiscal 1997 gross profit margin of 44.8%. Gross profit
margin for fiscal 1998 included a number of non-recurring charges related to
refocusing our supercomputer product roadmap, as well as a write-down of
excess spares. Without those charges, our fiscal 1998 gross profit margin
would have been 41.3%. Our gross profit margin over the past three years
reflects decreased volumes and continuing pricing pressures in both the
Server and Visual Workstation segments, as well as in our Global Services
business. We have been able to partially mitigate these effects by
consolidation and outsourcing of certain manufacturing operations and
continued improvements in manufacturing efficiencies and procurement
practices.


                                                                             15

<PAGE>

We believe we will continue to experience margin pressure in fiscal 2000,
particularly in our Server segment due to competitive pricing pressures as well
as our introduction of lower margin products based on industry standard
components. See "Risks That Affect Our Business." We expect UNIX workstation
margins to remain fairly stable.


OPERATING EXPENSES

<TABLE>
<CAPTION>

$ in millions                                               1999          1998           1997
                                                     -------------------------------------------
<S>                                                    <C>            <C>           <C>
Research and development                               $     380      $    459      $     479
% of total revenue                                          13.8%         14.8%          13.1%
Selling, general and administrative                    $     908      $  1,068      $   1,038
% of total revenue                                          33.0%         34.5%          28.3%
Other                                                  $     (15)     $    206      $      11
% of total revenue                                          (0.5%)         6.6%           0.3%
                                                     -------------------------------------------
</TABLE>


Our total fiscal 1999 operating expenses decreased $460 million compared with
fiscal 1998 and fiscal 1998 operating expense increased $205 million compared
with fiscal 1997. Fiscal 1998 operating expenses included $206 million of
restructuring, long-lived asset impairment and merger-related charges.

As we exited fiscal 1998, we expected our restructuring plans would result in
the elimination of approximately 1,000 positions in fiscal 1999 and would reduce
operating expense by at least $200 million. We believe those actions have
reduced our operating expense run rate by approximately $240 million.

RESEARCH AND DEVELOPMENT  Research and development spending decreased $79
million or 17% in fiscal 1999 compared with fiscal 1998 and $20 million or 4%
in fiscal 1998 compared with fiscal 1997. The fiscal 1999 decrease reflects
reductions in investments in vector supercomputer and UNIX workstation
development. These decreases were offset somewhat by increased investments in
scalable server and Windows NT-based visual workstation development. We
expect research and development spending in fiscal 2000 to decline compared
with fiscal 1999 and to be focused on new scalable server product
development. See "Risks That Affect Our Business--Expense Reduction Program."

SELLING, GENERAL AND ADMINISTRATIVE  Selling, general and administrative
expenses decreased $160 million or 15% compared with fiscal 1998, following a
$30 million increase in fiscal 1998 compared with fiscal 1997. The fiscal
1999 decrease reflects the impact of the restructuring actions taken in
fiscal 1998, as well as lower selling commissions due to lower revenue,
reduced outside consulting and business process re-engineering costs,
continued focus on productivity and general expense controls. Marketing
expense decreased significantly as well, particularly in corporate and vector
supercomputer programs. Fiscal 1999 selling, general and administrative
expenses include a number of charges that we do not expect to recur,
including a $16 million write-down of certain capitalized internal
use-software deemed obsolete as a result of changes in strategic direction.
The fiscal 1998 selling, general and administrative expenses increase
reflects primarily costs associated with outside consulting, business process
re-engineering, and an increase in marketing and advertising costs. The
fiscal 1998 increase was somewhat offset by lower selling commissions. We
expect selling, general and administrative expenses in fiscal 2000 to decline
compared with the fiscal 1999 as a result of the actions described in "Risks
That Affect Our Business--Expense Reduction Program."

OTHER OPERATING EXPENSE Other operating expense for fiscal 1999 includes $14
million of adjustments to the restructuring costs we estimated at the end of
fiscal 1998. Other operating expense for fiscal 1998 consists of restructuring
charges of $144 million, a charge for impairment of long-lived assets of $47
million and merger-related expenses of $15 million. Other operating expense for
fiscal 1997 relates to the Cray acquisition and consists principally of costs
associated with the integration of SGI and Cray information systems, accounting
processes and human resource activities.


INTEREST AND OTHER

INTEREST EXPENSE Interest expense has remained relatively flat over the last
three years. We do not expect a significant change in the level of interest
expense in fiscal 2000.


16
<PAGE>

INTEREST INCOME AND OTHER, NET  Interest income and other, net includes interest
income on our cash investments, gains and losses on other investments, the
minority interest in the earnings of MIPS and other non-operating items.
Interest income and other, net for fiscal 1999 decreased $21 million from fiscal
1998 and increased $13 million in fiscal 1998 from fiscal 1997. Interest income
on our cash investments has increased from $22 million in fiscal 1997 to $37
million in fiscal 1998 and to $40 million in fiscal 1999 due to significantly
higher cash balances. The decrease in interest and other income, net in fiscal
1999 was due to the write-down of investments in certain technology companies,
the minority interest in MIPS earnings and other non-operating items. We do not
expect a significant change in the level of interest income on our cash
investments in fiscal 2000.

PROVISION FOR (BENEFIT FROM) INCOME TAXES  The effective tax benefit rate for
fiscal 1999 was 23%, excluding the impact of the MIPS gain and a change in
previously estimated restructuring costs, which were tax effected at 38%. The
effective tax benefit rate for fiscal 1998 was 23% and the effective tax
provision rate for fiscal 1997 was 20%. The fiscal 1999 benefit rate differs
from the federal statutory rate primarily due to foreign losses for which no
benefit has been recognized. The fiscal 1998 benefit rate differs from the
federal statutory rate primarily due to foreign losses for which no benefit has
been recognized, the write-off of acquired in-process technology and goodwill
for which there was no tax benefit, and the establishment of reserves for
certain deferred tax assets not expected to be realized. The 1997 provision rate
differs from the federal statutory rate primarily due to U.S. Federal research
tax credits, earnings in low tax jurisdictions, and foreign sales corporation
benefits, offset partially by foreign losses for which no benefit was recorded.

At June 30, 1999, we had gross deferred tax assets arising from deductible
temporary differences, tax losses and tax credits of $594 million. A valuation
allowance of $105 million and deferred tax liability of $38 million offset the
gross deferred tax assets. Realization of the net deferred tax assets is
dependent on our ability to generate approximately $900 million of future
taxable income. We believe that it is more likely than not that the assets will
be realized based on forecasted income, including income from the planned
divestiture of our interest in MIPS. However, there can be no assurance that we
will achieve our expectations of future income. Therefore, on a quarterly basis,
we will evaluate the realizability of the deferred tax assets and assess the
need for additional valuation allowances.

We have not provided for U.S. federal income taxes on undistributed earnings of
foreign subsidiaries, which we intend to permanently reinvest in those
operations. The cumulative income tax benefit attributable to these permanently
reinvested earnings is estimated to be $85 million at June 30, 1999.

IMPACT OF CURRENCY

Because a significant portion of our revenue is from sales outside the United
States, and many key components are produced outside the United States, our
financial results can be significantly affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which we
distribute our products. However, over the most recent three fiscal years,
changes in foreign currency exchange rates have not had a material impact on our
results of operations.

FINANCIAL CONDITION

Our financial condition continued to improve during fiscal 1999. This
improvement is primarily due to continued focus on asset management,
particularly management of inventories and accounts receivable. At June 30,
1999, cash and cash equivalents and marketable and restricted investments
totaled $782 million compared with $737 million at June 30, 1998. Included in
the June 30, 1999 balance is approximately $94 million of restricted investments
that serve as collateral for letters of credit and an equity forward purchase
agreement.

Operating activities generated $145 million in cash for fiscal 1999, compared
with $643 million in fiscal 1998 and $170 million in fiscal 1997. To present
cash flows from operating activities, net income (loss) for each of the past
three years had to be adjusted for certain significant items that did not either
provide or use cash. Fiscal 1999 net income is adjusted to remove the impact of
the $273 million gain on the sale of a portion of our interest in MIPS stock
that is reflected as a cash flow from investing activities and $27 million in
non-cash charges for the write-off of investments in certain technology
companies. Fiscal 1998 net loss is adjusted for a $47 million non-cash charge
for long-lived asset impairment, a $32 million non-cash charge for the write-off
of purchased intangibles and goodwill resulting from the disposal of ParaGraph
International Inc. ("ParaGraph"), and a $30 million non-cash charge for the
write-down of excess spares. These and other non-deductible


                                                                             17
<PAGE>

charges resulted in significant deferred tax benefit provisions that did not
provide cash. Fiscal 1997 net income is adjusted for a $42 million non-cash
charge for amortization of the write-up of acquired Cray inventories and
service contracts and a $4 million non-cash charge for the write-off of an
investment in a software company.

Our focus on asset management that resulted in significant reductions in
accounts receivable and inventories in fiscal 1998, continued into 1999
generating $195 million in cash.

Aside from operations, the most significant transactions affecting our cash
position in fiscal 1999 were the initial and secondary public offerings of
shares of our subsidiary, MIPS. On a consolidated basis those offerings raised a
total of $290 million, of which $273 million represented the proceeds from the
sales of portions of our ownership interest in MIPS, and which is presented in
investing activities. The remaining $18 million represented the proceeds from
newly issued MIPS shares and is included in financing activities.

Investing activities, other than changes in our marketable and restricted
investments and the MIPS transactions, consumed $261 million in cash during
fiscal 1999. We used $35 million to fund a portion of our investment in Wam!Net,
Inc., with the remainder used principally for the acquisition of capital
equipment and spare parts. Investing activities, other than changes in our
marketable investments, consumed $269 million in cash during fiscal 1998 and
$301 million during fiscal 1997, principally for capital equipment and spare
parts. 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.
The purchase is expected to close in September 1999 at a cost of approximately
$125 million and will be paid in cash.

Financing activities over the past three years have included the issuance of
common stock under employee stock purchase and option plans and repurchases of
common stock. Our board of directors has authorized the repurchase of up to 27.5
million shares of common stock to mitigate the dilutive effect of the stock
plans. Since commencement of this repurchase program we have repurchased 19.3
million shares of common stock at a cost of $311 million. We utilize equity
instrument contracts to facilitate the repurchase of common stock and at June
30, 1999, we have outstanding commitments to buy an aggregate of 6.0 million
shares of common stock under our equity forward purchase arrangement. At June
30, 1999, approximately 2.2 million shares remain available for purchase under
this program.

The volume of our borrowing activity has decreased over the past three years
corresponding with our strengthened cash position. As a result of our strong
cash position, we terminated our $250 million revolving credit facility in
November 1998.

At June 30, 1999, our principal sources of liquidity included cash, cash
equivalents and marketable investments of $688 million. We believe that these
principal sources of liquidity, along with cash generated from operations, the
expected proceeds from future MIPS offerings, and other resources available to
us, should be adequate to fund our projected cash flow needs. At June 30, 1999,
we own approximately 67% of the total outstanding shares of Class A and Class B
Common Stock of MIPS. We currently intend to dispose of our remaining interest
in MIPS in one or more transactions through public or private offerings. We
expect our divestiture of MIPS to be completed in the first half of fiscal 2001,
subject to market and other conditions.

We believe that the level of financial resources is an important competitive
factor in the computer industry and, accordingly, we may elect to raise
additional capital through debt or equity financing in anticipation of future
needs.

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.

BUSINESS TRANSITION  Two of the principal market sectors in which we
compete--UNIX workstations and vector supercomputers--have declined over the
past few years, and we believe that these declines represent long-term
trends. Our goal is to generate an increasing proportion of our revenue from
growing markets, including Intel-based servers and UNIX-based scalable
servers such as our Origin server product family. We have announced a product
roadmap that will, over the next several years, ultimately shift our products
to the Intel microprocessor architecture. To further accelerate this
transition, we announced in August 1999 our intention to establish
arrangements to transition our Visual Workstation line of Windows NT-based
workstations and our Cray-Registration Trademark- branded line of vector
supercomputers to strategic partners who will assume the further development
and distribution of these product lines. The result of these alliances and
planned restructured operations will be a smaller revenue base and workforce
in fiscal 2000, with the goal of returning to sustainable profitability. This
is a long-term


18
<PAGE>

transition, and although some benefits are currently being realized, it could
take until well into fiscal 2000 or beyond before we have achieved our
desired business model. Our ability to achieve our revenue objectives in
fiscal 2000 will largely depend on the successful implementation of these
alliances and related restructuring activities in early fiscal 2000 with
minimal disruption, and on growth in the server business. There is no
assurance that we will successfully complete the strategic alliances and
related restrucuring activities required to achieve our fiscal 2000
objectives.

SERVER STRATEGY  Sustained growth in our scalable server business is an
important element of our strategic plan for the next several years. Sustained
growth will require, among other things, adapting to a longer sales cycle and
the need to deliver more complete solutions, establishing a presence in
emerging enterprise markets in which we have not traditionally participated,
working effectively with independent software providers to ensure that
important applications for the market segments targeted by us are available
on the SGI platform, and ultimately, managing a successful and timely
transition to the Intel architecture.

We are also engaged in a transition from our traditional business of
supporting IRIX-Registration Trademark-, our own proprietary UNIX operating
systems, to supporting operating systems such as Linux-Registration
Trademark- and Windows NT. We believe that this strategy will position us
favorably in growth markets, including the market for 32-bit
Intel-Registration Trademark- processor-based servers and for broadband
Internet servers. A successful transition to this model will require us to
make effective resource allocation choices and successfully manage a complex
set of support and strategic relationships, particularly with respect to open
source technologies.

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 an increasing emphasis on Linux and other open
source technologies, a collaborative relationship with NVIDIA for graphics
technologies, the introduction of Intel processor-based IA-32 servers and the
longer-term transition to the Intel architecture, additional outsourcing of
manufacturing and services, and establishing significant new distribution
channels will increase our dependence on Microsoft, Intel and other partners,
and on our manufacturing partners and other component suppliers. Our business
could be adversely affected, for example, if Intel or Microsoft fail to meet
product release schedules, if new channels do not ramp to desired levels or if
unanticipated quality issues arise with products from these suppliers.

EXPENSE REDUCTION PROGRAM  During fiscal 1999, we reduced our operating expenses
by about $240 million from the level of fiscal 1998 operating expenses. In
August 1999, we announced and began to implement a restructuring program aimed
at bringing our expenses more in line with expected revenue levels resulting
from our refocused business operations and restoring long-term profitability to
the Company. As part of this effort, we expect, through the anticipated transfer
of businesses to partners, the elimination of positions and managed hiring, to
end fiscal 2000 with about 1/3 fewer employees than was the case at the end of
fiscal 1999. These steps, and generally tighter operating expense controls, are
part of an overall program to reduce our expense structure by approximately $300
million in fiscal 2000. While our objective is to reduce our costs in ways that
will not have a material impact on revenue levels, there is no assurance that
this will be achieved.

PERIOD TO PERIOD FLUCTUATIONS  Our operating results may fluctuate for a number
of reasons. Delivery cycles are typically short, other than for supercomputer
and certain large-scale server products. Well over half of each quarter's
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 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 visual workstation product revenue including the mix of configurations
within these product categories.

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


                                                                             19
<PAGE>

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

PRODUCT DEVELOPMENT AND INTRODUCTION  Our continued success depends on our
ability to develop and rapidly bring to market highly differentiated,
technologically complex and innovative products. Product transitions are a
recurring part of our business. A number of risks are inherent in this process.

The development of new technology and products is increasingly complex and
uncertain, which increases the risk of delays. The introduction of a new
computer system 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.

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 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.

YEAR 2000 COMPLIANCE  Many computer systems and applications experience problems
handling dates beyond the year 1999 and will need to be modified before the year
2000 in order to remain functional. As for many other companies, the year 2000
computer issue poses a potential risk for SGI as a user of information systems
in the operation of its business, as a supplier of computer systems and related
software, including operating system software, to customers, and as a customer
of other organizations whose operations may be affected by year 2000 compliance
issues.

We have completed an assessment of our core business information systems, many
of which are provided by outside suppliers, for year 2000 readiness and are
extending that review to include a wide variety of other information systems and
related business processes used in our operations. We plan to have changes to
critical systems implemented by the third quarter of calendar 1999 to allow time
for testing. Most of our mission critical applications are believed to be year
2000 compliant, including the Oracle information system which was recently
upgraded to the most recent version. Although our assessment is ongoing, we
currently believe that resolving these matters will not have a material adverse
effect on our financial condition or results of operations.

We are implementing a program to support customer efforts to achieve year
2000 compliance. This program includes encouraging customers and independent
software vendors to adopt the latest updates to our IRIX and
UNICOS-Registration Trademark- operating systems, which we believe are year
2000 compliant, and additional customer support procedures. We also have made
available software upgrades for some earlier releases of the IRIX operating
system. We believe that the majority of the hardware systems we expect to
support beyond 1999, when running on compliant operating systems, will be
year 2000 compliant. Our older products may require upgrade or replacement to
become year 2000 compliant. There is no assurance that our current products
do not contain undetected errors or defects associated with year 2000
functions that may result in material costs to remediate. We believe that we
generally are not legally responsible for costs incurred by customers to
achieve their year 2000 compliance. However, we may experience increasing
customer satisfaction costs relating to these issues, including potential
litigation expenses, over the next few years.

We are also assessing the possible effect on our operations of the year 2000
readiness of critical suppliers of products and services. These include not just
suppliers of components but also our outsourcing partners in manufacturing
support and even suppliers of basic utilities. Our reliance on our key
suppliers, and therefore on the proper functioning of their information systems
and software, is increasing, and there can be no assurance that another
company's failure to address year 2000 issues could not have an adverse effect
on us.

Certain of the costs associated with our internal Year 2000 compliance effort
(exclusive of any potential costs related to any customer or other claim) cannot
effectively be isolated from other operating expenses, since investing in new
systems is both an ordinary cost of doing business and a means to ensure year
2000 compliance. Our current estimates indicate the total


20
<PAGE>

costs to insure year 2000 compliance will not be material. We believe that we
are unlikely to experience a material adverse impact on our financial
condition or results of operations due to year 2000 compliance issues.
However, since the assessment process is ongoing, year 2000 complications are
not fully known, and potential liability issues are not clear, the full
potential impact of the year 2000 on us is not known at this time. The
information regarding year 2000 issues provided in this Annual Report is
based on our current assessment of ongoing activities and is subject to
change as we continuously monitor these activities. We are currently
developing appropriate contingency plans for potential year 2000 problems.

The Year 2000 disclosure set forth above is "year 2000 readiness disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act of 1998.

INVESTMENT IN MIPS SUBSIDIARY  The value of our interest in MIPS Technologies,
Inc. is determined principally by factors outside our control, including overall
equity market conditions and may fluctuate significantly from time to time.
There can be no assurance that we will be successful in fully realizing the
value of the MIPS interest on a market efficient basis.

EXPORT REGULATION  Our sales to foreign customers are subject to export
regulations. Sales of many of the our high-end products require clearance and
export licenses from the U.S. Department of Commerce under these regulations.
The Departments of Commerce and Justice are currently conducting civil and
criminal investigations into SGI's compliance with the export regulations in
connection with the sale of several computer systems to a customer in Russia
during fiscal 1997. We believe that these matters will be resolved without a
significant adverse effect on our business. However, there is no assurance that
these matters will not have an unforeseen outcome that could impair the conduct
of our business.

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.

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

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

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.

EMPLOYEES  Our success depends on our ability to continue to attract, retain and
motivate highly qualified technical, marketing and management personnel, who are
in great demand. The current uncertainties surrounding SGI's business prospects
have increased the challenges of retaining world-class talent.

BUSINESS DISRUPTION  Our corporate headquarters, including most of our research
and development operations are located in the Silicon Valley area of Northern
California, a region known for seismic activity. A significant earthquake could
materially affect operating results. We are not insured for most losses and
business interruptions of this kind.

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.

                                                                             21
<PAGE>

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

To perform sensitivity analysis, we assess the risk of loss in fair values from
the impact of hypothetical changes in interest rates and foreign currency
exchange rates on market sensitive instruments. We compute the market values for
interest risk based on the present value of future cash flows as impacted by the
changes in rates attributable to the market risk being measured. We selected the
discount rates used for the present value computations based on market interest
exchange rates in effect at June 30, 1999 and 1998. We computed the market
values for foreign exchange risk based on spot rates in effect at June 30, 1999
and 1998. The market values that result from these computations are compared to
the market values of these financial instruments at June 30, 1999 and 1998. The
differences in this comparison are the hypothetical gains or losses associated
with each type of risk.

The results of the sensitivity analysis at June 30, 1999 and 1998 are as
follows:

Interest Rate Risk: A percentage point decrease in the level of interest rates
with all other variables held constant would result in a decrease in the
aggregate fair values of our financial instruments by $14 million at both June
30, 1999 and 1998. A percentage point increase in the level of interest rates
with all other variables held constant would result in an increase in the
aggregate fair values of our financial instruments by $13 million and $12
million, respectively.

Foreign Currency Exchange Rate Risk: A 10% decrease in levels of foreign
currency exchange rates, 20% for Asian currencies, 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 $8 million at June 30, 1999, and a decrease in
the fair values of our financial instruments by $14 million at June 30, 1998. A
10% increase in levels of foreign currency exchange rates, 20% for Asian
currencies, would result in a decrease in the fair values of our financial
instruments by $3 million at June 30, 1999, and an increase in fair values of
our financial instruments by $12 million at June 30, 1998. The change in the
relative sensitivity of the fair market value of foreign currency exchange rates
in fiscal 1999 compared with fiscal 1998 is primarily driven by the volume of
systems shipped and billed in U.S. dollars by our Swiss manufacturing subsidiary
which operates in local functional currency.


22

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           Years ended June 30
                                                              -------------------------------------------
(In thousands, except per share amounts)                               1999         1998         1997
<S>                                                           <C>            <C>          <C>

Revenue:
   Product and other revenue                                     $2,090,194   $2,489,983   $3,086,791
   Service revenue                                                  658,763      610,627      575,810
                                                              -------------------------------------------
     Total revenue                                                2,748,957    3,100,610    3,662,601

Costs and Expenses:
   Cost of product and other revenue                              1,202,562    1,580,647    1,697,277
   Cost of service revenue                                          400,688      382,904      325,269
   Research and development                                         380,346      459,188      479,101
   Selling, general and administrative                              907,612    1,068,429    1,038,313
   Other operating expense                                          (15,107)     205,543       10,757
                                                              -------------------------------------------
     Total costs and expenses                                     2,876,101    3,696,711    3,550,717

Operating (loss) income                                            (127,144)    (596,101)     111,884

Gain on sale of a portion of SGI interest in MIPS                   272,503           --           --
Interest expense                                                    (22,562)     (24,665)     (24,836)
Interest income and other, net                                        2,924       23,847       11,142
                                                              -------------------------------------------
Income (loss) before income taxes                                   125,721     (596,919)      98,190
Provision for (benefit from) income taxes                            71,892     (137,292)      19,639
                                                              -------------------------------------------
Net income (loss)                                                 $  53,829    $(459,627)   $  78,551
                                                              -------------------------------------------
Net income (loss) per share:
   Basic                                                          $    0.29    $   (2.47)   $    0.44
                                                              -------------------------------------------
   Diluted                                                        $    0.28    $   (2.47)   $    0.43
                                                              -------------------------------------------
Shares used in the calculation of net income (loss) per share:
   Basic                                                            186,374      186,149      175,548
   Diluted                                                          189,427      186,149      182,637
                                                              -------------------------------------------
</TABLE>

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


                                                                            23
<PAGE>


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      At June 30
                                                                           ------------------------------
(DOLLARS IN THOUSANDS)                                                              1999         1998
<S>                                                                        <C>            <C>
Assets:
Current assets:
   Cash and cash equivalents                                                   $ 571,117    $ 506,639
   Short-term marketable investments                                             117,026      230,081
   Accounts receivable, net of allowance for doubtful accounts of
     $15,407 in 1999; $17,463 in 1998                                            582,383      665,420
   Inventories                                                                   195,181      322,823
   Deferred tax assets                                                           243,867      240,838
   Prepaid expenses and other current assets                                     137,459       99,571
                                                                           ------------------------------
     Total current assets                                                      1,847,033    2,065,372
Restricted investments                                                            94,226          --
Property and equipment, net of accumulated depreciation and amortization         380,768      445,420
Net long-term deferred tax assets                                                126,562      189,806
Other assets                                                                     339,668      264,108
                                                                           ------------------------------
                                                                              $2,788,257   $2,964,706
                                                                           ------------------------------
Liabilities and Stockholders' Equity:
Current liabilities:
   Accounts payable                                                              192,974      215,260
   Accrued compensation                                                          104,362      160,609
   Other current liabilities                                                     365,736      386,477
   Deferred revenue                                                              308,281      329,525
   Current portion of long-term debt                                               5,700        4,801
                                                                           ------------------------------
     Total current liabilities                                                   977,053    1,096,672

Long-term debt and other                                                         387,005      403,522

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.001 par value: issuable in series,
     2,000,000 shares authorized; shares issued and outstanding: 17,500           16,998       16,998
   Common stock, $.001 par value, and additional paid-in capital;
     500,000,000 shares authorized; shares issued: 189,555,187 in 1999;
     189,519,187 in 1998;                                                      1,421,028    1,407,108
   Retained earnings                                                              92,449       65,415
   Treasury stock, at cost: 7,010,263 shares in 1999; 1,995,797 shares in 1998  (104,633)     (25,976)
   Accumulated other comprehensive income                                         (1,643)         967
                                                                           ------------------------------
     Total stockholders' equity                                                1,424,199    1,464,512
                                                                           ------------------------------
                                                                              $2,788,257   $2,964,706
                                                                           ------------------------------
                                                                           ------------------------------
</TABLE>

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


24
<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                          Years ended June 30
                                                               ----------------------------------------
(In thousands)                                                         1999         1998         1997
<S>                                                            <C>          <C>            <C>
Cash Flows From Operating Activities:
Net income (loss)                                                 $  53,829    $(459,627)   $  78,551
Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
   Depreciation and amortization                                    221,508      314,581      354,319
   Gain on sale of a portion of SGI interest in MIPS               (272,503)          --           --
   Write-off of acquired in-process technology                           --       16,900           --
   Changes in deferred tax assets and liabilities                    60,067     (162,540)     (18,918)
   Other                                                             54,640      171,608        4,690
Changes in operating assets and liabilities:
   Accounts receivable                                               83,036      467,055     (152,773)
   Inventories                                                      111,908      264,226     (211,013)
   Accounts payable                                                 (22,529)     (44,257)      (2,236)
   Other assets and liabilities                                    (144,592)      75,432      117,614
                                                               ----------------------------------------
       Total adjustments                                             91,535    1,103,005       91,683
                                                               ----------------------------------------
     Net cash provided by operating activities                      145,364      643,378      170,234

Cash Flows From Investing Activities:
Available-for-sale investments:
   Purchases                                                       (396,807)    (230,368)      (6,036)
   Sales                                                            207,740       43,000       16,162
   Maturities                                                       314,718      104,485       44,274
Purchases of restricted investments                                (219,579)          --           --
Proceeds from the maturities of restricted investments              113,893           --           --
Proceeds from sale of a portion of SGI interest in MIPS             272,503           --           --
Capital expenditures                                               (147,516)    (195,137)    (214,989)
Increase in other assets                                           (113,611)     (73,805)     (86,359)
                                                               ----------------------------------------
     Net cash provided by (used in) investing activities             31,341     (351,825)    (246,948)

Cash Flows From Financing Activities:
Issuance of debt                                                      7,461       18,735      123,807
Payments of debt principal                                          (25,918)     (62,838)    (153,730)
Sale of SGI common stock                                             61,527       95,241       77,304
Repurchase of SGI common stock                                     (172,426)     (62,749)          --
Sale of MIPS common stock                                            17,654           --           --
Cash dividends-preferred stock                                         (525)        (525)        (525)
                                                               ----------------------------------------
     Net cash (used in) provided by financing activities           (112,227)     (12,136)      46,856
                                                               ----------------------------------------
Net increase (decrease) in cash and cash equivalents                 64,478      279,417      (29,858)
Cash and cash equivalents at beginning of year                      506,639      227,222      257,080
                                                               ----------------------------------------
Cash and cash equivalents at end of year                          $ 571,117    $ 506,639    $ 227,222
                                                               ----------------------------------------
                                                               ----------------------------------------
</TABLE>

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


                                                                            25

<PAGE>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                              Three years ended June 30, 1999
                                                                                        ------------------------------------------
                                                                                                        Common Stock
                                                                                         Preferred     and Additional     Retained
(In thousands)                                                                               Stock    Paid-In Capital     Earnings
<S>                                                                                     <C>          <C>              <C>
Balance, June 30, 1996                                                                    $ 16,998      $   1,172,960    $ 461,311
  Components of comprehensive income:
    Net income                                                                                 --                 --        78,551
    Currency translation adjustment                                                            --                 --            --
    Change in unrealized loss on available-for-sale investments, net of tax                    --                 --            --
       Total comprehensive income
  Common stock issued under employee plans including related tax benefits (6,623
    shares)                                                                                    --              90,225           --
  Convertible preferred stock, Series A preferred dividends                                    --                 --          (525)
  Issuance of treasury stock under employee plans (36 shares)                                  --                 --        (2,099)
                                                                                        ------------------------------------------
Balance, June 30, 1997                                                                      16,998          1,263,185      537,238
  Components of comprehensive loss:
    Net loss                                                                                   --                 --      (459,627)
    Currency translation adjustment                                                            --                 --            --
    Change in unrealized loss on available-for-sale investments, net of tax                    --                 --            --
       Total comprehensive loss
  Common stock issued under employee plans including related tax benefits (7,551
    shares)                                                                                    --             95,194            --
  Common stock issued for ParaGraph acquisition (2,935 shares)                                 --             48,729            --
  Convertible preferred stock, Series A preferred dividends                                    --                 --          (525)
  Purchase (4,700 shares) and issuance (2,704 shares) of treasury stock under
    employee plans--net                                                                        --                 --       (11,671)
                                                                                        ------------------------------------------
Balance, June 30, 1998                                                                     16,998          1,407,108        65,415
  Components of comprehensive income:
    Net income                                                                                 --                 --        53,829
    Currency translation adjustment                                                            --                 --            --
    Change in unrealized loss on available-for-sale investments, net of tax                    --                 --            --
       Total comprehensive income
  Common stock issued under employee plans including related tax benefits (36
    shares)                                                                                    --                794            --
  Convertible preferred stock, Series A preferred dividends                                    --                 --          (525)
  Purchase (12,112 shares) and issuance (7,097 shares) of treasury stock under
    employee plans--net                                                                        --                 --       (29,744)
  Common stock issued by MIPS                                                                  --             16,600            --
  Other                                                                                        --             (3,474)        3,474
                                                                                        ------------------------------------------
Balance, June 30, 1999                                                                   $ 16,998       $  1,421,028     $  92,449
                                                                                        ------------------------------------------
</TABLE>

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


26
<PAGE>

<TABLE>
<CAPTION>
                                                                                            Three years ended June 30, 1999
                                                                                      --------------------------------------------
                                                                                                    Accumulated
                                                                                                          Other            Total
                                                                                      Treasury    Comprehensive    Stockholders'
(In thousands)                                                                           Stock           Income           Equity
<S>                                                                                  <C>         <C>               <C>
Balance, June 30, 1996                                                                 $ (867)         $ 24,916      $ 1,675,318
  Components of comprehensive income:
    Net income                                                                              --               --           78,551
    Currency translation adjustment                                                         --           (4,303)         (4,303)
    Change in unrealized loss on available-for-sale investments, net of tax                 --            1,208            1,208
                                                                                                                     -----------
       Total comprehensive income                                                                                         75,456
  Common stock issued under employee plans including related tax benefits (6,623
    shares)                                                                                 --               --           90,225
  Convertible preferred stock, Series A preferred dividends                                 --               --            (525)
  Issuance of treasury stock under employee plans (36 shares)                              867               --          (1,232)
                                                                                       -----------------------------------------
Balance, June 30, 1997                                                                      --           21,821        1,839,242
  Components of comprehensive loss:
    Net loss                                                                                --               --        (459,627)
    Currency translation adjustment                                                         --          (21,416)        (21,416)
    Change in unrealized loss on available-for-sale investments, net of tax                 --              562              562
                                                                                                                     -----------
       Total comprehensive loss                                                                                        (480,481)
  Common stock issued under employee plans including related tax benefits (7,551
    shares)                                                                                 --               --           95,194
  Common stock issued for ParaGraph acquisition (2,935 shares)                              --               --           48,729
  Convertible preferred stock, Series A preferred dividends                                 --               --            (525)
  Purchase (4,700 shares) and issuance (2,704 shares) of treasury stock under
    employee plans--net                                                                 (25,976)             --         (37,647)
                                                                                       -----------------------------------------
Balance, June 30, 1998                                                                  (25,976)             967       1,464,512
  Components of comprehensive income:
    Net income                                                                              --               --           53,829
    Currency translation adjustment                                                         --           (2,562)         (2,562)
    Change in unrealized loss on available-for-sale investments, net of tax                 --              (48)            (48)
                                                                                                                     -----------
       Total comprehensive income                                                                                         51,219
  Common stock issued under employee plans including related tax benefits (36 shares)       --               --              794
  Convertible preferred stock, Series A preferred dividends                                 --               --            (525)
  Purchase (12,112 shares) and issuance (7,097 shares) of treasury stock under
    employee plans--net                                                                 (78,657)             --        (108,401)
  Common stock issued by MIPS                                                               --               --           16,600
  Other                                                                                     --               --               --
                                                                                       -----------------------------------------
Balance, June 30, 1999                                                                 $(104,633)       $  (1,643)    $1,424,199
                                                                                       -----------------------------------------
                                                                                       -----------------------------------------

</TABLE>


                                                                             27
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. NATURE OF OPERATIONS

Silicon Graphics, Inc. ("SGI") is a leader in high-performance computing. SGI's
broad range of workstations and graphics servers deliver advanced 3D graphics
and computing capabilities for engineering and creative professionals. Our
highly scalable servers also have a growing presence in the enterprise market,
with a particular emphasis on Internet, large corporate data and
telecommunications applications. Our products are manufactured in Wisconsin and
Switzerland. We distribute our products through our direct sales force, as well
as through indirect channels including resellers and distributors. Product and
other revenue consists primarily of revenue from computer system and software
product shipments, as well as the sale of software distribution rights, system
leasing, technology licensing agreements and non-recurring engineering
contracts. Service revenue results from customer support and maintenance
contracts, as well as from delivery of professional services.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION  The consolidated financial statements include the
accounts of SGI and our wholly-and majority-owned subsidiaries.

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

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

CASH EQUIVALENTS AND MARKETABLE AND RESTRICTED INVESTMENTS  Cash equivalents
consist of high quality money market instruments with maturities of 90 days or
less at the date of purchase. Short-term marketable investments and restricted
investments consist of both high quality money market instruments and high
quality debt securities with maturities of one year or less, and are stated at
fair value. Other marketable investments consist primarily of high quality debt
securities with maturities greater than one year and less than two years, and
are stated at fair value. At June 30, 1999 and 1998, our cash equivalents and
marketable investments are all classified as available-for-sale. At June 30,
1999, our restricted investments are classified as available-for-sale but are
pledged as collateral against letters of credit and an equity forward purchase
arrangement. Restricted investments are held in SGI's name by major financial
institutions.

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

FAIR VALUES OF FINANCIAL INSTRUMENTS  The 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 and restricted investments, long-term debt,
and foreign exchange forward contracts are based on quoted market prices or
pricing models using current market rates.

DERIVATIVE FINANCIAL INSTRUMENTS  We 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. We defer gains and losses on currency
forward contracts that hedge firmly committed customer transactions and on
currency purchased options that hedge probable anticipated, but not firmly
committed, customer transactions and we recognize them in revenue in the same
period that the underlying transactions are settled. Gains and losses on
currency forward contracts that hedge existing assets and liabilities are
recognized in interest and other income, net, in the same period as losses and
gains on the underlying transactions are recognized and generally offset. Gains
and losses on any derivatives not meeting the above criteria would be recognized
in income in the current period.


28

<PAGE>


EQUITY INSTRUMENTS INDEXED TO SGI'S COMMON STOCK  We record the proceeds
received from the sale of equity instruments and amounts paid upon the
purchase of equity instruments as a component of stockholders' equity.
Subsequent changes in the fair value of the equity instrument contracts are
not recognized because we have the ability to determine whether the contracts
are settled in cash or stock. If the contracts are ultimately settled in
cash, the amount of cash paid or received is recorded as a component of
stockholders' equity.

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

PROPERTY AND EQUIPMENT  Property and equipment is stated at cost, and
depreciation is computed using the straight-line method. Useful lives of two to
six 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 eight to fifteen years.

OTHER ASSETS  Included in other assets are spare parts that are generally
amortized on a straight-line basis over the course of their respective lives
ranging from two to five years and investments in certain technology companies
that are not publicly traded and are carried at the lower of cost or market
value. Also included in other assets is goodwill associated with the fiscal 1991
acquisition of Silicon Graphics World Trade Corporation which is amortized on a
straight-line basis over a period of twenty years.

REVENUE RECOGNITION  We generally recognize product revenue when we ship the
product to the customer and we have no additional significant performance
obligations. Sales of certain high performance systems may be made on the basis
of contracts that include acceptance criteria. In these instances, we recognize
revenue upon acceptance by the customer or independent distributor, or in the
case of a conversion from lease to purchase, at the time of the customer's
election to convert.

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

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

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

PRODUCT WARRANTY  We 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 NT systems.

ADVERTISING COSTS  We account for advertising costs as expense in the period in
which they are incurred. Advertising expense for the years ended June 30, 1999,
1998 and 1997 was $49 million, $56 million and $43 million, respectively.

PER SHARE DATA  Basic earnings per share is based on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted earnings per share is calculated by dividing net
income available to common stockholders, 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 COMPENSATION  We 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.


                                                                             29
<PAGE>


ACCOUNTING CHANGES  We implemented new accounting standards in fiscal 1999. The
adoption of these standards did not have a material effect on our financial
position or results of operations.

Beginning with the first quarter of fiscal 1999, we adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes new standards for the reporting and display of
comprehensive income and its components. The disclosures required by SFAS 130
are presented in the Consolidated Statement of Stockholders' Equity and in
Note 14, "Comprehensive Income."

Effective June 30, 1999, we adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. See Note 16, "Segment Information" for further
information.

Effective July 1, 1998, we adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition,
which supersedes SOP 91-1. SOP 97-2, as amended by SOP 98-4, and modified by
SOP 98-9, provides guidance on revenue recognition for software transactions.
It requires deferral of some or all of the revenue related to a specific
contract depending on the existence of vendor specific objective evidence of
fair value and the ability to allocate the total fee to all elements within
the contract. The portion of the fee identified to an element is recognized
as revenue when all of the revenue recognition criteria have been met for
that element.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activity ("SFAS 133").
In June 1999, SFAS 133 was amended by Statement No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137 is required to be
adopted in all fiscal quarters of all fiscal years beginning after June 15,
2000. The Statement will require us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. We do not expect the adoption to have
a material impact on our consolidated financial position, results of
operations or cash flows.

During fiscal 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. The statement requires the capitalization of
internal use computer software costs if certain criteria are met. The
capitalized cost will be amortized on a straight-line basis over the useful
life of the software. We will adopt the statement as of July 1, 1999. The
adoption of the statement is not expected to have a material impact on our
financial statements.

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


NOTE 3. OTHER OPERATING EXPENSE

Other operating expense is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  ----------------------------------
                                                                            YEARS ENDED JUNE 30
                                                                  ----------------------------------
                                                                       1999         1998         1997
<S>                                                               <C>         <C>          <C>
Write-off of acquired in-process technology and other
  merger-related expenses                                         $  (1,107)   $  14,905     $10,757
Restructuring                                                       (14,000)     143,998          --
Charge for impairment of long-lived assets                               --       46,640          --
                                                                  ----------------------------------
                                                                  $ (15,107)   $ 205,543     $10,757
                                                                  ----------------------------------
                                                                  ----------------------------------

</TABLE>


30

<PAGE>


WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY AND OTHER MERGER-RELATED EXPENSES
The 1999 amount represents an adjustment to previously estimated merger-related
expenses. The 1998 amount includes a $17 million charge for acquired in-process
technology from the $50 million acquisition of Paragraph, which was accounted
for using the purchase method, partially offset by adjustments to previously
estimated merger-related expenses. The 1997 amount consists of merger-related
expenses. Merger-related expenses consist principally of costs associated with
the integration of SGI and Cray information systems, accounting processes and
marketing and human resources activities.

RESTRUCTURING  In the second quarter of fiscal 1998, we announced and began to
implement a restructuring program aimed at bringing our expenses more in line
with the current revenue levels and restoring long-term profitability to SGI.
SGI's restructuring program was broad-based and covered virtually all aspects of
our products, operations and processes. The process of developing this program
continued during the balance of fiscal 1998 and included a reevaluation of our
core competencies, technology roadmap and business model, as well as development
of our fiscal 1999 operating plan. Our restructuring activity resulted in the
elimination of approximately 1,400 positions, writing down certain operating
assets, vacating certain leased facilities and canceling certain contracts.
These actions resulted in aggregate charges of $144 million (before the effect
of the adjustment noted below), of which approximately $75 million have used or
will use cash, and $69 million of which were non-cash charges. The operating
asset write-down includes a $32 million charge taken in the third quarter of
fiscal 1998 to write down purchased intangibles and goodwill associated with the
September 1997 acquisition of ParaGraph which was taken following the evaluation
of our core competencies and technology roadmap. We expect that the remaining $8
million accrued balance at June 30, 1999 will result primarily in cash
expenditures and will be financed through current working capital. We believe
the savings resulting from the restructuring activities, as well as generally
tighter operating expense controls, contributed to a reduction in operating
expense levels by approximately $240 million in fiscal 1999.

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

The following table depicts the restructuring activity in fiscal 1998 and 1999
(in thousands):

<TABLE>
<CAPTION>
                                       -----------------------------------------------------------------
                                            Total   Fiscal 1999
                                      Fiscal 1998  Adjustments:
                                    Restructuring     Increase/           Expenditures        Balance at
Category                                  Charges    (Decrease)         Cash     Non-Cash  June 30, 1999
<S>                                 <C>            <C>            <C>          <C>         <C>
Severance and related charges          $   83,962   $  (15,500)   $ (57,188)   $  (6,056)   $   5,218
Operating asset write-down                 37,780        4,216           --      (41,996)          --
Canceled contracts                          4,675       (1,916)        (324)      (2,435)          --
Vacated facilities                          8,960       (1,300)      (6,408)        (203)       1,049
Other                                       8,621          500       (4,104)      (2,851)       2,166
                                       -----------------------------------------------------------------
                                       $  143,998   $  (14,000)   $ (68,024)   $ (53,541)   $   8,433
                                       -----------------------------------------------------------------
                                       -----------------------------------------------------------------
</TABLE>


CHARGE FOR IMPAIRMENT OF LONG-LIVED ASSETS  As a result of the processes
described above, we also found it necessary to downsize our vector
supercomputer business, necessitating an evaluation of the ongoing value of
the associated plant and equipment and intangible assets. Based on this
evaluation, we determined that assets (principally a specific-use
manufacturing facility; supercomputers used in product design, support and
manufacturing and other machinery and equipment) with a carrying amount of
$50 million were impaired and wrote them down by $47 million to their fair
value. Fair value was principally based on estimated exchange and resale
value.

                                                                             31
<PAGE>


NOTE 4. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                  -----------------------------------
                                                                          Years Ended June 30
                                                                  -----------------------------------
                                                                       1999         1998         1997
<S>                                                               <C>          <C>          <C>
Net income (loss)                                                 $  53,829    $(459,627)   $  78,551
Less preferred stock dividends                                         (525)        (525)        (525)
                                                                  -----------------------------------
Net income (loss) available to common stockholders                $  53,304    $(460,152)   $  78,026
                                                                  -----------------------------------
Weighted average shares outstanding--basic                          186,374      186,149      175,548
Employee stock options and restricted shares                          3,053           --        7,089
                                                                  -----------------------------------
Weighted average shares outstanding--diluted                        189,427      186,149      182,637
                                                                  -----------------------------------
Net income (loss) per share:
   Basic                                                          $    0.29   $    (2.47)   $    0.44
                                                                  -----------------------------------
   Diluted                                                        $    0.28   $    (2.47)   $    0.43
                                                                  -----------------------------------
Potentially dilutive securities excluded from computations
   because they are anti-dilutive                                     8,843       12,187        9,144
                                                                  -----------------------------------
                                                                  -----------------------------------
</TABLE>



NOTE 5. FINANCIAL INSTRUMENTS

CASH EQUIVALENTS AND MARKETABLE AND RESTRICTED INVESTMENTS  The following table
summarizes by major security type the fair value of SGI's cash equivalents and
marketable and restricted investments at June 30, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>

                                                                             -----------------------
                                                                                   1999         1998
<S>                                                                          <C>          <C>
U.S. commercial paper                                                          $ 253,227    $ 296,789
Certificates of deposit and time deposits                                        143,080       93,590
Money market funds                                                               128,600       17,800
Corporate notes and bonds                                                         64,480           --
Repurchase agreements                                                             40,000       36,000
U.S. government securities                                                        26,217      151,933
Money market preferreds                                                               --       40,000
Other                                                                              4,323           --
                                                                              -----------------------
   Total                                                                         659,927      636,112
Less amounts classified as cash equivalents                                     (448,675)    (406,031)
                                                                              -----------------------
   Total marketable and restricted investments                                 $ 211,252    $ 230,081
                                                                              -----------------------
                                                                              -----------------------
</TABLE>


At June 30, 1999 and 1998, the amortized cost of cash equivalents and marketable
and restricted investments approximates fair value. Gross unrealized gains and
losses were not significant in fiscal 1999 or 1998. Gross realized gains and
losses on sales of available-for-sale securities were not significant in fiscal
1999, 1998 or 1997.

FINANCIAL INSTRUMENTS WITH DERIVATIVE RISK (OFF-BALANCE SHEET)  The notional
principal amounts of our currency forward contracts at June 30, 1999 and 1998
were $3 million and $103 million, respectively. There were no currency options
outstanding at June 30, 1999. The notional principal amount of our currency
options at June 30, 1998 was $79 million. The notional principal amounts for
off-balance-sheet instruments provide one measure of the transaction volume
outstanding at year end, and do not represent the amount of our exposure to
credit loss or market risk. Credit risk is our gross exposure to potential
accounting loss on currency forward contracts if all counterparties failed to
perform as agreed at the contracted rates and contracts had to be replaced at
rates prevailing at each respective date.


32
<PAGE>


We transact business in various foreign currencies, including the major European
currencies and the Japanese yen. We have established revenue and balance sheet
hedging programs to protect against reductions in value and volatility of future
cash flows caused by changes in foreign exchange rates. We use derivatives in
the form of currency forward contracts and currency options in our programs. All
currency forward contracts related to recorded transactions expire within one
year. All currency forward contracts related to firmly committed customer
transactions expire within two and one-half years. All currency forward
contracts related to anticipated transactions expire within six months. Deferred
gains and losses on contracts related to firmly committed transactions and
anticipated transactions were not significant in fiscal 1999, 1998 or 1997.

FAIR VALUE OF FINANCIAL INSTRUMENTS  The carrying amounts and estimated fair
values of SGI's financial instruments at June 30, 1999 and 1998 are summarized
as follows (in thousands):

<TABLE>
<CAPTION>

                                                    -------------------------------------------------
                                                                1999                       1998
                                                    -------------------------------------------------
                                                      Carrying                  Carrying
                                                        Amount   Fair Value       Amount   Fair Value
<S>                                                 <C>          <C>           <C>         <C>
Cash and cash equivalents                           $  571,120    $ 571,120    $ 506,639    $ 506,639
Marketable and restricted investments                  211,252      211,252      230,081      230,081
Debt instruments                                       360,670      329,065      371,261      331,525
Currency forward contracts                               2,181        2,790       (3,577)        (822)
Currency options                                            --           --          592          163
                                                    -------------------------------------------------
</TABLE>



NOTE 6. CONCENTRATION OF CREDIT AND OTHER RISKS

CREDIT RISK  Financial instruments that potentially subject SGI to concentration
of credit risk consist principally of cash investments, currency forward
contracts and trade receivables. We place our investments and transact our
currency forward contracts with high-credit-quality counterparties and, by
policy, limit the amount of credit exposure to any one counterparty, and
generally do not require collateral. The credit risk on receivables due from
counterparties related to currency forward contracts is immaterial at June 30,
1999 and 1998. We perform ongoing credit evaluations of our customers and,
except in connection with the sales of supercomputers, generally do not require
collateral. We maintain reserves for potential credit losses and such losses
have been within our expectations.

PRODUCTION  Most of our products incorporate certain 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. In
addition, we increasingly outsource certain aspects of our production, including
the entire Windows NT-based workstation product line, to third parties. If we
were unable to procure certain such components or sustain our outsourced
production capacity, it could affect our ability to meet demand for our products
which would have an adverse effect upon our results.

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

Our sales to foreign customers also are subject to export regulations, with
sales of most of our high-end products requiring clearance and export licenses
from the U.S. Department of Commerce. Our export sales would be adversely
affected if such regulations were tightened, or if they are not modified over
time to reflect the increasing performance of our products. The Departments of
Commerce and Justice are currently conducting civil and criminal investigations
into SGI's compliance with the export regulations in connection with the sale of
several computer systems to a customer in Russia during fiscal 1997.


                                                                              33

<PAGE>

We believe that these matters will be resolved without a significant adverse
effect on our business. However, if our export privileges were limited or
denied, our results would be adversely affected.

NOTE 7. INVENTORIES

Inventories at June 30, 1999 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                      ----------------------
                                                           1999         1998
<S>                                                   <C>          <C>
Components and subassemblies                          $  19,988    $ 114,139
Work-in-process                                          71,406       74,961
Finished goods                                           41,694       47,917
Demonstration systems                                    62,093       85,806
                                                      ----------------------
Total inventories                                     $ 195,181    $ 322,823
                                                      ----------------------
</TABLE>

NOTE 8. PROPERTY AND EQUIPMENT

Property and equipment at June 30, 1999 and 1998 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    ------------------------
                                                          1999         1998
<S>                                                  <C>          <C>
Land and buildings                                   $  94,630    $ 123,437
Machinery and equipment                                639,166      644,144
Furniture and fixtures                                 117,418      118,602
Leasehold improvements                                 129,605      126,106
                                                    -----------   ----------
                                                       980,819    1,012,289
Accumulated depreciation and amortization             (600,051)    (566,869)
                                                    -----------   ----------
Net property and equipment                           $ 380,768    $ 445,420
                                                    -----------   ----------
</TABLE>

NOTE 9. OTHER ASSETS

Other assets at June 30, 1999 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     ----------------------
                                                          1999         1998
<S>                                                  <C>          <C>
Spare parts                                          $ 157,539    $ 146,024
Investments                                             82,561        1,418
Software licenses, goodwill and other                   99,568      116,666
                                                    ----------    ---------
                                                     $ 339,668    $ 264,108
                                                    ----------    ---------
</TABLE>

Included in investments at June 30, 1999, is our investment in Wam!Net Inc.
(WNI). In March 1999, we entered into a series of agreements with WNI, a
private company providing digital networking service that integrates
high-speed digital file transfer with high-bandwidth data applications
intended to improve production workflow in time-sensitive, data-critical
industries such as the graphics arts, entertainment and medical imaging.
Pursuant to those agreements, we acquired a minority interest in WNI
preferred stock in exchange for $35 million in cash and title to our campus
facility in Eagan, Minnesota, valued at $38 million. We are accounting for
this investment using the cost method. The two companies also have entered
into preferred provider arrangements whereby WNI and SGI each agreed to
purchase hardware, software and service from each other over a four-year
period beginning January 1, 1999.

34
<PAGE>

NOTE 10. LONG-TERM DEBT

Long-term debt at June 30, 1999 and 1998 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                               ----------------------
                                                                                    1999         1998
<S>                                                                            <C>          <C>
Senior Convertible Notes due September 2004 at 5.25%                           $ 230,591    $ 230,591
Zero Coupon Convertible Subordinated Debentures due
   November 2013 at 4.15%, net of unamortized discount of $3,313 in 1998              --        3,777
Convertible Subordinated Debentures due February 2011 at 6.125%,
   net of unamortized discount of $12,651 ($16,154 in 1998)                       54,674       65,846
Swiss Franc mortgage due June 2017 at 3.79% (3.77% in 1998),
   which resets quarterly                                                         18,116       19,893
Japanese Yen fixed rate loan due December 2001 at 2.06%                           49,493       42,005
Other                                                                              7,797        9,149
                                                                              -----------   ----------
                                                                                 360,671      371,261
Less amounts due within one year                                                  (5,700)      (4,801)
                                                                              -----------   ----------
Amounts due after one year                                                     $ 354,971    $ 366,460
                                                                              -----------   ----------
</TABLE>

In November 1993, we issued Zero Coupon Convertible Subordinated Debentures (the
"Zero Coupon Debentures") with an ultimate maturity amount of $455 million. In
September 1997, we completed an offer to exchange our newly registered Senior
Convertible Notes (the "Senior Notes") for up to all of our existing Zero Coupon
Debentures. The Senior Notes are convertible into shares of common stock at a
conversion price equal to $36.25 per share. The Senior Notes are redeemable at
our option, beginning in 2002, at varying prices based on the year of
redemption. The Senior Notes are redeemable at the holder's option in the event
of the sale of all, or substantially all, of our common stock for consideration
other than common stock traded on a U.S. exchange or approved for quotation on
the Nasdaq National Market. We redeemed all remaining unexchanged Zero Coupon
Debentures in fiscal 1999.

In connection with the Cray acquisition, SGI assumed the Cray Convertible
Subordinated Debentures. These debentures are convertible into SGI's common
stock at a conversion price of $78 per share at any time prior to maturity and
may be redeemed at our option at a price of 100%. Prior to our acquisition of
Cray, Cray repurchased a portion of the debentures with a face value of $33
million. The repurchase satisfied the first six required annual sinking fund
payments of $6 million originally scheduled for the years 1997 through 2002. In
fiscal 1999 we repurchased another portion of the debentures with a face value
of $15 million. This repurchase satisfied the next two required annual sinking
fund payments of $6 million originally scheduled for the years 2003 through
2004. Remaining annual sinking fund payments of $6 million each are scheduled
from 2005 to 2010 with a final maturity payment of $35 million in 2011.

Principal maturities of long-term debt at June 30, 1999 are as follows (in
millions): 2000 - $6; 2001 - $4; 2002 - $52; 2003 - $1; 2004 - $.3 and $298,
thereafter.


                                                                             35
<PAGE>


NOTE 11. LEASING ARRANGEMENTS AS LESSOR

We have entered into certain lease arrangements which are accounted for as
sales. The net investment in sales-type leases at June 30, 1999 and 1998 is
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                              -----------------------
                                                                                    1999         1998
<S>                                                                            <C>          <C>
Total minimum lease payments receivable                                        $  10,457    $   1,284
Less unearned interest income                                                     (1,091)         (47)
                                                                               ----------   ----------
Net investment in sales-type leases                                                9,366        1,237
Less current portion                                                              (2,847)      (1,113)
                                                                              -----------   ----------
Long-term portion                                                              $   6,519    $     124
                                                                              -----------   ----------
</TABLE>


Future minimum lease rents on noncancelable sales-type lease agreements at
June 30, 1999 are as follows (in millions): 2000 - $4; 2001 - $3; 2002 - $2
and 2003 - $1.

NOTE 12. 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, net of subleases
and rental income, at June 30, 1999 are as follows (in millions): 2000 - $63;
2001 - $48; 2002 - $38; 2003 - $23; 2004 - $18 and $194, thereafter.

Aggregate operating lease rent expense in fiscal 1999, 1998 and 1997 was (in
millions): $71, $77 and $71, respectively.


NOTE 13. STOCKHOLDERS' EQUITY

PREFERRED STOCK TRANSACTIONS NKK Corporation ("NKK") owns 17,500 shares of
Series A convertible preferred stock (see Note 18). The preferred stock pays
a 3% cumulative annual dividend, has preference upon liquidation in the
amount of the purchase price and has aggregate voting rights equivalent to
1,400,000 shares of common stock. The preferred stock is convertible into our
common stock at certain times at the then-current price of the common stock.
The preferred stock is perpetual, but is subject to redemption at our option
at certain times if the market price of the common stock is below $8.75 per
share.

STOCK AWARD PLANS We have various stock award plans which provide for the
grant of incentive and nonstatutory stock options and the issuance of
restricted stock to employees and certain other persons who provide
consulting or advisory services to SGI. We grant incentive stock options at
not less than the fair market value on the date of grant; the board of
directors determines the prices of nonstatutory stock option grants and
restricted stock. Under the plans, options and restricted stock generally
vest over a fifty-month period from the date of grant.

In addition, we have a Directors' Stock Option Plan which allows for the
grant of nonstatutory stock options to nonemployee directors at not less than
the fair market value at the date of grant. Eligible directors are granted an
option to purchase 30,000 shares of common stock on the date of their initial
election as a director. On November 1 of each year, each eligible director is
granted an option to purchase an additional 10,000 shares of common stock.
These options generally vest in installments over a four-year period. At June
30, 1999, 876,200 shares were available for future option grants under the
Directors' Stock Option Plan.

In July 1998, we effected an option exchange program to allow employees
(excluding senior executives) to exchange their out-of-the-money options for
new options at a more favorable exercise price. The new options have an
exercise price of $11.125, the fair value on the date the exchange was
announced, vest over the longer of two years or the original vesting schedule
and could not be exercised prior to January 1999. As a result of the program,
options to purchase approximately 12,800,000 shares with a weighted average
exercise price of $19.70 were exchanged for new options.

At June 30, 1999, 1998 and 1997, there were 18,437,793, 10,832,173, and
10,749,128 unused shares, respectively, available for grant, and there were
820,625, 580,316 and 303,620 shares of restricted stock, respectively,
subject to repurchase.


36
<PAGE>

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

<TABLE>
<CAPTION>
                                           1999                   1998                      1997
                          ----------------------------------------------------------------------
                           Number of   Weighted   Number of   Weighted    Number of     Weighted
                              Shares    Average      Shares    Average       Shares      Average
                               Under   Exercise       Under   Exercise        Under     Exercise
                              Option      Price      Option      Price       Option        Price
<S>                       <C>          <C>       <C>         <C>         <C>           <C>
Balance at July 1         34,394,843    $ 16.59  34,753,548  $   16.92   38,056,701    $   19.53
   Options granted        20,013,148    $ 12.14  11,536,447  $   13.18   18,817,420    $   20.49
   Options exercised      (3,151,195)   $  8.05  (6,146,202) $    8.93   (3,703,246)   $   10.47
   Options forfeited     (12,803,398)   $ 19.70  (5,748,950) $   19.86   (4,862,813)   $   26.98
   Options canceled       (7,838,056)   $ 17.15          --  $      --  (13,554,514)   $   27.37
                         -----------------------------------------------------------------------
Balance at June 30        30,615,342    $13.15   34,394,843  $   16.59   34,753,548    $   16.92
                         -----------------------------------------------------------------------
Exercisable at June 30    13,286,532    $13.86   17,337,552  $   17.12   18,346,324    $   13.72
                         -----------------------------------------------------------------------
</TABLE>


Additional information about options outstanding at June 30, 1999 is as
follows:

<TABLE>
<CAPTION>
                                          Options Outstanding          Options Exercisable
   ------------------------------------------------------------------------------------------------
                                         Weighted        Weighted                       Weighted
                                          Average         Average                        Average
          Exercise       Number of       Exercise     Contractual       Number of       Exercise
       Price Range          Shares          Price     Life (years)         Shares          Price
   <S>                  <C>              <C>          <C>              <C>              <C>
   $  0.96 - $ 10.00     2,070,419        $  7.02             2.5       1,869,276         $ 6.84
   $ 10.19 - $ 11.25    14,498,029        $ 11.13             6.7       5,761,399         $11.14
   $ 11.31 - $ 15.00    11,071,730        $ 13.74             8.5       3,093,467         $13.25
   $ 15.06 - $ 42.50     2,975,164        $ 25.06             6.0       2,562,390         $25.86
                        -------------------------                      -------------------------
                        30,615,342        $ 13.15                      13,286,532         $13.86
                        -------------------------                      -------------------------
</TABLE>

Stock Purchase Plan We have an employee stock purchase plan under which eligible
employees may purchase stock at 85% of the lower of the closing prices for the
stock at the beginning of a twenty four-month offering period or the end of each
six-month purchase period. The purchase periods generally begin in May and
November. Purchases are limited to 10% of each employee's compensation. At June
30, 1999, we had issued 22,174,495 shares under the plan and we have reserved
2,885,505 shares for future issuance.

Grant Date Fair Values The weighted average estimated fair value of employee
stock options granted at grant date market prices during fiscal 1999, 1998 and
1997 was $5.18, $6.32 and $5.94 per share, respectively. The weighted average
exercise price of employee stock options granted at grant date market prices
during fiscal 1999, 1998 and 1997 was $12.14, $13.20 and $20.56 per share,
respectively. There were no employee stock options granted at below grant date
market prices during fiscal 1999. The weighted average estimated fair value of
employee stock options granted at below grant date market prices during fiscal
1998 and 1997 was $10.92, and $13.54 per share, respectively. The weighted
average exercise price of employee stock options granted at below grant date
market prices during fiscal 1998 and 1997 was $8.91 and $12.56 per share,
respectively. The weighted average fair value of restricted stock granted during
fiscal 1999, 1998 and 1997 was $12.51, $20.79 and $18.93 per share,
respectively. The weighted average estimated fair value of shares granted under
the Stock Purchase Plan during fiscal 1999, 1998 and 1997 was $4.97, $5.81 and
$7.06 per share, respectively.


                                                                             37


<PAGE>

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:

<TABLE>
<CAPTION>
                                          Employee Stock Options                Stock Purchase Plan Shares
                                    --------------------------------------------------------------------------
Years ended June 30                   1999         1998         1997          1999         1998         1997
<S>                                  <C>          <C>          <C>           <C>          <C>          <C>
Expected life (in years)               1.9          2.3          2.7           0.5          0.5          0.5
Risk-free interest rate               5.26%        5.58%        6.38%         4.97%        5.68%        5.45%
Volatility                            0.71         0.61         0.50          0.56         0.76         0.57
Dividend yield                        0.00%        0.00%        0.00%         0.00%        0.00%        0.00%
                                    --------------------------------------------------------------------------
</TABLE>

PRO FORMA INFORMATION We 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 1999, 1998 and 1997 was $5
million, $13 million and $5 million, respectively.

We determined the following pro forma information regarding net income and
earnings per share as if we had accounted for our employee stock options and
employee stock purchase plan under the fair value method prescribed by SFAS
123. For purposes of pro forma disclosures, the estimated fair value of the
stock awards is amortized to expense over the vesting periods. The pro forma
information is as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                                  Years ended June 30
                                                                          ------------------------------------
                                                                               1999          1998        1997
<S>                                                                       <C>          <C>           <C>
Pro forma net loss                                                        $ (13,696)   $ (538,260)   $    (14)
Pro forma net loss per share:
   Basic                                                                  $   (0.08)   $    (2.89)   $     --
   Diluted                                                                $   (0.08)   $    (2.89)   $     --
                                                                          ------------------------------------
</TABLE>

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

STOCK REPURCHASE PROGRAM Our board of directors has authorized a program to
repurchase up to 27,500,000 shares of our common stock in open market or in
private transactions, option or other forward transactions and other
potential methods. We have repurchased 19,264,500 shares of common stock at a
cost of $311 million since commencement of the repurchase program. We utilize
equity instrument contracts to facilitate our repurchase of common stock. At
June 30, 1999, we have outstanding commitments to buy an aggregate of
6,000,000 shares of common stock under our equity forward purchase
arrangement, including obligations that were transferred from previous sold
put contracts. Under this arrangement, the purchase price will be paid within
the next two and a half years at a pre-determined price based on the
third-party's acquisition cost. The timing and method of payment (net-share
or full physical settlement) is at our discretion. The purchase commitment
under the equity forward is secured in part by collateral, reflected in our
financial statements as restricted investments. Repurchased shares are
available for use under our employee stock plans and for other corporate
purposes. At June 30, 1999, approximately 2,235,500 shares remained
uncommitted and available for our use under this stock repurchase program.

COMMON SHARES RESERVED We have reserved in the aggregate 60,328,957 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.

38
<PAGE>

NOTE 14. COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
                                                                                  Years ended June 30
                                                                         --------------------------------------
                                                                               1999         1998          1997
<S>                                                                       <C>          <C>           <C>
Unrealized loss on available-for-sale investments                         $    (118)   $     (70)    $    (632)
Foreign currency translation adjustments                                     (1,525)       1,037        22,453
                                                                         --------------------------------------

Accumulated other comprehensive (loss) income                             $  (1,643)   $     967     $  21,821
                                                                         --------------------------------------
                                                                         --------------------------------------
</TABLE>


NOTE 15. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                  Years ended June 30
                                                                         --------------------------------------
                                                                               1999         1998          1997
<S>                                                                       <C>          <C>           <C>
United States                                                             $  10,699    $(601,962)    $  84,508
International                                                               115,022        5,043        13,682
                                                                         --------------------------------------
                                                                          $ 125,721    $(596,919)    $  98,190
                                                                         --------------------------------------
                                                                         --------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  Years ended June 30
                                                                         ---------------------------------------
                                                                                1999          1998         1997
<S>                                                                       <C>          <C>           <C>
Federal:
   Current                                                                $  (44,972)  $    26,346   $   11,153
   Deferred                                                                   58,618      (185,555)      18,897
State:
   Current                                                                        93        25,488       20,771
   Deferred                                                                    5,455       (31,762)     (17,796)
Foreign:
   Current                                                                    38,244        12,727        6,633
   Deferred                                                                   14,454        15,464      (20,019)
                                                                         ---------------------------------------
                                                                          $   71,892    $ (137,292)    $ 19,639
                                                                         ---------------------------------------
                                                                         ---------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  Years ended June 30
                                                                         ----------------------------------------
                                                                               1999         1998          1997
<S>                                                                       <C>          <C>           <C>
Tax at U.S. federal statutory rate                                        $  44,003    $(208,922)    $  34,366
State taxes, net of federal tax benefit                                       3,606       (4,078)        1,934
Earnings subject to foreign taxes at lower rates                                 --           --       (16,599)
Income of Foreign Sales Corporation not subject to U.S. tax                      --           --        (6,170)
Acquired in-process technology and non-deductible goodwill                       --       16,800            --
Research and experimentation credits                                             --         (670)       (7,748)
Net operating loss with no tax benefit                                       14,705       43,606         9,140
Foreign tax credits with no tax benefit                                       4,020       13,355            --
Other                                                                         5,558        2,617         4,716
                                                                         ----------------------------------------
Provision for (benefit from) income taxes                                 $  71,892    $(137,292)    $  19,639
                                                                         ----------------------------------------
                                                                         ----------------------------------------
</TABLE>

                                                                            39
<PAGE>

We have made no provision for residual federal taxes on approximately $242
million of accumulated undistributed earnings of certain of our foreign
subsidiaries since it is our intention to permanently invest such earnings in
foreign operations. We have been granted exemptions from tax on income from
certain manufacturing operations located outside the U.S. for years through
2007. We estimate the cumulative income tax benefits attributable to the tax
status of this subsidiary to be $85 million at June 30, 1999.

The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities at June 30, 1999
and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                       -----------------------
                                                                                            1999         1998
<S>                                                                                    <C>           <C>
Deferred tax assets:
   Net operating loss carryforwards                                                    $ 191,145     $103,705
   General business credit carryforwards                                                  63,000       53,449
   Foreign tax credit carryforwards                                                       15,413       33,677
   Depreciation                                                                           49,226       40,435
   Capitalized research expenses                                                          33,661       32,768
   Inventory valuation                                                                    93,070      143,428
   Intercompany profit elimination                                                        18,284       64,283
   Reserves not currently deductible                                                      39,441       67,907
   Other                                                                                  90,725      103,655
                                                                                       -----------------------
     Subtotal                                                                            593,965      643,307
     Valuation allowance                                                                (105,364)     (90,705)
                                                                                       -----------------------
       Total deferred tax assets                                                         488,601      552,602
Deferred tax liabilities:
   Foreign taxes on unremitted foreign earnings, net of related U.S. tax liability        38,191       14,784
   Other                                                                                      --        8,881
                                                                                       -----------------------
     Total deferred tax liabilities                                                       38,191       23,665
   Total                                                                               $ 450,410     $528,937
                                                                                       -----------------------
                                                                                       -----------------------
</TABLE>

At June 30, 1999, we had gross deferred tax assets arising from deductible
temporary differences, tax losses, and tax credits of $594 million. The gross
deferred tax assets are offset by a valuation allowance of $105 million and
deferred tax liabilities of $38 million. The valuation allowance of $105
million includes $22 million attributable to benefits of stock option
deductions, which, if recognized, will be allocated directly to paid-in
capital. Realization of the majority of the net deferred tax assets is
dependent on our ability to generate approximately $900 million of future
taxable income. We believe that it is more likely than not that the assets
will be realized based on forecasted income, including income from the
planned divestiture of our interest in MIPS. However, there can be no
assurance that we will meet our expectations of future income. On a quarterly
basis, we will evaluate the realizability of the deferred tax assets and
assess the need for additional valuation allowances.

At June 30, 1999, we had United States federal and foreign jurisdictional net
operating loss carryforwards of approximately $382 million and $147 million,
respectively. The federal losses will begin expiring in fiscal year 2007 and
the foreign losses will begin expiring in fiscal year 2000. At June 30, 1999,
we also had general business credit carryovers of approximately $46 million
for United States federal tax purposes, which will begin expiring in fiscal
year 2000.


NOTE 16. SEGMENT INFORMATION

SGI is a market leader in technical computing, offering powerful servers,
supercomputers and visual workstations. We have three reportable segments:
Servers, Visual Workstations and Global Services. Reportable segments are
determined based on several factors including customer base, homogeneity of
products, technology, delivery channels and other factors. The Visual
Workstations segment has two operating units and the Server segment has three
operating units. Each operating unit has a vice president or senior vice
president that reports directly to the Chief Executive Officer. The CEO
evaluates performance and allocates resources to each of these operating
units based on profit or loss from operations before interest and taxes. The
CEO has been identified as the Chief Operating Decision Maker as defined by
SFAS 131.

40
<PAGE>

The Server segment's products include the Onyx2-TM- family of graphics
supercomputers, the Origin-TM-200 family of servers, the Origin-TM-2000
family of high-performance servers and the Cray supercomputers. Our servers
are high-performance multi-purpose computers designed to be the market
leaders in technical computing applications, empowering insight in key
industries such as manufacturing, government, entertainment, communications,
energy, science and education. Our servers also have a growing presence in
the commercial market with an emphasis on strategic business analysis,
internet applications and digital media serving. In addition, our servers are
used as storage management servers for managing very large data repositories
that contain company critical information. These products are distributed
through our direct sales force, as well as through indirect channels
including resellers and distributors.

The Visual Workstation segment's products include the Silicon Graphics-R- 320
and Silicon Graphics-R- 540 visual workstations based upon the Intel
microprocessor and the Windows NT operating system and the O2-R- and
Octane-R- visual workstations based upon the MIPS-R- microprocessor and the
IRIX operating system. The Company's visual workstations are used in a
variety of applications including computer-aided design, medical imaging, 3D
animation, broadcast, modeling and simulation. These products are distributed
through the Company's direct sales force, as well as through indirect
channels including resellers and distributors.

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

In addition to the aforementioned reportable segments, the sales and
marketing, manufacturing, finance and administration groups also report to
the CEO. Expenses of these groups are allocated to the operating units and
are included in the results reported. The revenue and related expenses of our
wholly-owned software subsidiary Alias|Wavefront and our majority-owned
subsidiary MIPS, a designer of high-performance processors and related
intellectual property, as well as certain corporate-level operating expenses
are not allocated to operating units and are included in "Other" in the
reconciliation of reported revenue and operating profit.

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

Information on reportable segments is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                  Years ended June 30
                                                                          ------------------------------------
                                                                                             Visual     Global
                                                                             Servers   Workstations   Services
<S>                                                                       <C>          <C>           <C>
1999:
Revenue from external customers                                           $1,217,965   $   647,182   $ 682,362
Segment profit (loss)                                                     $  (44,790)  $  (235,895)  $ 113,915
Significant noncash item:
   Asset valuation adjustments                                            $      --    $   (16,000)  $      --

                                                                          ------------------------------------
1998:
Revenue from external customers                                           $1,417,487   $   865,005  $ 630,416
Segment profit (loss)                                                     $ (215,562)  $  (155,961) $  39,952
Significant noncash items:
   Asset valuation adjustments                                            $      --    $   (18,800) $      --
   Write-off of excess spares                                             $      --    $        --  $ (30,000)
Vector supercomputer inventory and warranty-related charges               $  (98,500)  $        --  $ (15,700)

                                                                          ------------------------------------
1997:
Revenue from external customers                                           $1,795,206   $ 1,111,810  $ 571,141
Segment profit                                                            $   17,966   $    63,895  $ 104,613

                                                                          ------------------------------------
</TABLE>

                                                                            41
<PAGE>


Reconciliation to SGI as reported (in thousands):

<TABLE>
<CAPTION>

                                                                            Years ended June 30
                                                                  ------------------------------------
                                                                        1999         1998         1997
<S>                                                               <C>          <C>          <C>
Revenue:
Total reportable segments                                         $2,547,509   $2,912,908   $3,478,157
Other                                                                201,448      187,702      184,444
                                                                  ------------------------------------
Total SGI consolidated                                            $2,748,957   $3,100,610   $3,662,601
                                                                  ------------------------------------
Operating profit (loss):
Total reportable segments                                         $(166,770)   $(331,571)   $  186,474
Other                                                                24,519      (58,987)     (21,368)
Restructuring                                                        14,000     (143,998)           --
Write-off of acquired in-process technology
  and other merger-related expenses                                   1,107      (14,905)     (10,757)
Write-down of impaired long-lived assets                                 --      (46,640)          --
Amortization of write-up of acquired Cray
  inventory and service contracts                                        --            --     (42,465)
                                                                  ------------------------------------
Total SGI consolidated                                            $(127,144)   $(596,101)   $ 111,884
                                                                  ------------------------------------
                                                                  ------------------------------------
</TABLE>

No single customer represented 10% or more of our total revenue.

Geographic revenue for the three years ended June 30, 1999 is based on the
location of the customer. Long-lived assets include all non-current assets
except long-term restricted and marketable investments and net long-term
deferred tax assets.

Geographic information is as follows (in thousands):

<TABLE>
<CAPTION>

                                         Revenue                           Long-lived Assets
                          ---------------------------------------------------------------------------
                                1999         1998         1997         1999         1998         1997
<S>                       <C>          <C>          <C>           <C>          <C>          <C>
Americas                  $1,535,729   $1,728,680   $2,071,709    $ 370,981    $ 376,358    $ 570,652
Europe                       753,904      830,819      936,184      301,088      288,995      242,847
Rest of World                459,324      541,111      654,708       48,367       44,175       49,042
                          ---------------------------------------------------------------------------
   Total                  $2,748,957   $3,100,610   $3,662,601    $ 720,436    $ 709,528    $ 862,541
                          ---------------------------------------------------------------------------
                          ---------------------------------------------------------------------------
</TABLE>

NOTE 17. 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. Our matching
contributions for fiscal 1999, 1998 and 1997, were $6 million, $7 million and
$11 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 at June 30, 1999 and 1998, amounted to approximately
$5 million and $6 million, respectively. 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 18. RELATED PARTY TRANSACTIONS

We have from time to time engaged in significant transactions with related
parties in the ordinary course of business. Related parties include: Northrop
Grumman in fiscal 1999, and Northrop Grumman Corporation and Chrysler
Corporation in fiscal 1998 and 1997, as a director of both Northrop Grumman and
Chrysler became a member of our board of directors in fiscal 1996; and NKK
through its indirect ownership of 100% of Series A Convertible Preferred Stock
(see Note 13).


42
<PAGE>


Total revenue for the years ended June 30, 1999, 1998 and 1997 included, in the
aggregate, sales to related parties in the amount of $49 million, $87 million
and $60 million, respectively. Purchases and aggregate amounts receivable from
and amounts payable to such related parties were immaterial at June 30, 1999,
1998 and 1997.

NOTE 19. CONSOLIDATED STATEMENT OF CASH FLOWS

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

Supplemental disclosures of cash flow information (in thousands):

<TABLE>
<CAPTION>

                                                     Years ended June 30
                                             ---------------------------------
                                                1999         1998         1997
<S>                                          <C>           <C>          <C>
Cash paid during the year for:
Interest                                     $ 21,000      $14,100     $10,200
Income taxes, net of refunds                  (42,000)       9,200      29,000
                                             ---------------------------------

</TABLE>



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

<TABLE>
<CAPTION>

                                                                            Years ended June 30
                                                                    ---------------------------------
                                                                       1999         1998         1997
<S>                                                                <C>           <C>          <C>
Tax benefit from stock options                                      $   906      $ 11,700     $ 6,300
Capital lease financings                                              2,800         6,300          --
Exchange of property and equipment for minority
   interest investment in Wam!Net                                    37,600            --          --
Exchange of Senior Notes for Zero Coupon Debentures                       --      230,600          --
                                                                    ---------------------------------

</TABLE>

NOTE 20. CONTINGENCIES

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

We are defending putative securities class action lawsuits filed in the U.S.
District Court for the Northern District of California and in California
Superior Court for the County of Santa Clara in December 1997 and January 1998
alleging that SGI and certain of its officers made material misrepresentations
and omissions during the period from July to October 1997.

We are also defending a securities class action lawsuit filed in January 1996
in the Northern District of California alleging that SGI and certain of its
officers and directors made material misrepresentations and omissions during
the period from September to December 1995. The lawsuit was dismissed with
prejudice by the District Court in May 1996. On July 2, 1999, the U.S. Court
of Appeals for the Ninth Circuit upheld the dismissal.

We are also defending a securities class action lawsuit involving Alias
Research Inc., which we acquired in June 1995. The Alias case, which was
filed in 1991 in the U.S. District Court for the District of Connecticut,
alleges that Alias and certain of its former officers and directors made
material misrepresentations and omissions during the period from May 1991 to
April 1992. In October 1997, the defendants' motion to dismiss the amended
complaint was granted. In April 1999, the U.S. Court of Appeals for the
Second Circuit reversed the dismissal and remanded the case to the U.S.
District Court for the District of Connecticut. The U.S. Court of Appeals has
denied defendants' petition for rehearing en banc.

We have settled a securities class action lawsuit involving MIPS Computer
Systems, Inc., ("MCSI") which we acquired in June 1992. The MCSI case, which was
filed in 1992 in the Northern District of California, alleged that MCSI and
certain of its officers and directors made material misrepresentations and
omissions during the period from January to October of 1991. The parties to this
case reached an agreement to settle the case in December 1998, the terms of
which were reflected in a


                                                                            43
<PAGE>


Stipulation of Settlement filed with the Court in January 1999. Under the
settlement agreement, the defendants have agreed to establish a $15 million
escrow fund that shall be administered to pay the representative plaintiffs'
costs and attorneys fees, to notify and certify members of the class and to
pay the claims of class members. The settlement amount was largely covered by
insurance. The settlement agreement provides for release of all parties'
claims in connection with the class action and is subject to final approval
of the Court.

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

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

NOTE 21. SALE OF INTEREST IN MIPS TECHNOLOGIES, INC.

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

In April 1999, the outstanding common stock of MIPS was recapitalized into Class
A and Class B Common Stock to permit a multi-step divestiture of SGI's ownership
interest in MIPS. In May 1999, SGI and MIPS closed a secondary public offering
of $6,680,241 shares of the Class A Common Stock of MIPS owned by SGI for net
proceeds of approximately $219 million. Following the secondary offering, there
were 37,292,286 shares of MIPS common stock outstanding and we retained an
approximately 67% ownership interest in MIPS. We have accounted for the MIPS
transaction in accordance with APB 18, the 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 MIPS 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 the
offering of newly issued MIPS shares, the net proceeds of $16 million are
included in additional paid-in capital in our consolidated balance sheet. We
will continue to consolidate the results of MIPS' operations for so long as we
retain a greater than 50% ownership interest in MIPS.

We currently intend to dispose of our remaining interest in MIPS in one or more
transactions through public or private offerings. We expect our divestiture of
our interest in MIPS to be completed in the first half of fiscal 2001 subject to
market and other conditions.

NOTE 22. SUBSEQUENT EVENTS (UNAUDITED)

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. The
total purchase price will be approximately $125 million. We expect the purchase
to close in September 1999. As a result of this transaction, the future minimum
lease payments disclosed in Note 12 will be reduced by the following amounts (in
millions): 2000 -$7; 2001 - $8 and 2002 - $9.

On August 10, 1999, we announced our plans to realign our business through a
series of strategic alliances and restructuring actions. In particular, we
announced our intentions to establish arrangements to transition our Windows
NT-based line of visual workstations and our Cray-branded line of vector
supercomputers to strategic partners who will assume the further development and
distribution of these products lines. The result of these and other strategic
alliances along with related reductions in marketing, sales and administrative
personnel will be a smaller revenue base and workforce reduction of 1,000 to
1,500 in fiscal 2000. Further workforce reductions will occur as we transfer
businesses to strategic partners.


44
<PAGE>


REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SILICON GRAPHICS, INC.

We have audited the accompanying consolidated balance sheets of Silicon
Graphics, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Silicon Graphics,
Inc. at June 30, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.



                                       /s/ Ernst & Young LLP



Palo Alto, California
July 20, 1999

                                                                             45