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0000912057-01-535493.txt : 20011019 0000912057-01-535493.hdr.sgml : 20011019 ACCESSION NUMBER: 0000912057-01-535493 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20011015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON GRAPHICS INC /CA/ CENTRAL INDEX KEY: 0000802301 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942789662 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10441 FILM NUMBER: 1759532 BUSINESS ADDRESS: STREET 1: 1600 AMPHITHEATRE PKWY CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1351 BUSINESS PHONE: 6509601980 MAIL ADDRESS: STREET 1: 2011 N SHORELINE BLVD STREET 2: P O BOX 7311 MS 6U-710 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1389 10-K405 1 a2060031z10-k405.htm 10-K405 Prepared by MERRILL CORPORATION
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended June 30, 2001.

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

For the transition period from to

Commission File Number 1-10441

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

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

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

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

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

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

Title of each class		Name of each exchange on which registered:
Common Stock, $0.001 par value		New York Stock Exchange
5¹/4% Senior Convertible Notes		New York Stock Exchange

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

PART I

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

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

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

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

ITEM 1. BUSINESS

General

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

Products

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

Servers

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

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

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

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

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

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

Desktop Systems

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

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

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

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

Other Products

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

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

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

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

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

Alias/Wavefront

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

Applications Software

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

Marketing, Sales, and Distribution

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

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

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

Customer Service and Support

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

Professional Services

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

Research and Development

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

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

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

Manufacturing

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

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

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

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

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

Competition

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

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

Proprietary Rights and Licenses

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

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

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

Employees

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

Corporate Data

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

ITEM 2. PROPERTIES

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

Executive Officers of the Registrant

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

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

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

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

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

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

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

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

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

PART II

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

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

Price Range for Common Stock

	Fiscal 2001						Fiscal 2000
	Low		High		Close		Low		High		Close
First Quarter	$	3.56	$	5.00	$	4.12	$	10.56	$	18.88	$	10.94
Second Quarter	$	3.12	$	4.56	$	4.00		6.88		12.81		9.69
Third Quarter	$	3.56	$	5.00	$	3.94		8.25		13.50		10.56
Fourth Quarter	$	1.02	$	4.00	$	1.39		3.06		11.25		3.75

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

ITEM 6. SELECTED FINANCIAL DATA

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

		Years ended June 30
		2001			2000(3)			1999			1998			1997
		(in thousands, except per share amounts)(3)
Operating Data:
Total Revenue		$	1,854,461		$	2,331,134		$	2,748,957		$	3,100,610		$	3,662,601
Costs and expenses:
	Cost of revenue		1,247,713			1,503,525			1,603,250			1,963,551			2,022,546
	Research and development		236,240			301,248			380,346			459,188			479,101
	Selling, general and administrative		716,591			785,196			907,612			1,068,429			1,038,313
	Other operating expense(1)		102,052			102,861			(15,107	)		205,543			10,757

Operating (loss) income			(448,135	)		(361,696	)		(127,144	)		(596,101	)		111,884
Interest and other income (expense), net(2)			(18,020	)		(20,188	)		252,865			(818	)		(13,694	)

(Loss) income before income taxes		$	(466,155	)	$	(381,884	)	$	125,721		$	(596,919	)	$	98,190

Net (loss) income		$	(493,043	)	$	(829,544	)	$	53,829		$	(459,627	)	$	78,551

Net (loss) income per share:
	Basic	$	(2.59	)	$	(4.52	)	$	0.29		$	(2.47	)	$	0.44
	Diluted	$	(2.59	)	$	(4.52	)	$	0.28		$	(2.47	)	$	0.43
Shares used in the calculation of net (loss) income per share:
	Basic		190,338			183,528			186,374			186,149			175,548
	Diluted		190,338			183,528			189,427			186,149			182,637
Balance Sheet Data:
Cash, cash equivalents and marketable and restricted investments		$	202,960		$	384,489		$	782,369		$	736,720		$	374,292
Working (deficiency)capital			(41,884	)		58,781			869,980			968,700			1,229,388
Total assets			1,283,029			1,839,211			2,788,257			2,964,706			3,344,592
Long-term debt and other			412,720			385,133			387,005			403,522			419,144
Stockholders' (deficit) equity			(25,283	)		592,550			1,424,199			1,464,512			1,839,242
Statistical Data:
Number of employees			5,956			6,726			9,191			10,286			10,930
Long-term debt and other/total capitalization			107	%		39	%		21	%		22	%		19	%

(1): Fiscal 2001 amount includes net restructuring charges ($82 million) and impairment charges ($20 million). Fiscal 2000 amount includes restructuring and impairment charges ($103 million). Fiscal 1999 amount includes a reduction 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.

(2): Fiscal 2001 includes an $83 million write off of our investment in a private company and $50 million in gains from the sale of marketable investments. Fiscal 1999 amount includes a $273 million gain on the sale of a portion of SGI's interest in MTI.
(3): Amounts reflect the March 31, 2000 sale of our Cray product line.

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

Introduction

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

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

Results of Operations

	Years ended June 30,									Pro forma Years Ended June 30,
	2001			2000			1999			2000			1999
	(Numbers may not add due to rounding) $ in millions
Total revenue	$	1,854		$	2,331		$	2,749		$	2,060		$	2,344
Cost of revenue		1,248			1,504			1,603			1,398			1,399

Gross profit		607			828			1,146			661			946
Gross profit margin		32.7	%		35.5	%		41.7	%		32.1	%		40.3	%
Total operating expenses		1,055			1,189			1,273			1,113			1,206

Operating loss		(448	)		(362	)		(127	)		(453	)		(260	)
Interest and other (expense) income, net		(18	)		(20	)		253			(11	)		256

(Loss) income before income taxes	$	(466	)	$	(382	)	$	126		$	(463	)	$	(4	)

Net (loss) income	$	(493	)	$	(830	)	$	54		$	(892	)	$	(46	)

Net (loss) income per share-basic	$	(2.59	)	$	(4.52	)	$	0.29		$	(4.86	)	$	(0.25	)

Net (loss) income per share-diluted	$	(2.59	)	$	(4.52	)	$	0.28		$	(4.86	)	$	(0.25	)

Revenue

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

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

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

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

	Years ended June 30,									Pro forma Years Ended June 30,
	2001			2000			1999			2000			1999
	(Numbers may not add due to rounding) $ in millions
Servers	$	700		$	946		$	1,218		$	843		$	1,021
% of total revenue		38	%		41	%		44	%		41	%		44	%
Visual Workstations	$	362		$	500		$	647		$	500		$	647
% of total revenue		19	%		21	%		24	%		24	%		28	%
Global Services	$	682		$	678		$	682		$	600		$	547
% of total revenue		37	%		29	%		25	%		29	%		23	%
Other	$	110		$	206		$	201		$	116		$	130
% of total revenue		6	%		9	%		7	%		6	%		5	%

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

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

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

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

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

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

Area	2001		2000		1999		Pro forma 2000		Pro forma 1999
Americas	$	1,008	$	1,314	$	1,536	$	1,176	$	1,332
Europe		437		551		754		490		661
Rest of World		409		466		459		394		351

Total revenue	$	1,854	$	2,331	$	2,749	$	2,060	$	2,344

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

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

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

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

Gross Profit Margin

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

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

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

Operating Expenses

	2001			2000			1999			Proforma 2000			Proforma 1999
	$ in millions
Research and development	$	236		$	301		$	380		$	253		$	339
% of total revenue		13	%		13	%		14	%		12	%		15	%
Selling, general and administrative	$	717		$	785		$	908		$	757		$	882
% of total revenue		39	%		34	%		33	%		37	%		38	%
Other	$	102		$	103		$	(15	)	$	103		$	(15	)
% of total revenue		6	%		4	%		(1	%)		5	%		(1	%)

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

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

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

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

Interest and Other

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

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

Provision for Income Taxes

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

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

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

Recent Accounting Pronouncements

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

Financial Condition

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

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

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

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

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

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

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

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

Risks That Affect Our Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements			Page
Financial Statements:
	Report of Ernst & Young LLP, Independent Auditors		24
	Consolidated Statements of Operations		25
	Consolidated Balance Sheets		26
	Consolidated Statements of Cash Flows		27
	Consolidated Statements of Stockholders' (Deficit) Equity		28
	Notes to Consolidated Financial Statements		29
Financial Statement Schedule:
	For each of the three fiscal years in the period ended June 30, 2001
		Schedule II—Valuation and qualifying accounts	54

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

Report of Ernst & Young LLP, Independent Auditors

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

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

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

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

/s/ ERNST & YOUNG LLP

Palo Alto, California
October 9, 2001

CONSOLIDATED STATEMENTS OF OPERATIONS

			Years ended June 30,
			2001			2000			1999
			(In thousands, except per share amounts)
Revenue:
	Product and other revenue		$	1,222,561		$	1,688,859		$	2,090,194
	Service revenue			631,900			642,275			658,763

		Total revenue		1,854,461			2,331,134			2,748,957
Costs and expenses:
	Cost of product and other revenue			738,436			962,309			1,202,562
	Cost of discontinued product line			18,519			66,203			—
	Cost of service revenue			490,758			475,013			400,688
	Research and development			236,240			301,248			380,346
	Selling, general and administrative			716,591			785,196			907,612
	Other operating expense			102,052			102,861			(15,107	)

		Total costs and expenses		2,302,596			2,692,830			2,876,101

Operating loss				(448,135	)		(361,696	)		(127,144	)
Gain on sale of a portion of SGI interest in MTI				—			—			272,503
Interest expense				(19,807	)		(18,980	)		(22,562	)
Interest income and other, net				1,787			(1,208	)		2,924

(Loss) income before income taxes				(466,155	)		(381,884	)		125,721
Provision for income taxes				26,888			447,660			71,892

Net (loss) income			$	(493,043	)	$	(829,544	)	$	53,829

Net (loss) income per share:
	Basic		$	(2.59	)	$	(4.52	)	$	0.29

	Diluted		$	(2.59	)	$	(4.52	)	$	0.28

Shares used in the calculation of net (loss) income per share:
	Basic			190,338			183,528			186,374

	Diluted			190,338			183,528			189,427

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

CONSOLIDATED BALANCE SHEETS

			At June 30,
			2001			2000
			(Dollars in thousands)
Assets:
Current assets:
	Cash and cash equivalents		$	123,129		$	251,811
	Short-term marketable investments			2,978			6,270
	Short-term restricted investments			74,036			—
	Accounts receivable, net of allowance for doubtful accounts of $20,068 in 2001; $12,383 in 2000			354,026			347,515
	Inventories			205,152			181,594
	Prepaid expenses			51,161			73,281
	Other current assets			43,226			59,838

		Total current assets		853,708			920,309
	Restricted investments			2,817			126,408
	Property and equipment, net of accumulated depreciation and amortization			268,944			466,726
	Other assets			157,560			325,768

			$	1,283,029		$	1,839,211

Liabilities and Stockholders' (Deficit) Equity:
Current liabilities:
	Accounts payable			167,053			147,366
	Accrued compensation			114,162			79,289
	Income taxes payable			30,561			54,478
	Other current liabilities			203,153			273,143
	Deferred revenue			265,246			292,772
	Current portion of restructuring charge			64,723			9,705
	Current portion of long-term debt			50,694			4,775

		Total current liabilities		895,592			861,528
Long-term debt				289,289			349,521
Other liabilities				123,431			35,612

		Total liabilities		1,308,312			1,246,661
Commitments and contingencies
Stockholders' (deficit) equity:
	Preferred stock, $.001 par value; issuable in series, 2,000,000 shares authorized, share issued and outstanding: none in 2001; 17,500 in 2000			—			16,998
	Common stock, $.001 par value, and additional paid-in capital; 500,000,000 shares authorized; shares issued: 192,434,545 in 2001; 188,016,158 in 2000			1,442,867			1,410,663
	Accumulated deficit			(1,340,085	)		(832,219	)
	Treasury stock, at cost: 6,100,877 shares in 2001; 1,540,501 shares in 2000			(105,190	)		(21,458	)
	Accumulated other comprehensive (loss) income			(22,875	)		18,566

		Total stockholders' (deficit) equity		(25,283	)		592,550

			$	1,283,029		$	1,839,211

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

					Years ended June 30
					2001			2000			1999
					(In thousands)
Cash Flows From Operating Activities:
Net (loss) income					$	(493,043	)	$	(829,544	)	$	53,829
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
	Depreciation and amortization					135,463			168,524			221,508
	(Gain) loss on sale of Cray product line					(23,506	)		7,693			—
	Gain on sale of a portion of SGI interest in MTI					—			—			(272,503	)
	Gain on sale of long-term investments					(49,561	)		—			—
	Gain on sale of corporate real estate					(11,529	)		—			—
	Loss on investment in private company					83,129			—			—
	Restructuring and impairment charges, net					102,051			102,861			(14,000	)
	Changes in deferred tax assets and liabilities					—			351,264			60,067
	Other					(7,067	)		15,745			54,640
Changes in operating assets and liabilities:
	Accounts receivable					(6,511	)		225,116			83,036
	Inventories					(31,490	)		(19,900	)		111,908
	Accounts payable					19,687			(40,781	)		(22,529	)
	Other assets and liabilities					263			(56,843	)		(130,592	)

		Total adjustments				210,929			753,679			91,535

			Net cash (used in) provided by operating activities			(282,114	)		(75,865	)		145,364
Cash Flows From Investing Activities:
Marketable investments:
	Purchases					(1,178	)		(43,982	)		(396,807	)
	Sales					—			—			207,740
	Maturities					4,470			154,831			314,718
Purchases of restricted investments						(500,830	)		(322,915	)		(219,579	)
Proceeds from the maturities of restricted investments						445,947			290,733			113,893
Spin-off of interest in MTI						—			(84,358	)		—
Proceeds from the sale of a portion of SGI interest in MTI						—			—			272,503
Proceeds from the sale of corporate real estate						278,186			—			—
Capital expenditures						(139,010	)		(261,087	)		(147,516	)
Decrease (increase) in other assets						55,176			(3,991	)		(113,611	)

				Net cash provided by (used in) investing activities		142,761			(270,769	)		31,341
Cash Flows From Financing Activities:
Issuance of debt						93			2,988			7,461
Payments of debt principal						(5,150	)		(16,541	)		(25,918	)
Sale of SGI common stock						16,120			65,826			61,527
Restricted investments used to purchase SGI common stock						104,439			—			—
Repurchase of SGI common stock						(104,439	)		(24,420	)		(172,426	)
Sale of MTI common stock						—			—			17,654
Cash dividends-preferred stock						(392	)		(525	)		(525	)

				Net cash provided by (used in) financing activities		10,671			27,328			(112,227	)

Net (decrease) increase in cash and cash equivalents						(128,682	)		(319,306	)		64,478
Cash and cash equivalents at beginning of year						251,811			571,117			506,639

Cash and cash equivalents at end of year					$	123,129		$	251,811		$	571,117

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

				Three years ended June 30, 2001
				Preferred Stock			Common Stock and Additional Paid-in Capital			Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' (Deficit) Equity
				(In thousands)
Balance at June 30, 1998				$	16,998		$	1,407,108		$	65,415		$	(25,976	)	$	967		$	1,464,512
	Components of comprehensive income:
		Net income			—			—			53,829			—			—			53,829
		Currency translation adjustment			—			—			—			—			(2,562	)		(2,562	)
		Change in unrealized loss on available-for- sale investments, net of tax of $12			—			—			—			—			(48	)		(48	)

			Total comprehensive income																	51,219
	Common stock issued under employee plans including related tax benefits (36 shares)				—			794			—			—			—			794
	Convertible preferred stock, Series A preferred dividends				—			—			(525	)		—			—			(525	)
	Purchase (12,112 shares) and issuance (7,097 shares) of treasury stock under employee plans—net				—			—			(29,744	)		(78,657	)		—			(108,401	)
	Common stock issued by MTI				—			16,600			—			—			—			16,600
	Other				—			(3,474	)		3,474			—			—			—

Balance at June 30, 1999					16,998			1,421,028			92,449			(104,633	)		(1,643	)		1,424,199
	Components of comprehensive income:
		Net loss			—			—			(829,544	)		—			—			(829,544	)
		Currency translation adjustment			—			—			—			—			(7,947	)		(7,947	)
		Change in unrealized gain on available-for- sale investments, net of tax of $18,065			—			—			—			—			30,817			30,817
		Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges			—			—			—			—			(2,661	)		(2,661	)

			Total comprehensive loss																	(809,335	)
	Convertible preferred stock, Series A preferred dividends				—			—			(525	)		—			—			(525	)
	Purchase (2,132 shares) and issuance (7,602 shares) of treasury stock under employee plans—net				—			6,235			(58,354	)		83,175			—			31,056
	Common stock issued by MTI				—			14,750			—			—						14,750
	Spin-off of interest in MTI				—			(31,350	)		(36,245	)		—			—			(67,595	)

Balance at June 30, 2000					16,998			1,410,663			(832,219	)		(21,458	)		18,566			592,550
	Components of comprehensive income:
		Net loss			—			—			(493,043	)		—			—			(493,043	)
		Currency translation adjustment			—			—			—			—			(11,653	)		(11,653	)
		Change in unrealized gain on available-for- sale investments, net of tax of $(1,026)			—			—			—			—			(3,118	)		(3,118	)
		Reclassification adjustment of accumulated unrealized gain related to the sale of investments			—			—			—			—			(30,053	)		(30,053	)
		Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges			—			—			—			—			3,383			3,383
			Total comprehensive loss		—			—			—			—			—			(534,484	)
	Convertible preferred stock, Series A preferred dividends				—			—			(392	)		—			—			(392	)
	Purchase (160,134 shares) and issuance (1,599,886 shares) of treasury stock and (6,538,671) of common stock under employee plans—net				—			15,206			(14,431	)		20,707			—			21,482
	Purchase of 6,000,000 shares of treasury stock under equity forward arrangements				—			—			—			(104,439	)		—			(104,439	)
Conversion of preferred stock to common stock					(16,998	)		16,998			—			—			—			—

Balance at June 30, 2001					—		$	1,442,867		$	(1,340,085	)	$	(105,190	)	$	(22,875	)	$	(25,283	)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations

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

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

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

Note 2. Summary of Significant Accounting Policies

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

Foreign Currency 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, 2001 and 2000, our cash equivalents and marketable investments are all classified as available-for-sale. At June 30, 2001, our restricted investments are classified as available-for-sale but are pledged as collateral against letters of credit or held under a security agreement. At June 30, 2000 our restricted investments were pledged as collateral against letters of credit and an equity forward purchase arrangement. Restricted investments are held in SGI's name by major financial institutions.

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

Fair Values of Financial 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 investments, long-term debt, foreign exchange forward contracts and currency options are based on quoted market prices or pricing models using current market rates.

Derivative Financial 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.

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

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

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. 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 five years are used for machinery and equipment and furniture and fixtures; leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. Our buildings are depreciated over twenty-five to forty-five years and improvements over eight to fifteen years.

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

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

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

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

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

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

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 Windows 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, 2001, 2000 and 1999 was $30 million, $25 million and $49 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 (loss) income by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income, adjusted for the effect, if any, from assumed conversion of all potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.

Stock-Based 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.

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

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

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

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

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

Note 3. Other Operating Expense

Other operating expense is as follows (in thousands):

	Years ended June 30,
	2001		2000		1999
Restructuring and impairment charges	$	102,052	$	102,861	$	(14,000	)
Merger-related expenses		—		—		(1,107	)

	$	102,052	$	102,861	$	(15,107	)

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

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

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

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

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

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

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

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

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

Category		Severance and Related Charges			Canceled Contracts			Vacated Facilities			Other			Impairment Charges			Total
Balance at June 30, 1999		$	5,218		$	—		$	1,049		$	2,166		$	—		$	8,433
Additions—fiscal 2000 restructuring and impairment			65,820			8,468			32,509			—			37,741			144,538
Adjustments: decrease			(13,010	)		(3,285	)		(18,829	)		(2,166	)		—			(37,290	)
Expenditures:
	Cash		(54,763	)		(5,183	)		(8,289	)		—			—			(68,235	)
	Non-cash		—			—			—			—			(37,741	)		(37,741	)
Balance at June 30, 2000		$	3,265		$	—		$	6,440		$	—		$	—		$	9,705
Additions—fiscal 2001 restructuring and impairment			45,136			1,923			41,490			—			19,724			108,273
Adjustments:
	Increase		—			—			3,619			—			—			3,619
	(decrease)		(2,590	)		—			(3,631	)		—			—			(6,221	)
Expenditures:
	Cash		(9,428	)		(706	)		(3,880	)		—			—			(14,014	)
	Non-cash		(233	)		—			(756	)		—			(19,724	)		(20,713	)
Balance at June 30, 2001		$	36,150		$	1,217		$	43,282		$	—		$	—		$	80,649

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

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

Note 4. Earnings Per Share

		Years ended June 30,
		2001			2000			1999
		(in thousands, except per share amounts)
Net (loss) income		$	(493,043	)	$	(829,544	)	$	53,829
Less preferred stock dividends			(392	)		(525	)		(525	)

Net (loss) income available to common stockholders		$	(493,435	)	$	(830,069	)	$	53,304

Weighted average shares outstanding-basic			190,338			183,528			186,374
Employee stock options and restricted shares			—			—			3,053

Weighted average shares outstanding-diluted			190,338			183,528			189,427

Net (loss) income per share:
	Basic	$	(2.59	)	$	(4.52	)	$	0.29

	Diluted	$	(2.59	)	$	(4.52	)	$	0.28

Potentially dilutive securities excluded from computations because they are anti-dilutive			8,643			10,244			8,843

Note 5. Financial Instruments

Cash Equivalents and Marketable and Restricted 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, 2001 and 2000 (in thousands):

		2001			2000
Money market funds		$	68,465		$	189,915
Certificates of deposit and time deposits			79,014			91,770
U.S. commercial paper			817			60,908

	Total		148,296			342,593
Less amounts classified as cash equivalents			(68,465	)		(209,915	)

	Total marketable and restricted investments	$	79,831		$	132,678

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

Derivative Instruments and Hedging Activities

Risk Management 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. We regularly assess risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures. We use derivatives to moderate the financial market risks of our business operations by hedging the foreign currency market exposures underlying certain assets, liabilities and for commitments related to customer transactions. All of our hedges currently qualify as cash flow hedges. We do not use derivatives for trading purposes.

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

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

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

	2001			2000
Opening balance	$	(2,661	)	$	—
Reclassified into earnings from Other Comprehensive Income, net		(7,251	)		(7,283	)
Changes in fair value of derivatives, net		10,634			4,622

Unrealized gain (loss) on derivative instruments included in Other Comprehensive Income	$	722		$	(2,661	)

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

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

	2001				2000
	Carrying Amount		Fair Value		Carrying Amount			Fair Value
Cash and cash equivalents	$	123,129	$	123,129	$	251,811		$	251,811
Marketable investments		79,831		79,831		132,678			132,678
Debt instruments		339,983		181,284		354,296			247,875
Currency forward contracts		626		626		(3,413	)		(3,413	)
Currency options		402		402		(3,773	)		(3,773	)

Note 6. Sale of Cray Product Line.

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

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

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

	$	37.9

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

Note 7. MTI Technologies, Inc.

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

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

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

Note 8. Concentration of Credit and Other Risks

Credit 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, 2001 and 2000. We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain reserves for potential credit losses and such losses have been within our expectations.

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

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

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

Note 9. Consolidated Financial Statement Details

Inventories

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

	2001		2000
Components and subassemblies	$	85,383	$	38,855
Work-in-process		32,171		50,051
Finished goods		40,092		45,896
Demonstration systems		47,506		46,792

Total inventories	$	205,152	$	181,594

Property and Equipment

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

	2001			2000
Land and buildings	$	54,868		$	224,461
Machinery and equipment		510,772			586,233
Furniture and fixtures		84,313			106,687
Leasehold improvements		105,409			133,610

		755,362			1,050,991
Accumulated depreciation and amortization		(486,418	)		(584,265	)

Net property and equipment	$	268,944		$	466,726

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

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

Note 10. Other Assets

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

	2001		2000
Spare parts	$	80,044	$	98,601
Investments		12,841		152,642
Software licenses, goodwill and other, net of accumulated amortization of $83,836 in 2001 and $81,057 in 2000		64,675		74,525

	$	157,560	$	325,768

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

Note 11. Financing Arrangement

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

Note 12. Long Term Debt

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

	2001			2000
Senior Convertible Notes due September 2004 at 5.25%	$	230,591		$	230,591
Convertible Subordinated Debentures due February 2011 at 6.125%, net of unamortized discount of $9,493 ($10,106 in 2000)		47,283			46,670
Swiss Franc mortgage due June 2017 at 1.70% (4.47% in 2000), which resets quarterly		12,207			15,041
Japanese Yen fixed rate loan due December 2001 at 2.06%		48,325			56,770
Other		1,577			5,224

		339,983			354,296
Less amounts due within one year		(50,694	)		(4,775	)

Amounts due after one year	$	289,289		$	349,521

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

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

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

Note 13. Leasing Arrangements as Lessee

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

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

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

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

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

Note 14. Stockholders' Equity

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

Stock Award 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 with an exercise price of no less than the fair market value on the date of grant. The board of directors determines the prices of nonstatutory stock option grants and restricted stock. There were no discounted stock options, consultant or advisory grants granted during fiscal 2001. Under the plans, options and restricted stock generally vest over a fifty-month period from the date of grant. On August 8, 2000, a special restricted bonus was granted that vested in one year.

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

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

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

		2001				2000				1999
		Number of Shares Under Option		Weighted Average Exercise Price		Number of Shares Under Option		Weighted Average Exercise Price		Number of Shares Under Option			Weighted Average Exercise Price
Balance at July 1		23,827,668		$	6.78	30,615,342		$	13.15		34,394,843		$	16.59
	Options granted	19,734,021		$	3.62	38,267,284		$	7.79		20,013,148		$	12.14
	Options exercised	(1,563,748	)	$	0.92	(2,432,670	)	$	7.99		(3,151,195	)	$	8.05
	Options forfeited	—			—	(24,555,131	)	$	11.22		(12,803,398	)	$	19.70
	Options canceled	(8,775,356	)	$	7.14	(18,067,157	)	$	13.51		(7,838,056	)	$	17.15

Balance at June 30		33,222,585		$	5.08	23,827,668		$	6.78		30,615,342		$	13.15

Exercisable at June 30		18,827,210		$	5.57	12,923,200		$	7.34	$	13,286,532		$	13.86

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

	Options Outstanding
	Options Outstanding				Options Exercisable
				Weighted Average Contractual Life (years)	Options Exercisable
Exercise Price Range	Number of Shares	Weighted Average Exercise Price		Weighted Average Contractual Life (years)	Number of Shares	Weighted Average Exercise Price
$1.05 - $3.50	14,720,835	$	3.33	8.88	6,561,116	$	3.32
$3.53 - $5.74	7,892,892	$	5.09	8.42	4,563,379	$	5.52
$5.87 - $9.99	10,188,162	$	7.09	6.24	7,326,027	$	6.95
$10.05 - $37.49	420,696	$	17.85	4.69	376,688	$	18.60

	33,222,585	$	5.08	7.91	18,827,210	$	5.57

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

Employee Stock Purchase 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, 2001, we had issued 32,663,725 shares under the plan and we have reserved 1,871 shares for future issuance.

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

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

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

	Employee Stock Options						Stock Purchase Plan Shares
Years ended June 30,	Employee Stock Options						Stock Purchase Plan Shares
Years ended June 30,	2001		2000		1999		2001		2000		1999
Expected life (in years)	1.4		1.5		1.9		0.4		0.5		0.5
Risk-free interest rate	5.10	%	5.57	%	5.26	%	5.22	%	5.45	%	4.97	%
Volatility	0.81		0.79		0.71		0.93		0.78		0.56
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%

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 2001, 2000 and 1999 was $6 million, $7 million and $5 million, respectively.

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

		Years ended June 30,
		2001			2000			1999
Pro forma net loss		$	(542,976	)	$	(880,868	)	$	(13,696	)
Pro forma net loss per share:
	Basic	$	(2.85	)	$	(4.80	)	$	(0.08	)
	Diluted	$	(2.85	)	$	(4.80	)	$	(0.08	)

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

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

Note 15. Comprehensive Income

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

	Years ended June 30,
	2001			2000
	(in thousands)
Unrealized (loss) gain on available-for-sale investments	$	(2,472	)	$	30,699
Unrealized gain (loss) on derivative instruments designated and qualifying as cash flow hedges		722			(2,661	)
Foreign currency translation adjustments		(21,125	)		(9,472	)

Accumulated other comprehensive (loss) income	$	(22,875	)	$	18,566

Note 16. Income Taxes

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

	Years ended June 30,
	2001			2000			1999
United States	$	(341,479	)	$	(367,033	)	$	10,699
International		(124,676	)		(14,851	)		115,022

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

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

		Years ended June 30,
		2001		2000			1999
Federal:
	Current	$	6,111	$	(33,528	)	$	(44,972	)
	Deferred		—		352,757			58,618
State:
	Current		1,300		3,821			93
	Deferred		—		58,260			5,455
Foreign:
	Current		19,477		29,492			38,244
	Deferred		—		36,858			14,454

		$	26,888	$	447,660		$	71,892

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

	Years ended June 30,
	2001			2000			1999
Tax at U.S. federal statutory rate	$	(163,154	)	$	(133,659	)	$	44,003
State taxes, net of federal tax benefit		845			40,353			3,606
Effect of change in investment policy with respect to undistributed earnings of certain foreign affiliates		—			92,972			—
Net operating loss with no tax benefit		162,352			152,202			14,705
Foreign tax credits with no tax benefit		19,477			25,868			4,020
Increase (reduction) in tax contingencies		—			(67,000	)		—
Valuation allowance on net deferred tax assets		—			329,965			—
Other		7,368			6,959			5,558

Provision for income taxes	$	26,888		$	447,660		$	71,892

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

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

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

			2001			2000
Deferred tax assets:
	Net operating loss carryforwards		$	559,044		$	423,047
	General business credit carryforwards			63,000			63,000
	Depreciation			36,963			37,659
	Inventory valuation			49,245			68,969
	Reserves not currently deductible			47,329			23,812
	Other			163,759			127,429

		Subtotal		919,340			743,916
		Valuation allowance		(826,893	)		(632,324	)

	Total deferred tax assets			92,447			111,592
Deferred tax liabilities:
	Foreign taxes on unremitted foreign earnings, net of related U.S. tax liability			52,727			86,320
	Other			39,720			43,302

		Total deferred tax liabilities		92,447			129,622

	Total		$	—		$	(18,030	)

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

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

Note 17. Segment Information

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

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

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

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

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

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

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

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

		Servers			Visual Workstations			Global Services
2001:
Revenue from external customers		$	699,911		$	362,407		$	682,320
Segment (loss) profit		$	(245,625	)	$	(119,257	)	$	29,270
Significant items:
	Charges for contract cancellations and inventory and future support costs related to the discontinuance of Pentium 3-based product line	$	—		$	13,864		$	4,665
2000:
Revenue from external customers		$	946,452		$	500,404		$	678,205
Segment loss		$	(163,395	)	$	(148,750	)	$	(462	)
Significant items:
	Charges for contract cancellations and inventory and future support costs related to the discontinuance of the Silicon Graphics 320 and 540 visual workstations	$	—		$	(46,453	)	$	(20,950	)
Vector supercomputer warranty-related Charges		$	—		$	—		$	(15,300	)
Write-off of excess spares		$	—		$	—		$	(17,900	)
1999:
Revenue from external customers		$	1,217,965		$	647,182		$	682,362
Segment (loss) profit		$	(44,790	)	$	(235,895	)	$	113,915
Significant items:
	Asset valuation adjustments	$	—		$	(16,000	)	$	—

Reconciliation to SGI as reported (in thousands):

	Years ended June 30,
	2001			2000			1999
Revenue:
Total reportable segments	$	1,744,638		$	2,125,061		$	2,547,509
Other		109,823			206,073			201,448

Total SGI consolidated	$	1,854,461		$	2,331,134		$	2,748,957

Operating loss:
Total reportable segments	$	(335,612	)	$	(312,607	)	$	(166,770	)
Other		7,895			53,772			24,519
Restructuring		(82,328	)		(102,861	)		14,000
Write-down of impaired long-lived assets		(19,724	)		—			—
Enterprise Resource Planning implementation expense		(14,477	)		—			—
Business reorganization costs		(3,889	)		—			—
Merger-related expenses		—			—			1,107

Total SGI consolidated	$	(448,135	)	$	(361,696	)	$	(127,144	)

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

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

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

		Revenue						Long-lived Assets
		2001		2000		1999		2001		2000		1999
Americas		$	1,008,135	$	1,313,789	$	1,535,729	$	139,040	$	355,816	$	288,671
Europe			436,979		551,099		753,904		226,712		241,756		300,838
Rest of World			409,347		466,246		459,324		47,911		280		48,366

	Total	$	1,854,461	$	2,331,134	$	2,748,957	$	413,663	$	639,852	$	637,875

Note 18. Benefit Plans

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

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

Note 19. Related Party Transactions

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

Note 20. Consolidated Statement of Cash Flows

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

Supplemental disclosures of cash flow information (in thousands):

		Years ended June 30,
		2001		2000		1999
Cash paid during the year for:
	Interest	$	17,500	$	18,100	$	21,100
	Income taxes, net of refunds	$	16,300	$	40,000	$	(42,000	)

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

	Years ended June 30,
	2001		2000		1999
Conversion of Preferred stock to common stock	$	16,998	$	—	$	—
Exchange of property and equipment and accounts receivable for minority interest investment in private company	$	—	$	3,700	$	37,600

Note 21. Contingencies

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

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

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

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

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

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

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

Note 22. Subsequent Events (unaudited)

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

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

Note 23. Selected Quarterly Financial Data (Unaudited)

		Fiscal 2001
		June 30			March 31			December 31			September 30
		(in thousands, except per share amounts)
Total revenue		$	431,500		$	509,718		$	486,907		$	426,336
Costs and expenses:
	Cost of revenue		299,318			325,407			339,863			283,125
	Research and development		59,508			61,272			58,111			57,349
	Selling, general and administrative		171,521			177,170			182,237			185,663
	Other operating expense(1)		108,273			—			—			(6,221	)

Operating Loss			(207,120	)		(54,131	)		(93,304	)		(93,580	)
Interest and other income (expense), net(2)			(8,488	)		(83,166	)		25,526			48,108
Loss before income taxes			(215,608	)		(137,297	)		(67,778	)		(45,472	)

Net loss		$	(231,844	)	$	(141,095	)	$	(71,116	)	$	(48,988	)

Net loss per share:
	Basic	$	(1.20	)	$	(0.74	)	$	(0.38	)	$	(0.26	)
	Diluted	$	(1.20	)	$	(0.74	)	$	(0.38	)	$	(0.26	)
Shares used in the calculation of net loss per share:
	Basic		192,814			190,857			189,808			187,872
	Diluted		192,814			190,857			189,808			187,872

		Fiscal 2000
		June 30			March 31			December 31			September 30
		(in thousands, except per share amounts)
Total revenue		$	534,051		$	563,687		$	648,193		$	585,203
Costs and expenses:
	Cost of revenue		345,267			327,324			389,671			441,263
	Research and development		67,727			69,564			78,607			85,350
	Selling, general and administrative		188,152			185,197			183,487			228,360
	Other operating expense(3)		(8,000	)		(17,677	)		(16,000	)		144,538

Operating income (loss)			(59,095	)		(721	)		12,428			(314,308	)
Interest and other income (expense), net(4)			4,226			(22,560	)		2,165			(4,019	)
Income (loss) before income taxes			(54,870	)		(23,281	)		14,594			(318,327	)

Net income (loss)		$	(607,591	)	$	(18,133	)	$	9,081		$	(212,901	)

Net income (loss) per share:
	Basic	$	(3.27	)	$	(0.10	)	$	0.05		$	(1.17	)
	Diluted	$	(3.27	)	$	(0.10	)	$	0.05		$	(1.17	)
Shares used in the calculation of net income (loss) per share:
	Basic		185,573			183,826			182,789			181,924
	Diluted		185,573			183,826			183,143			181,924

(1): Amount includes a restructuring charge of $88 million and impairment charges of $20 million in the fourth quarter.

(2): Amount includes an $83 million write-off of an investment in a private company in the third quarter. Second quarter amount includes an $11 million gain on the sale of marketable investments and a $12 million gain on the sale of the Cray product line. First quarter amount includes a $39 million gain on the sale of marketable investments and a $12 million gain on the sale of the Cray product line.
(3): Amounts represent a $145 million charge for estimated restructuring costs in the first quarter and changes in previously estimated restructuring costs of $42 million in the second through fourth quarters.
(4): Amounts include a net loss on the sale of our Cray product line of $8 million, comprised of a gain of $13 million in the fourth quarter and a loss of $21 million in the third quarter.

Schedule II

Valuation and Qualifying Accounts and Reserves
(in thousands)

				Additions					Deductions
Description		Balance at Beginning of Period		Charged to Costs and Expenses		Other			Write-offs/ Other			Balance at End of Period
Year ended June 30. 1999
	Accounts receivable allowance	$	17,463	$	351	$	—		$	(2,407	)	$	15,407
	Warranty Accrual		32,732		36,111		9,945	(2)		(40,168	)		38,620
	Deferred tax asset allowance		90,705		13,511		11,439	(1)		(10,291	)		105,364
Year ended June 30, 2000
	Accounts receivable allowance		15,407		2,964		—			(5,988	)		12,383
	Warranty Accrual		38,620		56,158		295	(2)		(67,194	)		27,879
	Deferred tax asset allowance	$	105,364	$	525,979	$	981	(1)	$	—		$	632,324
Year ended June 30, 2001
	Accounts receivable allowance		12,383		10,334					(2,649	)		20,068
	Warranty Accrual		27,879		22,398		(2,457	)(2)		(26,460	)		21,360
	Deferred tax asset allowance	$	632,324	$	174,079	$	1,733	(1)	$	—		$	808,136

(1): Reserve of paid-in capital benefits related to stock option activity
(2): Reclassification from other accrual accounts

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

Not applicable.

PART III

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

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

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

(a): The following documents are filed as a part of this Report:
1.: FINANCIAL STATEMENTS. The following consolidated financial statements of Silicon Graphics, Inc. and Report of Ernst & Young LLP, Independent auditors are filed as part of this Report on pages 23 through 53;

Consolidated Statement of Operations—Years ended June 30, 2001, 2000 and 1999

Consolidated Balance Sheets—June 30, 2001 and 2000

Consolidated Statements of Cash Flows—Years ended June 30, 2001, 2000, and 1999

Consolidated Statements of Stockholders' (Deficit) Equity—Years ended June 30, 2001, 2000, and 1999

Notes to Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors

2.: FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule of Silicon Graphics, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Silicon Graphics, Inc.

Schedule		Description		Page
II		Valuation and Qualifying Accounts		54

Schedules not listed above have been omitted because they are not applicable or are not included in the consolidated financial statements or notes thereto.

3.: Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Report:

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

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

*: This exhibit is a management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
(1): Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (No. 33-8892), which became effective October 29, 1986.
(2): Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (No. 33-12863), which became effective March 31, 1987.
(3): Incorporated by reference to exhibits to the Company's Post-Effective Amendment to Registration Statement on Form S-8 (No. 33-16529), which became effective June 18, 1990.
(4): Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1992.
(5): Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1993.
(6): Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1994.
(7): Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1994.
(8): Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 33-60215), which became effective June 14, 1995.
(9): Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 33-60213), which became effective June 14, 1995.
(10): Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1995.
(11): Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 333-06403), which became effective June 20, 1996.
(12): Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the period ended June 30, 1996, as amended.
(13): Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996.
(14): Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997.
(15): Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1991.
(16): Incorporated by reference to exhibits to the Company's Registration Statement on Form S-4 (No. 333-32379), which became effective August 7, 1997.

(17): Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1997.
(18): Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999.
(19): Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2001.
(b): Reports on Form 8-K.

NONE

Trademarks used in the Form 10-K

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

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

SIGNATURES

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

Dated: October 15, 2001		SILICON GRAPHICS, INC.
		By:	/s/ ROBERT R. BISHOP Robert R. Bishop Chairman and Chief Executive Officer

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

Signature	Title	Date

/s/ ROBERT R. BISHOP Robert R. Bishop	Chairman, Chief Executive Officer and Director (Principal Executive Officer)	October 15, 2001
/s/ JEFFREY V. ZELLMER Jeffrey V. Zellmer	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	October 15, 2001
/s/ RICHARD KRAMLICH Richard Kramlich	Director	October 15, 2001
/s/ JAMES A. MCDIVITT James A. McDivitt	Director	October 15, 2001

EXHIBIT INDEX

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

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PART I

ITEM 1. BUSINESS

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

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

PART II

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

ITEM 6. SELECTED FINANCIAL DATA

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

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

SIGNATURES
EXHIBIT INDEX
EX-3.2 3 a2060031zex-3_2.htm EXHIBIT 3.2 Prepared by MERRILL CORPORATION
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Exhibit 3.2

AMENDED AND RESTATED BYLAWS
OF
SILICON GRAPHICS, INC.

July 25, 2000

TABLE OF CONTENTS


ARTICLE I—CORPORATE OFFICES
1.1		Registered Office
1.2		Other Offices
ARTICLE II—STOCKHOLDERS
2.1		Place of Meetings
2.2		Annual Meeting
2.3		Special Meeting
2.4		Notice of Stockholders Meetings
2.5		Manner of Giving Notice; Affidavit of Notice
2.6		Quorum
2.7		Adjourned Meeting; Notice
2.8		Voting
2.9		Waiver of Notice
2.10		Stockholder Action by Written Consent Without a Meeting
2.11		Record Date for Stockholder Notice; Voting; Giving Consents
2.12		Proxies
2.13		Conduct of Business
2.14		Inspectors of Election
2.15		Inspectors of Election and Procedures for Counting Written Consents
ARTICLE III—DIRECTORS
3.1		Powers
3.2		Number of Directors
3.3		Election, Qualification and Term of Office of Directors
3.4		Resignation and Vacancies
3.5		Place of Meetings; Meetings by Telephone
3.6		Regular Meetings
3.7		Special Meetings; Notice
3.8		Quorum
3.9		Waiver of Notice
3.10		Adjourned Meeting; Notice
3.11		Board Action by Written Consent Without a Meeting
3.12		Fees and Compensation of Directors
3.13		Approval of Loans to Officers
3.14		Removal of Directors
3.15		Conduct of Business
ARTICLE IV—COMMITTEES
4.1		Committees of Directors
4.2		Committee Minutes
4.3		Meetings and Action of Committees
ARTICLE V—OFFICERS
5.1		Officers
5.2		Appointment of Officers
5.3		Subordinate Officers
5.4		Removal and Resignation of Officers
5.5		Vacancies in Offices
5.6		Chairman of the Board
5.7		Chief Executive Officer; President

5.8		Vice Presidents
5.9		Secretary
5.10		Chief Financial Officer
5.11		Treasurer
5.12		Assistant Secretary
5.13		Assistant Treasurer
5.14		Authority and Duties of Officers
5.15		Representation of Shares of Other Corporations
ARTICLE VI—INDEMNITY
6.1		Indemnification of Directors and Officers
6.2		Indemnification of Others
6.3		Insurance
ARTICLE VII—RECORDS AND REPORTS
7.1		Maintenance and Inspection of Records
7.2		Inspection by Directors
ARTICLE VIII—GENERAL MATTERS
8.1		Checks
8.2		Execution of Corporate Contracts and Instruments
8.3		Stock Certificates; Partly Paid Shares
8.4		Special Designation on Certificates
8.5		Lost Certificates
8.6		Construction; Definitions
8.7		Dividends
8.8		Fiscal Year
8.9		Seal
8.10		Transfer of Stock
8.11		Stock Transfer Agreements
8.12		Registered Stockholders
8.13		Notices
ARTICLE IX—AMENDMENTS
ARTICLE X—DISSOLUTION

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AMENDED AND RESTATED BYLAWS OF SILICON GRAPHICS, INC.
July 25, 2000
TABLE OF CONTENTS
EX-10.13 4 a2060031zex-10_13.htm EXHIBIT 10.13 Prepared by MERRILL CORPORATION
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Exhibit 10.13

SILICON GRAPHICS, INC.

AMENDED AND RESTATED 1996 SUPPLEMENTAL NON-
EXECUTIVE EQUITY INCENTIVE PLAN

1. Purpose of the Plan. The purpose of the Silicon Graphics, Inc. 1996 Supplemental Non-Executive Equity Incentive Plan (the "Plan") is to promote the long-term success of Silicon Graphics, Inc. (the "Company") by providing supplemental equity incentives to non-executives of the Company to address special circumstances identified from time to time by the Compensation and Human Resources Committee, which could without limitation include special retention programs addressing exceptional competitive pressures in the market for technical personnel, special recognition programs for outstanding performance, and other circumstances outside of the normal course.

2. Eligibility. Stock Awards ("Rights") and nonstatutory stock options ("Options") may be granted to Eligible Employees. If otherwise eligible, an Employee who has been granted an Option or Right may be granted additional Options or Rights.

3. Stock Subject to the Plan.

(a) Subject to Section 11 of the Plan, the maximum aggregate number of shares of Common Stock of the Company ("shares") that may be issued pursuant to Options and Rights granted to participants under the Plan shall be 17,500,000 shares*. If shares issued pursuant to a Stock Award are forfeited or otherwise reacquired by the Company, or if an Option or Right expires or becomes unexercisable without having been exercised in full, the reacquired or unpurchased shares, respectively, that were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated).

*: The number of shares authorized for issuance was increased by 5,000,000 shares through an amendment approved by the Board of Directors in July 2001.

(b) Any shares issued under the Plan may consist in whole or in part of authorized and unissued shares or of treasury shares, and no fractional shares shall be issued under the Plan. Cash may be paid in lieu of any fractional shares in settlement of awards under the Plan.

4. Plan Administration.

(a) Committee. The Compensation and Human Resources Committee (the "Committee") appointed by the Board of Directors of the Company (the "Board") shall be responsible for administering the Plan. The Committee shall have full and exclusive power to interpret the Plan and to adopt such rules, regulations and guidelines for carrying out the Plan as it may deem necessary or proper. This power includes, but is not limited to, selecting award recipients, establishing all award terms and conditions and adopting modifications, amendments and procedures, including subplans and the like as may be necessary to comply with provisions of the laws and applicable regulatory rulings of countries in which the Company operates in order to assure the viability of awards granted under the Plan and to enable participants employed in such countries to receive advantages and benefits under the Plan and such laws and rulings.

(b) Effect of Committee's Decision. The Committee's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Rights.

5. Duration of the Plan. The Plan shall remain in effect until terminated by the Board.

6. Awards. The Committee shall determine the type or types of award(s) to be made to each participant. Awards may be granted singly, in combination or in tandem. Awards also may be made in combination or in tandem with, in replacement of, as alternatives to, or as the payment form for grants or rights under any other employee or compensation plan of the Company, including the plan of any

acquired entity. The types of awards that may be granted under the Plan are Options and Stock Awards.

7. Options.

(a) Options; Number of Shares. The Committee, in its discretion, may grant Options to eligible participants. Each Option shall be evidenced by a Notice of Grant that shall specify the number of shares to which it pertains and be in such form and contain such provisions as the Committee shall from time to time deem appropriate. Without limiting the foregoing, the Committee may at any time authorize the Company, with the consent of the respective recipients, to issue new Options or Rights in exchange for the surrender and cancellation of outstanding Options or Rights. Option agreements shall contain the following terms and conditions:

(i) Exercise Price. The per share exercise price for the shares issuable pursuant to an Option shall be such price as is determined by the Committee.

(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Committee shall determine the terms and conditions to be satisfied before shares may be purchased, including the dates on which shares subject to the Option may first be purchased. The Committee may specify than an Option may not be exercised until the completion of a service period specified at the time of grant. (Any such period is referred to herein as the "waiting period.") At the time an Option is granted, the Committee shall fix the period within which the Option may be exercised, which shall not be earlier than the end of the waiting period, if any.

(iii) Form of Payment. The consideration to be paid for the shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Committee and may consist entirely of:

(1) cash;

(2) check;

(3) promissory note;

(4) other shares that (1) in the case of shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (2) have a Fair Market Value on the date of surrender not greater than the aggregate exercise price of the shares as to which said Option shall be exercised;

(5) delivery of a properly executed exercise notice together with such other documentation as the Committee and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price;

(6) any combination of the foregoing methods of payment; or

(7) such other consideration and method of payment for the issuance of shares to the extent permitted by Applicable Laws.

(iv) Other Provisions. Unless otherwise determined by the Committee at the time of grant, each Option shall provide that in the event of a change in control of the Company (as specified by the Committee), any Optionee's Options will become exercisable in full if, within twenty-four (24) months after a change in control of the Company, the Optionee's employment is terminated without cause or the Optionee resigns due to certain involuntary relocations or reductions in compensation, as specified by the Committee. Each Option granted under the Plan may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee.

(v) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash, promissory note or shares, an Option previously granted, based on such terms and conditions

as the Committee shall establish and communicate to the Optionee at the time that such offer is made.

(b) Method of Exercise.

(i) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Committee and as shall be permissible under the terms of the Plan.

An Option may not be exercised for a fraction of a share.

An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Committee and permitted by the Option Agreement, consist of any consideration and method of payment allowable under subsection 7(a)(iii) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of shares that thereafter shall be available, both for purposes of the Plan and for sale under the Option, by the number of shares as to which the Option is exercised.

(ii) Termination of Employment Relationship. In the event an Optionee ceases to be an Employee (other than as a result of the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within such period of time from the date of such termination as is determined by the Committee and, unless determined otherwise by the Committee, only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). To the extent that Optionee was not entitled to exercise an Option at the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

(iii) Disability of Optionee. In the event an Optionee ceases to be an Employee as a result of the Optionee's Disability, the Optionee may exercise his or her Option, but only within twelve (12) months from the date of such termination, and, unless determined otherwise by the Committee, only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). To the extent that Optionee was not entitled to exercise an Option at the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

(iv) Death of Optionee. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the deceased Optionee's Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and, unless determined otherwise by the Committee, only to the extent that the Optionee was entitled to exercise it at the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). To the extent that Optionee was not entitled to exercise an Option at the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

8. Stock Awards. All or part of any Stock Award may be subject to conditions and restrictions established by the Committee, and set forth in the award agreement, which will include, but are not limited to, achievement of specific business objectives and other measurements of individual, business unit or Company performance measured over a period of not less than twelve (12) months.

9. Deferrals and Settlements. Payment of awards may be in the form of cash, Common Stock, other awards or combinations thereof as the Committee shall determine, and with such restrictions as it may impose. The Committee also may require or permit participants to elect to defer the issuance of shares or the settlement of awards in cash under such rules and procedures as it may establish under the Plan. The Committee may also provide that deferred settlements include the payment or crediting of interest on the deferral amounts.

10. Transferability of Options and Rights. Unless otherwise determined by the Committee to the contrary, Options and Rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee only by the Optionee. The Committee may, in the manner established by the Committee, provide for the transfer, without payment of consideration, of an Option or Right by the Optionee to any member of the Optionee's immediate family or to a trust or partnership whose beneficiaries are members of the Optionee's immediate family. In such case, the Option or Right will be exercisable only by such transferee. Following transfer, any such Options or Rights shall continue to be subject to the same terms and conditions as were applicable immediately prior to the transfer. For purposes of this Section, an Optionee's "immediate family" shall mean the Optionee's spouse, children and grandchildren.

11. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset Sale or Change of Control.

(a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Right, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Right, as well as the price per share of Common Stock covered by each such outstanding Option or Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Right.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option or Right has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option or Right shall terminate as of a date fixed by the Committee and give each Optionee the right to exercise his or her Option or Right as to all or any part of the Optioned Stock, including shares as to which the Option or Right would not otherwise be exercisable.

(c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Right shall be assumed or an equivalent Option or Right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation does not agree to assume the Option or to substitute an equivalent option, the Committee may, in lieu of such assumption or substitution, provide for the Optionee to have the right to exercise the Option or Right

as to all or a portion of the Optioned Stock, including shares as to which it would not otherwise be exercisable. If the Committee makes an Option or Right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify the Optionee that the Option or Right shall be exercisable for such period as the Committee may designate, and the Option or Right will terminate upon the expiration of such period. For the purposes of this Section 11(c), the Option or Right shall be considered assumed if, immediately following the merger or sale of assets, the Option or Right confers the right to receive, for each share of Optioned Stock subject to the Option or Right immediately prior to the merger or sale of assets, the consideration (either stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its parent, the Committee may, with the consent of the successor corporation and the Optionee, provide for the consideration to be received upon the exercise of the Option or Right, for each share of Optioned Stock subject to the Option or Right, to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

12. Date of Grant. The date of grant of an Option or Right shall be, for all purposes, the date on which the Committee makes the determination granting such Option or Right, or such other later date as is determined by the Committee. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant.

13. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.

(b) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company.

14. Conditions Upon Issuance of Shares.

(a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Right unless the exercise of such Option or Right and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise of an Option or Right, the Company may require the person exercising such Option or Right to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required.

15. Liability of Company. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.

16. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of the Plan.

17. Definitions. As used herein, the following definitions shall apply:

(a) "Applicable Laws" means all applicable law, including without limitation, the Code, Delaware General Corporation Law, and applicable federal and state securities laws.

(b) "Common Stock" means the Common Stock of the Company.

(c) "Company" means Silicon Graphics, Inc., and any entity that is directly or indirectly controlled by the Company, or any entity in which the Company has a significant equity interest, as determined by the Committee.

(d) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code.

(e) "Eligible Employee" means an Employee who is not a vice-president or more senior Employee.

(f) "Employee" means any person employed by the Company.

(g) "Fair Market Value" means, as of any date, the closing price for a share of Common Stock as reported daily in The Wall Street Journal or a similar readily available public source. If no sales of shares were made on such date, the closing price of a share as reported for the preceding day on which sale of shares were made shall be used.

(h) "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option or Stock Award grant. The Notice of Grant is part of the Option Agreement and the Stock Award Agreement.

(i) "Option" means a stock option granted pursuant to the Plan.

(j) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(k) "Optioned Stock" means the Common Stock subject to an Option or Right.

(l) "Optionee" means an Employee who holds an outstanding Option or Right.

(m) "Stock Award" means an award made or denominated in shares or equivalent in value to shares pursuant to Section 8 of the Plan.

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SILICON GRAPHICS, INC.
AMENDED AND RESTATED 1996 SUPPLEMENTAL NON- EXECUTIVE EQUITY INCENTIVE PLAN
EX-10.25 5 a2060031zex-10_25.htm EXHIBIT 10.25 Prepared by MERRILL CORPORATION
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Exhibit 10.25

SECOND AMENDMENT
TO LOAN AND SECURITY AGREEMENT

THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Second Amendment") is made as of September 27, 2001, by and among the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for the Lenders ("Agent"), BANK OF AMERICA, N.A., as the documentation agent for the Lenders ("Documentation Agent"), SILICON GRAPHICS, INC., a Delaware corporation ("Parent"), and SILICON GRAPHICS FEDERAL, INC., a Delaware corporation (together with Parent, the "Borrower"), with reference to the following facts:

A. The parties hereto have entered into that certain Loan and Security Agreement, dated as of April 10, 2001, as amended by a letter agreement, dated as of May 15, 2001, a letter agreement, dated as of June 8, 2001, a First Amendment to Loan and Security Agreement, dated as of June 29, 2001, and a letter agreement, dated as of July 25, 2001 (as so amended, the "Loan Agreement"), and other Loan Documents. (Capitalized terms, which are used herein but not defined herein, shall have the meanings ascribed to them in the Loan Agreement.)

B. The parties wish to make certain modifications to the Loan Documents, all on the terms and conditions set forth herein.

NOW, THEREFORE, the parties hereto agree as follows:

1. Amendments to Loan Agreement. Effective as of the Effective Date (as defined below), the Loan Agreement shall be amended as follows:

1.1 Section 7.20(a) is deleted and replaced by the following:

"7.20 Financial Covenants. Fail to maintain:

(a) Minimum EBITDA. EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto:

Applicable Amount		Applicable Period
($95,000,000	)	For the 3 month period ending June 30, 2001
($135,000,000	)	For the 3 month period ending September 30, 2001
$21,000,000		For the 3 month period ending December 31, 2001
$35,000,000		For the 3 month period ending March 31, 2002
$43,000,000		For the 3 month period ending June 30, 2002;

provided, however, that: (w) the required amount of EBITDA for the 3 month period ending June 30, 2001 shall be increased by $1 for each $1 by which Borrowers' restructuring charges during the same 3 month period aggregate less than $80,000,000; (x) the required amount of EBITDA for the 3 month period ending September 30, 2001 shall be increased by $1 for each $1 by which Borrowers' restructuring charges during the same 3 month period aggregate less than $100,000,000; (y) if Parent is

required under GAAP to make a non-cash write-down of its remaining investment in WAM!NET after the date hereof, then the required amount of EBITDA for the 3 month period during which said write-down is made shall be decreased by the amount of said write-down; and (z) the required amount of EBITDA for each 3 month period ending after June 30, 2002 shall be set by Agent at a discount to projected EBITDA following receipt of and based upon applicable Projections satisfactory to Lenders."

1.2 The definition of "Collateral" in Section 1.1 of the Loan Agreement is deleted and replaced by the following:

"Collateral" means, except for the Excluded Intellectual Property, all of each Borrower's now owned or hereafter acquired right, title, and interest in and to each of the following:

(a) Accounts,

(b) Books,

(d) IP Collateral,

(e) Inventory,

(f) Negotiable Property,

(g) money or other assets of each such Borrower that now or hereafter come into the possession, custody, or control of Lender, and

(h) the proceeds and products, whether tangible or intangible, of any of the foregoing described in clauses (a) through (g) above, including (x) proceeds of insurance covering any or all of the foregoing, and (y) any and all Accounts, Books, Equipment, IP Collateral, General Intangibles, Inventory, Investment Property, Negotiable Property, Real Property, money, deposit accounts, or other tangible or intangible property, solely to the extent, in the case of each of the foregoing clauses (x) and (y), resulting from the sale, exchange, collection, or other disposition of any of the foregoing described in clauses (a) through (g) above, or any portion thereof or interest therein, and the proceeds thereof; provided, however, that Collateral shall not include such General Intangibles: (i) which cannot be subject to a consensual security interest in favor of Agent without the consent of the licensor or other party thereto, (ii) as to which any such restriction described in clause (i) is effective and enforceable under applicable law including Section 9318(4) of the Code or, from and after the effective date thereof, Section 9408 of the revised Article 9 of the Code, and (iii) to which such consent described in clause (i) has not been obtained by the party granting the security interest."

1.3 The following definitions are hereby added to Section 1.1 of the Loan Agreement:

"Copyrights" means all of Borrower's right, title and interest in and to copyrights in works of authorship of any kind, and all registration applications, registrations and recordings thereof in the Office of the United States Register of Copyrights, Library of Congress, or in any similar office or agency of any country or political subdivision thereof throughout the world, whether now owned or hereafter acquired by such Borrower, including those described in Schedule 5.16A annexed hereto and made a part hereof, together with all extensions, renewals, reversionary rights, and corrections thereof and all licenses thereof or pertaining thereto.

"Excluded Intellectual Property" means each Patent, Trademark and Copyright presently owned by the Borrowers and listed on Schedule 5.16B.

"Intellectual Property" means collectively, the Patents, Trademarks and Copyrights.

"IP Collateral" means collectively, the Patent Collateral, Trademarks and Copyrights.

"Intellectual Property Security Agreement" means an intellectual property security agreement executed and delivered by each Borrower and Agent, the form and substance of which is satisfactory to Agent.

"Loan Documents" means this Agreement, the Cash Management Agreements, the Disbursement Letter, Intellectual Property Security Agreement, the Fee Letter, the Letters of Credit, the Intercompany Subordination Agreement, the Intercreditor Agreement, the Officers' Certificate, any note or notes executed by a Borrower in connection with this Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by any Borrower and the Lender Group in connection with this Agreement.

"Patents" means all of Borrower's right, title and interest in and to all inventions and letters patent and registration applications therefor, and all registrations and recordings thereof, including, without limitation, registration applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States or any state thereof, or in any similar office or agency of any country or political subdivision thereof throughout the world, including those described in Schedule 5.16A, together with all re-examinations, reissues, continuations, continuations-in-part, divisions, improvements and extensions thereof and all licenses thereof or pertaining thereto and all licenses of patent rights to such Borrower now in effect or entered into during the term of this Agreement and the rights to make, use and sell, and all other rights with respect to, the inventions disclosed or claimed therein, all inventions, designs, proprietary or technical information, know-how, other data or information, software, databases, all embodiments or fixations thereof and related documentation, all information pertaining to the foregoing having value in connection with such Borrower's business and all other trade secret pertaining to the foregoing rights not described above.

"Patent Collateral" means all of Borrower's right, title and interest in and to all registrations and recordings in the United States Patent and Trademark Office described in Schedule 5.16A, together with all re-examinations, reissues, continuations, continuations-in-part, divisions, improvements and extensions thereof and all licenses thereof or pertaining thereto and all licenses of patent rights to such Borrower now in effect or entered into during the term of this Agreement and the rights to make, use and sell, and all other rights with respect to, the inventions disclosed or claimed therein, all inventions, designs, proprietary or technical information, know-how, other data or information, software, databases, all embodiments or fixations thereof and related documentation, all information pertaining to the foregoing having value in connection with such Borrower's business and all other trade secret pertaining to the foregoing rights not described above.

"Trademarks" means all of Borrower's right, title and interest in and to trademarks, trade names, trade styles, service marks, logos, emblems, prints and labels, all elements of package or trade dress of goods, and all general intangibles of like nature, now existing or hereafter adopted or acquired by such Borrower, together with the goodwill of such Borrower's business connected with the use thereof and symbolized thereby, and all registration applications, registrations and recordings thereof, including, without limitation, registration applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States or in any office of the Secretary of State (or equivalent) of any state thereof, or in any similar office or agency of any country or political subdivision thereof throughout the world, whether now owned or hereafter acquired by such Borrower, including those described in Schedule 5.16A annexed hereto and made a part hereof, together with all extensions, renewals and corrections thereof and all licenses thereof or pertaining thereto.

1.4 The following is added as Section 3.2(f) of the Loan Agreement:

"(f) no later than October 30, 2001, deliver to Agent executed copies of the Intellectual Property Security Agreement and all other documents related thereto, in form and substance satisfactory to Agent in its Permitted Discretion, necessary to create and perfect a Lien on Borrower's Intellectual Property in favor of Agent, for the benefit of the Lender Group."

1.5 Section 5.16 of the Loan Agreement is hereby deleted and replaced by the following:

"5.16 Intellectual Property; IP Collateral.

(a) Each Borrower owns, or holds licenses in all of its Intellectual Property, and licenses that are necessary to the conduct of its business as currently conducted. Attached hereto as Schedule 5.16A is a true, correct, and complete listing of all IP Collateral as to which each Borrower is the owner or is an exclusive licensee.

(b) Except as set forth in Schedule 5.16A:

(i) Each Borrower is the sole owner of its IP Collateral, free and clear of any Lien (other than in favor of Agent, for the benefit of Lender Group) without the payment of any monies or royalty except with respect to off-the-shelf software;

(ii) Each Borrower has taken, and will continue to take, all actions which are necessary or advisable to acquire and protect its IP Collateral, consistent with prudent commercial practices and such Borrower's business judgment, including without limitation: (x) registering all Copyrights which, in such Borrower's business judgment, are of sufficient value to merit such treatment, in the U.S. Copyright Office, and (y) registering all Patent Collateral and Trademarks which, in such Borrower's business judgment, are of sufficient value to merit such treatment, in the United States Patent and Trademark Office;

(iii) Each Borrower's rights in the IP Collateral are valid and enforceable;

(iv) No Borrower has received any demand, claim, notice or inquiry from any Person in respect of the IP Collateral which challenges, threatens to challenge or inquiries as to whether there is any basis to challenge, the validity of, the rights of Borrowers in or the right of Borrowers to use, any such IP Collateral, and Borrowers know of no basis for any such challenge;

(v) Borrowers have not received any formal notice of any violation or infringement of any proprietary rights of any other Person;

(vi) to the knowledge of Borrowers, no Person is infringing any of the Trademarks;

(vii) except on an arm's-length basis for value and other commercially reasonable terms, Borrowers have not granted any license with respect to any IP Collateral to any Person; and

(viii)Borrowers are not pursuing any claims or causes of actions against any Person for infringement of Borrowers' IP Collateral. "

1.6 Section 6.4 of the Loan Agreement is hereby deleted and replaced with the following:

"6.4 Intellectual Property; IP Collateral. Comply with their continuing obligations described in Section 5.16 and the Intellectual Property Security Agreement."

1.7 The following schedule is added to the Exhibits and Schedules of the Loan Agreement:

"Schedule 5.16A IP Collateral

Schedule 5.16B Excluded Intellectual Property"

1.8 The following are hereby added as Sections 6.16 and 6.17 of the Loan Agreement:

"6.16 Cash Collateral. Provide and maintain at all times cash collateral to be held by Agent in an amount equal to no less than $6,995,540.38, which cash collateral will be held in an interest bearing account maintained by Agent.

6.17 Assignment of Proceeds. Execute and deliver to Agent any and all additional documents that Agent may request in its Permitted Discretion, in form and substance reasonably satisfactory to Agent, providing for the assignment of all proceeds to Agent arising from any license or royalty agreement entered into by the Borrower with respect to Borrower's General Intangibles."

1.9 Section 7.2 of the Loan Agreement is hereby deleted and replaced with the following:

"7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of the following property, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 7.1(h) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness): (i) each Borrower's Intellectual Property; provided, however, that such Intellectual Property shall not include the Excluded Intellectual Property, or (ii) Borrowers' other assets located within the United States, of any kind."

2. Conditions to Effectiveness. The effectiveness of this Second Amendment is subject to the receipt by the Agent or the completion by Borrower of the following, and the date on which the Agent receives or Borrower completes all of the following shall be the "Effective Date:"

2.1 Counterparts of this Second Amendment, executed by each of the parties hereto;

2.2 Borrower has paid Agent a waiver fee of $300,000 and all of Agent's attorneys' fees and costs as described in Section 3.8 hereof;

2.3 Borrower has fulfilled all the conditions set forth in Section 3 of that certain Forbearance Agreement, dated as of September 27, 2001 and entered into by and among the parties hereto.

3. Miscellaneous.

3.1 Loan Documents Confirmed. Except as expressly amended hereby, the Loan Agreement and the other Loan Documents shall remain unchanged and in full force and effect. This Second Amendment is hereby incorporated into the Loan Agreement.

3.2 Choice of Law. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED, THIS SECOND AMENDMENT AND ALL OTHER DOCUMENTS BEING EXECUTED CONCURRENTLY HEREWITH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

3.3 Sole Parties. This Second Amendment is made exclusively for the benefit of and solely for the protection of the parties hereto, and no other person or persons shall have the right to enforce the provisions hereof by action or legal proceedings or otherwise.

3.4 Interpretation. Whenever the context so requires, all words used in the singular will be construed to have been used in the plural, and vice versa, and each gender will include any other gender. The headings used in this Second Amendment are inserted solely for the convenience of reference and are not part of, nor intended to govern, limit or aid in the construction of, any term or provision hereof.

3.5 Counterparts. This Second Amendment may be executed in one or more counterparts, each of which shall be an original but all of which shall constitute one and the same instrument.

3.6 Further Assurances. From time to time, each party will execute and deliver in recordable form, if necessary, such further instruments and will take such other action as the other party reasonably may request in order to discharge and perform their obligations and agreements under this Second Amendment.

3.7 Time of Essence. Time is of the essence in this Second Amendment.

3.8 Attorneys' Fees and Costs. The Borrower agrees that all of the Agent's attorneys' fees and costs in drafting and negotiating this Second Amendment are part of the Obligations and are payable on demand.

IN WITNESS WHEREOF, the parties have executed this Second Amendment as of the date first written above.

	SILICON GRAPHICS, INC. a Delaware corporation
	By: Title:
	SILICON GRAPHICS FEDERAL, INC. a Delaware corporation
	By: Title:
	FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender
	By: Title:
	BANK OF AMERICA, N.A., as Documentation Agent and as a Lender
	By: Title:

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SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
EX-10.26 6 a2060031zex-10_26.htm EXHIBIT 10.26 Prepared by MERRILL CORPORATION

Exhibit 10.26

April 25, 2001

Hal Covert
c/o SGI
1600 Amphitheatre Parkway
Mountain View, CA 94043

[LETTERHEAD]

Dear Hal:

This letter agreement amends and restates the provisions of our agreement dated July 20, 2000 regarding your employment.

1. The eighth paragraph of that agreement providing for a forgivable loan is restated in its entirety as follows:

"SGI will provide you with a $2,000,000 forgivable loan, of which $1,000,000 will be forgiven as of April 25, 2001. The remaining balance of the loan will be forgiven in equal monthly installments beginning with May 2001 and ending with December 2001 provided you remain an active employee in good standing. This loan will be forgiven in full, if (1) you are terminated by SGI for any reason other than Cause, (2) in the event of a Change in Control as defined in the Employment Continuation Agreement dated July 20, 2000, or (3) you resign within 30 days of and as the result of a fundamental disagreement with the Board of Directors or the CEO regarding corporate strategy.

For these purposes, "Cause" shall mean that you are terminated for one of the following reasons: (1) willfully refusing or failing to carry out specific directions of the Board of Directors or the Chief Executive Officer of the Company; (2) for acting fraudulently or dishonestly in your relations with SGI; (3) for committing larceny, embezzlement, conversion or any act involving the misappropriation of funds from the Company in the course of your employment; (4) for having been convicted of a crime involving an act of moral turpitude, fraud or misrepresentation; or (5) for willfully engaging in misconduct which materially injured the reputation, business or business relationship of the Company. In addition, this loan shall be forgiven in full if you die or your employment with the company is terminated due to your becoming physically or mentally disabled.

Unless you provide written notification of your intention to resign as the result of a fundamental disagreement within 30 days after you know or have reason to know of the occurrence of any such event, you will be deemed to have consented thereto and the event will no longer constitute a basis for forgiveness of the loan for purposes of this agreement. If you provide such written notice, SGI will have 20 business days from the date of receipt of such notice to effect a cure of the event described therein (which cure will be retroactive with respect to any monetary matter) and, upon cure thereof by SGI to your reasonable satisfaction, such event will no longer constitute a basis for forgiveness of the loan for purposes of this agreement.

2. SGI shall require any successor or assignee, in connection with any sale, transfer or other disposition of all or substantially all of SGI's assets or business, whether by purchase, merger, consolidation or otherwise, expressly to assume and agree to perform the Company's obligation under this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company" or

"SGI", as used in the Agreement, shall mean the Company and SGI as defined above and any successor or assignee to the business and assets which by reason hereof becomes bound by the terms and provisions of this Agreement.

3. In the event of any dispute, claim, question, or disagreement arising out of or relating to this agreement or the breach thereof, the parties hereto agree to first use their best efforts to settle such matters in an amicable manner. Initially, they shall consult and negotiate with each other, in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If they do not reach such resolution within a period of sixty (60) days, then upon written notice by either party to the other, any unresolved dispute, claim or differences shall be submitted to confidential mediation by a mutually agreed upon mediator. Either party may, without inconsistency with this agreement, apply to any court having jurisdiction hereof and seek injunctive relief so as to maintain the status quo until such time as the mediation is concluded or the controversy is otherwise resolved. The site of the mediation shall be in the County of Santa Clara, California. Each party shall each bear its own costs and expenses and an equal share of the mediators' and any similar administrative fees.

If any such dispute is finally determined in your favor through a judicial proceeding, the Company shall reimburse all reasonable fees and expenses, including attorneys' and consultants' fees, that you incur in good faith in connection therewith. If the dispute involves an amount to be paid, the Company shall reimburse such fees to the extent you received half or more of the amount in dispute.

4. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to agreements made and to be performed entirely within such state.

5. This Agreement, our offer letter dated July 20, 2000 and any written agreements or Company plans that are referenced herein represent the entire agreement and understanding between you and SGI as to the subject matter hereof and supersede all prior or contemporaneous agreements, whether written or oral. No waiver, alteration or modification, if any, of the provisions of this Agreement shall be binding unless in writing and signed by you and a duly authorized representative of SGI.

Sincerely,
Sandra M. Escher Vice President, General Counsel and Corporate Secretary
ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE:
Harold L. Covert

EX-21.1 7 a2060031zex-21_1.htm EXHIBIT 21.1 Prepared by MERRILL CORPORATION
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Exhibit 21.1

SILICON GRAPHICS, INC. SUBSIDIARIES

Name		Jurisdiction of Incorporation
Alias/Wavefront, Inc.		California
ParaGraph International, Inc.		California
WTI Developments, Inc.		California
Cray Research, LLC		Delaware
Cray Asia/Pacific, Inc.		Delaware
Cray Financial Corporation		Delaware
Cray Research (America Latina) Ltd.		Delaware
Cray Research (Eastern Europe) Ltd.		Delaware
Cray Research (India) Ltd.		Delaware
Cray Research International, Inc.		Delaware
Silicon Graphics Federal, Inc.		Delaware
Silicon Graphics Real Estate, Inc.		Delaware
Silicon Graphics World Trade Corporation		Delaware
Silicon Studio, Inc.		Delaware
Silicon Graphics S.A.		Argentina
Silicon Graphics Pty Limited		Australia
Silicon Graphics International Inc.		Barbados
Silicon Graphics S.A./N.V.		Belgium
Alias/Wavefront N.V.		Belgium
Silicon Graphics Comercio e Serviços Limitada		Brazil
Cray Research (Canada) Inc.		Canada
Silicon Graphics Limited		Canada
Wavefront Canada Limited		Canada
Silicon Graphics spolecnost rucerum omezenym		Czech Republic
Silicon Graphics A/S		Denmark
Silicon Graphics		France
Alias/Wavefront SAS		France
Silicon Graphics GmbH		Germany
Alias/Wavefront GmbH		Germany
Silicon Graphics Limited		Hong Kong
Silicon Graphics Kft.		Hungary
Silicon Graphics Systems (India) Ltd		India
Cray Research (Israel) Ltd.		Israel
Silicon Graphics Computer Systems Limited		Israel
Alias/Wavefront Srl.		Italy
Silicon Graphics S.p.A.		Italy
Alias/Wavefront KK		Japan
SGI Japan Limited.		Japan
Korea Silicon Graphics Ltd.		South Korea
Silicon Graphics Sdn. Bhd.		Malaysia
Silicon Graphics S.A. de C.V.		Mexico
Silicon Graphics B.V.		Netherlands
Silicon Graphics Europe Trade B.V.		Netherlands
Silicon Graphics World Trade B.V.		Netherlands
Silicon Graphics Limited		New Zealand
Silicon Graphics A/S		Norway

Silicon Graphics Computer Engineering and Technology (China) Co. Ltd.		People's Republic of China
Silicon Graphics Pte. Limited		Singapore
Silicon Graphics (Pty) Limited		South Africa
Silicon Graphics, S.A.		Spain
Silicon Graphics AB		Sweden
Silicon Graphics S.A.		Switzerland
Silicon Graphics Manufacturing S.A.		Switzerland
Silicon Graphics Trading SARL		Switzerland
Silicon Graphics Limited		Taiwan
Silicon Graphics Bilbisayar Sistemleri Anonim Siket		Turkey
Alias/Wavefront Limited		United Kingdom
Silicon Graphics Limited		United Kingdom
Silicon Graphics Manufacturing Finance Limited		Jersey Channel Islands
Silicon Graphics S.A.		Venezuela

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Exhibit 21.1

SILICON GRAPHICS, INC. SUBSIDIARIES
EX-23.1 8 a2060031zex-23_1.htm EXHIBIT 23.1 Prepared by MERRILL CORPORATION
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Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements (Form S-8 File Nos. 33-11703, 33-16529, 33-18717, 33-26003, 33-34919, 33-38536, 33-40879, 33-44305, 33-44333, 33-48890, 33-59098, 33-65190, 33-50999, 33-51275, 33-56017, 33-60213, 33-60215, 333-01211, 333-06403, 333-08651, 333-15977, 333-40849, 333-76445, 333-90263 and 333-48780) pertaining to the Employee Stock Purchase Plan; 1982 Stock Option Plan; 1984 Incentive Stock Option Plan; 1985 Stock Incentive Program; 1986 Incentive Stock Option Plan; 1987 Stock Option Plan, 1998 Employee Stock Purchase Plan; 1993 Long-term Incentive Stock Plan; WaveFront Technologies, Inc. 1990 Stock Option Plan; Alias Research, Inc. 1998 Employee Share Ownership Plan, 1989 Employee Share Ownership Plan, 1990 Employee Share Ownership Plan, 1994 Stock Plan; Amended and Restated 1996 Supplemental Non- Executive Equity Incentive Plan; 1989 Non-Employee Directors' Stock Option Plan; Cray Research, Inc. Amended and Restated 1989 Employee Benefit Stock Plan; Directors' Stock Option Plan of our report dated October 9 with respect to the consolidated financial statements and schedule of Silicon Graphics, Inc. included in the Annual Report (Form 10-K) for the year ended June 30, 2001.

		/s/ ERNST & YOUNG LLP
Palo Alto, California October 9, 2001

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Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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