10-K

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended June 28, 2002.

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

For the transition period from                              to                             

Commission File Number 1-10441

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 ý    No o

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

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

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

PART I

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

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

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

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

ITEM 1. BUSINESS

General

        SGI is a leading provider of products, services and solutions for use in high-performance computing, visualization and the management of large-scale complex data. We sell highly scalable servers, advanced visualization systems, desktop workstations, storage solutions and a range of software products which enable our customers in the scientific, technical and creative communities to solve their

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most challenging problems and provide them with strategic and competitive advantages in their marketplace. We also offer a range of technical solutions, including professional services, Reality Center™ immersive visualization centers, customer support and education. These products and services are targeted primarily towards five market segments: Government and Defense, Science, Manufacturing, Energy, and Media.

Products

        SGI® systems are designed specifically to meet the needs of the scientific, technical and creative marketplaces. SGI systems utilize the IRIX® operating system, which is an enhanced version of UNIX® and feature MIPS® RISC microprocessors. In calendar 2003, SGI will expand the server line to include systems that run on Intel® Itanium 2 processors and the Linux® operating system in addition to those that run on MIPS and IRIX. Both the MIPS/IRIX and Intel/Linux-based product lines feature our innovative SGI NUMA™ architecture and provide unique levels of performance and scalability to our customers.

        Scalable Servers    The SGI Origin™ family of high-performance servers includes the Origin 3000 and Origin 300 series of systems. The Origin family of servers feature the SGI NUMA architecture and IRIX operating system, as well as SGI NUMAflex™, which allows customers to configure systems to meet their unique needs by constructing systems of modular components or "bricks". These bricks can be CPU, storage, and input/output ("I/O") components, which can be configured independently within each system. The modularity of the NUMAflex approach enables the computer system to meet the exact requirements of the customer, while maintaining optimum flexibility in meeting changing needs over time.

        Advanced Graphics Systems    For 20 years, Silicon Graphics has been synonymous with the most powerful and advanced computer graphics capabilities in the industry. Today, the SGI Onyx® family of products continues that tradition, providing the greatest resolution, the most realism and the highest levels of performance in the industry. The Onyx family of systems is built on the same high-bandwidth SGI NUMA architecture as the Origin servers and features our industry-leading InfiniteReality4™ graphics. SGI Onyx 3000 series systems integrate high-performance computing, data management, and high-performance visualization into a single system.

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

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

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

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

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

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

        Alias/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 2002 direct sales accounted for more than half of our product revenues. The direct sales and support organization operates throughout the United States and in all significant international markets. We also have channel partners in almost all the countries in which we have a presence; in others, we work through an SGI authorized distributor.

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

        Information with respect to international operations and export sales may be found in Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. See also "Risks That Affect Our Business" included in Part II, Item 7 of this Form 10-K. No single end-user customer accounted for 10% or more of our revenues for each of the last three fiscal years.

Technical Solutions

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

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

Research and Development

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

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

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

Manufacturing

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

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

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

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

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

Competition

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

        Our principal competitors are IBM, Hewlett Packard, NEC, Cray and, in some markets, Sun Microsystems. Our unique market focus on technical and creative users provides advantages in being able to design our systems specifically for these users. Our competitors, however, are generally far larger companies with much greater resources.

Proprietary Rights and Licenses

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

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

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

Employees

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

Corporate Data

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

ITEM 2. PROPERTIES

        SGI owns and leases sales, service, R&D, and administrative offices worldwide and has its principal facilities in California, Wisconsin and Minnesota. Our corporate headquarters and certain

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R&D operations are located in Mountain View, California, where we lease a total of about 868,000 square feet. Our primary manufacturing facility is located in Chippewa Falls, Wisconsin, where we own and lease about 429,000 square feet for manufacturing, service and R&D activities. We also have leased sales, administrative and R&D facilities of about 241,000 square feet in Eagan, Minnesota.

        As a result of restructuring over the last several years, we also own and lease additional space that we do not currently expect to use in our operations. We own a facility consisting of about 170,000 square feet in Cortaillod, Switzerland that was used until December 2001 as our European manufacturing site. This property is currently being offered for sale or lease. We also lease 3 other buildings near our Mountain View headquarters (about 154,000 square feet) and an additional 50 leased facilities worldwide (about 327,000 square feet), under leases that expire through fiscal 2010. The anticipated costs associated with these facilities, net of estimated sublease income, have been accrued in prior restructuring charges. See Note 3 to Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

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

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

        None.

Executive Officers of the Registrant

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

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

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

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

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

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

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

        Dr. Goh was appointed Senior Vice President and Chief Technology Officer in May 2001. He was made Vice President and Chief Technology Officer in October 2000, Vice President of Global Systems Engineering in October 1999 and a Chief Scientist in 1998. He joined SGI in 1989 and has held a variety of systems engineering positions since that time.

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

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

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

        Mr. Silverman was appointed Senior Vice President, Marketing in April 2001. He joined SGI in May 1999 as Vice President, Server Marketing. Prior to joining SGI, he was with Hewlett Packard for ten years and held a number of marketing director, business development and product management positions, including the head of marketing for Internet Imaging Operations and Director of Internet Solutions.

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

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PART II

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

        SGI's common stock is traded on the New York Stock Exchange under the symbol SGI. The following table sets forth, for the periods indicated, the high, low, and close prices for the Common Stock as reported on the NYSE.

Price Range for Common Stock

	Fiscal 2002						Fiscal 2001
	Low		High		Close		Low		High		Close
First Quarter	$	0.32	$	1.28	$	0.46	$	3.56	$	5.00	$	4.12
Second Quarter	$	0.44	$	2.40	$	2.14	$	3.12	$	4.56	$	4.00
Third Quarter	$	2.10	$	4.61	$	4.25	$	3.56	$	5.00	$	3.94
Fourth Quarter	$	2.50	$	4.16	$	2.94	$	1.02	$	4.00	$	1.39

        SGI had 6,451 stockholders of record as of June 28, 2002. We have not paid any cash dividends on our common stock. As a result of our accumulated deficit position and restrictions in certain debt instruments, we do not anticipate paying cash dividends to common stockholders.

ITEM 6. SELECTED FINANCIAL DATA

        The following selected financial information has been derived from the audited consolidated financial statements. The information set forth in the table below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related footnotes included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below. For example, Item 7 presents certain information on a pro forma basis, reflecting adjustments for certain changes in our business operations in fiscal 2000.

		Years ended
		June 28, 2002			June 30, 2001			June 30, 2000(3)			June 30, 1999			June 30, 1998
		(in thousands, except per share amounts)
Operating Data:
Total revenue		$	1,341,385		$	1,854,461		$	2,331,134		$	2,748,957		$	3,100,610
Costs and expenses:
	Cost of revenue		770,412			1,247,713			1,503,525			1,603,250			1,963,551
	Research and development		176,893			236,240			301,248			380,346			459,188
	Selling, general and administrative		450,365			716,591			785,196			907,612			1,068,429
	Other operating expense (recovery)(1)		44,476			102,052			102,861			(15,107	)		205,543
Operating loss			(100,761	)		(448,135	)		(361,696	)		(127,144	)		(596,101	)
Interest and other income (expense), net(2)			18,502			(18,020	)		(20,188	)		252,865			(818	)
(Loss) income before income taxes		$	(82,259	)	$	(466,155	)	$	(381,884	)	$	125,721		$	(596,919	)
Net (loss) income		$	(46,323	)	$	(493,043	)	$	(829,544	)	$	53,829		$	(459,627	)

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

(1)

Fiscal 2002 amounts include net restructuring charges ($33 million) and impairment charges ($12 million). Fiscal 2001 amounts include net restructuring charges ($82 million) and impairment charges ($20 million). Fiscal 2000 amounts include net restructuring charges ($65 million) and impairment charges ($38 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).

(2)

Fiscal 2002 amounts include a $64 million gain on sale of 60% interest in SGI Japan and $24 million in class action lawsuit settlement expense. Fiscal 2001 amounts include an $83 million write-off of our investment in a private company and $50 million in gains from the sale of marketable investments. Fiscal 2000 amounts include a loss on the sale of the Cray product line ($8 million). See Note 7 to the Consolidated Financial Statements, "Sale of Cray Product Line". 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

        SGI has had declining revenue and has been unprofitable on an operating basis for each of the past five fiscal years as we have felt the impact of the slowdown in the economy, strong competition from much larger companies, technologies and product families in transition and management and employee turnover. As part of our plan to restore growth and profitability to SGI, we took several major steps in both fiscal 2002 and 2001 to refocus our operations. We restructured our overall operations, including closing our manufacturing operations in Switzerland and consolidating operations in Wisconsin, reorganizing our services business, discontinuing our Pentium® III-based product line, resulting in noticeable improvements in our gross margins as a percentage of revenues. We also continued to manage significant reductions in operating expenses over the last two fiscal years

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

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

Results of Operations

	Years ended									Pro forma year ended
	June 28, 2002			June 30, 2001			June 30, 2000			June 30, 2000
	($ in millions)
Total revenue	$	1,341		$	1,854		$	2,331		$	2,060
Cost of revenue		770			1,247			1,504			1,399
Gross profit		571			607			827			661
Gross profit margin		42.6	%		32.7	%		35.5	%		32.1	%
Total operating expenses		672			1,055			1,189			1,113
Operating loss		(101	)		(448	)		(362	)		(452	)
Interest and other (expense) income, net		19			(18	)		(20	)		(11	)
Loss before income taxes		(82	)		(466	)		(382	)		(463	)
Net loss	$	(46	)	$	(493	)	$	(830	)	$	(892	)
Net loss per share-basic and diluted	$	(0.24	)	$	(2.59	)	$	(4.52	)	$	(4.86	)

Revenue

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

        Total revenue in fiscal 2002 decreased $513 million or 28% compared with fiscal 2001, and fiscal 2001 revenue decreased $206 million or 10% compared with pro forma fiscal 2000. Revenue for fiscal 2002 included a one-time receipt of $63 million from Microsoft resulting from an agreement involving a patent cross-license and the transfer of certain of SGI's intellectual property rights. The decline in revenue from fiscal 2001 to fiscal 2002 reflects a general economic slowdown and a significant downturn in IT spending, strong competition from much larger companies and products based on processors with higher peak performance benchmarks, the impact of no longer consolidating the revenue of SGI Japan, the discontinuance of certain visualization workstations based on Pentium III microprocessors, and other factors discussed below that affected particular product families. We expect

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

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

	Years ended									Pro forma year ended
	June 28, 2002			June 30, 2001			June 30, 2000			June 30, 2000
	($ in millions)
Servers	$	517		$	748		$	963		$	782
% of total revenue		38	%		40	%		41	%		38	%
Visual Workstations	$	237		$	397		$	520		$	520
% of total revenue		18	%		22	%		22	%		25	%
Global Services	$	457		$	598		$	606		$	606
% of total revenue		34	%		32	%		26	%		30	%
Other	$	130		$	111		$	242		$	152
% of total revenue		10	%		6	%		11	%		7	%

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

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

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

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

        Other revenue is generally comprised of our operating units that are not reportable segments, including the product and service revenue of our application software subsidiary, Alias/Wavefront. Fiscal 2002 other revenue includes a one-time receipt of $63 million from Microsoft resulting from an intellectual property agreement involving a patent cross-license and the transfer of certain of SGI's intellectual property rights. Excluding the revenue associated with the one-time receipt of $63 million from Microsoft, Other revenue decreased $44 million or 40% in fiscal 2002 compared with fiscal 2001, primarily due to a decline in Alias/Wavefront revenue.

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

	Years ended						Pro forma year ended
	June 28, 2002		June 30, 2001		June 30, 2000		June 30, 2000
Area
Americas	$	839	$	1,008	$	1,314	$	1,176
Europe		306		437		551		490
Rest of World		196		409		466		394
Total revenue	$	1,341	$	1,854	$	2,331	$	2,060

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

	Years ended						Pro forma year ended
	June 28, 2002		June 30, 2001		June 30, 2000		June 30, 2000
Area
Americas	63	%	54	%	56	%	57	%
Europe	23	%	24	%	24	%	24	%
Rest of World	14	%	22	%	20	%	19	%

        The fluctuation in geographic revenue as a percentage of total revenue between the Americas and Rest of World business in fiscal 2002 compared with fiscal 2001 is primarily due to the impact of no longer consolidating the revenue of SGI Japan. A decrease in sales in the Asia Pacific region in fiscal 2002 compared with fiscal 2001 also contributed to the decline in Rest of World revenue as a percentage of total revenue. The increase in Rest of World business in fiscal 2001 compared with fiscal 2000 primarily reflects increased sales in Japan as a percentage of total revenue.

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

Gross Profit Margin

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

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        Our overall gross profit margin increased to 43% in fiscal 2002 compared with 33% in fiscal 2001. Excluding the $63 million in revenue recognized from the Microsoft intellectual property agreement, gross margin was 40% for fiscal 2002. Gross margin improvements in fiscal 2002 are primarily attributable to decreases in manufacturing overhead expense in the second half of fiscal 2002 due to the closure of our manufacturing facility in Switzerland, the completion of the restructuring that was announced in the first quarter of fiscal 2002, and a better product mix. The restructuring included the closure of our manufacturing facility in Switzerland and the reorganization of our services business, which has had a significant impact on the increase in our service margins. Gross margin improvements in fiscal 2002 were offset slightly due to the change in SGI Japan's status during the second quarter of fiscal 2002 to a distribution model, which negatively affects gross margin. See "Impact of SGI Japan Transaction."

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

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

Operating Expenses

	Years ended									Pro forma year ended
	June 28, 2002			June 30, 2001			June 30, 2000			June 30, 2000
	($ in millions)
Research and development	$	177		$	236		$	301		$	253
% of total revenue		13	%		13	%		13	%		12	%
Selling, general and administrative	$	450		$	717		$	785		$	757
% of total revenue		34	%		39	%		34	%		37	%
Other	$	44		$	102		$	103		$	103
% of total revenue		3	%		6	%		4	%		5	%

        Our total fiscal 2002 operating expenses decreased $383 million or 36% compared with fiscal 2001. Fiscal 2002 operating expenses included $44 million of charges for restructuring and impairment costs. The significant decline in operating expenses year over year is due to an overall expense reduction program aimed at bringing expenses in line with lower revenue levels. Total fiscal 2001 operating expenses decreased $58 million or 5% compared with pro forma fiscal 2000. Fiscal 2001 operating expenses included $102 million of charges for restructuring and impairment and $18 million of charges as a result of the implementation of an Enterprise Resource Planning ("ERP") system and costs associated with a business reorganization. Pro forma fiscal 2000 operating expenses included a net charge of $103 million for estimated restructuring and impairment charges.

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

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

        Other operating expense    Other operating expense for fiscal 2002 represents a charge for estimated restructuring of $46 million and charges of $12 million associated with the impairment of assets, partially offset by adjustments to previously recorded restructuring charges of $13 million. Other operating expense for fiscal 2001 represents a charge for estimated restructuring of $88 million and charges of $20 million associated with the impairment of assets, partially offset by adjustments to previously recorded restructuring charges of $6 million. Other operating expense for fiscal 2000 represents a net charge for estimated restructuring costs of $103 million. As a result of these restructuring actions, we anticipate cash outflows of $11 million through fiscal 2003 for severance and related charges and canceled contracts and $28 million through fiscal 2010 for facilities related expenditures, net of estimated sublease income. See Note 3 to the Consolidated Financial Statements, "Other Operating Expense," for further information regarding these activities.

Interest and Other

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

        Interest Income and Other, 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 2002 is primarily comprised of a $64 million gain from the sale of 60% of our interest in SGI Japan recognized in the second quarter of fiscal 2002, partially offset by a charge of $24 million for the settlement of a securities class action lawsuit involving a payment of $4 million in cash and the issuance of 8 million shares of common stock, and a $4 million loss on the sale of a building recognized in the first quarter of fiscal 2002. Interest income and other, net for fiscal 2001 includes an $83 million write-off of a private investment, a $50 million gain on the sale of marketable investments, a $24 million gain related to the sale of the Cray product line, and an $8 million gain on the sale of corporate real estate. Significantly lower cash balances in fiscal 2001 compared with fiscal 2000 also contributed to a decrease in interest income.

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Provision for Income Taxes

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

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

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

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

Impact of SGI Japan Transaction

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

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

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Financial Condition

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

        Primarily as a result of net losses, operating activities used $13 million in cash for fiscal 2002, compared with using $282 and $76 million in fiscal 2001 and 2000, respectively. Operating cash flows for fiscal 2002 benefited from $63 million in one-time revenue from the Microsoft intellectual property agreement that was received in the first quarter. To present cash flows from operating activities, net loss for each of the past three years had to be adjusted for certain significant items. Fiscal 2002 net loss is adjusted to remove the impact of a gain of $64 million from the sale of the 60% interest in SGI Japan that is reflected as a cash flow from investing activities. Fiscal 2001 net loss is adjusted to remove the impact of a non-cash charge of $83 million for the write-off of an investment in a private company and a gain of $50 million on the sale of marketable investments that is reflected as a cash flow from investing activity. Included in fiscal 2000 adjustments is an increase of $369 million in our valuation allowance against our remaining deferred tax asset and a tax charge of $93 million related to repatriating accumulated foreign earnings. Partially offsetting these charges is a reduction of $67 million in previously provided income taxes related to certain exposures that were no longer necessary given the increase in the valuation allowance against our deferred tax assets.

        Investing activities, other than changes in our marketable and restricted investments, provided $78 million in cash during fiscal 2002. The principal investing activity during fiscal 2002 was the sale of a 60% interest in SGI Japan for proceeds of $91 million and the sale of corporate real estate and other assets for proceeds of $29 million. These proceeds were offset in part by capital expenditures totaling $28 million. Investing activities, other than changes in our marketable and restricted investments, provided $194 million in cash during fiscal 2001. The principal investing activity during fiscal 2001 was the sale of certain corporate real estate for total cash proceeds of $278 million. These proceeds were partially offset by capital expenditures, including capitalized costs associated with our global ERP system. Investing activities, other than changes in our marketable and restricted investments consumed $349 million in cash during fiscal 2000. The principal investing activity during fiscal 2000 was for the acquisition of capital equipment and our election to exercise an option to purchase five buildings on our Mountain View campus for approximately $125 million that had been held under an off-balance sheet financing arrangement. In addition, cash was reduced by $84 million in fiscal 2000 as result of the spin-off of MTI that is no longer included in our consolidated balance sheet.

        Financing activities over the past three years have included the issuance of common stock under employee stock purchase and option plans, the repurchase of common stock and the repayment of debt. The principal financing activity during fiscal 2002 included the retirement of a $13 million mortgage on our manufacturing facility in Switzerland and the non-cash restructuring of the yen denominated debt from $50 million to $37 million in the second quarter in conjunction with the sale of a majority equity interest in SGI Japan.

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

17

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

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

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

Fiscal year ended	2003		2004		2005		2006		2007		Thereafter		Total
10% loan payable to SGI Japan due Dec 2004 (payable in quarterly installments)	$	10,914	$	16,773	$	12,580	$	—	$	—	$	—		40,267
5.25% Senior Convertible Notes due Sep 2004		—		—		230,591		—		—		—		230,591
6.125% Convertible Subordinated Debentures due Feb 2011		—		—		—		—		5,026		51,750		56,776
Non-cancelable operating leases		49,675		46,481		42,388		31,636		26,481		129,922		326,583
Total	$	60,589	$	63,254	$	285,559	$	31,636	$	31,507	$	181,672	$	654,217

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Critical Accounting Policies and Estimates

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

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

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

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

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

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

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

        Deferred Taxes    We regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income over the next three years, and we record a valuation allowance to reduce our deferred tax assets to the amount that we believe to be more likely than not realizable.

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

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

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

        Other Significant Accounting Policies    Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies regarding financial instruments, stock-based compensation and consolidation require difficult judgements on complex matters that are often subject

20

to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standards setters appear likely to cause a material change in our accounting policies, outcomes cannot be predicted with confidence. Also see Note 2 "Summary of Significant Accounting Policies" which discusses accounting policies that must be selected when there are acceptable alternatives.

Recent Accounting Pronouncements

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

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

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

21

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

        In June 2002 the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in this Statement is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under Statement 146, in many cases, would be recognized over time rather than up front. The FASB decided that if the benefit arrangement requires employees to render future service beyond a "minimum retention period" a liability should be recognized as employees render service over the future service period even if the benefit formula used to calculate an employee's termination benefit is based on length of service. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged.

Risks That Affect Our Business

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

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

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

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

22

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

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

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

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

        Product Development and Introduction.    Meeting our objectives for fiscal 2003 and beyond will require the timely development and introduction of successful new products. Product transitions are a recurring part of our business. A number of risks are inherent in this process.

        The development of new technology and products is increasingly complex and uncertain, which increases the risk of delays. The introduction of new computer systems requires close collaboration and continued technological advancement involving multiple hardware and software design teams, internal and external manufacturing teams, outside suppliers of key components such as semiconductor and storage products and outsourced manufacturing partners. The failure of any one of these elements could cause our new products to fail to meet specifications or to miss the aggressive timetables that we establish. There is no assurance that acceptance of our new systems will not be affected by delays in this process. As noted above, our ability to successfully attract and retain key technical, marketing and

23

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

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

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

        Dependence On Partners and Suppliers.    Our business has always involved close collaboration with partners and suppliers. However, many elements of our current business strategy, including the addition of scalable servers based on Itanium 2 processors and the Linux operating system in the second half of this fiscal year, will increase our dependence on Intel and other partners, and on our manufacturing partners and other component suppliers. Our business could be adversely affected, for example, if Intel fails to meet product release schedules, if we experience supply constraints, or if we experience any other interruption or delay in the supply chain. The competitiveness of our system products, particularly our servers, is significantly affected by the availability on our platform of third-party software applications that are important to customers in our target markets. Our ability to work with our software partners to ensure porting of these applications to our IRIX operating system and, in the future, to Linux, is a key factor to our business success.

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

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

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

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

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

        Employees.    Our success depends on our ability to continue to attract, retain and motivate highly qualified technical, sales, marketing and management personnel. The uncertainties surrounding SGI's business prospects have increased the challenges of retaining world-class talent. We implemented further restructuring actions during fiscal 2002. As we continue to work through the turnaround process, there is no guarantee that we will not lose highly qualified employees or that we will be able to hire highly qualified candidates as new skills are needed.

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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        To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments. We compute the market values for interest risk based on the present value of future cash flows as impacted by the changes in rates attributable to the market risk being measured. We selected the discount rates used for the present value computations based on market interest rates in effect at June 28, 2002 and June 30, 2001. We computed the market values for foreign exchange risk based on spot rates in effect at June 28, 2002 and June 30, 2001. The market values that result from these computations are compared to the market values of these financial instruments at June 28, 2002 and June 30, 2001. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.

        The results of the sensitivity analysis at June 28, 2002 and June 30, 2001 are as follows:

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

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

			Page
Financial Statements:
	Report of Ernst & Young LLP, Independent Auditors		27
	Consolidated Statements of Operations		28
	Consolidated Balance Sheets		29
	Consolidated Statements of Cash Flows		30
	Consolidated Statements of Stockholders' (Deficit) Equity		31
	Notes to Consolidated Financial Statements		32
Financial Statement Schedule:
	For each of the three fiscal years in the period ended June 28, 2002		•
		Schedule II—Valuation and qualifying accounts	78

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

26

Report of Ernst & Young LLP, Independent Auditors

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

        We have audited the accompanying consolidated balance sheets of Silicon Graphics, Inc. as of June 28, 2002 and June 30, 2001, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended June 28, 2002. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silicon Graphics, Inc. at June 28, 2002 and June 30, 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 28, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

                                                                                                                            /s/ ERNST & YOUNG LLP

Palo Alto, California
July 23, 2002

27

CONSOLIDATED STATEMENTS OF OPERATIONS

			Years ended
			June 28, 2002			June 30, 2001			June 30, 2000
			(In thousands, except per share amounts)
Revenue:
	Product and other revenue		$	856,719		$	1,222,561		$	1,688,859
	Service revenue			484,666			631,900			642,275
		Total revenue		1,341,385			1,854,461			2,331,134
Costs and expenses:
	Cost of product and other revenue			464,405			738,436			962,309
	Cost of discontinued product line			—			18,519			66,203
	Cost of service revenue			306,007			490,758			475,013
	Research and development			176,893			236,240			301,248
	Selling, general and administrative			450,365			716,591			785,196
	Other operating expense			44,476			102,052			102,861
		Total costs and expenses		1,442,146			2,302,596			2,692,830
Operating loss				(100,761	)		(448,135	)		(361,696	)
Interest expense				(22,959	)		(19,807	)		(18,980	)
Interest income and other, net				41,461			1,787			(1,208	)
Loss before income taxes				(82,259	)		(466,155	)		(381,884	)
(Benefit) provision for income taxes				(35,936	)		26,888			447,660
Net loss			$	(46,323	)	$	(493,043	)	$	(829,544	)
Net loss per share—basic and diluted			$	(0.24	)	$	(2.59	)	$	(4.52	)
Shares used in the calculation of net loss per share—basic and diluted				194,974			190,338			183,528

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

28

CONSOLIDATED BALANCE SHEETS

			June 28, 2002			June 30, 2001
			(In thousands, except share and per share amounts)
Assets:
Current assets:
	Cash and cash equivalents		$	213,302		$	123,129
	Short-term marketable investments			4,878			2,978
	Short-term restricted investments			43,506			74,036
	Accounts receivable, net of allowance for doubtful accounts of $12,548 in 2002; $20,068 in 2001			193,992			354,026
	Inventories			109,410			205,152
	Prepaid expenses			18,227			51,161
	Other current assets			48,298			43,226
		Total current assets		631,613			853,708
	Restricted investments			1,183			2,817
	Property and equipment, net of accumulated depreciation and amortization			160,282			268,944
	Other assets			117,041			157,560
			$	910,119		$	1,283,029
Liabilities and Stockholders' Deficit:
Current liabilities:
	Accounts payable		$	92,326		$	167,053
	Accrued compensation			46,734			79,589
	Income taxes payable			10,369			30,561
	Other current liabilities			179,041			237,986
	Deferred revenue			168,283			265,246
	Current portion of restructuring charge			29,979			64,463
	Current portion of long-term debt			10,216			50,694
		Total current liabilities		536,948			895,592
Long-term debt				308,631			289,289
Other liabilities				119,181			123,431
		Total liabilities		964,760			1,308,312
Commitments and contingencies
Stockholders' deficit:
	Preferred stock, $.001 par value; issuable in series, 2,000,000 shares authorized; shares issued and outstanding: none in 2002 and 2001;			—			—
	Common stock, $.001 par value, and additional paid-in capital; 500,000,000 shares authorized; shares issued: 199,762,254 in 2002; 192,434,545 in 2001;			1,450,829			1,442,867
	Accumulated deficit			(1,466,181	)		(1,340,085	)
	Treasury stock, at cost: 1,124,392 shares in 2002; 6,100,877 in 2001;			(17,096	)		(105,190	)
	Accumulated other comprehensive loss			(22,193	)		(22,875	)
		Total stockholders' deficit		(54,641	)		(25,283	)
			$	910,119		$	1,283,029

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

29

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Years ended
				June 28, 2002			June 30, 2001			June 30, 2000
				(In thousands)
Cash Flows From Operating Activities:
Net loss				$	(46,323	)	$	(493,043	)	$	(829,544	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation				148,920			119,895			151,703
	Amortization				11,264			15,568			16,821
	Gain on sale of 60% interest in SGI Japan				(63,723	)		—			—
	(Gain) loss on sale of Cray product line				—			(23,506	)		7,693
	Gain on sale of long-term investments				(1,713	)		(49,561	)		—
	Gain on sale of corporate real estate				(3,573	)		(11,529	)		—
	Loss on write-down of investments in private companies				6,158			83,129			—
	Restructuring and impairment charges, net				44,476			102,051			102,861
	Changes in deferred tax assets and liabilities				—			—			351,264
	Other				10,634			(7,067	)		15,745
Changes in operating assets and liabilities:
	Accounts receivable				105,184			(6,511	)		225,116
	Inventories				52,812			(31,490	)		(19,900	)
	Accounts payable				(55,327	)		19,687			(40,781	)
	Accrued compensation				(32,855	)		1,671			(25,982	)
	Deferred revenue				(69,949	)		(27,526	)		(15,509	)
	Other assets and liabilities				(118,757	)		26,118			(15,352	)
		Total adjustments			33,551			210,929			753,679
			Net cash used in operating activities		(12,772	)		(282,114	)		(75,865	)
Cash Flows From Investing Activities:
Marketable investments:
	Purchases				(2,125	)		(1,178	)		(43,982	)
	Maturities				225			4,470			154,831
Purchases of restricted investments					(448,984	)		(500,830	)		(322,915	)
Proceeds from the maturities of restricted investments					481,147			445,947			290,733
Proceeds from the sale of interest in SGI Japan					90,705			—			—
Spin-off of interest in MIPS Technologies, Inc. ("MTI")					—			—			(84,358	)
Proceeds from the sale of corporate real estate and other assets					29,400			278,186			—
Capital expenditures					(27,833	)		(139,010	)		(261,087	)
(Increase) decrease in other assets					(14,304	)		55,176			(3,991	)
			Net cash provided by (used in) investing activities		108,231			142,761			(270,769	)
Cash Flows From Financing Activities:
Issuance of debt					44			93			2,988
Payments of debt principal					(13,877	)		(5,150	)		(16,541	)
Sale of SGI common stock					8,547			16,120			65,826
Restricted investments used to purchase SGI common stock					—			104,439			—
Repurchase of SGI common stock					—			(104,439	)		(24,420	)
Cash dividends-preferred stock					—			(392	)		(525	)
			Net cash (used in) provided by financing activities		(5,286	)		10,671			27,328
Net increase (decrease) in cash and cash equivalents					90,173			(128,682	)		(319,306	)
Cash and cash equivalents at beginning of year					123,129			251,811			571,117
Cash and cash equivalents at end of year				$	213,302		$	123,129		$	251,811

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

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

				Three years ended June 28, 2002
				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, 1999				$	16,998		$	1,421,028		$	92,449		$	(104,633	)	$	(1,643	)	$	1,424,199
	Components of comprehensive loss:
		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 loss:
		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 shares) 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	)
	Components of comprehensive income:
		Net loss			—			—			(46,323	)		—			—			(46,323	)
		Currency translation adjustment			—			—			—			—			901			901
		Change in unrealized gain on available-for-sale investments, net of tax of $(66)			—			—			—			—			(165	)		(165	)
	Reclassification adjustment of accumulated unrealized gain related to the sale of investments				—			—			—			—			2,637			2,637
		Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges			—			—			—			—			(2,691	)		(2,691	)
		Total comprehensive loss																		(45,641	)
	Issuance (4,974,487 shares) of treasury stock under employee plans—net				—			2,106			(79,773	)		88,094			—			10,427
	Issuance (2,400,000 shares) of common stock for settlement of securities class action lawsuit				—			5,856			—			—			—			5,856
Balance at June 28, 2002				$	—		$	1,450,829		$	(1,466,181	)	$	(17,096	)	$	(22,193	)	$	(54,641	)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations

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

        Our products were manufactured in Wisconsin and Switzerland during fiscal 2002. During the first half of fiscal 2002, we consolidated our manufacturing operations with the closure of our manufacturing facility in Switzerland. We distribute our products through our direct sales force, as well as through indirect channels including resellers, distributors and system integrators. Product and other revenue consists primarily of revenue from computer system and software product shipments, as well as the sale of software distribution rights, system leasing, technology licensing agreements and non-recurring engineering contracts. Service revenue results from customer support and maintenance contracts, as well as from delivery of professional services.

        We have incurred net losses and negative cash flows from operations during each of the past three fiscal years. Primarily as a result of net substantial business restructuring and expense reductions, we reduced our net loss and cash consumed from operations significantly from fiscal 2001 to fiscal 2002. Through improved operational execution and the sale of certain assets, we also improved our cash position substantially during fiscal 2002. At June 28, 2002, we had unrestricted cash and marketable investments of $218 million, net working capital of $95 million and stockholders' deficit of $55 million. While a forecast of future events is inherently uncertain, we believe that the combination of our current resources and cash expected to be generated from our fiscal 2003 operating plan will provide sufficient funding to enable the Company to meet its obligations during fiscal 2003. We are committed to the successful execution of our operating plan and business turnaround, and will take steps if necessary to further restructure our business operations to reduce expenses and improve working capital.

Note 2. Summary of Significant Accounting Policies

        Basis of Presentation and Principles of Consolidation    Beginning in fiscal 2002, SGI changed to a 52–53 week fiscal year ending on the last Friday in June. For fiscal 2002, the fiscal year ended on June 28. For prior years, the fiscal year ended on June 30. The consolidated financial statements include the accounts of SGI and our wholly-and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

        Foreign Currency Translation    Historically, the functional currency of a majority of our foreign subsidiaries' was their local currency and, at the end of every period, their financial statements were translated to the U.S. dollar at the rates of exchange in effect at the end of the period with the resulting translation adjustments recorded directly to accumulated comprehensive income, a separate component of stockholders' (deficit) equity. Effective December 29, 2001, we changed the functional currency of all but a few of our foreign subsidiaries from their respective local currency to the U.S. dollar due to the subsidiaries' operations becoming less self-contained and more integrated within our U.S. business. Accordingly, with the U.S. dollar as the functional currency for most of our subsidiaries, foreign currency assets and liabilities are remeasured into the U.S. dollar at end-of-period exchange rates, except for inventory, property, plant and equipment and certain other assets, which are

32

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

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

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

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

        Fair Values of Financial 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 (loss) income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash

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flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in other comprehensive (loss) income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period.

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

        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 18-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 years and improvements over five 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, prior to our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," beginning in fiscal 2003, was being amortized on a straight-line basis over a period of 20 years.

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

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

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

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

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

        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 fiscal years 2002, 2001 and 2000 was $4 million, $30 million and $25 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 ("SFAS") No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", we review long-lived assets, including property and equipment, acquired technology rights, goodwill, and other intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 121, an impairment loss would be recognized when undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. Long lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, such as a significant industry downturn, significant decline in the market value of the Company, or a significant decline in projected future cash flow for an operating segment. Determination of recoverability is based on an estimate of undiscounted future cash flows from the use of the asset and its eventual disposition. Measurement of impairment charges for long-lived assets and certain identifiable intangible assets that management expects to hold and use are based on the fair value of such assets. Long lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

        Capitalized Software    In accordance with Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", we capitalize certain costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces, installation and testing of the software. Internal use software costs capitalized during fiscal 2002 and fiscal 2001 relating to our global ERP system amounted to $5 million and $17 million, respectively. Capitalized costs are included in property and equipment (see Note 10, "Property and Equipment") and are amortized over periods ranging from 3 to 5 years.

        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.

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

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

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

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        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS 146 and Issue 94-3 relates to SFAS 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS 146 is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, SFAS 146 eliminates the definition and requirements for recognition of exit costs in Issue 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up front. The FASB decided that if the benefit arrangement requires employees to render future service beyond a "minimum retention period" a liability should be recognized as employees render service over the future service period even if the benefit formula used to calculate an employee's termination benefit is based on length of service. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged.

Note 3. Other Operating Expense

        Other operating expense is as follows (in thousands):

	Years ended
	June 28, 2002		June 30, 2001		June 30, 2000
Restructuring and impairment charges	$	44,476	$	102,052	$	102,861

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

        Fiscal 2000 restructuring actions also were comprised of vacating approximately 1,500,000 square feet of leased sales and administrative facilities throughout the world, with lease terms expiring through fiscal 2004. We estimated this would require ongoing lease payments of $26 million until subleases could be arranged and incurring $7 million in exit costs, including costs to restore facilities to original condition.

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

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

37

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

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

        During the fourth quarter of fiscal 2001, we announced and began to implement additional restructuring actions with the objective of further reducing our operating expenses and restoring long-term profitability to SGI. These actions resulted in aggregate charges of $88 million and were broad-based and covered virtually all aspects of our products, operations and processes. Fiscal 2001 restructuring actions resulted in the elimination of approximately 1,000 positions, across all levels and functions, all of which were eliminated as of March 29, 2002. Severance payments and related charges of $45 million consisted primarily of salary and expected payroll taxes, extended medical benefits, statutory legal obligations and outplacement services. Third party contract cancellation charges associated with the fiscal 2001 actions totaled $2 million. Our plans include vacating approximately 3,000,000 square feet of leased sales and administrative facilities throughout the world, with lease terms expiring through April 2010. We estimate this will require ongoing lease payments of $32 million and $9 million in exit costs, including costs to restore facilities to their original condition. During the fourth quarter of fiscal 2002, we lowered our estimate of the total costs associated with the fiscal 2001 restructuring activities and recorded an adjustment of $5 million. The adjustment primarily reflected lower than estimated severance and related costs primarily due to the sale of our 60% interest in SGI Japan which resulted in a smaller headcount reduction than originally anticipated. The remaining fiscal 2001 accrual balance of approximately $22 million at June 28, 2002 is expected to result in cash expenditures through fiscal 2010 for facilities related expenditures.

        During fiscal 2002, we announced and began to implement additional restructuring actions consistent with the objective of the fiscal 2001 restructuring. These actions resulted in aggregate charges of $46 million and the elimination of approximately 1,000 positions across all levels and functions. Severance payments and related charges of $37 million consist primarily of salary and expected payroll taxes, extended medical benefits, statutory legal obligations and outplacement services. Third party contract cancellation charges associated with the fiscal 2002 actions totaled $3 million. Our plans include vacating approximately 176,000 square feet of administrative facilities throughout the world, with lease terms expiring through fiscal 2007. We estimate this will require ongoing lease payments of $5 million. Our plans also included consolidating our manufacturing activity in Wisconsin and closing our manufacturing facility in Switzerland, which was completed in December 2001 (see "Impairment" below). During the fourth quarter of fiscal 2002, we lowered our estimate of the total costs associated with the fiscal 2002 restructuring activities and recorded an adjustment of $1 million, which reflected lower than estimated severance and related costs. The remaining fiscal 2002 restructuring accrual balance of approximately $12 million at June 28, 2002 is expected to result in cash expenditures through fiscal 2003 for severance and related charges and through fiscal 2007 for facilities related expenditures.

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

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

        As a result of the fiscal 2001 restructuring activities described above, we wrote down approximately $10 million of fixed assets, primarily associated with leasehold improvements and associated furniture and fixtures held for disposal. We wrote down approximately $6 million related to canceled projects and demonstration units as a result of the decision to discontinue the Pentium III product line. In addition, we also recorded approximately $4 million in impairments for internally developed software projects that were discontinued in fiscal 2002 as a result of the functionality provided by the new ERP system. The fair value and remaining carrying value of all of these assets at June 30, 2001 was immaterial.

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

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

Category		Severance and Related Charges			Canceled Contracts			Vacated Facilities			Other			Impairment Charges			Total
Balance at June 30, 1999		$	5,218		$	—		$	1,049		$	2,166		$	—		$	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
Additions—fiscal 2002 restructuring and impairment			37,440			3,224			4,899			—			11,515			57,078
Adjustments:
	Increase		—			—			—			—			—			—
	(decrease)		(6,430	)		—			(6,172	)		—			—			(12,602	)
Expenditures:
	Cash		(57,982	)		(3,023	)		(20,438	)		—			—			(81,443	)
	Non-cash		—			—			6,172			—			(11,515	)		(5,343	)
Balance at June 28, 2002		$	9,178		$	1,418		$	27,743		$	—		$	—		$	38,339

Note 4. Loss Per Share

	Years ended
	June 28, 2002			June 30, 2001			June 30, 2000
	(in thousands, except per share amounts)
Net loss	$	(46,323	)	$	(493,043	)	$	(829,544	)
Less preferred stock dividends		—			(392	)		(525	)
Net loss available to common stockholders	$	(46,323	)	$	(493,435	)	$	(830,069	)
Weighted average shares outstanding—basic and diluted		194,974			190,338			183,528
Net loss per share—basic and diluted	$	(0.24	)	$	(2.59	)	$	(4.52	)
Potentially dilutive securities excluded from computations because they are anti-dilutive		18,090			8,643			10,244

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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 28, 2002 and June 30, 2001 (in thousands):

		2002			2001
Money market funds		$	122,442		$	68,465
Certificates of deposit and time deposits			48,840			79,014
U.S. commercial paper			2,735			817
	Total		174,017			148,296
Less amounts classified as cash equivalents			(124,450	)		(68,465	)
	Total marketable and restricted investments	$	49,567		$	79,831

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

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

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

	2002			2001
Opening balance	$	722		$	(2,661	)
Reclassified into earnings from other comprehensive (loss) income, net		1,470			(7,251	)
Changes in fair value of derivatives, net		(4,161	)		10,634
Unrealized (loss) gain on derivative instruments included in other comprehensive (loss) income	$	(1,969	)	$	722

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

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

	2002						2001
	Carrying Amount			Fair Value			Carrying Amount		Fair Value
Cash and cash equivalents	$	213,302		$	213,302		$	123,129	$	123,129
Marketable investments		49,567			49,567			79,831		79,831
Debt instruments		318,847			220,435			339,983		181,284
Currency forward contracts		62			62			626		626
Currency options		(1,698	)		(1,698	)		402		402

Note 6. Sale of Interest in SGI Japan

        On November 9, 2001, NEC Corporation and its publicly held affiliate, NEC Soft, acquired 40% and 20% respectively, of SGI Japan, Ltd. for an aggregate purchase price of 11.5 billion Japanese yen, yielding approximately $91 million in net proceeds. The net proceeds exceeded 60% of the net book value of SGI Japan at the purchase date by approximately $68 million. The total gain in this transaction, after recognition of the debt reduction (see below) and transaction-related costs, is approximately $74 million. We recognized a gain of approximately $64 million in other income during the quarter ended December 28, 2001. The remaining $10 million has been recorded as deferred revenue and will be recognized as revenue over three years as we fulfill product orders from SGI Japan under a long-term exclusive distribution agreement to supply SGI equipment, services and solutions in Japan. Also as part of this transaction, SGI's current yen-denominated debt held by a financial institution, which would have otherwise matured in December 2001, was restructured and is now owed to SGI Japan, maturing in quarterly installments from September 2002 through December 2004. The result of this debt restructuring was to reduce the outstanding balance at December 28, 2001 from $50 million to $37 million (See Note 13, "Long Term Debt"). SGI's debt is secured by its remaining ownership interest in SGI Japan. Effective November 10, 2001, SGI no longer consolidates SGI Japan's results in its financial statements but instead records its proportionate share of SGI Japan's earnings as non-operating income in accordance with APB 18, "The Equity Method of Accounting for Investments in Common Stock." Due to the timing of receipt of financial reporting information from SGI Japan, these entries are recorded on a quarter lag. At June 28, 2002, we have a net investment in SGI Japan of approximately $15.7 million recorded in other assets and have recorded approximately $0.4 million in income from this equity investment.

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

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

Note 7. Sale of Cray Product Line

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

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

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

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Note 8. MIPS Technologies, Inc.

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

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

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

Note 9. Concentration of Credit and Other Risks

        Credit 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 counter-parties and, by policy, limit the amount of credit exposure to any one counter-party. The credit risk on receivables due from counter-parties related to currency forward contracts is immaterial at June 28, 2002 and June 30, 2001. We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain reserves for potential credit losses and such losses have been within our expectations.

        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 that would have an adverse effect upon our results.

        International Operations    We derive slightly more than one-third of our revenue from sales outside the United States. Therefore, our results would be minimally affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns, and changes in regional or worldwide economic or political conditions. The risks of our international operations are mitigated in part by our foreign exchange hedging program and by the extent to which our sales are geographically distributed.

        Export Compliance    Our sales to foreign customers are subject to export regulations. Sales of many of our high-end products require clearance and export licenses from the U.S. Department of Commerce under these regulations. The U.S. Departments of Commerce and Justice are currently conducting civil and criminal investigations into SGI's compliance with the export regulations in

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connection with several export sales to Tier 3 countries. We have agreed to waivers of the statutes of limitations for these matters and are currently in discussion with the authorities concerning a potential resolution. We believe that these matters will be resolved without a significant adverse effect on our business. There is no assurance, however, that we will reach an acceptable resolution or that the ultimate result would not impair the conduct of our business with the U.S. government or our sales outside the United States. Our international sales would also be adversely affected if such regulations were tightened, or if they are not modified over time to reflect the increasing performance of our products. The Swiss authorities are also investigating compliance with their export regulations in connection with exports from the Swiss manufacturing facility we closed during the second quarter of fiscal 2002. We believe that these matters will be resolved without a significant adverse effect on our business.

Note 10. Consolidated Financial Statement Details

Inventories

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

	2002		2001
Components and subassemblies	$	70,497	$	85,383
Work-in-process		19,442		32,171
Finished goods		8,682		40,092
Demonstration systems		10,789		47,506
Total inventories	$	109,410	$	205,152

Property and Equipment

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

	2002			2001
Land and buildings	$	90,416		$	113,115
Machinery and equipment (including capitalized software)		457,414			510,772
Furniture and fixtures		47,807			84,313
Leasehold improvements		45,299			73,055
		640,936			781,255
Accumulated depreciation and amortization		(480,654	)		(512,311	)
Net property and equipment	$	160,282		$	268,944

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

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Note 11. Other Assets

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

	2002		2001
Spare parts	$	55,548	$	80,044
Investments		20,628		12,841
Software licenses, goodwill and other, net of accumulated amortization of $71,466 in 2002 and $83,836 in 2001		40,865		64,675
	$	117,041	$	157,560

Note 12. Financing Arrangement

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

Note 13. Long-Term Debt

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

	2002			2001
Senior Convertible Notes due September 2004 at 5.25%	$	230,591		$	230,591
Convertible Subordinated Debentures due February 2011 at 6.125%, net of unamortized discount of $8,825 ($9,493 in 2001)		47,951			47,283
Swiss Franc mortgage due June 2017 at 1.70% in 2001		—			12,207
Japanese Yen fixed rate loan due in quarterly installments through December 2004 at 10.00% (1)		40,267			—
Japanese Yen fixed rate loan due December 2001 at 2.06%		—			48,325
Other		38			1,577
		318,847			339,983
Less amounts due within one year		(10,216	)		(50,694	)
Amounts due after one year	$	308,631		$	289,289

(1)

The Japanese yen fixed rate loan of approximately 4.8 billion yen was converted at a rate of 119.24 yen per U.S. dollar.

        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

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holder's option in the event of the sale of all, or substantially all, of our common stock for consideration other than common stock traded on a U.S. exchange or approved for quotation on the Nasdaq National Market.

        In connection with the fiscal 1996 acquisition of Cray Research, SGI assumed the Convertible Subordinated Debentures. These debentures are convertible into SGI's common stock at a conversion price of $39.17 per share at any time prior to maturity and may be redeemed at our option at a price of 100%. Prior to our acquisition of Cray, Cray repurchased a portion of the debentures with a face value of $33 million. The repurchase satisfied the first six required annual sinking fund payments of approximately $6 million originally scheduled for the years 1997 through 2002. In fiscal 2000 and fiscal 1999, we repurchased additional portions of the debentures with a face value of $11 million and $15 million, respectively. These repurchases satisfied the next four required annual sinking fund payments of approximately $6 million originally scheduled for the years 2003 through 2006. Remaining annual sinking fund payments of $6 million each are scheduled from 2007 to 2010 with a final maturity payment of $35 million in 2011.

        As a result of our sale of a 60% interest in SGI Japan (Note 6, "Sale of Interest in SGI Japan"), SGI's current yen-denominated debt held by a financial institution, which would have otherwise matured in December 2001, was restructured and is now owed to SGI Japan, maturing in quarterly installments from September 2002 through December 2004. The result of this debt restructuring was to reduce the outstanding balance at December 28, 2001 from $50 million to $37 million. SGI's debt is collateralized by its remaining ownership interest in SGI Japan.

        Principal maturities of long-term debt at June 28, 2002 are as follows (in millions): 2003—$11; 2004—$17; 2005—$243; 2006—$0; 2007—$5 and $52 thereafter.

Note 14. Leasing Arrangements as Lessee

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

        Future minimum annual lease payments under operating leases at June 28, 2002 are as follows (in millions): 2003—$50; 2004—$46; 2005—$42; 2006—$32; 2007—$26, and thereafter- $130. Included in these lease payments are amounts related to restructuring activities at June 28, 2002 as follows: 2003—$9; 2004—$7; 2005—$6; 2006—$3; 2007—$1; and thereafter—$1. Future sublease and rental income as of June 28, 2002 are as follows (in millions): 2003—$5; 2004—$4; 2005—$4; and 2006—$1.

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

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

Note 15. Stockholders' Equity

        Preferred Stock 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.

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

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

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

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

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

		2002				2001				2000
		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 beginning of fiscal year		33,222,585		$	5.09	23,827,668		$	6.78	30,615,342		$	13.15
	Options granted	13,044,170		$	0.87	19,734,021		$	3.62	38,267,284		$	7.79
	Options exercised	(1,273,554	)	$	1.56	(1,563,748	)	$	0.92	(2,432,670	)	$	7.99
	Options forfeited	—			—	—			—	(24,555,131	)	$	11.22
	Options canceled	(10,573,612	)	$	4.71	(8,775,356	)	$	7.14	(18,067,157	)	$	13.51
Balance at end of fiscal year		34,419,589		$	3.73	33,222,585		$	5.08	23,827,668		$	6.78
Exercisable at end of fiscal year		23,306,452		$	4.44	18,827,210		$	5.57	12,923,200		$	7.34

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

	Options Outstanding
					Options Exercisable
				Weighted Average Contractual Life (years)
Exercise Price Range	Number of Shares	Weighted Average Exercise Price			Number of Shares	Weighted Average Exercise Price
$0.42–$2.10	10,433,007	$	0.64	8.94	4,111,616	$	0.69
$2.12–$4.60	12,862,448	$	3.44	8.14	9,520,745	$	3.48
$4.81–$6.12	8,187,757	$	5.89	6.20	7,195,599	$	5.89
$6.18–$37.49	2,936,377	$	9.96	5.46	2,478,492	$	10.09
$0.42–$37.49	34,419,589	$	3.73	7.69	23,306,452	$	4.44

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

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

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

	Employee Stock Options						Stock Purchase Plan Shares
	2002		2001		2000		2002		2001		2000
Expected life (in years)	1.3		1.4		1.5		0.5		0.4		0.5
Risk-free interest rate	3.00	%	5.10	%	5.57	%	1.27	%	5.22	%	5.45	%
Volatility	1.02		0.81		0.79		1.3		0.93		0.78
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 2002, 2001 and 2000 was $2 million, $6 million and $7 million, respectively.

        We determined the following pro forma information regarding net loss and loss per share as if we had accounted for our employee stock options and employee stock purchase plan under the fair value method prescribed by SFAS No. 123. For purposes of pro forma disclosures, the estimated fair value of

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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 28, 2002			June 30, 2001			June 30, 2000
Pro forma net loss		$	(59,687	)	$	(542,976	)	$	(880,868	)
Pro forma net loss per share:
	Basic and diluted	$	(0.31	)	$	(2.85	)	$	(4.80	)

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

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

Note 16. Comprehensive Loss

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

	Years ended
	June 28, 2002			June 30, 2001
Unrealized loss on available-for-sale investments	$	—		$	(2,472	)
Unrealized (loss) gain on derivative instruments designated and qualifying as cash flow hedges		(1,969	)		722
Foreign currency translation adjustments		(20,224	)		(21,125	)
Accumulated other comprehensive loss	$	(22,193	)	$	(22,875	)

Note 17. Income Taxes

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

	Years ended
	June 28, 2002			June 30, 2001			June 30, 2000
United States	$	(164,422	)	$	(341,479	)	$	(367,033	)
International		82,163			(124,676	)		(14,851	)
	$	(82,259	)	$	(466,155	)	$	(381,884	)

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

		Years ended
		June 28, 2002			June 30, 2001		June 30, 2000
Federal:
	Current	$	(40,654	)	$	6,111	$	(33,528	)
	Deferred		—			—		352,757
State:
	Current		2,635			1,300		3,821
	Deferred		—			—		58,260
Foreign:
	Current		314			19,477		29,492
	Deferred		1,769			—		36,858
		$	(35,936	)	$	26,888	$	447,660

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

	Years ended
	June 28, 2002			June 30, 2001			June 30, 2000
Tax at U.S. federal statutory rate	$	(28,791	)	$	(163,154	)	$	(133,659	)
State taxes, net of federal tax benefit		1,713			845			40,353
Effect of change in investment policy with respect to undistributed earnings of certain foreign affiliates		—			—			92,972
Net operating loss with no tax benefit		27,985			162,352			152,202
Change in U.S. federal tax law		(42,083	)		—			—
Foreign tax credits with no tax benefit		2,083			19,477			25,868
Increase (reduction) in tax contingencies		—			—			(67,000	)
Valuation allowance on net deferred tax assets		—			—			329,965
Other		3,157			7,368			6,959
(Benefit from) provision for income taxes	$	(35,936	)	$	26,888		$	447,660

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

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

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

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

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

			2002			2001
Deferred tax assets:
	Net operating loss carryforwards		$	504,895		$	559,044
	General business credit carryforwards			54,330			63,000
	Inventory valuation			42,246			49,245
	Reserves not currently deductible			34,106			47,329
	Other			146,285			201,116
		Subtotal		781,862			919,734
		Valuation allowance		(699,950	)		(826,893	)
	Total deferred tax assets			81,912			92,841
Deferred tax liabilities:
	Foreign taxes on unremitted foreign earnings, net of related U.S. tax liability			23,733			52,727
	Intercompany eliminations			59,214			39,720
	Other			734			394
		Total deferred tax liabilities		83,681			92,841
	Total		$	(1,769	)	$	—

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

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

Note 18. Segment Information

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

        The Server segment's current products include visualization systems, high-performance servers and integrated storage solutions. The Server segment's current visualization systems include the SGI® Onyx® 300 and the SGI® Onyx® 3000 family of graphics systems. The Server segment's current high-performance servers include the SGI® Origin® 300 servers and the Origin® 3000 family of

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high-performance servers. During the second quarter of fiscal 2002, we announced the end of production of the Silicon Graphics® Onyx2®, the SGI® Origin® 200 and the Origin® 2000 systems. These systems are now only available through our Remanufactured Products Division. The server segment's current key storage product offerings include the SGI® TP900, SGI® TP9100 and SGI® TP9400. Fiscal 2000 results include the Cray product line that was sold to Cray Inc., formerly Tera, in the third quarter of fiscal 2000. See Note 7, "Sale of Cray Product Line", for further information. Our servers are high-performance supercomputing systems designed to be the market leaders in technical computing applications. In addition, our servers are used as storage management servers for managing very large data repositories that contain critical information and media servers for video on demand, media streaming and broadcast television applications. These products are distributed through our direct sales force, as well as through indirect channels including resellers and distributors.

        The Visual Workstation segment's current products include the Silicon Graphics® 02+™, the Silicon Graphics Fuel™, and the Silicon Graphics® Octane2™ visual workstations based upon the MIPS® microprocessor and the IRIX® operating system. In addition to the current production products noted above, the Silicon Graphics® 02® and the Silicon Graphics Octane® are no longer in current production but are available through our Remanufactured Products Division. During the fourth quarter of fiscal 2002, a decision was made to end of life the Silicon Graphics® 750 system based upon the new Intel® Itanium® processor and first-generation Intel Itanium architecture. This product shipped through the end of fiscal 2002. During the fourth quarter of fiscal 2001, a decision was made to end of life the Silicon Graphics® 230, Silicon Graphics® 330, Silicon Graphics® 550 and the Silicon Graphics Zx10™ visual workstations based upon the Intel microprocessor and the Windows NT® and Red Hat® Linux® operating systems. These products were shipped through the first quarter of fiscal 2002. Fiscal 2000 results include the Silicon Graphics 320 and 540 visual workstations based upon the Intel microprocessor and the Windows NT operating system that were discontinued in favor of more industry standard architectures. Our visual workstations are used in a variety of applications including computer-aided design, medical imaging, 2D and 3D animation, broadcast, modeling and simulation. These products are distributed through our direct sales force, as well as through indirect channels including resellers and distributors.

        The Global Services segment supports our computer hardware and software products and provides professional services to help customers realize the full value of their information technology investments. Our Professional Services organization provides technology consulting, education and managed services. Effective for fiscal 2002, we reorganized our Global Services segment and removed the remanufactured product organization from this segment. Revenue from remanufactured systems is included in either the servers and visual workstations reportable segments based on the nature of the system sold. Prior period amounts have been restated to conform to current period presentation. We evaluate each of these segments based on profit or loss from operations before interest and taxes.

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

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

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

		Servers			Visual Workstations			Global Services
2002:
Revenue from external customers		$	516,720		$	237,668		$	456,790
Segment (loss) profit		$	(122,263	)	$	(79,917	)	$	103,251
2001:
Revenue from external customers		$	747,698		$	397,297		$	598,025
Segment (loss) profit		$	(219,029	)	$	(124,143	)	$	5,242
Significant items:
	Charges for contract cancellations and inventory and future support costs related to the discontinuance of Pentium III -based product line	$	—		$	(13,864	)	$	(4,665	)
2000:
Revenue from external customers		$	963,180		$	520,059		$	606,446
Segment loss		$	(133,612	)	$	(152,134	)	$	(27,467	)
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	)

        Reconciliation to SGI as reported (in thousands):

	Years ended
	June 28, 2002			June 30, 2001			June 30, 2000
Revenue:
Total reportable segments	$	1,211,178		$	1,743,020		$	2,089,685
Other		130,207			111,441			241,449
Total SGI consolidated	$	1,341,385		$	1,854,461		$	2,331,134
Operating loss:
Total reportable segments	$	(98,929	)	$	(337,930	)	$	(313,213	)
Other		64,841			10,213			54,378
Restructuring		(32,958	)		(82,328	)		(102,861	)
Write-down of impaired long-lived assets		(11,515	)		(19,724	)		—
Enterprise Resource Planning implementation expense		(22,200	)		(14,477	)		—
Business reorganization costs		—			(3,889	)		—
Total SGI consolidated	$	(100,761	)	$	(448,135	)	$	(361,696	)

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

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

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

		Revenue						Long-lived Assets
		2002		2001		2000		2002		2001		2000
Americas		$	839,576	$	1,008,135	$	1,313,789	$	134,763	$	139,040	$	355,816
Europe			306,194		436,979		551,099		118,399		226,712		241,756
Rest of World			195,615		409,347		466,246		5,065		47,911		42,280
	Total	$	1,341,385	$	1,854,461	$	2,331,134	$	258,227	$	413,663	$	639,852

Note 19. Benefit Plans

        401(k) Retirement Savings Plan.    We provide a 401(k) investment plan covering substantially all of our U.S. employees. The plan provides for a minimum 25% Company match of an employee's contribution up to a specified limit, but allows for a larger matching subject to certain regulatory limitations. The Company's matching contributions for fiscal 2002, 2001 and 2000, were approximately $3 million, $4 million and $5 million, respectively.

        Deferred Compensation Plan.    We have a Non-Qualified Deferred Compensation Plan that allows eligible executives and directors to defer a portion of their compensation. The deferred compensation, together with Company matching amounts and accumulated earnings, is accrued but unfunded. Such deferred compensation is distributable in cash and amounted to approximately $2 million and $4 million at June 28, 2002 and June 30, 2001. A participant may elect to receive such deferred amounts in one payment or in annual installments no sooner than two years following each annual election. Participant contributions are always 100% vested and our matching contributions vest as directed by the board of directors. There have been no matching contributions to date.

Note 20. Related Party Transactions

        We have from time to time engaged in significant transactions with related parties in the ordinary course of business. Total revenue for the fiscal years ended 2002, 2001 and 2000 included, in the aggregate, sales to related parties in the amounts of $28 million, $12 million, and $34 million, respectively. In fiscal 2002, related party sales were primarily to SGI Japan which is not a consolidated subsidiary following the sale of a majority equity interest by SGI to NEC and NEC Soft during fiscal 2002. Total purchases for the year ended June 28, 2002 included, in the aggregate, purchases from related parties in the amount of $13 million and were immaterial for fiscal 2001 and 2000. Aggregate amounts receivable from and amounts payable to such related parties were immaterial at June 28, 2002, June 30, 2001 and June 30, 2000.

Note 21. Consolidated Statement of Cash Flows

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

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        Supplemental disclosures of cash flow information (in thousands):

		Years ended
		June 28, 2002			June 30, 2001		June 30, 2000
Cash paid during the year for:
	Interest	$	16,700		$	17,500	$	18,100
	Income taxes, net of refunds	$	(24,800	)	$	16,300	$	40,000

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

	Years ended
	June 28, 2002		June 30, 2001		June 30, 2000
Settlement of shareholder lawsuit	$	19,500	$	—	$	—
Conversion of preferred stock to common stock	$	—	$	16,888	$	—
Exchange of property and equipment and accounts receivable for minority interest investment in private company	$	—	$	—	$	3,700

Note 22. Contingencies

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

        In September 2001, we reached a settlement of securities class action lawsuits that were filed in the U.S. District Court for the Northern District of California and in California Superior Court for the County of Santa Clara in December 1997 and January 1998 alleging that SGI and certain former officers made material misrepresentations and omissions during the period from July to October 1997. The settlement, which involved a payment of $4 million in cash and the issuance of 8 million shares of SGI common stock to the settlement class, received final court approval on January 3, 2002. Accordingly, we recorded a total charge of approximately $24 million ($20 million non cash) in the nine months ended March 29, 2002 in Interest income (expense) other, net. Approximately 2.4 million shares have been issued to date in satisfaction of plaintiffs' attorneys' fees and the remaining shares are expected to be issued later this calendar year, without any further financial impact, as the members of the settlement class are identified.

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

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

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

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

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

Note 23. Subsequent Events (unaudited)

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

Note 24. Selected Quarterly Financial Data (Unaudited)

		Fiscal 2002
		June 28(5)			March 29			December 28(5)			September 28
		(in thousands, except per share amounts)
Total revenue		$	284,501		$	313,604		$	363,888		$	379,392
Costs and expenses:
	Cost of revenue		167,292			180,213			217,269			205,637
	Research and development		44,087			43,093			42,095			47,620
	Selling, general and administrative		95,430			100,106			114,233			140,598
	Other operating expense(1)		1,929			10,512			(80	)		32,112
Operating loss			(24,237	)		(20,320	)		(9,629	)		(46,575	)
Interest and other (expense) income, net(2)			(10,961	)		(1,743	)		51,862			(20,655	)
(Loss) income before income taxes			(35,198	)		(22,063	)		42,233			(67,230	)
Net (loss) income		$	(36,690	)	$	10,337		$	49,312		$	(69,282	)
Net (loss) income per share—basic:		$	(0.18	)	$	0.05		$	0.26		$	(0.36	)
Net (loss) income per share—diluted:		$	(0.18	)	$	0.05		$	0.24		$	(0.36	)
Shares used in the calculation of net (loss) income per share:
	Basic		198,545			196,372			192,956			192,094
	Diluted		198,545			202,484			210,293			192,094

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		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(3)		108,273			—			—			(6,221	)
Operating loss			(207,120	)		(54,131	)		(93,304	)		(93,580	)
Interest and other (expense) income, net(4)			(8,488	)		(83,166	)		25,526			48,108
Loss before income taxes			(215,608	)		(137,297	)		(67,778	)		(45,472	)
Net loss		$	(231,843	)	$	(141,095	)	$	(71,116	)	$	(48,988	)
Net Loss per share—basic and diluted:		$	(1.20	)	$	(0.74	)	$	(0.38	)	$	(0.26	)
Shares used in the calculation of net loss per share—basic and diluted			192,814			190,857			189,808			187,872

(1)

Fiscal 2002 amounts include net aggregate restructuring charges of $33 million and $12 million in impairment charges.

(2)

Amounts include a $64 million gain on the sale of 60% interest in SGI Japan in the second quarter and $24 million in expenses associated with the class action lawsuit in the first nine months of fiscal 2002.

(3)

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

(4)

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.

(5)

The second quarter was adjusted to reflect the reversal of a $5 million restructuring accrual and a $7 million deferred tax valuation allowance, which were no longer required following our sale of a 60% interest in SGI Japan. The second quarter results included above reflect the following adjustments to our previously reported second quarter results (numbers in thousands): a $5,529 decrease in each of other operating expense and operating loss, a $5,529 increase in income before taxes, a $12,134 increase in net income, a $0.07 increase in net income per basic share, and $0.05 increase in net income per diluted share. These adjustments have an offsetting impact on the previously announced fourth quarter results of fiscal 2002.

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

        Not applicable.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

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

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

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

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

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

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

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

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

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

Executive Officers

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

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ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

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

		Annual Compensation Paid or Accrued(1)						Long Term Compensation Awards
Name and Principal Position	Fiscal Year	Salary ($)		Bonus ($)(2)		Other Annual Comp (3)		Options (#)	Restricted Stock ($)(4)
Robert R. Bishop(5) Chairman and Chief Executive Officer	2002 2001 2000	$	800,000 800,000 692,308	$	370,000 — —	$	7,528 7,566 —	750,000 2,000,000 —	$	— — —
Warren C. Pratt Chief Operating Officer and Executive Vice President	2002 2001 2000	$	480,031 458,615 361,738	$	355,290 147,406 634,100	$	37,743 64,173 60,480	400,000 100,000 350,000	$	— — 157,787
Anthony K. Robbins Senior Vice President, Silicon Graphics, Inc. and President, Silicon Graphics Federal, Inc.	2002 2001 2000	$	356,528 317,204 253,000	$	283,504 119,102 115,035	$	3,862 6,200 24,832	300,000 300,000 195,000	$	— — 132,362
Jeffrey V. Zellmer Senior Vice President and Chief Financial Officer	2002 2001 2000	$	322,007 242,380 188,672	$	382,852 32,500 37,500	$	1,720 15,720 11,979	200,000 70,000 10,000	$	— 35,492 —
Sandra M. Escher Senior Vice President and General Counsel	2002 2001 2000	$	303,577 217,147 227,251	$	292,922 16,667 33,333	$	1,664 4,453 6,981	150,000 100,000 100,000	$	— 32,997 —

(1)

SGI has no pension, retirement, annuity or similar benefit plan.

(2)

Bonus amounts for fiscal 2002 include bonuses paid under the corporate executive incentive program when the company achieved the specified financial results in the second quarter. Bonus amounts for Mr. Pratt, Mr. Zellmer and Ms. Escher also include loan forgiveness, imputed interest and certain taxes paid by the Company in connection with the loans described in "Certain Relationships and Related Transactions". These amounts are as follows: Mr. Pratt, $238,490 for fiscal 2002 and $147,706 for fiscal 2001; Mr. Zellmer, $192,227 for fiscal 2002, and Ms. Escher, $107,647 for fiscal 2002.

(3)

Other compensation generally includes relocation assistance and executive perquisites.

(4)

Mr. Pratt has an aggregate total of 12,500 shares in unvested stock holdings, valued at $36,737.50 at 6/28/02. Mr. Pratt's restricted stock award of 25,000 shares granted in May 2000 vests in five installments. Mr. Zellmer's restricted stock award of 8,000 shares granted in August 2000 fully vested on August 8, 2001. Mr. Robbins was granted two stock awards in fiscal 2000. One grant for 3,000 shares was granted on August 25, 1999 and fully vested on January 15, 2000 and the other grant of 10,000 shares, granted on January 26, 2000 fully vested on January 27, 2001. Ms. Escher was granted a stock award of 3,000 shares on August 25, 1999 that was fully vested on January 15, 2000.

(5)

Mr. Bishop elected to defer his salary and bonus for each of the fiscal years shown above.

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Option Grants in Fiscal 2002

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

	Individual Grants(1)
		% of Total Options Granted to Employees in Fiscal Year				Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2)
	Number of Securities Underlying Options Granted
Name			Exercise Price ($/Share)		Expiration Date
						5%		10%
Robert R. Bishop	750,000	5.78	$	2.98	1/30/12	$	1,405,579.49	$	3,562,014.40
Warren C. Pratt	400,000	3.08	$	2.98	1/30/12	$	749,642.39	$	1,899,741.02
Jeffrey V. Zellmer	200,000	1.54	$	0.57	7/24/11	$	71,693.98	$	181,686.64
Anthony K. Robbins	300,000	2.31	$	0.57	7/24/11	$	107,540.98	$	272,529.96
Sandra M. Escher	150,000	1.15	$	0.57	7/24/11	$	53,770.49	$	136,264.98

*

Less than 1%.

(1)

The options in this table were granted under the 1993 Long-Term Incentive Stock Plan. The options become exercisable at a rate of 2% per month over a period of fifty months or 4% per month over a period of 25 months and expire ten years from the date of grant.

(2)

Potential realizable value assumes that the stock price increases from the date of grant until the end of the option term (10 years) at the annual rate specified (5% and 10%). The 5% and 10% assumed annual rates of appreciation are mandated by SEC rules and do not represent SGI's estimate or projection of the future Common Stock price. SGI believes that this method does not accurately illustrate the potential value of stock options.

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

				Number of Unexercised Options at June 30, 2002		Value of Unexercised In-the-Money Options at Fiscal-Year-End(1)
Name	Shares Acquired on Exercise	Value Realized
				Exercisable	Unexercisable	Exercisable		Unexercisable
Robert R. Bishop	—	$	—	1,308,634	1,441,466	$	—	$	—
Warren C. Pratt	—		—	548,053	529,932		152,828		152,828
Jeffrey V. Zellmer	—		—	171,217	118,230		208,560		265,440
Anthony K. Robbins	—		—	614,087	284,130		367,380		398,160
Sandra M. Escher	—		—	288,098	122,402		189,840		199,080

(1)

The amounts in this column reflect the difference between the closing market price of the Common Stock on June 28, 2002, which was $2.94 and the option exercise price. The actual value of unexercised options fluctuates with the market price of the Common Stock.

Director Compensation

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

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

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

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

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

Compensation Committee Interlocks and Insider Participation

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

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

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

Compensation Philosophy

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

Executive Compensation Components

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

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

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

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

Compensation of the Chief Executive Officer

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

64

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

Section 162(m)

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

COMPENSATION AND HUMAN RESOURCES COMMITTEE

Charles A. Steinberg, Chairman
C. Richard Kramlich
James A. McDivitt
Arthur L. Money

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

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

*

Assumes $100 invested on June 30, 1997 in SGI Common Stock, the S&P 500 Stock Index, and the S&P Computer Hardware, with reinvestment of dividends.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

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

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

*

Less than 1%.

(1)

As reported on a Schedule 13G/A dated January 2, 2002. This amount includes 613,368 shares from the potential conversion of filer's Senior Convertible Notes and 62,538 shares from the potential conversion of filer's Cray Research Convertible Notes.

(2)

As reported on a Schedule 13G/A dated February 14, 2002, these shares are beneficially owned by various entities and individuals affiliated with Highfields Capital Management.

(3)

Each share of Common Stock is entitled to one vote and the outstanding share of Series E Preferred Stock is entitled to 36,183 votes.

Security Ownership of Management

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

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

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

*

Less than 1%.

(1)

Unless otherwise indicated, the persons named have sole voting and investment power over the shares shown as being beneficially owned by them, subject to community property laws, where applicable. The table includes the following shares issuable on exercise of options that were exercisable on August 31, 2002, or within 60 days thereafter: Mr. Bishop, 1,526,700 shares; Mr. Kramlich, 60,000 shares; Mr. McDivitt, 60,000 shares; Mr. Money 25,000 shares; Mr. Pratt, 633,435 shares; Mr. Zellmer, 218,097 shares; Mr. Robbins, 710,142 shares; Ms. Escher, 336,295 shares; and all directors and executive officers as a group, 4,358,744 shares.

Equity Compensation Plan Information
as of June 28, 2002

	Number of shares to be issued on exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of shares remaining available for future issuance under equity compensation plans
Equity compensation plans approved by stockholders(1)	16,485,723	$	4.1921	11,870,533	(2)
Equity compensation plans not approved by stockholders	17,075,862	$	3.1599	4,342,258
Total	33,561,585		3.6669	16,212,791

(1)

Additionally, the company has outstanding options to purchase an aggregate of 857,276 shares at a weighted average exercise price $6.2526 per share. The options were assumed in connection with certain acquisitions in 1995 and 1996. No additional awards can be granted under these plans.

(2)

Includes 6,124 shares available for future issuance under the Employee Stock Purchase Plan at June 28, 2002. At July 1, 2002, the shares available under this plan increased under the evergreen provision by an additional 4,006,664 shares. This is the last authorized evergreen increase provided for in this plan.

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Amended and Restated 1996 Supplemental Non-Executive Equity Incentive Plan

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

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

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

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

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

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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 26 through 58.

Consolidated Statement of Operations—Years ended June 28, 2002, June 30, 2001 and 2000

Consolidated Balance Sheets—June 28, 2002 and June 30, 2001

Consolidated Statements of Cash Flows—Years ended June 28, 2002, June 30, 2001 and 2000

Consolidated Statements of Stockholders' (Deficit) Equity—Years ended June 28, 2002, June 30, 2001, and 2000

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	78

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(6)	Restated Certificate of Incorporation of the Company.
3.1.2(9)	Certificate of Designation of the Series E Preferred Stock filed June 13, 1995.
3.2(15)	Bylaws of the Company, as amended.
4.1(11)	Indenture dated February 1, 1986 between Cray Research, Inc. and Manufacturers Hanover Trust Company, as Trustee.
4.2(11)	First Supplemental Indenture dated June 30, 1996 between the Company, Cray Research, Inc., and Chemical Bank (formerly Manufacturers Hanover Trust Company).
4.3(13)	Indenture dated as of September 1, 1997 between the Company and State Street Bank and Trust Company of California, N.A., as Trustee.
9.1(9)	Voting and Exchange Trust Agreement between the Company and Montreal Trust Company of Canada dated June 15, 1995.
10.1(1)	Software Agreement dated as of January 4, 1986, as supplemented June 6, 1986, and Sublicensing Agreement dated as of June 9, 1986 between the Company and AT&T Information Systems Inc.
10.2(2)	Software License Agreement dated January 24, 1986, between the Company and AT&T Information Systems Inc.

71

10.3(3)	Form of Indemnification Agreement entered into between the Company and its executive officers and certain other agents. (Revised)
10.4(6)*	Directors' Stock Option Plan and form of Stock Option Agreement as amended as of October 31, 1994.
10.5(12)*	1985 Stock Incentive Program, as amended.
10.6(3)*	1986 Incentive Stock Option Plan, as amended, and amended forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement.
10.7(12)*	Amended and Restated 1989 Employee Benefit Stock Plan and form of stock option agreement.
10.8(12)*	1993 Long-Term Incentive Stock Plan, as amended, and form of stock option agreement.
10.9(15)*	1996 Supplemental Non-Executive Equity Incentive Plan, as amended, and form of stock option agreement.
10.10(14)*	1998 Employee Stock Purchase Plan.
10.11(5)*	Non-Qualified Deferred Compensation Plan dated as of September 9, 1994.
10.12(13)*	Addendum to the Non-Qualified Deferred Compensation Plan.
10.13(7)*	Alias Research Inc.'s 1994 Stock Plan and standard forms of Option Agreements.
10.14(8)*	Wavefront Technologies, Inc. 1990 Stock Option Plan with standard form of Option Agreement.
10.15	Amended and Restated Loan and Security Agreement between the Company and Foothill Capital Corporation and the Bank of America, N.A. dated September 24, 2002.
10.16	Intellectual Property Security Agreement between the Company and Foothill Capital Corporation dated November 9, 2001.
10.17	Loan Agreement between the Company, Silicon Graphics World Trade B.V. and SGI Japan, Ltd. as of November 2001 and related Pledge Agreement.
10.18*	Letter Agreement between Warren Pratt and the Company, as amended as of November 2001.
10.19*	Amended and Restated Promissory Note in the principal amount of $250,000 as of April 2001.
10.20	Pledge Agreement between Warren Pratt and the Company dated September 27, 2000.
10.21*	Amended and Restated Promissory Note in the principal amount of $500,000 as of April 2001.
10.22*	Letter Agreement between Jeffrey Zellmer and the Company, as amended as of October 2001.
10.23*	Letter Agreement between Sandra Escher and the Company, effective October 2001.
10.24	Consulting Agreement between Arthur L. Money and Silicon Graphics, Inc. dated June 1, 2002.

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

*

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 Annual Report on Form 10-K for the year ended June 30, 1992.



(4)

Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1993.



(5)

Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1994.



(6)

Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1994.



(7)

Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 33-60215), which became effective June 14, 1995.



(8)

Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 33-60213), which became effective June 14, 1995.



(9)

Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1995.



(10)

Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the period ended June 30, 1996, as amended.



(11)

Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996.



(12)

Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997.



(13)

Incorporated by reference to exhibits to the Company's Registration Statement on Form S-4 (No. 333-32379), which became effective August 7, 1997.



(14)

Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999.



(15)

Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 2001.

(b)

Reports on Form 8-K.

None.

Trademarks used in the Form 10-K

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

73

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

        MIPS is a registered of MIPS Technologies, Inc. used under license by Silicon Graphics, Inc. Cray is a registered trademark and Cray T90 is a trademark of Cray, Inc. UNIX is a registered trademark of The Open Group, in the U. S. and other countries. Windows and Windows NT are registered trademarks of Microsoft Corporation in the United States and/or other countries. Intel, Pentium and Itanium are registered trademarks of Intel Corporation or its subsidiaries in the United States and other countries. Linux is a registered trademark of Linus Torvalds. Red Hat is a registered trademark of Red Hat, Inc. in the United States and other countries. Macintosh is a registered trademark of Apple Computer, Inc, registered in the United States and other countries.

74

SIGNATURES

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

	SILICON GRAPHICS, INC.
Dated: September 25, 2002	By:	/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.

Name	Title	Date
/s/  ROBERT R. BISHOP Robert R. Bishop	Chief Executive Officer and Director (Principal Executive Officer)	September 25, 2002
/s/  JEFFREY V. ZELLMER Jeffrey V. Zellmer	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	September 25, 2002
/s/  KATHY A. LANTERMAN Kathy A. Lanterman	Vice President and Corporate Controller (Principal Accounting Officer)	September 25, 2002
/s/  C. RICHARD KRAMLICH C. Richard Kramlich	Director	September 25, 2002
/s/  JAMES A. MCDIVITT James A. McDivitt	Director	September 25, 2002

75

/s/  ARTHUR L. MONEY Arthur L. Money	Director	September 25, 2002
/s/  CHARLES A. STEINBERG Charles A. Steinberg	Director	September 25, 2002
/s/  ROBERT M. WHITE Robert M. White	Director	September 25, 2002

76

CERTIFICATIONS

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

1.

I have reviewed this annual report on Form 10-K of Silicon Graphics, Inc.;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3.

Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

Dated: September 25, 2002
/s/  ROBERT R. BISHOP Robert R. Bishop
Chairman and Chief Executive Officer

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

4.

I have reviewed this annual report on Form 10-K of Silicon Graphics, Inc.;

5.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

6.

Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

Dated: September 25, 2002
/s/  JEFFREY V. ZELLMER Jeffrey V. Zellmer
Senior Vice President and Chief Financial Officer

77

Schedule II

Valuation and Qualifying Accounts and Reserves

Description		Balance at Beginning of Period		Charged to Costs and Expenses		Other			Write-offs/ Other			Balance at End of Period
		(in thousands)
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	$	192,836	$	1,733	(1)	$	—		$	826,893
Year ended June 28, 2002
	Accounts receivable allowance	$	20,068	$	4,443	$	—		$	(11,963	)	$	12,548
	Warranty Accrual	$	21,360	$	13,173	$	(1,083	)(2)	$	(24,229	)	$	9,221
	Deferred tax asset allowance	$	826,893	$	—	$	(1,761	)(1)	$	(125,182	)	$	699,950

(1)

Reserve of paid-in capital benefits related to stock option activity

(2)

Reclassification from other accrual accounts

78

QuickLinks

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

Report of Ernst & Young LLP, Independent Auditors

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

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

REPORT OF THE COMPENSATION AND HUMAN RESOURCES COMMITTEE OF THE BOARD OF DIRECTORS
COMPANY STOCK PRICE PERFORMANCE GRAPH Comparison of Five Year Cumulative Total Return

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Amended and Restated 1996 Supplemental Non-Executive Equity Incentive Plan

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

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

SIGNATURES
CERTIFICATIONS

Schedule II

Valuation and Qualifying Accounts and Reserves

EX-10.15

Exhibit 10.15

AMENDED AND RESTATED

LOAN AND SECURITY AGREEMENT

by and among

SILICON GRAPHICS, INC.

and

EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES HERETO

as Borrowers,

THE LENDERS THAT ARE SIGNATORIES HERETO

as the Lenders,

FOOTHILL CAPITAL CORPORATION

as the Arranger and Administrative Agent,

and

BANK OF AMERICA, N.A.,

as the Documentation Agent

Dated as of September 24, 2002

TABLE OF CONTENTS

			Page
1.	DEFINITIONS AND CONSTRUCTION.		1
	1.1	Definitions	1
	1.2	Accounting Terms	26
	1.3	Code	26
	1.4	Construction.	26
	1.5	Schedules and Exhibits	27
2.	LOAN AND TERMS OF PAYMENT.		27
	2.1	Revolver Advances.	27
	2.2	[INTENTIONALLY OMITTED.]	28
	2.3	Borrowing Procedures and Settlements.	28
	2.4	Payments.	35
	2.5	Overadvances	37
	2.6	Interest Rates and Letter of Credit Fee:  Rates, Payments, and Calculations	37
	2.7	Cash Management.	39
	2.8	Crediting Payments	40
	2.9	Designated Account.	40
	2.10	Maintenance of Loan Account; Statements of Obligations	40
	2.11	Fees.	41
	2.12	Letters of Credit	41
	2.13	LIBOR Option.	44
	2.14	Capital Requirements	47
	2.15	Joint and Several Liability of Borrowers	47
	2.16	Interpretation of Certain Aspects of Advances	51
3.	CONDITIONS; TERM OF AGREEMENT.		51
	3.1	Conditions Precedent to the Initial Extension of Credit	51
	3.2	Conditions Subsequent to the Initial Extension of Credit.	53
	3.3	Conditions Precedent to all Extensions of Credit.	54
	3.4	Term.	55
	3.5	Effect of Termination.	55
	3.6	Early Termination by Borrowers.	55
4.	CREATION OF SECURITY INTEREST.		56
	4.1	Grant of Security Interest	56
	4.2	Negotiable Property.	56
4.3	Collection of Accounts, General Intangibles Collateral, and Negotiable Property Collateral		56

-i-

	4.4	Delivery of Additional Documentation Required	56
	4.5	Power of Attorney.	57
	4.6	Right to Inspect	57
	4.7	[INTENTIONALLY OMITTED.	57
5.	REPRESENTATIONS AND WARRANTIES.		57
	5.1	No Encumbrances.	58
	5.2	Eligible Accounts.	58
	5.3	Threshold Inventory.	58
	5.4	Threshold Equipment.	58
	5.5	Location of Threshold Inventory and Threshold Equipment	58
	5.6	Inventory Records.	59
	5.7	Location of Chief Executive Office; FEIN.	59
	5.8	Due Organization and Qualification; Subsidiaries	59
	5.9	Due Authorization; No Conflict.	59
	5.10	Litigation.	60
	5.11	No Material Adverse Change.	60
	5.12	Fraudulent Transfer.	60
	5.13	Employee Benefits	60
	5.14	Environmental Condition	61
	5.15	Brokerage Fees.	61
	5.16	Intellectual Property	61
	5.17	Leases.	62
	5.18	DDAs.	62
	5.19	Complete Disclosure	62
	5.20	Indebtedness.	62
6.	AFFIRMATIVE COVENANTS.		63
	6.1	Accounting System	63
	6.2	Collateral Reporting	63
	6.3	Financial Statements, Reports, Certificates.	64
	6.4	Intellectual Property; IP Collateral	66
	6.5	Return.	66
	6.6	Maintenance of Properties.	66
	6.7	Taxes.	66
	6.8	Insurance.	67
	6.9	Location of Threshold Inventory and Threshold Equipment.	67
	6.10	Compliance with Laws.	68
	6.11	Leases.	68
	6.12	Brokerage Commissions	68
	6.13	Existence.	68
	6.14	[INTENTIONALLY OMITTED]	68
	6.15	Disclosure Updates.	68
	6.16	Cash Collateral	68
	6.17	Assignment of Proceeds	68

-ii-

7.	NEGATIVE COVENANTS.		69
	7.1	Indebtedness.	69
	7.2	Liens.	70
	7.3	Restrictions on Fundamental Changes.	70
	7.4	Disposal of Assets	70
	7.5	Change Name.	70
	7.6	Guarantee	70
	7.7	Nature of Business	70
	7.8	Prepayments and Amendments.	70
	7.9	Change of Control.	71
	7.10	Consignments	71
	7.11	Distributions.	71
	7.12	Accounting Methods.	71
	7.13	Investments	71
	7.14	Transactions with Affiliates	71
	7.15	Suspension	71
	7.16	[INTENTIONALLY OMITTED].	72
	7.17	Use of Proceeds	72
	7.18	Change in Location of Chief Executive Office; Inventory and Equipment with Bailees	72
	7.19	[INTENTIONALLY OMITTED	72
	7.20	Financial Covenants.	72
8.	EVENTS OF DEFAULT		73
9.	THE LENDER GROUP’S RIGHTS AND REMEDIES.		75
	9.1	Rights and Remedies	75
	9.2	Remedies Cumulative.	77
10.	TAXES AND EXPENSES.		78
11.	WAIVERS; INDEMNIFICATION.		78
	11.1	Demand; Protest; etc.	78
	11.2	The Lender Group’s Liability for Collateral.	78
	11.3	Indemnification	78
12.	NOTICES.		79
13.	CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.		80
14.	ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.		81
	14.1	Assignments and Participations.	81

-iii-

	14.2	Successors.	84
15.	AMENDMENTS; WAIVERS.		84
	15.1	Amendments and Waivers.	84
	15.2	Replacement of Holdout Lender	85
	15.3	No Waivers; Cumulative Remedies.	86
16.	AGENT; THE LENDER GROUP.		86
	16.1	Appointment and Authorization of Agent	86
	16.2	Delegation of Duties	86
	16.3	Liability of Agent	86
	16.4	Reliance by Agent	86
	16.5	Notice of Default or Event of Default	88
	16.6	Credit Decision	88
	16.7	Costs and Expenses; Indemnification	88
	16.8	Agent in Individual Capacity	89
	16.9	Successor Agent	89
	16.10	Lender in Individual Capacity	90
	16.11	Withholding Taxes.	90
	16.12	Collateral Matters.	93
	16.13	Restrictions on Actions by Lenders; Sharing of Payments.	94
	16.14	Agency for Perfection	94
	16.15	Payments by Agent to the Lenders	94
	16.16	Concerning the Collateral and Related Loan Documents.	95
	16.17	Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information	95
	16.18	Several Obligations; No Liability	96
	16.19	Legal Representation of Agent	97
17.	GENERAL PROVISIONS.		97
	17.1	Effectiveness	97
	17.2	Section Headings.	97
	17.3	Interpretation	97
	17.4	Severability of Provisions	97
	17.5	Amendments in Writing.	98
	17.6	Counterparts; Telefacsimile Execution	98
	17.7	Revival and Reinstatement of Obligations	98
	17.8	Integration	98
	17.9	Parent as Agent for Borrowers	98

-iv-

EXHIBITS AND SCHEDULES

Exhibit A-1	Form of Assignment and Acceptance
Exhibit B-1	Form of Borrowing Base Certificate
Exhibit C-1	Form of Compliance Certificate
Exhibit L-1	Form of LIBOR Notice
Schedule C-1	Commitments
Schedule P-1	Permitted Liens
Schedule 1.1	Closing Date Business Plan
Schedule 2.7(a)	Cash Management Banks
Schedule 5.5	Locations of Inventory and Equipment
Schedule 5.7	Chief Executive Office; FEIN
Schedule 5.8(b)	Capitalization of Borrowers
Schedule 5.8(c)	List of Borrowers’ Subsidiaries
Schedule 5.10	Litigation
Schedule 5.13	Benefit Plans
Schedule 5.16A	IP Collateral
Schedule 5.16B	Excluded Intellectual Property
Schedule 5.18	Demand Deposit Accounts
Schedule 5.20	Permitted Indebtedness

-v-

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this “Agreement”), is entered into as of September 20, 2002, between and among, on the one hand, the lenders identified on the signature pages hereof (such lenders, 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 the arranger and administrative agent for the Lenders (“Agent”), BANK OF AMERICA, N.A., as the documentation agent for the Lenders (“Documentation Agent”) and, on the other hand, SILICON GRAPHICS, INC., a Delaware corporation (“Parent”), and each of Parent’s Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a “Borrower,” and individually and collectively, jointly and severally, as “Borrowers”).  The purpose of this Agreement is to restate the relationship which exists between the parties as established by that certain Loan and Security Agreement, dated as of April 10, 2001 (“Initial Agreement”), as amended by a letter agreement, dated as of May 15, 2001, a letter agreement, dated June 8, 2001, a First Amendment to Loan and Security Agreement, dated as of June 29, 2001, a letter agreement, dated July 25, 2001, a Second Amendment to Loan and Security Agreement, dated as of September 27, 2001, a Third Amendment to Loan and Security Agreement, dated as of November 1, 2001, a Fourth Amendment to Loan and Security Agreement, dated as of November 23, 2001, a Fifth Amendment to Loan and Security Agreement, dated as of February 11, 2002, a Sixth Amendment to Loan and Security Agreement, dated as of April 11, 2002, a Seventh Amendment to Loan and Security Agreement, dated as of May 10, 2002, a letter agreement, dated August 19, 2002, and other Loan Documents.

The parties agree as follows:

1.             DEFINITIONS AND CONSTRUCTION.

1.1          Definitions.  As used in this Agreement, the following terms shall have the following definitions:

“Account Debtor” means any Person who is or who may become obligated under, with respect to, or on account of, any Account, General Intangible Collateral or Negotiable Property Collateral.

“Accounts” means all of Borrowers’ now owned or hereafter acquired right, title, and interest with respect to “accounts” (as that term is defined in the Code), and any and all supporting obligations in respect thereof, and as for which the Account Debtor obligated thereon maintains its chief executive office in the United States or is organized under the laws of the United States or any state thereof.

“Additional Documents” has the meaning set forth in Section 4.4.

“Administrative Borrower” has the meaning set forth in Section 17.9.

1

“Advances” means advances made by the Lenders, Swing Lender or Agent, as the case may be, pursuant to Section 2.1(a), Section 2.3(d), Section 2.3(e) or Section 2.3(i).

“Affiliate” means , as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person.  For purposes of this definition, “control” means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, in any event: (a) any Person which owns directly or indirectly 20% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 20% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person; (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person; and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person.  For purposes of this definition, SGI Japan shall not be deemed to be an Affiliate of the Borrower.

“Agent” means Foothill, solely in its capacity as agent for the Lenders hereunder, and any successor thereto.

“Agent’s Account” means an account at a bank designated by Agent from time to time as the account into which Borrowers shall make all payments to Agent for the benefit of the Lender Group and into which the Lender Group shall make all payments to Agent under this Agreement and the other Loan Documents; unless and until Agent notifies Administrative Borrower and the Lender Group to the contrary, Agent’s Account shall be that certain deposit account bearing account number 323-266193 and maintained by Agent with The Chase Manhattan Bank, 4 New York Plaza, 15th Floor, New York, New York 10004, ABA  #021000021.

“Agent Advances” has the meaning set forth in Section 2.3(e)(i).

“Agent’s Liens” means the Liens granted by Borrowers to Agent for the benefit of the Lender Group under this Agreement or the other Loan Documents.

“Agent-Related Persons” means Agent together with its Affiliates, officers, directors, employees, and agents.

“Agreement” has the meaning set forth in the preamble hereto.

“Applicable Prepayment Premium” means, as of any date of determination, an amount equal to (a) during the period of time from and after the date of the execution and delivery of this Agreement up to the date that is the first anniversary of the Closing Date, 1.0% times the Maximum Revolver Amount, and (b) during the period of time from and including the date that is the first anniversary of the Closing Date up to the Maturity Date, 0.5% times the Maximum Revolver Amount.

“Assignee” has the meaning set forth in Section 14.1.

2

“Assignment and Acceptance” means an Assignment and Acceptance in the form of Exhibit A-1.

“Authorized Person” means any officer or other employee of Administrative Borrower.

“Availability” means, as of any date of determination, if such date is a Business Day, and determined at the close of business on the immediately preceding Business Day, if such date of determination is not a Business Day, the amount that Borrowers are entitled to borrow as Advances under Section 2.1 (after giving effect to all then outstanding Obligations and all sublimits and reserves applicable hereunder).

“Average Daily Balance” means the average Daily Balance of all Advances during a calendar month.

“Bank of America” means Bank of America, N.A.

“Bankruptcy Code” means the United States Bankruptcy Code, as in effect from time to time.

“Base LIBOR Rate” means the rate per annum, determined by Agent in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/16%), on the basis of the rates at which Dollar deposits are offered to major banks in the London interbank market on or about 11:00 a.m. (California time) 2 Business Days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Rate Loan requested by Administrative Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error.

“Base Rate” means, the rate of interest announced within Wells Fargo at its principal office in San Francisco as its “prime rate,” with the understanding that the “prime rate” is one of Wells Fargo’s base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate.

“Base Rate Loan” means each portion of an Advance that bears interest at a rate determined by reference to the Base Rate.

“Base Rate Margin” means the following margin based upon the Average Daily Balance, to be effective as of the first day of the calendar month immediately following the end of the applicable calendar month for which the Average Daily Balance is determined:

Average Daily Balance	Applicable Base Rate Margin
Less than $30,000,000	0.25 percentage points
Greater than or equal to $30,000,000 and less than or equal to $60,000,000	1.00 percentage points
Greater than $60,000,000	2.00 percentage points

3

“Benefit Plan” means a “defined benefit plan” (as defined in Section 3(35) of ERISA) for which any Borrower or any Subsidiary or ERISA Affiliate of any Borrower has been an “employer” (as defined in Section 3(5) of ERISA) within the past six years.

“Board of Directors” means the board of directors (or comparable managers) of Parent or any committee thereof duly authorized to act on behalf thereof.

“Books” means all of each Borrower’s now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of its Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information), excluding (y) books and records relating to (i) General Intangibles other than General Intangibles described above in this definition or in clause (f) of the definition of “Collateral” in this Section 1.1 or (ii) Real Property, or (z) any of the foregoing which is located outside of the United States.

“Borrower” and “Borrowers” have the respective meanings set forth in the preamble to this Agreement.

“Borrowing” means a borrowing hereunder consisting of Advances made on the same day by the Lenders (or Agent on behalf thereof), or by Swing Lender in the case of a Swing Loan, or by Agent in the case of an Agent Advance.

“Borrowing Base” has the meaning set forth in Section 2.1.

“Borrowing Base Certificate” means a certificate in the form of Exhibit B-1.

“Business Day” means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term “Business Day” also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market.

“Capital Lease” means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

“Capitalized Lease Obligation” means any Indebtedness represented by obligations under Capital Lease.

4

“Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody’s, (c) commercial paper or other money market instruments maturing no more than 1 year from the date of acquisition thereof and, at the time of acquisition, having a short-term debt rating of A-1 or P-1, or better, or a long-term debt rating of BBB or better, from S&P or Moody’s, and (d) certificates of deposit or bankers’ acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank which has a rating of A or A2, or better, from S&P or Moody’s, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation.

“Cash Management Bank” has the meaning set forth in Section 2.7(a).

“Cash Management Account” has the meaning set forth in Section 2.7(a).

“Cash Management Agreements” means those certain cash management service agreements, in form and substance satisfactory to Agent, each of which is among Administrative Borrower, Agent, and one of the Cash Management Banks.

“Change of Control” means (a) any “person” or “group” (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35%, or more, of the Stock of Parent having the right to vote for the election of members of the Board of Directors, or (b) a majority of the members of the Board of Directors do not constitute Continuing Directors.

“Classified Material” has the meaning set forth in Section 16.20.

“Closing Date” means the date of the making of the initial Advance (or other extension of credit) hereunder or the date on which Agent sends Administrative Borrower a written notice that each of the conditions precedent set forth in Section 3.1 either have been satisfied or have been waived.

“Closing Date Business Plan” means the set of Projections of Parent for the 3 year period following the Closing Date (on a year by year basis, and for the 1 year period following the Closing Date, on a quarter by quarter basis), in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, a copy of which is attached as Schedule 1.1.

“Code” means the California Uniform Commercial Code, as in effect from time to time.

“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:

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(a)           Accounts,

(b)           Books,

(c)           Equipment,

(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.

“Collateral Access Agreement” means a landlord waiver, bailee letter, or acknowledgment agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance satisfactory to Agent.

“Collections” means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) of Borrowers, but excluding any of the foregoing directly arising out of the disposition of Real Property or any patent, trademark or copyright of any Borrower.

“Commitment” means, with respect to each Lender, its Commitment, and, with respect to all Lenders, their Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1.

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“Compliance Certificate”  means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Parent to Agent.

“Continuing Director” means (a) any member of the Board of Directors who was a director (or comparable manager) of Parent on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Parent (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof.

“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.

“DDA” means any checking or other demand deposit account maintained by any Borrower.

“Daily Balance” means, with respect to each day during the term of this Agreement, the amount of an Obligation due at the end of such day.

“Default” means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default.

“Defaulting Lender” means any Lender that fails to make any Advance (or other extension of credit) that it is required to make hereunder on the date that it is required to do so hereunder.

“Defaulting Lender Rate” means (a) the Base Rate for the first 3 days from and after the date the relevant payment is due, and (b) thereafter, at the interest rate then applicable to Advances that are Base Rate Loans (inclusive of the Base Rate Margin applicable thereto.

“Designated Account” means account number 4173297425 of Administrative Borrower maintained with the Designated Account Bank, or such other deposit account of Administrative Borrower (located within the United States) that has been designated as such, in writing, by Administrative Borrower to Agent.

“Designated Account Bank” means Wells Fargo Bank, N.A., whose office is located in  Palo Alto, CA 94301, and whose ABA number is 121 000 248.

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“Dilution” means, as of any date of determination, a percentage, based upon the experience of the immediately prior 90 days, that is the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items with respect to the Accounts during such period, by (b) Borrowers’ Collections with respect to Accounts during such period (excluding extraordinary items) plus the Dollar amount of clause (a).

“Dilution Reserve” means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of 5%.

“Disbursement Letter” means an instructional letter executed and delivered by Administrative Borrower to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Agent.

“Documentation Agent” means Bank of America, N.A., solely in its capacity as documentation agent for the Lenders hereunder, and any successor hereto.

“Dollars” or “$” means United States dollars.

“EBITDA” means, with respect to any fiscal period, Parent’s and its Subsidiaries’ consolidated net earnings (or loss), minus interest income and extraordinary gains, including gains on sale of assets, plus interest expense, income taxes, and depreciation and amortization for such period, as determined in accordance with GAAP.

“Eligible Accounts” means those Accounts created by one of Borrowers in the ordinary course of its business, that arise out of its sale of goods, that comply with each of the representations and warranties respecting Eligible Accounts made by Borrowers under the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the criteria set forth below; provided, however, that such criteria may be fixed and revised from time to time by Agent in Agent’s Permitted Discretion to address the results of any audit performed by Agent from time to time after the Closing Date.  In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits and unapplied cash remitted to Borrowers.  Eligible Accounts shall not include the following:

(a)           Accounts that the Account Debtor has failed to pay within 90 days of original invoice date or Accounts with selling terms of more than 60 days,

(b)           Accounts owed by an Account Debtor (or any Person known by any Borrower to be an Affiliate of such Account Debtor) where 50% or more of all Accounts owed by that Account Debtor (or any such Affiliate) are deemed ineligible under clause (a) above,

(c)           Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of any Borrower (other than any Person that:  (A) is not an Affiliate or employee of any Borrower and (B) has entered into a written distribution agreement with any Borrower),

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(d)           Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional,

(e)           Accounts that are not payable in Dollars,

(f)            Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any state thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent and is directly drawable by Agent, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, satisfactory to Lenders,

(g)           Accounts that arise out of the rendition of services by any Person,

(h)           Accounts with respect to which the Account Debtor is a creditor of any Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, to the extent of such claim, right of setoff, or dispute,

(i)            Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed 10% of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, however, if Accounts with respect to which the Account Debtor is (y) General Electric Corporation exceed 35% (or such other percentage as Agent may determine in its sole discretion) of all Eligible Accounts in the aggregate, to the extent of the obligations owing by such Account Debtor in excess of such percentage, or (z) Raytheon Company or Lockheed Martin exceed 20% (or such other percentage as Agent may determine in its sole discretion) of all Eligible Accounts in the aggregate, to the extent of the obligations owing by such Account Debtor in excess of such percentage;

(j)            Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which a Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor,

(k)           Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, or West Virginia (or any other state that requires a creditor to file a business activity report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless the applicable Borrower has qualified to do business in New Jersey, Minnesota, West Virginia, or such other states, or has filed a business activities report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement,

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(l)            Accounts, the collection of which, Agent, in its Permitted Discretion, has notified Administrative Borrower that Agent believes to be doubtful by reason of the Account Debtor’s financial condition,

(m)          Accounts that are not subject to a valid and perfected first priority Agent’s Lien,

(n)           Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor,

(o)           Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services, or

(p)           Accounts for which the applicable Borrower has executory performance obligations or which have acceptance criteria, until such time as such performance obligations or acceptance criteria have been completed, accepted or waived, as applicable.

“Eligible Transferee” means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender that was party hereto as of the Closing Date, and (e) during the continuation of an Event of Default, any other Person approved by Agent.

“Environmental Actions” means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of any Borrower or any predecessor in interest, (b) adjoining properties or businesses, or (c) or onto any facilities which received Hazardous Materials generated by any Borrower or any predecessor in interest.

“Environmental Law” means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrowers, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC § 1251 et seq; the Toxic Substances Control Act, 15

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USC, § 2601 et seq; the Clean Air Act, 42 USC § 7401 et seq.; the Safe Drinking Water Act, 42 USC. § 3803 et seq.; the Oil Pollution Act of 1990, 33 USC. § 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC. § 11001 et seq.; the Hazardous Material Transportation Act, 49 USC § 1801 et seq.; and the Occupational Safety and Health Act, 29 USC. §651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time.

“Environmental Liabilities and Costs” means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action.

“Environmental Lien” means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs.

“Equipment” means all of Borrowers’ now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, spare parts, goods (other than consumer goods, farm products, or Inventory), including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, in each case to the extent that any of the foregoing is located anywhere within the United States.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto.

“ERISA Affiliate” means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which a Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with a Borrower and whose employees are aggregated with the employees of a Borrower under IRC Section 414(o).

“ERISA Event” means (a) a Reportable Event (as defined in Section 4043 of ERISA) with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Borrower or any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a “substantial employer” (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant

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to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of a Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any plan under Section 401(a)(29) of the IRC by a Borrower or its Subsidiaries or any of their ERISA Affiliates.

“Event of Default” has the meaning set forth in Section 8.

“Excess Availability” means the amount, as of the date any determination thereof is to be made, equal to the sum of: (i) Availability minus the aggregate amount, if any, of all trade payables of Borrowers aged in excess of their historical levels with respect thereto and all book overdrafts in excess of their historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion, plus (ii) unrestricted cash and Cash Equivalents of Parent and its Subsidiaries on a consolidated basis.

“Exchange Act” means the Securities Exchange Act of 1934, as in effect from time to time.

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

“Fee Letter” means that certain fee letter, dated as of even date herewith, between Borrowers and Agent, in form and substance satisfactory to Agent.

“FEIN” means Federal Employer Identification Number.

“Foothill” means Foothill Capital Corporation, a California corporation.

“Funding Date” means the date on which a Borrowing occurs.

“Funding Losses” has the meaning set forth in Section 2.13(b)(ii).

“GAAP” means generally accepted accounting principles as in effect from time to time in the United States, consistently applied.

“General Intangibles” means all of Borrowers’ now owned or hereafter acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Books, Inventory, Equipment Investment Property, and Negotiable Property.

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“General Intangibles Collateral” means that portion of the General Intangibles which is included in the Collateral as proceeds of other Collateral.

“Governing Documents” means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person.

“Governmental Authority” means any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.

“Hazardous Materials” means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as “hazardous substances,” “hazardous materials,” “hazardous wastes,” “toxic substances,” or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or “EP toxicity,” (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million.

“Holdout Lender” has the meaning set forth in Section 15.2(a).

“Indebtedness” means (a) all obligations of a Borrower for borrowed money, (b) all obligations of a Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of a Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of a Borrower under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of a Borrower, irrespective of whether such obligation or liability is assumed, (e) all obligations of a Borrower for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of a Borrower’s business and repayable in accordance with customary trade practices), and (f) any obligation of a Borrower guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse to a Borrower) any obligation of any other Person.

“Indemnified Liabilities” has the meaning set forth in Section 11.3.

“Indemnified Person” has the meaning set forth in Section 11.3.

“Insolvency Proceeding” means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief.

“Intellectual Property” means collectively, the Patents, Trademarks and Copyrights.

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“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.

“Intercompany Subordination Agreement” means a subordination agreement executed and delivered by Borrowers, Agent, and Borrowers’ Affiliates party thereto, the form and substance of which is satisfactory to Agent.

“Intercreditor Agreement” means an intercreditor agreement executed by Bank of America and Agent, the form and substance of which is satisfactory to Agent.

“Interest Period” means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan, or designation thereof as a LIBOR Rate Loan, as the case may be, and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrowers (or Administrative Borrower on behalf thereof) may not elect an Interest Period which will end after the Maturity Date.

“Inventory” means all Borrowers’ now owned or hereafter acquired right, title, and interest with respect to inventory, including goods (and any software embedded therein or otherwise included therewith and all rights to such software) held for sale or lease or to be furnished under a contract of service, goods that are leased by a Borrower as lessor, goods that are furnished by a Borrower under a contract of service, and raw materials, work in process, or materials used or consumed in a Borrower’s business, in each case to the extent that any of the foregoing is located anywhere in the United States.

“Investment” means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, relocation, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising from the sale of goods or rendition of services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP.

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“Investment Property” means all of Borrowers’ now owned or hereafter acquired right, title, and interest with respect to “investment property” as that term is defined in the Code, and any and all supporting obligations in respect thereof.

“IP Collateral” means collectively, the Patent Collateral, Trademarks and Copyrights.

“IRC” means the Internal Revenue Code of 1986, as in effect from time to time.

“Issuing Lender” means Foothill or any other Lender that, at the request of Administrative Borrower and with the consent of Agent agrees, in such Lender’s sole discretion, to become an Issuing Lender for the purpose of issuing L/Cs or L/C Undertakings pursuant to Section 2.12.

“L/C” has the meaning set forth in Section 2.12(a).

“L/C Disbursement” means a payment made by the Issuing Lender pursuant to a Letter of Credit.

“L/C Undertaking” has the meaning set forth in Section 2.12(a).

“Lender” and “Lenders” have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1.

“Lender Group” means, individually and collectively, any and all of the Lenders (including the Issuing Lender), Agent and Documentation Agent.

“Lender Group Bank Products” means any one or more of the following types of services or facilities extended to any Borrower by any member of the Lender Group or any Affiliate of the Lender Group in reliance on the Borrower’s agreement to indemnify such member of the Lender Group or such Affiliate: (i) credit cards; (ii) cash management or related services, including the automatic clearing house transfer of funds for the account of any Borrower pursuant to agreement or overdrafts; (iii) foreign exchange contracts; and (iv) interest rate protection agreements.

“Lender Group Expenses” means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by a Borrower under any of the Loan Documents that are paid or incurred by the Lender Group, (b) fees or charges reasonably paid or incurred by Agent in connection with the Lender Group’s transactions with Borrowers, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) authorized in this Agreement, (c) costs and expenses incurred by Agent in the disbursement of funds to or for the account of Borrowers (by wire transfer or otherwise), (d) charges paid or incurred by Agent resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default

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or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Agent related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) authorized in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group’s relationship with any Borrower arising under the Loan Documents, (h) Agent’s and each Lender’s reasonable fees and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Agent’s and each Lender’s reasonable fees and expenses (including attorneys fees) incurred in terminating, enforcing (including attorneys fees and expenses incurred in connection with a “workout,” a “restructuring,” or an Insolvency Proceeding concerning any Borrower or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral.

“Lender-Related Person” means, with respect to any Lender, such Lender, together with such Lender’s Affiliates, and the officers, directors, employees, and agents of such Lender.

“Letter of Credit” means an L/C or an L/C Undertaking, as the context requires.

“Letter of Credit Usage” means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit plus 100% of the amount of outstanding time drafts accepted by an Underlying Issuer as a result of drawings under Underlying Letters of Credit.

“LIBOR Deadline” has the meaning set forth in Section 2.13(b)(i).

“LIBOR Notice” means a written notice in the form of Exhibit L-1.

“LIBOR Option” has the meaning set forth in Section 2.13.

“LIBOR Rate” means, for each Interest Period for each LIBOR Rate Loan, the rate per annum determined by Agent (rounded upwards, if necessary, to the next 1/16%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage.  The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage.

“LIBOR Rate Loan” means each portion of Advances that bears interest at a rate determined by reference to the LIBOR Rate for an Interest Period common to such portion.

“LIBOR Rate Margin” means the following margin based upon the Average Daily Balance, to be effective as of the first day of the calendar month immediately following the end of the applicable calendar month for which the Average Daily Balance is determined:

Average Daily Balance	Applicable LIBOR Rate Margin
Less than $30,000,000	2.25 percentage points
Greater than or equal to $30,000,000 and less than or equal to $60,000,000	3.00 percentage points
Greater than $60,000,000	3.75 percentage points

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“Lien” means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property.

“Loan Account” has the meaning set forth in Section 2.10.

“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.

“Material Adverse Change” means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrowers taken as a whole, (b) a material impairment of a Borrower’s ability to perform its obligations under the Loan Documents to which it is a party or of the Lender Group’s ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Agent’s Liens with respect to the Collateral as a result of an action or failure to act on the part of a Borrower.

“Maturity Date” has the meaning set forth in Section 3.4.

“Maximum Revolver Amount” means $75,000,000.

“Multiemployer Plan” means a “multiemployer plan” (as defined in Section 3(37) of ERISA) to which a Borrower or any of its Subsidiaries organized under the laws of the United States or any state thereof or any ERISA Affiliate is making, is obligated to make, has made or has been obligated to make, contributions on behalf of participants who are or were employed by any of them.

“Negotiable Property” means all of Borrowers’ now owned and hereafter acquired right, title, and interest with respect to letters of credit, letter of credit rights, instruments, promissory

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notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof.

“Negotiable Property Collateral” means that portion of the Negotiable Property which is included in the Collateral as proceeds of other Collateral.

“Obligations” means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrowers’ Loan Account pursuant hereto or  arising pursuant to Lender Group Bank Products), obligations (including indemnity obligations arising pursuant to the Loan Documents or in connection with Lender Group Bank Products), fees (including fees provided in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrowers to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrowers are required to pay or reimburse by the Loan Documents, by law, or otherwise.  Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding.

“Officers’ Certificate” means the representations and warranties of officers form submitted by Agent to Administrative Borrower, together with Borrowers’ completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Agent.

“Originating Lender” has the meaning set forth in Section 14.1(e).

“Overadvance” has the meaning set forth in Section 2.5.

“PBGC” means Pension Benefit Guaranty Corporation or any successor entity.

“Parent” has the meaning set forth in the preamble to this Agreement.

“Participant” has the meaning set forth in Section 14.1(e).

“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,

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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.

“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.

“Permitted Discretion” means a determination made in good faith and in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment.

“Permitted Dispositions” means (a) sales or other dispositions by Borrowers of Equipment that is substantially worn, damaged, or obsolete in the ordinary course of the applicable Borrower’s business, (b) sales by Borrowers of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrowers in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, (d) the licensing by Borrowers, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of the applicable Borrower’s business, (e) sales and other dispositions reflected in the Closing Date Business Plan, (f) sales and other dispositions of assets no longer material to Borrower’s business, (g) sales and other dispositions contemplated by Parent and disclosed in a side letter relating thereto delivered by Parent to Agent and dated the date of this Agreement, (h) dispositions pursuant to or in connection with any full or partial termination, unwinding or settlement, whether or not at the option of Parent, of the Structured Stock Repurchase, and (i) other sales and other dispositions in an amount not greater than $12,000,000 in the aggregate in any fiscal year ending after the Closing Date; provided, however, that no Permitted Dispositions described in clauses (e) through (i) hereof may be made if immediately prior to making any such Permitted Disposition, or giving effect thereto: (x) there shall occur an Event of Default which is continuing; or (y) Borrower and its Subsidiaries, as determined on a consolidated basis, shall have Excess Availability in an aggregate amount of less than $50,000,000.

“Permitted Investments” means (a) investments in Cash Equivalents, (b) investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) Investments in the Stock of any Subsidiary of Parent, (e) intercompany advances, guaranties, capital contributions and other Investments made in the ordinary course of business consistent with the written intercompany financing policy of Parent and its Subsidiaries submitted to Agent prior to the Closing Date, (f) investments made pursuant to

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participation in the Intel 64 Fund in an amount not greater than the greater of the following in the aggregate in any fiscal year ending after the Closing Date:  (A) $5,000,000; and (B) the minimum amount required to be invested by Parent during such fiscal year in the Intel 64 Fund, as certified by the chief financial officer of Parent, (g) loans to employees made pursuant to a written employee relocation program duly adopted by Parent or any of its Subsidiaries and submitted to Agent prior to the Closing Date, (h) Investments reflected in the Closing Date Business Plan, (i) Investments pursuant to or in connection with any full or partial termination, unwinding or settlement, whether or not at the option of Parent, of the Structured Stock Repurchase, and (j) other Investments in an amount no greater than $12,000,000 in the aggregate in any fiscal year ending after the Closing Date; provided, however, that no Permitted Investments described in clauses (d) through (j) hereof may be made if immediately prior to making any such Permitted Investment, or giving effect thereto: (x) there shall occur an Event of Default which is continuing; or (y) Borrower and its Subsidiaries, as determined on a consolidated basis, shall have Excess Availability in an aggregate amount of less than $50,000,000.

“Permitted Liens” means (a) Liens held by Agent for the benefit of Agent and the Lenders, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of Borrowers’ business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker’s compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, or leases incurred in the ordinary course of Borrowers’ business and not in connection with the borrowing of money, (i) Liens granted as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of Borrowers’ business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, and (k) any Lien with respect to any Real Property.

“Permitted Protest” means the right of the applicable Borrower to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by the applicable Borrower in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent’s Liens.

“Permitted Purchase Money Indebtedness” means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate amount outstanding at any one time not in excess of $50,000,000.

“Person” means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts,

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business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof.

“Projections” means Parent’s forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a basis consistent  with Parent’s historical financial statements, in reasonable detail and accompanied by a statement of underlying assumptions.

“Pro Rata Share” means:

(a)           with respect to a Lender’s obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, the percentage obtained by dividing (i) such Lender’s Commitment, by (ii) the aggregate Commitments of all Lenders,

(b)           with respect to a Lender’s obligation to participate in Letters of Credit, to reimburse the Issuing Lender, and to receive payments of fees with respect thereto, the percentage obtained by dividing (i) such Lender’s Commitment, by (ii) the aggregate Commitments of all Lenders, and

(c)           with respect to all other matters (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) such Lender’s Commitment, by (ii) the aggregate amount of Commitments of all Lenders;

provided, however, that, in each case, in the event all Commitments have been terminated, Pro Rata Share shall be determined according to the Commitments in effect immediately prior to such termination.

“Purchase Money Indebtedness” means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof.

“Real Property” means any estates or interests in real property now owned or hereafter acquired by any Borrower and the improvements thereto.

“Record” means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form.

“Remedial Action” means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC § 9601.

“Replacement Lender” has the meaning set forth in Section 15.2(a).

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“Report” has the meaning set forth in Section 16.17.

“Required Availability” means Excess Availability of not less than $125,000,000.

“Required Lenders” means, at any time, (a) Agent, and (b) Lenders whose Pro Rata Shares aggregate at least 51% of the Commitments, or if the Commitments have been terminated irrevocably, at least 51% of the Obligations then outstanding.

“Reserve Percentage” means, on any day, for any Lender, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as “eurocurrency liabilities”) of that Lender, but so long as such Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero.

“Revolver Usage” means, as of any date of determination, the sum of (a) the then extant amount of outstanding Advances, plus (b) the then extant amount of the Letter of Credit Usage.

“Risk Participation Liability” means, as to each Letter of Credit, all reimbursement obligations of Borrowers to the Issuing Lender with respect to an L/C Undertaking, consisting of (a) the amount available to be drawn or which may become available to be drawn, (b) all amounts that have been paid by the Issuing Lender to the Underlying Issuer to the extent not reimbursed by Borrowers, whether by the making of an Advance or otherwise, and (c) all accrued and unpaid interest, fees, and expenses payable with respect thereto.

“SEC” means the United States Securities and Exchange Commission and any successor thereto.

“Security Clearance” has the meaning set forth in Section 16.20.

“Settlement” has the meaning set forth in Section 2.3(f)(i).

“Settlement Date” has the meaning set forth in Section 2.3(f)(i).

“SGI Japan” shall mean Silicon Graphics Japan, Inc., a corporation organized under the laws of Japan.

“SGI Loan” shall mean that certain loan made by SGI Japan to Parent and Silicon Graphics World Trade B.V., a private limited company incorporated in the Netherlands; pursuant to the terms of the documents attached hereto as Exhibit A.

“Solvent” means, with respect to any Person on a particular date, that such Person is not insolvent (as such term is defined in the Uniform Fraudulent Transfer Act).

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“Stock” means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act).

“Structured Stock Repurchase” means the structured stock repurchases entered into by Parent pursuant to the Structured Stock Repurchase Documents.

“Structured Stock Repurchase Documents” means, collectively:

(i)            the ISDA Master Agreement dated as of September 1, 1998 (the “BofA Master Agreement”) between Parent and Bank of America, as amended by the First Amendment thereto dated as of March 4, 1999;

(ii)           that certain confirmation dated September 1, 1998 between Parent and Bank of America relating to the BofA Master Agreement together with any supplemental letters in the form of Appendix 1 thereto sent by Bank of America to Parent in connection therewith and the Security Agreement entered into as of September 1, 1998 relating thereto;

(iii)          that certain confirmation dated March 8, 1999 between Parent and Bank of America relating to the BofA Master Agreement together with any supplemental letters in the form of Appendix 1 thereto sent by Bank of America to Parent in connection therewith and the Security Agreement entered into as of March 8, 1999 relating thereto;

(iv)          the ISDA Master Agreement dated as of November 20, 1998 (the “1st Chicago Master Agreement”) between Parent and First National Bank of Chicago (“1st Chicago”), together with the ISDA Credit Support Annex relating thereto and dated the date thereof, each as amended by that certain letter agreement dated October 26, 1999 (the “Bank One Amendment”) between Parent and Bank One NA (as successor to 1st Chicago);

(v)           that certain confirmation dated November 20, 1998 between Parent and 1st Chicago relating to the 1st Chicago Master Agreement together with any supplemental letters in the form of Appendix 1 thereto sent by 1st Chicago to Parent in connection therewith, each as amended by the Bank One Amendment;

(vi)          that certain confirmation dated February 26, 1999 between Parent and 1st Chicago relating to the 1st Chicago Master Agreement together with any supplemental letters in the form of Appendix 1 thereto sent by 1st Chicago to Parent in connection therewith, each as amended by the Bank One Amendment; and

(vii)         that certain Amendment of Confirmation dated as of April 10, 2001 between Parent and Bank of America.

“Subsidiary” of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having

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ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity.

“Swing Lender” means Foothill or any other Lender that, at the request of Administrative Borrower and with the consent of Agent agrees, in such Lender’s sole discretion, to become the Swing Lender hereunder.

“Swing Loan” has the meaning set forth in Section 2.3(d)(i).

“Taxes” has the meaning set forth in Section 2.2.

“Tax Lender” has the meaning set forth in Section 16.11(g).

“Tax Replacement Lender” has the meaning set forth in Section 16.11(g).

“Threshold Equipment” means, as of the date of determination, no less than 75% of Borrowers’ Equipment, as measured by book value, other than demonstration systems.

“Threshold Inventory” means, as of the date of determination, no less than 75% of Borrowers’ Inventory, as measured by book value, other than demonstration systems.

“Total Commitment” means, with respect to each Lender, its Total Commitment, and, with respect to all Lenders, their Total Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 attached hereto or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1.

“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.

“Underlying Issuer” means a third Person which is the beneficiary of an L/C Undertaking and which has issued a letter of credit at the request of the Issuing Lender for the benefit of Borrowers.

“Underlying Letter of Credit” means a letter of credit that has been issued by an Underlying Issuer.

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“Voidable Transfer” has the meaning set forth in Section 17.7.

“Wells Fargo” means Wells Fargo Bank, National Association, a national banking association.

1.2          Accounting Terms.  All accounting terms not specifically defined herein shall be construed in accordance with GAAP.  When used herein, the term “financial statements” shall include the notes and schedules thereto.  Whenever the term “Borrowers” or the term “Parent” is used in respect of a financial covenant or a related definition, it shall be understood to mean Parent and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise.

1.3          Code.  Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein.

1.4          Construction.  Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term “including” is not limiting, the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or,” and any provision that is set forth herein as part of a list or series is to be construed in a manner that does not result in duplication of any other provision in such list or series.  The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be.  Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified.  Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein).  Any reference herein to any Person shall be construed to include such Person’s successors and assigns.  Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein.

1.5          Schedules and Exhibits.  All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference.

2.             LOAN AND TERMS OF PAYMENT.

2.1          Revolver Advances.

(a)           Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Commitment agrees (severally, not

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jointly or jointly and severally) to make advances to Borrowers in an amount at any one time outstanding not to exceed such Lender’s Pro Rata Share of an amount equal to the lesser of (i) the Maximum Revolver Amount less the Letter of Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage.  For purposes of this Agreement, “Borrowing Base,” as of any date of determination, shall mean the result of:

(y)the lesser of

(i)            85.0% of Eligible Accounts, less the amount, if any, of the Dilution Reserve,and

(ii)           an amount equal to Borrower’s Collections with respect to Accounts for the immediately preceding 45 day period,

minus

(z)            the aggregate amount of reserves, if any, established by Agent under Section 2.1(b).

(b)           Anything to the contrary in this Section 2.1 notwithstanding, Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent in its Permitted Discretion shall deem necessary or appropriate, against the Borrowing Base, including reserves with respect to (i) sums that Borrowers are required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and has failed to pay under any Section of this Agreement or any other Loan Document, and (ii) amounts owing by Borrowers to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on Schedule P-1 which is specifically identified thereon as entitled to have priority over the Agent’s Liens), which Lien or trust, in the Permitted Discretion of Agent likely would have a priority superior to the Agent’s Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral.

(c)           The Lenders with  Commitments shall have no obligation to make additional Advances hereunder to the extent such additional Advances would cause the Revolver Usage to exceed the Maximum Revolver Amount.

(d)           Amounts borrowed pursuant to this Section may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement.

2.2          [INTENTIONALLY OMITTED.]

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2.3          Borrowing Procedures and Settlements.

(a)           Procedure for Borrowing.  Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent (which notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day prior to the date that is the requested Funding Date in the case of a request for an Advance specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day; provided, however, that in the case of a request for Swing Loan in an amount of $5,000,000, or less, such notice will be timely received if it is received by Agent no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date) specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day.  At Agent’s election, in lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within 24 hours of the giving of such notice.

(b)           Agent’s Election.  Promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall elect, in its discretion, (i) to have the terms of Section 2.3(c) apply to such requested Borrowing, or (ii) if the Borrowing is for an Advance, to request Swing Lender to make a Swing Loan pursuant to the terms of Section 2.3(d) in the amount of the requested Borrowing; provided, however, that if Swing Lender declines in its sole discretion to make a Swing Loan pursuant to Section 2.3(d), Agent shall elect to have the terms of Section 2.3(c) apply to such requested Borrowing.

(c)           Making of Advances.

(i)            In the event that Agent shall elect to have the terms of this Section 2.3(c) apply to a requested Borrowing as described in Section 2.3(b), then promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, not later than 1:00 p.m. (California time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing.  Each Lender shall make the amount of such Lender’s Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent’s Account, not later than 10:00 a.m. (California time) on the Funding Date applicable thereto.  After Agent’s receipt of the proceeds of such Advances, upon satisfaction of the applicable conditions precedent set forth in Section 3 hereof, Agent shall make the proceeds thereof available to Administrative Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Administrative Borrower’s Designated Account; provided, however, that, subject to the provisions of Section 2.3(i), Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date.

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(ii)           Unless Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least 1 Business Day prior to the date of such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrowers the amount of that Lender’s Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrowers on such date a corresponding amount.  If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrowers such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lender Rate for each day during such period.  A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error.  If such amount is so made available, such payment to Agent shall constitute such Lender’s portion of the requested Advance on the date of Borrowing for all purposes of this Agreement.  If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Administrative Borrower of such failure to fund and, upon demand by Agent, Borrowers shall pay such amount to Agent for Agent’s account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing such Borrowing.  The failure of any Lender to make its portion of any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make available its portion of the requested Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make available its portion of the requested Advance to be made by such other Lender on any Funding Date.

(iii)          Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrowers to Agent for the Defaulting Lender’s benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender’s Advance was funded by the other members of the Lender Group) or, if so directed by Administrative Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender’s Advance was not funded by the Lender Group), retain same to be re-advanced to Borrowers as if such Defaulting Lender had made Advances to Borrowers.  Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrowers for the account of such Defaulting Lender the amount of all such payments received and retained by it for the account of such Defaulting Lender.  Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a “Lender” and such Lender’s Commitment shall be deemed to be zero.  This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and

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Administrative Borrower shall have waived such Defaulting Lender’s default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Advance and pays to Agent all amounts owing by Defaulting Lender in respect thereof.  The operation of this Section shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrowers of their duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender.  Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Administrative Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent.  In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance Agreement in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever; provided further, however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups’ or Borrowers’ rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund.

(d)           Making of Swing Loans.

(i)            In the event Agent shall elect, with the consent of Swing Lender, as a Lender, to have the terms of this Section 2.3(d) apply to a requested Borrowing as described in Section 2.3(b), Swing Lender as a Lender shall make an advance in the amount of such Borrowing (any such advance made solely by Swing Lender as a Lender pursuant to this Section 2.3(d) being referred to as a “Swing Loan” and such advances being referred to collectively as “Swing Loans”) available to Borrowers on the Funding Date applicable thereto by transferring immediately available funds to Administrative Borrower’s Designated Account.  Each Swing Loan is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that no such Swing Loan shall be eligible for the LIBOR Option and all payments on any Swing Loan shall be payable to Swing Lender as a Lender solely for its own account (and for the account of the holder of any participation interest with respect to such Swing Loan).  Subject to the provisions of Section 2.3(i), Agent shall not request Swing Lender as a Lender to make, and Swing Lender as a Lender shall not make, any Swing Loan if Agent has actual knowledge that (i) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (ii) the requested Borrowing would exceed the Availability on such Funding Date.  Swing Lender as a Lender shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 3 have

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been satisfied on the Funding Date applicable thereto prior to making, in its sole discretion, any Swing Loan.

(ii)           The Swing Loans shall be secured by the Agent’s Liens, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans.

(e)           Agent Advances.

(i)            Agent hereby is authorized by Borrowers and the Lenders, from time to time in Agent’s sole discretion, (1) after the occurrence and during the continuance of a Default or an Event of Default, or (2) at any time that any of the other applicable conditions precedent set forth in Section 3 have not been satisfied, to make advances to Borrowers on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (A) to preserve or protect the Collateral, or any portion thereof, (B) to enhance the likelihood of repayment of the Obligations, or (C) to pay any other amount chargeable to Borrowers pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 10 (any of the Advances described in this Section 2.3(e) shall be referred to as “Agent Advances”).  Each Agent Advance is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that no such Agent Advance shall be eligible for the LIBOR Option and all payments thereon shall be payable to Agent solely for its own account (and for the account of the holder of any participation interest with respect to such Agent Advance).

(ii)           The Agent Advances shall be repayable on demand and secured by the Agent’s Liens granted to Agent under the Loan Documents, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans.

(f)            Settlement.  It is agreed that each Lender’s funded portion of the Advances is intended by the Lenders to equal, at all times, such Lender’s Pro Rata Share of the outstanding Advances.  Such agreement notwithstanding, Agent, Swing Lender, and the other Lenders agree (which agreement shall not be for the benefit of or enforceable by Borrowers) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among them as to the Advances, the Swing Loans, and the Agent Advances shall take place on a periodic basis in accordance with the following provisions:

(i)            Agent shall request settlement (“Settlement”) with the Lenders on a weekly basis, or on a more frequent basis if so determined by Agent, (1) on behalf of Swing Lender, with respect to each outstanding Swing Loan, (2) for itself, with respect to each Agent Advance, and (3) with respect to Collections received, as to each by notifying the Lenders by telecopy, telephone, or other similar form of transmission, of such requested Settlement, no later than 2:00 p.m. (California time) on the Business Day immediately prior to the date of such requested Settlement (the

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date of such requested Settlement being the “Settlement Date”).  Such notice of a Settlement Date shall include a summary statement of the amount of outstanding Advances, Swing  Loans, and Agent Advances for the period since the prior Settlement Date.  Subject to the terms and conditions contained herein (including Section 2.3(c)(iii)):  (y) if a Lender’s balance of the Advances, Swing Loans, and Agent Advances exceeds such Lender’s Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, then Agent shall, by no later than 12:00 p.m. (California time) on the Settlement Date, transfer in immediately available funds to the account of such Lender as such Lender may designate, an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances, and (z) if a Lender’s balance of the Advances, Swing Loans, and Agent Advances is less than such Lender’s Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, such Lender shall no later than 12:00 p.m. (California time) on the Settlement Date transfer in immediately available funds to the Agent’s Account, an amount such that each such Lender shall, upon transfer of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances.  Such amounts made available to Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable Swing Loan or Agent Advance and, together with the portion of such Swing Loan or Agent Advance representing Swing Lender’s or Agent’s Pro Rata Share thereof, shall constitute Advances of such Lenders.  If any such amount is not made available to Agent by any Lender on the Settlement Date applicable thereto to the extent required by the terms hereof, Agent shall be entitled to recover for its account such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate.

(ii)           In determining whether a Lender’s balance of the Advances, Swing Loans, and Agent Advances is less than, equal to, or greater than such Lender’s Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received in good funds by Agent with respect to principal, interest and fees payable by Borrowers and allocable to the Lenders hereunder, and proceeds of Collateral.  To the extent that a net amount is owed to any such Lender after such application, such net amount shall be distributed by Agent to that Lender as part of such next Settlement.

(iii)          Between Settlement Dates, Agent, to the extent no Agent Advances or Swing Loans are outstanding, may pay over to Swing Lender any payments received by Agent, that in accordance with the terms of this Agreement would be applied to the reduction of the Advances, for application to Swing Lender’s Pro Rata Share of the Advances.  If, as of any Settlement Date, Collections received since the then immediately preceding Settlement Date have been applied to Swing Lender’s Pro Rata Share of the Advances other than to Swing Loans, as provided for in the previous sentence, Swing Lender shall pay to Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such

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Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances.  During the period between Settlement Dates, Swing Lender with respect to Swing Loans, Agent with respect to Agent Advances, and each Lender (subject to the effect of letter agreements between Agent and individual Lenders) with respect to the Advances other than Swing Loans and Agent Advances, shall be entitled to interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by Swing Lender, Agent, or the Lenders, as applicable.

(g)           Notation.  Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Swing Loans owing to Swing Lender, and Agent Advances owing to Agent, and the interests therein of each Lender, from time to time.  In addition, each Lender is authorized to, at such Lender’s option, and Agent shall, note the date and amount of each payment or prepayment of principal of such Lender’s Advances (or in the case of Agent, all Advances, including Swing Loans and Agent Advances) in its books and records, including computer records, such books and records constituting conclusive evidence, absent manifest error, of the accuracy of the information contained therein.  In the event of any inconsistency between the books and records of any Lender of the books and records of Agent, the books and records of Agent shall control.

(h)           Lenders’ Failure to Perform.  All Advances (other than Swing Loans and Agent Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares.  It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder.

(i)            Optional Overadvances.  Any contrary provision of this Agreement notwithstanding, the Lenders hereby authorize Agent or Swing Lender, as applicable, and Agent or Swing Lender, as applicable, may, but is not obligated to, knowingly and intentionally, continue to make Advances (including Swing Loans) to Borrowers notwithstanding that an Overadvance exists or thereby would be created, so long as (i) after giving effect to such Advances (including a Swing Loan), the Revolver Usage does not exceed the Borrowing Base by more than $1,500,000, (ii) after giving effect to such Advances (including a Swing Loan) the outstanding Revolver Usage (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) does not exceed the Maximum Revolver Amount, and (iii) at the time of the making of any such Advance (including a Swing Loan), Agent does not believe, in good faith, that the Overadvance created by such Advance will be outstanding for more than 90 days.  The foregoing provisions are for the exclusive benefit of Agent, Swing Lender, and the Lenders and are not intended to benefit Borrowers in any way.  The Advances and Swing Loans, as applicable, that are made pursuant to this Section 2.3(i) shall be subject to the same terms and conditions as any other Advance or Swing Loan, as applicable, except that they shall not be eligible for the LIBOR Option and the rate of interest applicable thereto shall be the rate applicable to Advances that are Base Rate Loans under Section 2.6(c) hereof without regard to the presence or absence of a Default or Event of Default.

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(i)            In the event Agent obtains actual knowledge that the Revolver Usage exceeds the amounts permitted by the preceding paragraph, regardless of the amount of, or reason for, such excess, Agent shall notify Lenders as soon as practicable (and prior to making any (or any additional) intentional Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses)), and the Lenders with Commitments thereupon shall, together with Agent, jointly determine the terms of arrangements that shall be implemented with Borrowers and intended to reduce, within a reasonable time, the outstanding principal amount of the Advances to Borrowers to an amount permitted by the preceding paragraph.  In the event Agent or any Lender disagrees over the terms of reduction or repayment of any Overadvance, the terms of reduction or repayment thereof shall be implemented according to the determination of the Required Lenders.

(ii)           Each Lender with a Commitment shall be obligated to settle with Agent as provided in Section 2.3(f) for the amount of such Lender’s Pro Rata Share of any unintentional Overadvances by Agent reported to such Lender, any intentional Overadvances made as permitted under this Section 2.3(i), and any Overadvances resulting from the charging to the Loan Account of interest, fees, or Lender Group Expenses.

2.4          Payments.

(a)           Payments by Borrowers.

(i)            Except as otherwise expressly provided herein, all payments by Borrowers shall be made in Dollars to Agent’s Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein.  Any payment received by Agent later than 11:00 a.m. (California time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day.

(ii)           Unless Agent receives notice from Administrative Borrower prior to the date on which any payment is due to the Lenders that Borrowers will not make such payment in full as and when required, Agent may assume that Borrowers have made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender.  If and to the extent Borrowers do not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid.

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(b)           Apportionment and Application of Payments.

(i)            Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements between Agent and individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender) and payments of fees and expenses (other than fees or expenses that are for Agent’s separate account, after giving effect to any letter agreements between Agent and individual Lenders) shall be apportioned ratably among the Lenders.  All payments shall be remitted to Agent and all such payments, including all proceeds of Accounts or other Collateral, received by Agent (other than payments, including proceeds of Accounts or other Collateral, received while no Default or Event of Default has occurred or is continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees), shall be applied as follows:

(A)          first, to pay any Lender Group Expenses then due to Agent under the Loan Documents, until paid in full,

(B)           second, to pay any Lender Group Expenses then due to the Lenders under the Loan Documents, on a ratable basis, until paid in full,

(C)           third, to pay any fees then due to Agent (for its separate accounts, after giving effect to any letter agreements between Agent and the individual Lenders) under the Loan Documents until paid in full,

(D)          fourth, to pay any fees then due to any or all of the Lenders (after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, on a ratable basis, until paid in full,

(E)           fifth, to pay interest due in respect of all Agent Advances, until paid in full,

(F)           sixth, ratably to pay interest due in respect of the Advances (other than Agent Advances) and the Swing Loans until paid in full,

(G)           seventh, to pay the principal of all Agent Advances until paid in full,

(H)          eighth, to pay the principal of all Swing Loans until paid in full,

(I)            ninth, to pay the principal of all other Advances until paid in full,

(J)            tenth, if an Event of Default has occurred and is continuing, to Agent, to be held by Agent, for the ratable benefit of Issuing Lender and those Lenders having a Commitment, as cash collateral in an amount up to 105% of the then extant Letter of Credit Usage until paid in full,

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(K)          eleventh, to pay any other Obligations until paid in full, and

(L)           twelfth, to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law.

(ii)           Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provided in Section 2.3(f).

(iii)          In each instance, so long as no Default or Event of Default has occurred and is continuing, Section 2.4(b) shall not be deemed to apply to any payment by Borrowers specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement.

(iv)          For purposes of the foregoing, “paid in full” in respect of any amount means payment of such amount owing under the Loan Documents according to the terms thereof, whether or not constituting loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, and whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding.

(v)           In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other.  In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern.

2.5          Overadvances.  If, at any time or for any reason, the aggregate amount of outstanding principal of the Advances, Letter of Credit Usage and other Obligations accrued and payable by Borrowers to the Lender Group pursuant to this Agreement is greater than permitted in Sections 2.1 or 2.12 (an “Overadvance”), Borrowers immediately shall pay to Agent, in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b).  In addition, Borrowers hereby promise to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full to the Lender Group as and when due and payable under the terms of this Agreement and the other Loan Documents.

2.6          Interest Rates and Letter of Credit Fee:  Rates, Payments, and Calculations.

(a)           Interest Rates.  Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit and other amounts that have accrued but are not yet due and payable pursuant to Section 2.6(d)) that have been charged to the Loan Account pursuant to the terms

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hereof shall bear interest on the Daily Balance thereof as follows:  (i) if the relevant Obligation is an Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin, and (ii) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin.

(b)           Letter of Credit Fee.  Borrowers shall pay Agent (for the ratable benefit of the Lenders with a Commitment, subject to any letter agreement between Agent and individual Lenders), a Letter of Credit fee (inclusive of all charges, commissions, fees, and costs associated with the issuance of L/C’s) which shall accrue at a rate equal to 3.25% (of which 3.00% shall be apportioned ratably among the Lenders and 0.25% shall be for the separate account of Agent) per annum times the daily balance of the undrawn amount of all outstanding Letters of Credit.

(c)           Default Rate.  Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders),

(i)            all Obligations (except for undrawn Letters of Credit ) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 3 percentage points above the per annum rate otherwise applicable hereunder, and

(ii)           the Letter of Credit fee provided for above shall be increased to 3 percentage points above the per annum rate otherwise applicable hereunder.

(d)           Payment.  Interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month at any time that Obligations or Commitments are outstanding.  Borrowers hereby authorize Agent, from time to time, without prior notice to Borrowers, to charge such interest and fees, all Lender Group Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.12(e) (as and when accrued or incurred), the fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document to Borrowers’ Loan Account, which amounts thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder.  Any interest not paid when due shall be compounded by being charged to Borrowers’ Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans hereunder.

(e)           Computation.  All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed.  In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate.

(f)            Intent to Limit Charges to Maximum Lawful Rate.  In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction

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shall, in a final determination, deem applicable.  Borrowers and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess.

2.7          Cash Management.

(a)           Borrowers shall (i) establish and maintain cash management services of a type and on terms satisfactory to Agent at one or more of the banks set forth on Schedule 2.7(a) (each a “Cash Management Bank”), and shall request in writing and otherwise take such reasonable steps to ensure that all of its Account Debtors forward payment of the amounts owed by them directly to such Cash Management Bank, and (ii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all Collections (including those sent directly by Account Debtors to a Cash Management Bank) into a bank account in Agent’s name (a “Cash Management Account”) at one of the Cash Management Banks.

(b)           Each Cash Management Bank shall establish and maintain Cash Management Agreements with Agent and Borrowers, in form and substance reasonably acceptable to Agent.  Each such Cash Management Agreement shall provide, among other things, that (i) all items of payment deposited in such Cash Management Account and proceeds thereof are held by such Cash Management Bank as agent or bailee-in-possession for Agent, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account, other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) it immediately will forward by daily sweep all amounts in the applicable Cash Management Account to the Agent’s Account.

(c)           So long as no Event of Default has occurred and is continuing, Administrative Borrower may amend Schedule 2.7(a) to add or replace a Cash Management Account Bank or Cash Management Account; provided, however, that (i) such prospective Cash Management Bank shall be reasonably satisfactory to Agent and Agent shall have consented in writing in advance to the opening of such Cash Management Account with the prospective Cash Management Bank, and (ii) prior to the time of the opening of such Cash Management Account, Borrowers and such prospective Cash Management Bank shall have executed and delivered to Agent a Cash Management Agreement.  Borrowers shall close any of their Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of written notice from Agent that the creditworthiness of any Cash Management Bank is no longer acceptable in Agent’s reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Agent that the operating performance, funds transfer, availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Agent’s liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Agent’s reasonable judgment.

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(d)           The Cash Management Accounts shall be cash collateral accounts, with all cash, checks and similar items of payment in such accounts securing payment of the Obligations, and in which Borrowers are hereby deemed to have granted a Lien to Agent.

2.8          Crediting Payments.  The receipt of any payment item by Agent (whether from transfers to Agent by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Agent’s Account or unless and until such payment item is honored when presented for payment.  Should any payment item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment and interest shall be calculated accordingly.  Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into the Agent’s Account on a Business Day on or before 11:00 a.m. (California time).  If any payment item is received into the Agent’s Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day.  The parties acknowledge and agree that the economic benefit of the foregoing provisions of this Section 2.8 shall be for the exclusive benefit of Agent.

2.9          Designated Account.  Agent is authorized to make the Advances, and Issuing Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(d).  Administrative Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrowers and made by Agent or the Lenders hereunder.  Unless otherwise agreed by Agent and Administrative Borrower, any Advance, Agent Advance, or Swing Loan requested by Borrowers and made by Agent or the Lenders hereunder shall be made to the Designated Account.

2.10        Maintenance of Loan Account; Statements of Obligations.  Agent shall maintain an account on its books in the name of Borrowers (the “Loan Account”) on which Borrowers will be charged with all Advances (including Agent Advances and Swing Loans) made by Agent, Swing Lender, or the Lenders to Borrowers or for Borrowers’ account, with the amounts charged pursuant to Section 2.12 in respect of the Letters of Credit issued by Issuing Lender for Borrowers’ account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Group Expenses.  In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrowers or for Borrowers’ account, including all amounts received in the Agent’s Account from any Cash Management Bank.  Agent shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and the Lender Group unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements.

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2.11        Fees.  Borrowers shall pay to Agent the following fees and charges, which fees and charges shall be non–refundable when paid (irrespective of whether this Agreement is terminated thereafter) and shall be apportioned among the Lenders (unless otherwise expressly indicated):

(a)           Closing Fee.  Borrowers shall pay to Agent, for the ratable benefit of the Lenders, a closing fee of one percent (1.00%) of the Maximum Revolver Amount, which fee shall be due and payable in full on the Closing Date,

(b)           Unused Line Fee.  On the first day of each month during the term of this Agreement, an unused line fee in an amount equal to  0.375% per annum times the result of (a) the Maximum Revolver Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average daily balance of the Letter of Credit Usage during the immediately preceding month,

(c)           Fee Letter Fees.  As and when due and payable under the terms of the Fee Letter, Borrower shall pay to Agent the fees set forth in the Fee Letter, and

(d)           Audit, Appraisal, and Valuation Charges.  For the separate account of Agent, audit, appraisal, and valuation fees and charges as follows, (i) a fee of $750 per day, per auditor, plus out-of-pocket expenses for each financial audit of a Borrower performed by personnel employed by Agent, such financial audits not to occur more than 4 times per calendar year so long as there has not occurred any Event of Default which is continuing, (ii) no later than six months following the Closing Date, a one time charge of $5,000 plus out-of-pocket expenses for expenses for the establishment of electronic collateral reporting systems, and (iii) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of Borrowers, to appraise the Collateral, or any portion thereof, or to assess a Borrower’s business valuation.

2.12        Letters of Credit

(a)           Subject to the terms and conditions of this Agreement, the Issuing Lender agrees to issue letters of credit for the account of Borrowers (each, an “L/C”) or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an “L/C Undertaking”) with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo Bank of Minnesota, N.A.) for the account of Borrowers.  To request the issuance of an L/C or an L/C Undertaking (or the amendment, renewal, or extension of an outstanding L/C or L/C Undertaking), Administrative Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Lender) to the Issuing Lender and Agent (reasonably in advance of the requested date of issuance, amendment, renewal, or extension) a notice requesting the issuance of an L/C or L/C Undertaking, or identifying the L/C or L/C Undertaking to be amended, renewed, or extended, the date of issuance, amendment, renewal, or extension, the date on which such L/C or L/C Undertaking is to expire, the amount of such L/C or L/C Undertaking, the name and address of the beneficiary thereof (or of the Underlying Letter of Credit, as applicable), and such other information as shall be necessary to prepare, amend, renew, or extend such L/C or L/C Undertaking.  If requested by the

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Issuing Lender, Borrowers also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking.  The Issuing Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the requested Letter of Credit:

(i)            The Letter of Credit Usage would exceed the Borrowing Base less the then extant amount of outstanding Advances, or

(ii)           the Letter of Credit Usage would exceed $50,000,000, or

(iii)          the Letter of Credit Usage would exceed the Maximum Revolver Amount less the then extant amount of outstanding Advances.

Borrowers and the Lender Group acknowledge and agree that certain Underlying Letters of Credit may, at Administrative Borrower’s request, be issued to support letters of credit for the account of any Borrower that already are outstanding as of the Closing Date.  Each Letter of Credit (and corresponding Underlying Letter of Credit) shall have an expiry date no later than 30 days prior to the Maturity Date and all such Letters of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to the Issuing Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars.  If Issuing Lender is obligated to advance funds under a Letter of Credit, Borrowers immediately shall reimburse such L/C Disbursement to Issuing Lender by paying to Agent an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Administrative Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Administrative Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on the Business Day that Administrative Borrower receives such notice, if such notice is received prior to 10:00 a.m., California time, on the date of receipt, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Base Rate Loans under Section 2.6.  To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrowers’ obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance.  Promptly following receipt by Agent of any payment from Borrowers pursuant to this paragraph, Agent shall distribute such payment to the Issuing Lender or, to the extent that Lenders have made payments pursuant to Section 2.12(c) to reimburse the Issuing Lender, then to such Lenders and the Issuing Lender as their interest may appear.

(b)           Promptly following receipt of a notice of L/C Disbursement pursuant to Section 2.12(a), each Lender with a Commitment agrees to fund its Pro Rata Share of any Advance deemed made pursuant to the foregoing subsection on the same terms and conditions as if Borrowers had requested such Advance and Agent shall promptly pay to Issuing Lender the amounts so received by it from the Lenders.  By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Lender or the Lenders with Commitment, the Issuing Lender shall be deemed to have granted to each Lender with a Commitment, and each Lender with a Commitment shall be deemed to have purchased, a

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participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit, and each such Lender agrees to pay to Agent, for the account of the Issuing Lender, such Lender’s Pro Rata Share of any payments made by the Issuing Lender under such Letter of Credit.  In consideration and in furtherance of the foregoing, each Lender with a Commitment hereby absolutely and unconditionally agrees to pay to Agent, for the account of the Issuing Lender, such Lender’s Pro Rata Share of each L/C Disbursement made by the Issuing Lender and not reimbursed by Borrowers on the date due as provided in clause (a) of this Section, or of any reimbursement payment required to be refunded to Borrowers for any reason.  Each Lender with a Commitment acknowledges and agrees that its obligation to deliver to Agent, for the account of the Issuing Lender, an amount equal to its respective Pro Rata Share pursuant to this Section 2.12(b) shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3 hereof.  If any such Lender fails to make available to Agent the amount of such Lender’s Pro Rata Share of any payments made by the Issuing Lender in respect of such Letter of Credit as provided in this Section, Agent (for the account of the Issuing Lender) shall be entitled to recover such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate until paid in full.

(c)           Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by the Lender Group arising out of or in connection with any Letter of Credit; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group.  Each Borrower agrees to be bound by the Underlying Issuer’s regulations and interpretations of any Underlying Letter of Credit or by Issuing Lender’s interpretations of any L/C issued by Issuing Lender to or for such Borrower’s account, even though this interpretation may be different from such Borrower’s own, and each Borrower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrowers’ instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto.  Each Borrower understands that the L/C Undertakings may require Issuing Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrowers against such Underlying Issuer.  Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by the Lender Group under any L/C Undertaking as a result of the Lender Group’s indemnification of any Underlying Issuer; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group.

(d)           Each Borrower hereby authorizes and directs any Underlying Issuer to deliver to the Issuing Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon the Issuing Lender’s instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application.

(e)           [INTENTIONALLY OMITTED]

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(f)            If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change after the date hereof in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or the Lender Group with any direction, request, or requirement (irrespective of whether having the force of law) imposed after the date hereof of any Governmental Authority or monetary authority, including any change after the date hereof in the application of Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto):

(i)            any reserve, deposit, or similar requirement is or shall, after the date hereof, be imposed or modified in respect of any Letter of Credit issued hereunder, or

(ii)           there shall, after the date hereof, be imposed on the Underlying Issuer or the Lender Group any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto,

and the result of the foregoing is to increase, directly or indirectly, the cost to the Lender Group of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender Group, then, and in any such case, Agent may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Administrative Borrower, and Borrowers shall pay on demand such amounts as Agent may reasonably specify to be necessary to compensate the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder.  The determination by Agent of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto.

2.13        LIBOR Option.

(a)           Interest and Interest Payment Dates.  In lieu of having interest charged at the rate determined by reference to the Base Rate, Borrowers shall have the option (the “LIBOR Option”) to have interest on all or a portion of the Advances (either upon the Borrowing of any such portion or thereafter as provided herein) be charged at a rate of interest determined by reference to the LIBOR Rate.  Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the occurrence of an Event of Default in consequence of which the Required Lenders or Agent on behalf thereof elect to accelerate the maturity of the Obligations, or (iii) termination of this Agreement pursuant to the terms hereof.  On the last day of each applicable Interest Period, unless Administrative Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder.  At any time that an Event of Default has occurred and is continuing, Borrowers no longer shall have the option to request that Advances bear interest at the LIBOR Rate and Agent shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder.

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(b)           LIBOR Election.

(i)            Administrative Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Agent prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the “LIBOR Deadline”).  Notice of Administrative Borrower’s election of the LIBOR Option for a permitted portion of the Advances and an Interest Period pursuant to this Section shall be made by delivery to Agent of a LIBOR Notice received by Agent before the LIBOR Deadline, or by telephonic notice received by Agent before the LIBOR Deadline (to be confirmed by delivery to Agent of a LIBOR Notice received by Agent prior to 5:00 p.m. (California time) on the same day.  Promptly upon its receipt of each such LIBOR Notice, Agent shall provide a copy thereof to each of the Lenders having a Commitment.

(ii)           Each LIBOR Notice shall be irrevocable and binding on Borrowers.  In connection with each LIBOR Rate Loan, each Borrower shall indemnify, defend, and hold Agent and the Lenders harmless against any loss, cost, or expense incurred by Agent or any Lender as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, “Funding Losses”).  Funding Losses shall, with respect to Agent or any Lender, be deemed to equal the amount determined by Agent or such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Agent or such Lender would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market.  A certificate of Agent or a Lender delivered to Administrative Borrower setting forth any amount or amounts that Agent or such Lender is entitled to receive pursuant to this Section shall be conclusive absent manifest error.

(iii)          Borrowers shall have not more than 5 LIBOR Rate Loans in effect at any given time.  Borrowers only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof.

(c)           Prepayments.  Borrowers may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on any date that is not the

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last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Agent of proceeds of Collections in accordance with Section 2.4(b) or for any other reason, including early termination of the term of this Agreement or acceleration of the Obligations pursuant to the terms hereof, each Borrower shall indemnify, defend, and hold Agent and the Lenders and their Participants harmless against any and all Funding Losses in accordance with clause (b) above.

(d)           Special Provisions Applicable to LIBOR Rate.

(i)            The LIBOR Rate may be adjusted by Agent with respect to any Lender on a prospective basis to take into account any additional or increased costs to such Lender of maintaining or obtaining any eurodollar deposits or increased costs due to changes after the date hereof in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes after the date hereof in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at a rate determined by reference to the LIBOR Rate.  In any such event, the affected Lender shall give Administrative Borrower and Agent notice of such a determination and adjustment and Agent promptly shall transmit the notice to each other Lender and, upon its receipt of the notice from the affected Lender, Administrative Borrower may, by notice to such affected Lender (y) require such Lender to furnish to Administrative Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above).

(ii)           In the event that any change after the date hereof in market conditions or the adoption after the date hereof of any law, regulation, treaty, or directive, or any change after the date hereof therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of any Lender, make it unlawful or impractical for such Lender to fund or maintain LIBOR Advances or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, such Lender shall give notice of such changed circumstances to Agent and Administrative Borrower and Agent promptly shall transmit the notice to each other Lender and (y) in the case of any LIBOR Rate Loans of such Lender that are outstanding, the date specified in such Lender’s notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of such Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrowers shall not be entitled to elect the LIBOR Option until such Lender determines that it would no longer be unlawful or impractical to do so.

(e)           No Requirement of Matched Funding.  Anything to the contrary contained herein notwithstanding, neither Agent, nor any Lender, nor any of their Participants, is required

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actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at a rate determined by reference to the LIBOR Rate.  The provisions of this Section shall apply as if each Lender or its Participants had match funded any Obligation as to which interest is accruing at a rate determined by reference to the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans.

2.14        Capital Requirements.  If, after the date hereof, any Lender determines that (i) the adoption of or change after the date hereof in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change after the date hereof in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), imposed after the date hereof, has the effect of reducing the return on such Lender’s or such holding company’s capital as a consequence of such Lender’s Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender’s or such holding company’s then existing policies with respect to capital adequacy and assuming the full utilization of such entity’s capital) by any amount deemed by such Lender to be material, then such Lender may notify Administrative Borrower and Agent thereof.  Following receipt of such notice, Borrowers agree to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender’s calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error).  In determining such amount, such Lender may use any reasonable averaging and attribution methods.

2.15        Joint and Several Liability of Borrowers.

(a)           Each of Borrowers is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by the Agent and the Lenders under this Agreement, for the mutual benefit, directly and indirectly, of each of Borrowers and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations.

(b)           Each of Borrowers, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co–debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.15), it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Person composing Borrowers without preferences or distinction among them.

(c)           If and to the extent that any of Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Persons composing Borrowers will make such payment with respect to, or perform, such Obligation.

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(d)           The Obligations of each Person composing Borrowers under the provisions of this Section 2.15 constitute the absolute and unconditional, full recourse Obligations of each Person composing Borrowers enforceable against each such Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever.

(e)           Except as otherwise expressly provided in this Agreement, each Person composing Borrowers hereby waives notice of acceptance of its joint and several liability, notice of any Advances or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by Agent or Lenders under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except as otherwise provided in this Agreement).  Each Person composing Borrowers hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Agent or Lenders at any time or times in respect of any default by any Person composing Borrowers in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by Agent or Lenders in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Person composing Borrowers.  Without limiting the generality of the foregoing, each of Borrowers assents to any other action or delay in acting or failure to act on the part of any Agent or Lender with respect to the failure by any Person composing Borrowers to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.15 afford grounds for terminating, discharging or relieving any Person composing Borrowers, in whole or in part, from any of its Obligations under this Section 2.15, it being the intention of each Person composing Borrowers that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of such Person composing Borrowers under this Section 2.15 shall not be discharged except by performance and then only to the extent of such performance.  The Obligations of each Person composing Borrowers under this Section 2.15 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Person composing Borrowers or any Agent or Lender.  The joint and several liability of the Persons composing Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, constitution or place of formation of any of the Persons composing Borrowers or any Agent or Lender.

(f)            Each Person composing Borrowers represents and warrants to Agent and Lenders that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations.  Each Person composing Borrowers further represents and warrants to Agent and Lenders that such Borrower has read and understands the terms and conditions of the

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Loan Documents.  Each Person composing Borrowers hereby covenants that such Borrower will continue to keep informed of Borrowers’ financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations.

(g)           Each of the Persons composing Borrowers waives all rights and defenses arising out of an election of remedies by the Agent or any Lender, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed such Person’s rights of subrogation and reimbursement against other Borrowers by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise.

(h)           Each of the Persons composing Borrowers waives all rights and defenses that such Borrower may have because the Obligations are secured by collateral that may include Real Property proceeds.  This means, among other things:

(i)            Agent and Lenders may collect from such Borrower without first foreclosing on any Real or Personal Property Collateral pledged by Borrowers.

(ii)           If Agent or any Lender forecloses on any Real Property Collateral pledged by Borrowers:

(A)          The amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.

(B)           Agent and Lenders may  collect from such Borrower even if Agent or Lenders, by foreclosing on the Real Property Collateral, has destroyed any right such Borrower may have to collect from the other Borrowers.

This is an unconditional and irrevocable waiver of any rights and defenses such Borrower may have because the Obligations are secured by Real Property.  These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure.

(i)            The provisions of this Section 2.15 are made for the benefit of the Agent, the Lenders and their respective successors and assigns, and may be enforced by it or them from time to time against any or all of the Persons composing Borrowers as often as occasion therefor may arise and without requirement on the part of any such Agent, Lender, successor or assign first to marshal any of its or their claims or to exercise any of its or their rights against any of the other Persons composing Borrowers or to exhaust any remedies available to it or them against any of the other Persons composing Borrowers or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy.  The provisions of this Section 2.15 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied.  If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by any Agent or Lender upon the insolvency, bankruptcy or

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reorganization of any of the Persons composing Borrowers, or otherwise, the provisions of this Section 2.15 will forthwith be reinstated in effect, as though such payment had not been made.

(j)            Each of the Persons composing Borrowers hereby agrees that it will not enforce any of its rights of contribution or subrogation against the other Persons composing Borrowers with respect to any liability incurred by it hereunder or under any of the other Loan Documents or any payments made by it to the Agent or the Lenders with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash.  Any claim which any Borrower may have against any other Borrower with respect to any payments to any Agent or Lender hereunder or under any other Loan Documents is hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor.

(k)           Each of the Persons composing Borrowers hereby agrees that, after the occurrence and during the continuance of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the Obligations.  Each Borrower hereby agrees that after the occurrence and during the continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness of any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash.  If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Borrower as trustee for the Lender Group, and such Borrower shall deliver any such amounts to Agent for application to the Obligations in accordance with Section 2.4(b).

2.16        Interpretation of Certain Aspects of Advances.  Notwithstanding anything to the contrary provided herein:

(a)           A Swing Loan may be made only if Administrative Borrower has requested that the applicable Advance be a Base Rate Loan; and

(b)           Although Swing Loan and Agent Advances are considered to be “Advances” under the Loan Documents, no Lender is required to make an Advance under Section 2.1(a) if a Swing Loan or Agent Advance is made, but each Lender is required to make Settlement pursuant to Section 2.1(f).

3.             CONDITIONS; TERM OF AGREEMENT.

3.1          Conditions Precedent to the Initial Extension of Credit.  The obligation of the Lender Group (or any member thereof) to make the initial Advance (or otherwise to extend any

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credit provided for hereunder), is subject to the fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below:

(a)           the Closing Date shall occur on or before April 13, 2001;

(b)           Agent shall have received all financing statements required by Agent, duly executed by the applicable Borrowers, and Agent shall have received searches reflecting the filing of all such financing statements;

(c)           Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect:

(i)            the Disbursement Letter,

(ii)           the Intercreditor Agreement,

(iii)          the Fee Letter,

(iv)          the Officers’ Certificate;

(d)           Agent shall have received a certificate from the Secretary of each Borrower attesting to the resolutions of such Borrower’s Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party and authorizing specific officers of such Borrower to execute the same;

(e)           Agent shall have received copies of each Borrower’s Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower;

(f)            Agent shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction;

(g)           Agent shall have received certificates of status with respect to each Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the following jurisdictions, which certificates shall indicate that such Borrower is in good standing in such jurisdictions: for each Borrower, California, Wisconsin, and Minnesota, and for Silicon Graphics Federal, Inc., Maryland;

(h)           Agent shall have received confirmation from Bank of America that Parent has secured, to Bank of America’s satisfaction, by cash or one or more letters of credit, Parent’s obligation to cover: (i) the mark-to-market exposure on foreign exchange contracts (said collateral to be released as the contracts expire); and (ii) the extension of credit from Bank of America’s New Delhi, India branch;

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(i)            [INTENTIONALLY OMITTED];

(j)            [INTENTIONALLY OMITTED];

(k)           Agent shall have received an executed copy of that certain Amendment of Confirmation entered into between Parent and Bank of America as part of the Structured Stock Repurchase Documents;

(l)            Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent;

(m)          [INTENTIONALLY OMITTED];

(n)           Agent shall have received opinions of Borrowers’ counsel in form and substance satisfactory to Agent;

(o)           Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Parent) that all tax returns required to be filed by Borrowers have been timely filed and all taxes upon Borrowers or their properties, assets, income, and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest;

(p)           Borrowers shall have the Required Availability after giving effect to the initial extensions of credit hereunder;

(q)           Agent shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Borrowers’ books and records and verification of Borrowers’ representations and warranties to the Lender Group, the results of which shall be satisfactory to Agent, and (ii) an inspection of each of the locations where Inventory is located, the results of which shall be satisfactory to Agent;

(r)            Agent shall have received completed reference checks with respect to Borrowers’ senior management, the results of which are satisfactory to Agent in its sole discretion;

(s)           [INTENTIONALLY OMITTED];

(t)            Agent shall have received Parent’s Closing Date Business Plan;

(u)           Administrative Borrower shall have paid all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement;

(v)           [INTENTIONALLY OMITTED];

(w)          [INTENTIONALLY OMITTED];

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(x)            Agent shall have received copies of the listing of United States registered patents, trademarks and copyrights, in each case together with a certified of the secretary of Administrative Borrower certifying each such document as being a true, correct, and complete copy thereof;

(y)           Borrowers shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Borrowers of this Agreement or any other Loan Document or with the consummation of the transactions contemplated hereby and thereby; and

(z)            all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent.

3.2          Conditions Subsequent to the Initial Extension of Credit.The obligation of the Lender Group (or any member thereof) to continue to make Advances (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default):

(a)           within 30 days of the Closing Date, deliver to Agent certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent and its counsel;

(b)           within 60 days of the Closing Date, deliver to Agent executed copies of the Cash Management Agreements;

(c)           deliver to Agent Collateral Access Agreement with respect to the following locations: (i) 2081 N. Shoreline Blvd., Bldg. 11, Mountain View, California, by June 15, 2001, (ii) 1600 Amphitheatre Parkway, Bldgs. 30, 31, 40, 41, 42, and 43, by June 15, 2001, (iii) Warehouse of Wisconsin, 2313 Olson Drive, Chippewa Falls, Wisconsin, (iv) Sonic Air, 2200 Outer Loop Drive, Louisville, Kentucky, by May 21, 2001,  (v) 12200-G Plum Orchard Drive, Silver Spring, Maryland, by June 15, 2001,and (vi) North American Van Lines, 1710 Little Orchard Street, San Jose, California, by July 30, 2001;

(d)           within 30 days of the Closing Date, deliver to Agent an executed copy of the Intercompany Subordination Agreement;

(e)           within 5 Business Days of the Closing Date, deliver to Agent an executed UCC-1 financing statement describing the Collateral for filing in the State of Kentucky; and

(f)            no later than November 15, 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.

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3.3          Conditions Precedent to all Extensions of Credit.The obligation of the Lender Group (or any member thereof) to make all Advances (or to extend any other credit hereunder) shall be subject to the following conditions precedent:

(a)           the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date);

(b)           no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof;

(c)           no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against any Borrower, Agent, any Lender, or any of their Affiliates;

(d)           no Material Adverse Change shall have occurred with respect to Borrowers from the financial condition of Borrowers on March 31, 2001 reflected in the Closing Date Business Plan;

(e)           no Material Adverse Change (other than a Material Adverse Change described in Section 3.3(d)) shall have occurred; and

(f)            Administrative Borrower shall have delivered to Agent a completed and executed Borrowing Base Certificate, dated as of the Business Day on which the request for the Borrowing is made.

3.4          Term.  This Agreement shall become effective upon the execution and delivery hereof by Borrowers, Agent, and the Lenders and shall continue in full force and effect for a term ending on April 13, 2003 (the “Maturity Date”).  The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement pursuant to Section 9.1.

3.5          Effect of Termination.  On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrowers with respect to any outstanding Letters of Credit) immediately shall become due and payable without notice or demand.  No termination of this Agreement, however, shall relieve or discharge Borrowers of their duties, Obligations, or covenants hereunder and the Agent’s Liens in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and the Lender Group’s obligations to provide additional credit hereunder have been terminated.  When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and the Lender Group’s obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrowers’ sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other

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similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Agent’s Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations.

3.6          Early Termination by Borrowers.  Borrowers have the option, at any time upon 90 days prior written notice by Administrative Borrower to Agent, to terminate this Agreement by paying to Agent, for the benefit of the Lender Group, in cash, the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full, together with the Applicable Prepayment Premium (to be allocated based upon letter agreements between Agent and individual Lenders).  If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Commitments shall terminate and Borrowers shall be obligated to repay the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full, together with the Applicable Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice.  In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (a) termination upon the election of the Required Lenders to terminate after the occurrence of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the Collateral in any Insolvency Proceeding, or (d) restructure, reorganization or compromise of the Obligations by the confirmation of a plan of reorganization, or any other plan of compromise, restructure, or arrangement in any Insolvency Proceeding, then, in view of the impracticability and extreme difficulty of ascertaining the actual amount of damages to the Lender Group or profits lost by the Lender Group as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of the Lender Group, Borrowers shall pay the Applicable Prepayment Premium to Agent (to be allocated based upon letter agreements between Agent and individual Lenders), measured as of the date of such termination.  Notwithstanding any provision to the contrary herein provided, Borrowers shall not be liable for an Applicable Prepayment Premium if this Agreement is terminated as a direct result of Borrowers refinancing the Obligations through a commercial banking unit of Wells Fargo as a provider, arranger or agent of such refinancing.

4.             CREATION OF SECURITY INTEREST.

4.1          Grant of Security Interest.  Each Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising  Collateral in order to secure prompt repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by Borrowers of each of their covenants and duties under the Loan Documents.  The Agent’s Liens in and to the  Collateral shall attach to all  Collateral without further act on the part of Agent or Borrowers.  Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrowers have no authority, express or implied, to dispose of any item or portion of the Collateral.

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4.2          Negotiable Property.In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Property, and if and to the extent that perfection or priority of Agent’s security interest is dependent on or enhanced by possession, the applicable Borrower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Property to Agent.

4.3          Collection of Accounts, General Intangibles Collateral, and Negotiable Property Collateral.  At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent’s designee may (a) notify Account Debtors of Borrowers that the Accounts, Negotiable Property Collateral and General Intangibles Collateral have been assigned to Agent or that Agent has a security interest therein, or (b) collect the Accounts, Negotiable Property Collateral and General Intangibles Collateral directly and charge the collection costs and expenses to the Loan Account.  Each Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group’s trustee, any Collections that it receives and immediately will deliver said Collections to Agent or a Cash Management Bank in their original form as received by the applicable Borrower.

4.4          Delivery of Additional Documentation Required.  At any time upon the request of Agent, Borrowers shall execute and deliver to Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, and all other documents (the “Additional Documents”) that Agent may request in its Permitted Discretion, in form and substance reasonably satisfactory to Agent, to perfect and continue perfected or better perfect the Agent’s Liens in the Collateral (whether now owned or hereafter arising or acquired), and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents.  To the maximum extent permitted by applicable law, each Borrower authorizes Agent to execute any such Additional Documents in the applicable Borrower’s name and authorize Agent to file such executed Additional Documents in any appropriate filing office.

4.5          Power of Attorney.  Each Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent’s officers, employees, or agents designated by Agent) as such Borrower’s true and lawful attorney, with power to (a) if such Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of such Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign such Borrower’s name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Accounts; provided, however, that so long as no Event of Default has occurred which is continuing, Agent will coordinate any such verification activities with Administrative Borrower, (d) endorse such Borrower’s name on any Collection item that may come into the Lender Group’s possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Borrower’s policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, General Intangibles Collateral or Negotiable Property Collateral directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary.  The appointment of

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Agent as each Borrower’s attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group’s obligations to extend credit hereunder are terminated.

4.6          Right to Inspect.  Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and to check, test, and appraise the Collateral in order to verify Borrowers’ financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral; provided, however, that so long as no Event of Default has occurred which is continuing, any such inspection, check, test or appraisal shall be conducted during normal business hours in a manner so as not to interfere unreasonably with Borrowers’ business operations.

4.7          [INTENTIONALLY OMITTED.]

5.             REPRESENTATIONS AND WARRANTIES.

In order to induce the Lender Group to enter into this Agreement, each Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement:

5.1          No Encumbrances.  Each Borrower has good and indefeasible title to its Collateral free and clear of Liens except for Permitted Liens.

5.2          Eligible Accounts.  The Eligible Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory to such Account Debtors in the ordinary course of Borrowers’ business, owed to Borrowers without defenses, disputes, offsets, counterclaims, or rights of return or cancellation.  As to each Eligible Account, such Account is not excluded as ineligible by virtue of one or more of the criteria set forth in clauses (a) through (o) contained in the definition of “Eligible Accounts” in Section 1.1.

5.3          Threshold Inventory.  The Threshold Inventory is of good and merchantable quality, free from material defects.  As to each item of Threshold Inventory, such Inventory is:

(a)           owned by a Borrower free and clear of all Liens other than Agent’s Liens and Permitted Liens,

(b)           either located at one of the locations set forth on Schedule 5.5 or in transit from one such location to another such location,

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(c)           not located on real property leased by a Borrower or in a contract warehouse, in each case, unless subject to a Collateral Access Agreement executed by the lessor, the warehouseman, or other third party, as the case may be (subject to the delivery of certain Collateral Access Agreements as provided in Section 3.2(c)), and unless segregated or otherwise separately identifiable from goods of others, if any, stored on the premises,

(d)           not goods that have been returned or rejected by Borrowers’ customers, and

(e)           not goods that are obsolete or slow moving, restrictive or custom items, or that constitute packaging and shipping materials, supplies used or consumed in Borrowers’ business, bill and hold goods, defective goods, “seconds,” or Inventory acquired on consignment.

5.4          Threshold Equipment.  The Threshold Equipment is used or held for use in Borrowers’ business and is fit for such purposes.

5.5          Location of Threshold Inventory and Threshold Equipment.  Except as set forth on Schedule 5.5, the Threshold Inventory and the Threshold Equipment are not stored with a bailee, warehouseman, or similar party and are located only at the locations identified on Schedule 5.5 or are in transit from one such location to another.

5.6          Inventory Records.  Each Borrower keeps correct and accurate records itemizing and describing the type, quality, and quantity of its Inventory and the book value thereof.

5.7          Location of Chief Executive Office; FEIN.  The chief executive office of each Borrower is located at the address indicated in Schedule 5.7 and each Borrower’s FEIN is identified in Schedule 5.7.

5.8          Due Organization and Qualification; Subsidiaries.

(a)           Each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change.

(b)           Set forth on Schedule 5.8(b), is a complete and accurate description of the authorized capital Stock of each Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding.  Other than as described on Schedule 5.8(b), there are no subscriptions, options, warrants, or calls relating to any shares of any Borrower’s capital Stock, including any right of conversion or exchange under any outstanding security or other instrument.  No Borrower is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock.

(c)           Set forth on Schedule 5.8(c), is a complete and accurate list of each Borrower’s direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization; and (ii) where indicated in Schedule 5.8(c), the percentage of equity ownership of such Subsidiaries.  All of the

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outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable.

5.9          Due Authorization; No Conflict.

(a)           As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Borrower.

(b)           As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to any Borrower, the Governing Documents of any Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of any Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of any Borrower’s interestholders or any approval or consent of any Person under any material contractual obligation of any Borrower.

(c)           Other than the filing of financing statements and fixture filings, the execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which such Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person.

(d)           As to each Borrower, this Agreement and the other Loan Documents to which such Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally.

(e)           The Agent’s Liens are validly created, perfected (to the extent that perfection can be effected by the measures required to be taken under the Loan Documents for such purpose), and first priority Liens, subject only to Permitted Liens.

5.10        Litigation.  Other than those matters disclosed on Schedule 5.10, there are no actions, suits, or proceedings pending or, to the best knowledge of Borrowers, threatened against Borrowers, or any of their Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), and (b) matters arising after the Closing Date that, if decided adversely to Borrowers, or any of their Subsidiaries, as applicable, reasonably could not be expected to result in a Material Adverse Change.

5.11        No Material Adverse Change.  All financial statements relating to Borrowers that have been delivered by Borrowers to the Lender Group other than the financial statements provided

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in the Closing Date Business Plan have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrowers’ financial condition as of the date thereof and results of operations for the period then ended.  There has not been a Material Adverse Change with respect to Borrowers from the financial condition of Borrowers on March 31, 2001 reflected in the Closing Date Business Plan.

5.12        Fraudulent Transfer.

(a)           Each Borrower is Solvent.

(b)           No transfer of property is being made by any Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrowers.

5.13        Employee Benefits.  Except as set forth on Schedule 5.13, none of Borrowers, their Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan or Multiemployer Plan.  Each of Borrowers, their Subsidiaries and their ERISA Affiliates have satisfied the minimum funding standards of ERISA and the IRC with respect to each Benefit Plan to which it is obligated to contribute and has made all contributions required under the terms of each Multiemployer Plan to which it is obligated to contribute.  No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Change.  None of Borrowers, their Subsidiaries or any of their ERISA Affiliates is required to provide security to any Benefit Plan under Section 401(a)(29) of the IRC.

5.14        Environmental Condition.  No Borrower has received notice that a Lien arising under any Environmental Law has attached to any of its revenues or to any Collateral.

5.15        Brokerage Fees.  Borrowers have not utilized the services of any broker or finder in connection with Borrowers’ obtaining financing from the Lender Group under this Agreement and no brokerage commission or finders fee is payable by Borrowers in connection herewith.

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;

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(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.

5.17        Leases.  Borrowers enjoy peaceful and undisturbed possession under all leases of Equipment and Real Property located in the United States material to the business of Borrowers and to which Borrowers are a party or under which Borrowers are operating.  All of such leases are valid and subsisting and no material default by Borrowers exists under any of them.

5.18        DDAs.  Set forth on Schedule 5.18 are all of the DDAs of each Borrower, including, with respect to each depository: (i) the name and address of that depository, and (ii) the account numbers of the accounts maintained with such depository.

5.19        Complete Disclosure.  All factual information (taken as a whole) furnished by or on behalf of Borrowers in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrowers in writing to the Agent or any Lender will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact

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necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided.  On the Closing Date, the Closing Date Business Plan represents, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Borrowers’ good faith best estimate of its future performance for the periods covered thereby.  Notwithstanding anything in any Loan Document to the contrary, Borrowers make no representation or warranty for any purpose, including, without limitation, Section 8.11 hereof,  as to any projection or forecast of results or other forward looking statement set forth in any Projection, in the Closing Date Business Plan or otherwise in any document or statement delivered or made to the Agent or any Lender other than, in the case of any such projection, forecast or forward looking statement, that Borrowers had a good faith belief at the time of such delivery that such projection, forecast or forward looking statement was reasonably supported based on the assumptions described in connection therewith at the time of such delivery.

5.20        Indebtedness.  Set forth on Schedule 5.20 is a true and complete list of all Indebtedness of each Borrower outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal financial terms thereof.

5.21        Classified Material.  The Classified Material is not necessary to and will not otherwise prohibit or impede the Lender Group’s enforcement rights related to any Collateral (except for non-material amounts of Books and Equipment which may contain Classified Material).

6.             AFFIRMATIVE COVENANTS.

Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers shall do all of the following (provided, however, that only Administrative Borrower is required to comply with Section 6.2 and Section 6.3(a)(iii), in each case on behalf of itself and the other Borrower):

6.1          Accounting System.  Maintain a system of accounting that enables Borrowers to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent.  Borrowers also shall keep an inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory.

6.2          Collateral Reporting.  Provide Agent (and if so requested by Agent, with copies for each Lender) with the following documents at the following times in form satisfactory to Agent:

Weekly (a) a sales journal, collection journal, and credit register since the last such schedule and a calculation of the Borrowing Base as of such date, and (b) notice of all returns, disputes, or claims. (c) restricted and unrestricted cash of Parent and its Subsidiaries on both a consolidated domestic and worldwide basis,

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	(d) a detailed calculation of the Borrowing Base (including detail regarding those Accounts that are not Eligible Accounts),
Monthly (not later than the 10th day of each month)	(e) a detailed aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base  previously provided to Agent, (f) a summary aging, by vendor, of Borrowers’ accounts payable  and any book overdraft, and (g) a calculation of Dilution for the prior month.
Quarterly	(h) a detailed list of each Borrower’s customers, (i) a report regarding each Borrower’s accrued, but unpaid, ad valorem taxes,
Upon request by Agent	(j) copies of invoices in connection with the Accounts, credit memos, remittance advices, deposit slips, shipping and delivery documents in connection with the Accounts and, for Inventory and Equipment acquired by Borrowers, purchase orders and invoices, and (k) such other reports as to the Collateral, or the financial condition of Borrowers as Agent may request.

In addition, each Borrower agrees to cooperate fully with Agent to facilitate and implement a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above.

6.3          Financial Statements, Reports, Certificates.  Deliver to Agent, with copies to each Lender:

(a)           as soon as available, but in any event within 30 days (45 days in the case of the a month that is the end of one of the first 3 fiscal quarters in a fiscal year) after the end of each  month during each of Parent’s fiscal years,

(i)            a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Parent’s and its Subsidiaries’ operations during such period,

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(ii)           a certificate signed by the chief financial officer of Parent to the effect that:

(A)          the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Parent and its Subsidiaries,

(B)           the representations and warranties of Borrowers contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and

(C)           there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrowers have taken, are taking, or propose to take with respect thereto), and

(iii)          a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such quarter with the applicable financial covenants contained in Section 7.20, and

(b)           as soon as available, but in any event within 90 days after the end of each of Parent’s fiscal years,

(i)            financial statements of Parent and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants’ letter to management),

(ii)           a certificate of such accountants addressed to Agent and the Lenders stating that such accountants do not have knowledge of the existence of any Default or Event of Default under Section 7.20,

(c)           as soon as available, but in any event within 30 days prior to the start of each of Parent’s fiscal years,

(i)            copies of Parent’s Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its reasonable discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, quarter by quarter, certified by the chief financial officer of Parent as being such officer’s good faith best estimate of the financial performance of Parent and its Subsidiaries

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during the period covered thereby,

(d)           if and when filed by any Borrower, within 5 days of filing,

(i)            Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports,

(ii)           any other filings made by any Borrower with the SEC,

(iii)          copies of Borrowers’ federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and

(iv)          any other information that is provided by Parent to its shareholders generally,

(e)           if and when filed by any Borrower and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in each jurisdiction (i) in which any Borrower conducts business or is required to pay any such excise tax, (ii) where any Borrower’s failure to pay any such applicable excise tax would result in a Lien on any of the Collateral, or (iii) where any Borrower’s failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change,

(f)            as soon as a Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrowers propose to take with respect thereto, and

(g)           upon the request of Agent, any other report reasonably requested relating to the financial condition of Borrowers.

In addition to the financial statements referred to above, Parent agrees to deliver financial statements prepared on both a consolidated and consolidating basis.  Parent agrees that its independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrowers that Borrowers are obligated to deliver to Agent pursuant to this Agreement, and agrees that Agent may contact directly any such accounting firm or service bureau in order to obtain such information.

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

6.5          Return.  Cause returns and allowances as between Borrowers and their Account Debtors, to be on the same basis and in accordance with the usual customary practices of the applicable Borrower, as they exist at the time of the execution and delivery of this Agreement.

6.6          Maintenance of Properties.  Maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition,

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ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder.

6.7          Taxes.  Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrowers or any of their assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest.  Borrowers will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof reasonably satisfactory to Agent indicating that the applicable Borrower has made such payments or deposits.  Borrowers shall deliver satisfactory evidence of payment of applicable excise taxes in each United States jurisdiction in which any Borrower is required to pay any such excise tax.

6.8          Insurance.

(a)           At Borrowers’ expense, maintain insurance respecting its property and assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses.  Borrowers also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation.  All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent.  Borrowers shall deliver copies of all such policies to Agent with a satisfactory lender’s loss payable endorsement naming Agent as a loss payee or additional insured, as appropriate.  Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever.

(b)           Administrative Borrower shall give Agent prompt notice of any loss of the Collateral in an amount in excess of $250,000 covered by such insurance.  Agent shall have the exclusive right to adjust any such losses payable under any such insurance policies in excess of $250,000, without any liability to Borrowers whatsoever in respect of such adjustments.  Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain of Collateral, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations or shall be disbursed to Administrative Borrower under staged payment terms reasonably satisfactory to the Required Lenders for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items of property destroyed prior to such damage or destruction.

(c)           Borrowers shall not take out separate insurance concurrent in form or contributing in the event of loss with insurance covering the Collateral required to be maintained under this Section 6.8, unless Agent is included thereon as named insured with the loss payable to Agent under a lender’s loss payable endorsement or its equivalent.  Administrative Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer

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thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent.

6.9          Location of Threshold Inventory and Threshold Equipment.Keep the Threshold Inventory and Threshold Equipment only at the locations identified on Schedule 5.5 or in transit from one such location to another; provided, however, that Administrative Borrower may amend Schedule 5.5 so long as such amendment occurs by written notice to Agent not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent’s Liens on such assets and also, if such location is not owned by a Borrower, provides to Agent a Collateral Access Agreement (subject to the time and extent permitted for compliance with Section 3.2(c)).

6.10        Compliance with Laws.  Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change.

6.11        Leases.  Pay when due all rents and other amounts payable under any leases to which any Borrower is a party or by which any Borrower’s properties and assets are bound, unless the failure to pay such amounts would not, individually or in the aggregate, result in and reasonably could not be expected to result in a Material Adverse Change or a Lien other than a Permitted Lien.

6.12        Brokerage Commissions.  Pay any and all brokerage commission or finders fees incurred in connection with or as a result of Borrowers’ obtaining financing from the Lender Group under this Agreement.  Borrowers agree and acknowledge that payment of all such brokerage commissions or finders fees shall be the sole responsibility of Borrowers, and each Borrower agrees to indemnify, defend, and hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrowers’ obtaining financing from the Lender Group under this Agreement.

6.13        Existence.  At all times preserve and keep in full force and effect each Borrower’s valid existence and good standing and any rights and franchises, in each case material to Borrowers’ businesses.

6.14        [INTENTIONALLY OMITTED]

6.15        Disclosure Updates.  Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify Agent if any written information, exhibit, or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the facts and circumstances in which such statement was made or known by any Borrower to exist at the time such statement was made, and (b) correct any defect or error that may be discovered therein or in any Loan

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Document or in the execution, acknowledgment, filing, or recordation thereof.

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.

7.             NEGATIVE COVENANTS.

Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, it will not do any of the following:

7.1          Indebtedness.  Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness or permit any Subsidiary to do the same, except:

(a)           Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit;

(b)           Indebtedness set forth on Schedule 5.20;

(c)           the SGI Loan and Permitted Purchase Money Indebtedness;

(d)           Indebtedness reflected in the Closing Date Business Plan;

(e)           advances, guaranties, capital contributions and other Investments made to Affiliates in the ordinary course of business,

(f)            Indebtedness consisting of obligations of Parent under the Structured Stock Repurchase Documents or incurred in connection with any full or partial termination, unwinding or settlement, whether or not at the option of Parent, of the Structured Stock Repurchase,

(g)           other unsecured Indebtedness in an aggregate principal amount at any time outstanding not to exceed $50,000,000, and

(h)           refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) through (g) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) such refinancings, renewals, or extensions do not result in an increase in the principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed, or extended, (ii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or

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conditions, that, taken as a whole, are materially more burdensome or restrictive to the applicable Borrower, and (iii) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must be include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed, or extended Indebtedness.

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.

7.3          Restrictions on Fundamental Changes.

(a)           Enter into any merger or consolidation (other than a merger or consolidation in which Borrower is the surviving entity and that is otherwise permitted in Section 7.13), reorganization or recapitalization not otherwise permitted under the Loan Documents, or reclassify its Stock other than pursuant to the terms of such Stock.

(b)           Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution).

(c)           Convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of its assets.

7.4          Disposal of Assets.  Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of its assets.

7.5          Change Name.  Change its name, FEIN, corporate structure or identity, or add any new fictitious name; provided, however, that a Borrower may change its name upon at least 30 days prior written notice by Administrative Borrower to Agent of such change and so long as, at the time of such written notification, such Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Agent’s Liens.

7.6          Guarantee.  Except where otherwise permitted as a guarantee of Indebtedness under Section 7.1, guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrowers or which are transmitted or turned over to Agent.

7.7          Nature of Business.  Make any change in the principal nature of its business.

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7.8          Prepayments and Amendments.

(a)           Except in connection with (i) any full or partial termination, unwinding or settlement, whether or not at the option of Parent, of the Structured Stock Repurchase or otherwise pursuant to the Structured Stock Repurchase Documents or (ii) a refinancing permitted by Section 7.1(h), prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of any Borrower, other than the Obligations in accordance with this Agreement; and

(b)           Except in connection with (i) any full or partial termination, unwinding or settlement, whether or not at the option of Parent, of the Structured Stock Repurchase or otherwise pursuant to the Structured Stock Repurchase Documents or (ii) a refinancing permitted by Section 7.1(h), directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b) through 7.1(g) in a manner materially adverse to the Lender Group.

7.9          Change of Control.  Cause, permit, or suffer, directly or indirectly, any Change of Control.

7.10        Consignments.  Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale.

7.11        Distributions.  Other than (i) any full or partial termination, unwinding or settlement, whether or not at the option of Parent, of the Structured Stock Repurchase or otherwise pursuant to the Structured Stock Repurchase Documents or (ii) distributions or declaration and payment of dividends by a Borrower to another Borrower, make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, or retire any  Borrower’s Stock, of any class, whether now or hereafter outstanding.

7.12        Accounting Methods.  Materially modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrowers’ accounting records in a manner that would result in said accounting firm or service bureau declining to provide Agent information regarding the Collateral or Borrowers’ financial condition.

7.13        Investments.  Except for Permitted Investments, directly or indirectly, make or acquire any Investment, or incur any liabilities (including contingent obligations) other than Indebtedness permitted under Section 7.1 and guarantees permitted under Section 7.6 for or in connection with any Investment.

7.14        Transactions with Affiliates.  Directly or indirectly enter into or permit to exist any transaction with any Affiliate of Borrowers except for transactions that are in the ordinary course of Borrowers’ business, upon fair and reasonable terms, and that are no less favorable to Borrowers than would be obtained in an arm’s length transaction with a non-Affiliate.

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7.15        Suspension.  Other than Permitted Dispositions, suspend or go out of a substantial portion of its business.

7.16        [INTENTIONALLY OMITTED].

7.17        Use of Proceeds.  Use the proceeds of the Advances for any purpose other than (a) on the Closing Date to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes.

7.18        Change in Location of Chief Executive Office; Inventory and Equipment with Bailees.  Relocate its chief executive office to a new location without Administrative Borrower providing 30 days prior written notification thereof to Agent and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent’s Liens and also provides to Agent a Collateral Access Agreement with respect to such new location if such location is not owned by Borrower.  The Threshold Inventory and Threshold Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Agent’s prior written consent.

7.19        [INTENTIONALLY OMITTED.]

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 28, 2001
$35,000,000	For the 3 month period ending March 29, 2002
$7,950,000	For the 3 month period ending June 28, 2002;
<$6,250,000>	For the 3 month period ending September 27, 2002;

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$12,900,000	For the 3 month period ending December 27, 2002;
$12,075,000	For the 3 month period ending March 28, 2003

provided, however, that: (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) for the calculation of the minimum amount of EBITDA for the 3 month periods ending December 28, 2001 and March31, 2002, net income will be measured prior to non-cash mark-to-market adjustments necessitated as a direct result of the settlement of the class action lawsuits filed in December 1997 and January 1998, in the United States District Court for the Northern District of California, Lead Docket Case No. 97-CV-4362 and in the California Superior Court for the County of Santa Clara, Case Nos. CV770727, CV770685, and CV774756.

(b)           Minimum Cash and Cash Equivalents. Cash and Cash Equivalents of Parent and its Subsidiaries, determined on a consolidated basis, (i) except as set forth in clause (ii) below, of no less than $50,000,000 at all times during the term of this Agreement, and (ii) of no less than $40,000,000 for the period beginning on November 3, 2001 through November 9, 2001.

(c)           Maximum Capital Expenditures.  Make capital expenditures in excess of $10,000,000 in any fiscal quarter.

8.             EVENTS OF DEFAULT.

Any one or more of the following events shall constitute an event of default (each, an “Event of Default”) under this Agreement:

8.1          If Borrowers fail to pay when due and payable or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations);

8.2          (a) If Borrowers fail or neglect to perform, keep, or observe any covenant or other provision contained in Sections 6.2 or 6.3 hereof and such failure or neglect continues for a period of 5 Business Days after the date on which such failure or neglect first occurs, or (b) if Borrowers fail or neglect to perform, keep, or observe any covenant or other provision contained in Sections 4.2, 6.1, 6.6, 6.7 or 6.11 hereof and such failure or neglect is not cured within 15 days after the date on which such failure or neglect first occurs, or (c) if Borrowers fail or neglect to perform, keep, or observe any other covenant or other provision contained in any Section of this Agreement (other than a

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Section that is expressly addressed elsewhere in this Section 8) or the Loan Documents (other than a Section of such other Loan Document addressed elsewhere in this Section 8);

8.3          If any material portion of any Borrower’s assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person;

8.4          If an Insolvency Proceeding is commenced by any Borrower;

8.5          If an Insolvency Proceeding is commenced against any Borrower and any of the following events occurs:  (a) the applicable Borrower consents to the institution of the Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent) and each other member of the Lender Group shall be relieved of their obligation to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, any Borrower, or (e) an order for relief shall have been entered therein;

8.6          If any Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs;

8.7          If a notice of Lien, levy, or assessment is filed of record with respect to any Collateral (or any portion thereof) by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any Collateral (or any portion thereof) and the same is not paid before such payment is delinquent;

8.8          If a judgment or other claim becomes a Lien or encumbrance upon any material portion of the Collateral;

8.9          If there is a default in any material agreement to which any Borrower or any of its Subsidiaries is a party, including any agreement evidencing, securing or otherwise relating to Indebtedness in an amount in excess of $5,000,000, and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of the applicable Borrower’s or its Subsidiaries’ obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein;

8.10        If any Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness;

8.11        If any material misstatement or misrepresentation exists now or hereafter in any

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warranty, representation, statement, or Record made to the Lender Group in connection with the transactions contemplated by the Loan Documents by any Borrower, or any officer, employee, or director of any Borrower proves to have been untrue in any material respect when made;

8.12        [INTENTIONALLY OMITTED];

8.13        If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected (to the extent that perfection can be effected by the measures required to be taken under the Loan Documents for such purpose) and, except to the extent permitted by the terms hereof or thereof and otherwise subject to Permitted Liens, first priority Lien on or security interest in the Collateral covered hereby or thereby; or

8.14        Any material provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Borrower in a proceeding shall be commenced by any Borrower, or by any Governmental Authority having jurisdiction over any Borrower, seeking to establish the invalidity or unenforceability thereof.

9.             THE LENDER GROUP’S RIGHTS AND REMEDIES.

9.1          Rights and Remedies.  Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrowers:

(a)           Declare all Obligations (including the Dollar amount of contingent unreimbursed liabilities under L/C’s and L/C Undertakings) whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable;

(b)           Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and the Lender Group;

(c)           Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent’s Liens in the Collateral and without affecting the Obligations;

(d)           Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Agent considers reasonably advisable, and in such cases, Agent will credit the Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith;

(e)           Cause Borrowers to hold all returned Inventory in trust for the Lender Group, segregate all returned Inventory from all other assets of Borrowers or in Borrowers’ possession and conspicuously label said returned Inventory as the property of the Lender Group;

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(f)            Without notice to or demand upon any Borrower, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interests in the Collateral.  Each Borrower agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent at a place that Agent may designate which is reasonably convenient to both parties.  Each Borrower authorizes Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Agent’s determination appears to conflict with the Agent’s Liens and to pay all expenses incurred in connection therewith and to charge Borrowers’ Loan Account therefor.  With respect to any of Borrowers’ owned or leased premises, each Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender Group’s rights or remedies provided herein, at law, in equity, or otherwise;

(g)           Without notice to any Borrower (such notice being expressly waived), and without constituting a retention of any Collateral in satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of any Borrower held by the Lender Group (including any amounts received in the Cash Management Accounts), or (ii) Indebtedness at any time owing to or for the credit or the account of any Borrower held by the Lender Group;

(h)           Agent or Agent’s designee may (a) notify Account Debtors of Borrowers that the Accounts, General Intangibles Collateral and Negotiable Property Collateral of Borrower have been assigned to Agent or that Agent has a security interest therein, or (b) collect such Accounts, General Intangibles Collateral and Negotiable Property Collateral directly and charge the collection costs and expenses to the Loan Account.  Borrowers agree that each will hold in trust for Agent, as Agent’s trustee, any Collections that it receives and immediately will deliver said Collections to Agent in their original form as received by such Borrower;

(i)            Hold, as cash collateral, any and all balances and deposits of any Borrower held by the Lender Group, and any amounts received in the Cash Management Accounts, to secure the full and final repayment of all of the Obligations;

(j)            Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral.  Each Borrower hereby grants to Agent a license or other right to use, without charge, such Borrower’s software (including all rights thereto as owner or licensee thereof), labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and such Borrower’s rights under all licenses and all franchise agreements shall inure to the Lender Group’s benefit;

(k)           Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers’ premises) as Agent determines is commercially reasonable.  It is not necessary that the Collateral be present at any such sale;

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(l)            Agent shall give notice of the disposition of the Collateral as follows:

(i)            Agent shall give Administrative Borrower (for the benefit of the applicable Borrower) a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, the time on or after which the private sale or other disposition is to be made; and

(ii)           The notice shall be personally delivered or mailed, postage prepaid, to Administrative Borrower as provided in Section 12, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market;

(m)          Agent, on behalf of the Lender Group may credit bid and purchase at any public sale;

(n)           Agent may seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing;

(o)           The Lender Group shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents; and

(p)           Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrowers.  Any excess will be returned, without interest and subject to the rights of third Persons, by Agent to Administrative Borrower (for the benefit of the applicable Borrower).

9.2          Remedies Cumulative.  The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative.  The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity.  No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver.  No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it.

10.          TAXES AND EXPENSES.

If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then Agent, in its sole discretion, and without prior notice to any Borrower, may do any or all of the following; provided, however, that if any failure by any Borrower described above in this Section 10 does not constitute an Event of Default and occurs when there has not occurred any Event of Default which is continuing, then Agent may do any or all of the following only if Agent shall have given notice of such failure to Administrative Borrower and

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such failure is not cured within 5 Business Days after the date of such notice:  (a) make payment of the same or any part thereof, (b) set up such reserves in Borrowers’ Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure, or (c) in the case of the failure to comply with Section 6.8 hereof, obtain and maintain insurance policies of the type described in Section 6.8 and take any action with respect to such policies as Agent deems prudent.  Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement.  Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing.

11.          WAIVERS; INDEMNIFICATION.

11.1        Demand; Protest; etc.  Each Borrower waives demand, protest, notice of protest, notice of default or dishonor (other than any notice required under this Agreement), notice of payment and nonpayment (other than any notice required under this Agreement), nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which each such Borrower may in any way be liable.

11.2        The Lender Group’s Liability for Collateral.  Each Borrower hereby agrees that:  (a) so long as the Lender Group complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for:  (i) the safekeeping of any of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrowers.

11.3        Indemnification.  Each Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant, and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an “Indemnified Person”) harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the “Indemnified Liabilities”).  The foregoing to the contrary notwithstanding, Borrowers shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified

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Person.  This provision shall survive the termination of this Agreement and the repayment of the Obligations.  If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrowers with respect thereto.  WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON.

12.          NOTICES.

Unless otherwise provided in this Agreement, all notices or demands by Borrowers or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as the Administrative Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrowers in care of Administrative Borrower or to Agent, as the case may be, at its address set forth below:

Administrative Borrower:	Silicon Graphics, Inc.
	1600 Amphitheatre Parkway
	Mountain View, California 94043
	Attn:  Jean Furter, Vice President and Treasurer
	Fax No.: (650) 932-0660
	Email address:  jean@sgi.com
with copies to:	Brobeck Phleger & Harrison, LLP
	Spear Street Tower
	One Market
	San Francisco, California 94105
	Attn:  Douglas Young, Esq.
	Fax No.: (415) 442-1010
	Email address:  dyoung@brobeck.com
and copies to:	Silicon Graphics, Inc.
	1600 Amphitheatre Parkway
	Mountain View, California 94043
	Attn:  Barry Weinert, Esq., Associate General Counsel
	Fax No.: (650) 933-0096
	Email address:  barryw@sgi.com

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If to Lenders:	c/o Foothill Capital Corporation
	2450 Colorado Avenue
	Suite 3000 West
	Santa Monica, California 90404
	Attn:  Business Finance Division Manager
	Fax No.:  (310) 453-7413
with copies to:	Jeffer, Mangels, Butler & Marmaro LLP
	1900 Avenue of the Stars
	7th Floor
	Los Angeles, California 90067
	Attn:  Joel J. Berman, Esq.
	Fax:  (310) 203-0567
	Email address:  jjb@jmbm.com

Agent and Borrowers may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party.  All notices or demands sent in accordance with this Section 12, other than notices by Agent in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail.  Each Borrower acknowledges and agrees that notices sent by the Lender Group in connection with the exercise of enforcement rights against Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above.

13.          CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

(a)           THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

(b)           THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER

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PROPERTY MAY BE FOUND.  BORROWERS AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b).

(c)           BORROWERS AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.  BORROWERS AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

14.          ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.

14.1        Assignments and Participations.

(a)           Any Lender may, with the written consent of Agent and, so long as no Event of Default has occurred and is continuing, upon 5 Business Days’ notice to and with the written consent of Administrative Borrower (not to be unreasonably withheld) (provided that no written consent of Agent or Borrowers shall be required in connection with any assignment and delegation by a Lender to an Eligible Transferee), assign and delegate to one or more assignees (each an “Assignee”) all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided, however, that Borrowers and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Administrative Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Administrative Borrower and Agent an Assignment and Acceptance in form and substance satisfactory to Agent, and (iii) the assignor Lender or Assignee has paid to Agent for Agent’s separate account a processing fee in the amount of $5,000 and (iv) such Assignee has delivered any applicable documentation relating to exemption from withholding taxes provided for in Section 16.11.  Anything contained herein to the contrary notwithstanding, the consent of Agent or Borrowers shall not be required (and payment of any fees shall not be required) if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender.

(b)           From and after the date that Agent notifies the assignor Lender (with a copy to Administrative Borrower) that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the

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extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrowers and the Assignee.

(c)           By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows:  (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrowers or the performance or observance by Borrowers of any of their obligations under this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

(d)           Immediately upon each Assignee’s making its processing fee payment under the Assignment and Acceptance and receipt and acknowledgment by Agent of such fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom.  The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto.

(e)           Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a “Participant”) participating interests in its Obligations, the Commitment, and the other rights and interests of that Lender (the “Originating Lender”) hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a “Lender” for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not

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constitute a “Lender” hereunder or under the other Loan Documents and the Originating Lender’s obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrowers, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender’s rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or a material portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums; and (v) all amounts payable by Borrowers hereunder shall be determined as if such Lender had not sold such participation.  The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrowers, the Collections, the Collateral, or otherwise in respect of the Obligations.  No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves.  The provisions of this Section 14.1(e) are solely for the benefit of the Lender Group, and no Borrower shall have any rights as third party of any such provisions.

(f)            In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrowers or Borrowers’ business.

(g)           Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR §203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.

14.2        Successors.  This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrowers may not assign this Agreement or any rights or duties hereunder without the Lenders’ prior written consent and any prohibited assignment shall be absolutely void ab initio.  No consent to assignment by the Lenders shall release any Borrower from its Obligations.  A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by any Borrower is required in connection with any such assignment.

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15.          AMENDMENTS; WAIVERS.

15.1        Amendments and Waivers.  No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrowers therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Administrative Borrower (on behalf of all Borrowers) and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all of the Lenders affected thereby and Administrative Borrower (on behalf of all Borrowers) and acknowledged by Agent, do any of the following:

(a)           increase or extend any Commitment of any Lender,

(b)           postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document,

(c)           reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document,

(d)           change the percentage of the Commitments that is required to take any action hereunder,

(e)           amend this Section or any provision of the Agreement providing for consent or other action by all Lenders,

(f)            release Collateral other than as permitted by Section 16.12,

(g)           change the definition of “Required Lenders,”

(h)           contractually subordinate any of the Agent’s Liens,

(i)            release any Borrower from any obligation for the payment of money, or

(j)            change the definition of Borrowing Base or the definitions of Eligible Accounts, or Maximum Revolver Amount, or change Section 2.1, or

(k)           amend any of the provisions of Section 16,

and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, Issuing Lender, or Swing Lender, affect the rights or duties of Agent, Issuing Lender, or Swing Lender, as applicable, under this Agreement or any other Loan Document.  The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrowers, shall not require consent by or the agreement of Borrowers.

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15.2        Replacement of Holdout Lender.

(a)           If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender (“Holdout Lender”) fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a “Replacement Lender”), and the Holdout Lender shall have no right to refuse to be replaced hereunder.  Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given.

(b)           Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance Agreement, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever.  If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance Agreement prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance Agreement.  The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1.  Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender’s Pro Rata Share of Advances and to purchase a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit.

15.3        No Waivers; Cumulative Remedies.  No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or, any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof.  No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated.  No waiver by Agent or any Lender on any occasion shall affect or diminish Agent’s and each Lender’s rights thereafter to require strict performance by Borrowers of any provision of this Agreement.  Agent’s and each Lender’s rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have.

16.          AGENT; THE LENDER GROUP.

16.1        Appointment and Authorization of Agent.  Each Lender hereby designates and appoints Agent as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto.  Agent agrees to act as such on the express conditions contained in this Section 16.  The provisions of this Section 16 (other than Sections 16.11 and 16.17) are solely for the benefit of Agent and the Lenders, and Borrowers shall have no rights as a third party beneficiary of any of the provisions contained herein (other than

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Sections 16.11 and 16.17).  Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word “Agent” is for convenience only, that Agent is merely the representative of the Lenders, and only has the contractual duties set forth herein.  Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents.  Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect:  (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management accounts as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrowers, the Obligations, the Collateral, the Collections, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents.

16.2        Delegation of Duties.  Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties.  Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct.

16.3        Liability of Agent.  None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by any Borrower or any Subsidiary or Affiliate of any Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of any Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder.  No Agent-Related Person shall be under any

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obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrowers or the books or records or properties of any of Borrowers’ Subsidiaries or Affiliates.

16.4        Reliance by Agent.  Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrowers or counsel to any Lender), independent accountants and other experts selected by Agent.  Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable.  If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action.  Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders.

16.5        Notice of Default or Event of Default.  Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Administrative Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a “notice of default.”  Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge.  If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default.  Each Lender shall be solely responsible for giving any notices to its Participants, if any.  Subject to Section 16.4, Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable.

16.6        Credit Decision.  Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrowers and their Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person (other than the Lender Group) party to a

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Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrowers.  Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person (other than the Lender Group) party to a Loan Document.  Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrowers and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons.

16.7        Costs and Expenses; Indemnification.  Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrowers are obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise.  Agent is authorized and directed to deduct and retain sufficient amounts from Collections received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders.  In the event Agent is not reimbursed for such costs and expenses from Collections received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender’s Pro Rata Share thereof.  Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrowers and without limiting the obligation of Borrowers to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Person’s gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender’s ratable share of any costs or out-of-pocket expenses (including attorneys fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrowers.  The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent.

16.8        Agent in Individual Capacity.  Foothill and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally

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engage in any kind of banking, trust, financial advisory, underwriting, or other business with Borrowers and their Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though Foothill were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group.  The other members of the Lender Group acknowledge that, pursuant to such activities, Foothill or its Affiliates may receive information regarding Borrowers or their Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them.  The terms “Lender” and “Lenders” include Foothill in its individual capacity.

16.9        Successor Agent.  Agent may resign as Agent upon 45 days notice to the Lenders.  If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders.  If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent.  If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders.  In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term “Agent” shall mean such successor Agent and the retiring Agent’s appointment, powers, and duties as Agent shall be terminated.  After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement.  If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above.

16.10      Lender in Individual Capacity.  Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrowers and their Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group.  The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrowers or their Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them.  With respect to the Swing Loans and Agent Advances, Swing Lender shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the sub-agent of

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the Agent.

16.11      Withholding Taxes.

(a)           If any Lender is a “foreign corporation, partnership or trust” within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrowers, to deliver to Agent and Administrative Borrower:

(i)            if such Lender claims an exemption from withholding tax pursuant to its portfolio interest exception, (a) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a “bank” as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder (within the meaning of Section 881(c)(3)(B) of the IRC), or (III) a controlled foreign corporation described in Section 881(c)(3)(C) of the IRC, and (B) a properly completed IRS Form W-8BEN, before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower;

(ii)           if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower;

(iii)          if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before the first payment of any interest is due under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower;

(iv)          such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction in full of, United States withholding tax.

Such Lender agrees promptly to notify Agent and Administrative Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction.

(b)           If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations due to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrowers due such Lender.  To the extent of such percentage amount, Agent will treat such Lender’s IRS Form W-8BEN as no longer valid.

(c)           If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the

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applicable withholding tax after taking into account such reduction.  If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax.

(d)           If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses).  The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent.

(e)           All payments made by Borrowers hereunder or under any note or other Loan Document will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below).  All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of a Lender, or (ii) to the extent that such tax results from a change in the circumstances of the Lender, including a change in the residence, place of organization, or principal place of business of the Lender, or a change in the branch or lending office of the Lender participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as “Taxes”).  If any Taxes are so levied or imposed, each Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.11(e) after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrowers shall not be required to increase any such amounts payable to Agent or any Lender (i) that is not organized under the laws of the United States, if such Person fails to comply with the other requirements of this Section 16.11, or (ii) if the increase in such amount payable results from Agent’s or such Lender’s own willful misconduct or gross negligence.  Borrowers will furnish to Agent as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrowers.

(f)            Each Lender hereby represents that, as of the date it became a Lender under this Agreement, it was not subject to any Taxes applicable to payments made by the Borrowers hereunder.

(g)           (i)            If any Lender becomes subject to any Taxes applicable to payments

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made by the Borrowers hereunder (a “Taxed Lender”), and so long as there has not occurred any Event of Default which is continuing, then Administrative Borrower, upon at least 5 Business Days prior irrevocable notice to the Agent and such Taxed Lender, may permanently replace such Taxed Lender with one or more substitute Lenders which is an Eligible Transferee (each, a “Tax Replacement Lender”), and the Taxed Lender shall have no right to refuse to be replaced hereunder.  Such notice to replace the Taxed Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given.

(ii)           Prior to the effective date of such replacement, the Taxed Lender and each Tax Replacement Lender shall execute and deliver an Assignment and Acceptance Agreement, subject only to the Taxed Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever.  If the Taxed Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance Agreement prior to the effective date of such replacement, the Taxed Lender shall be deemed to have executed and delivered such Assignment and Acceptance Agreement.  The replacement of any Taxed Lender shall be made in accordance with the terms of Section 14.1.  Until such time as the Tax Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Taxed Lender hereunder and under the other Loan Documents, the Taxed Lender shall remain obligated to make the Taxed Lender’s Pro Rata Share of Advances and to purchase a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit.

16.12      Collateral Matters.

(a)           The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrowers of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Administrative Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which no Borrower owned any interest at the time the security interest was granted or at any time thereafter, or (iv) constituting property leased to a Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement.  Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders.  Upon request by Agent or Administrative Borrower at any time, the Lenders will confirm in writing Agent’s authority to release any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent’s opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrowers in respect of) all interests retained by Borrowers, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral.

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(b)           Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrowers or is cared for, protected, or insured or has been encumbered, or that the Agent’s Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent’s own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein.

16.13      Restrictions on Actions by Lenders; Sharing of Payments.

(a)           Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrowers or any deposit accounts of Borrowers now or hereafter maintained with such Lender.  Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral.

(b)           If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender’s Pro Rata Share of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment.

16.14      Agency for Perfection.  Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent’s Liens in assets which, in accordance with Article 9 of the Code can be perfected only by possession.  Should any Lender obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent’s request therefor shall deliver such Collateral to Agent or in accordance with

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Agent’s instructions.

16.15      Payments by Agent to the Lenders.  All payments to be made by Agent to the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent.  Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations.

16.16      Concerning the Collateral and Related Loan Documents.  Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group.  Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders.

16.17      Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information.  By becoming a party to this Agreement, each Lender:

(a)           is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a “Report” and collectively, “Reports”) prepared by Agent, and Agent shall so furnish each Lender with such Reports,

(b)           expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report,

(c)           expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrowers and will rely significantly upon the Books, as well as on representations of Borrowers’ personnel,

(d)           and Agent agrees to keep all Reports and other material, non-public information regarding Borrowers and their Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrowers that in any event such Lender or Agent may make disclosures (i) to counsel for and other advisors, accountants, and auditors to such Lender or Agent, (ii) reasonably required by any bona fide potential or actual Assignee or Participant in connection with any contemplated or actual assignment or transfer by such Lender or Agent of an interest herein or any participation interest in such Lender’s rights hereunder, (iii) of information that has become public by disclosures made by Persons other than such Lender or Agent, its Affiliates, assignees, transferees, or Participants, or (iv) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, however, that, unless prohibited by applicable law, statute, regulation, or court order, such Lender or Agent shall:  (y) notify Administrative Borrower of any request by any court, governmental or administrative

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agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof, and (z) notify all other Persons described in clause (i) above that they are bound by, and cause all other Persons described in clause (ii) above to be bound by, the provisions of this Section 16.17(d), and

(e)           without limiting the generality of any other indemnification provision contained in this Agreement, agrees:  (i) to hold Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrowers, or the indemnifying Lender’s participation in, or the indemnifying Lender’s purchase of, a loan or loans of Borrowers; and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.

In addition to the foregoing:  (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrowers to Agent that has not been contemporaneously provided by Borrowers to such Lender, and, upon receipt of such request, Agent shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrowers, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender’s notice to Agent, whereupon Agent promptly shall request of Administrative Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Administrative Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Administrative Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender.

16.18      Several Obligations; No Liability.  Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments.  Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender.  Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender.  Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts of any other member of the Lender Group.  No Lender shall be responsible to any Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein.

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16.19      Legal Representation of Agent.  In connection with the negotiation, drafting, and execution of this Agreement and the other Loan Documents, or in connection with future legal representation relating to loan administration, amendments, modifications, waivers, or enforcement of remedies, Jeffer, Mangels, Butler & Marmaro LLP (“JMBM”) only has represented and only shall represent Foothill in its capacity as Agent and as a Lender.  Each other Lender hereby acknowledges that JMBM does not represent it in connection with any such matters.

16.20      Disclosure of Classified Material.  Borrowers and the Lender Group acknowledge that due to the nature of Borrowers’  business and their customers, certain items comprising the Collateral contain “classified” information and/or data (“Classified Material”) which may not be legally disclosed without proper authorization and/or security clearance (a “Security Clearance”).  The  Lender Group agrees that to the extent any representation, warranty, or covenant of either Borrower or right or remedy of the Lender Group contained in this Agreement or the other Loan Documents would otherwise require any Borrower to disclose Classified Material without a proper Security Clearance, such representation, warranty, covenant, right or remedy shall not apply with respect to obligations which would lead to such illegal disclosure; provided that any time a Borrower  refuses, declines or otherwise fails to fulfill an obligation under this Agreement or the other Loan Documents due to an invocation of this provision or the substance thereof, such Borrower shall promptly provide written notice to Agent of that fact certifying that it has complied with its obligations hereunder or under the other Loan Documents to the fullest extent possible without illegally disclosing Classified Material and, upon the reasonable request of Agent, such Borrower shall provide evidence reasonably satisfactory to Agent that the requested items of Collateral or information are in fact “classified.”

17.          GENERAL PROVISIONS.

17.1        Effectiveness.  This Agreement shall be binding and deemed effective when executed by Borrowers, Agent, and each Lender whose signature is provided for on the signature pages hereof.

17.2        Section Headings.  Headings and numbers have been set forth herein for convenience only.  Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement.

17.3        Interpretation.  Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against the Lender Group or Borrowers, whether under any rule of construction or otherwise.  On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto.  Time is of the essence in Borrowers’ payment and performance of the Obligations.

17.4        Severability of Provisions.  Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

17.5        Amendments in Writing.  This Agreement only can be amended by a writing in

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accordance with Section 15.1.

17.6        Counterparts; Telefacsimile Execution.  This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.  Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement.  Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement.  The foregoing shall apply to each other Loan Document mutatis mutandis.

17.7        Revival and Reinstatement of Obligations.  If the incurrence or payment of the Obligations by any Borrower or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors’ rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a “Voidable Transfer”), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrowers automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made.

17.8        Integration.  This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof.

17.9        Parent as Agent for Borrowers.  Each Borrower hereby irrevocably appoints Parent as its borrowing agent and attorney-in-fact for all actions required to be taken by such Borrower under this Agreement (the “Administrative Borrower”) which appointment shall remain in full force and effect unless and until Agent shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Administrative Borrower.  Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (i) to provide Agent with all notices with respect to Advances and Letters of Credit obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (ii) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Advances and Letters of Credit and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement.  It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Lender Group shall not incur liability to any Borrower as a result thereof.  Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued

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successful performance of the Parent and the other Borrowers as an integrated group.  To induce the Lender Group to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify each member of the Lender Group and hold each member of the Lender Group harmless against any and all liability, expense, loss or claim of damage or injury, made against the Lender Group by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the collective handling of the Loan Account and Collateral of Borrowers as herein provided, (b) the Lender Group’s relying on any instructions of the Administrative Borrower, or (c) any other action taken by the Lender Group hereunder or under the other Loan Documents, except that Borrowers will have no liability to the relevant Agent-Related Person or Lender-Related Person under this Section 17.9 with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Agent-Related Person or Lender-Related Person, as the case may be.

[Signature page to follow.]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.

SILICON GRAPHICS, INC.

a Delaware corporation

By:  Jean Furter

Title:  VP and Treasurer

SILICON GRAPHICS FEDERAL, INC.

a Delaware corporation

By:  Jeff Zellmer

Title:  VP

FOOTHILL CAPITAL CORPORATION,

a California corporation, as Agent and as a Lender

By:  Teresa Bolick

Title:  VP

BANK OF AMERICA, N.A.,

as Documentation Agent and as a Lender

By:   Kevin R. Kelly

Title: Sr. V.P.

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EX-10.16

Exhibit 10.16

INTELLECTUAL PROPERTY SECURITY AGREEMENT

                                This Intellectual Property Security Agreement (the “Agreement”), is made as of November 9, 2001, by and among FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for the Lenders (“Agent”), SILICON GRAPHICS, INC., a Delaware corporation (“Parent”), and SILICON GRAPHICS FEDERAL, INC., a Delaware corporation (together with Parent, the “Borrowers”), with refer­ence to the following facts:

                                A.            Each Borrower has adopted certain trademarks and service marks, as identified herein and in Schedule A annexed hereto and made a part hereof, and

                                B.            Each Borrower is the owner and holder of certain patents, patent applications, inventions and trade secret information, as identified herein and in Schedule B annexed hereto and made a part hereof.

                                C.            Each Borrower is the owner of the copyrights in certain works of authorship, as described herein and in Schedule C annexed hereto and made a part hereof.

                                D.            Each Borrower, Agent, Documentation Agent, and the Lenders party thereto have entered into that certain Loan and Security Agreement dated as of April 10, 2001 (as from time to time amended, modified or supplemented in accordance with its terms, the “Loan Agreement”), pursuant to which the Lender Group has agreed to extend credit to or for the account of Borrowers in the form of a revolving credit facility, and each Borrower granted to Agent, for the benefit of the Lender Group, a security interest in substantially all of each Borrower’s assets as security for all obligations and liabilities of the Borrowers for payment and performance under, arising out of or in connection with the Loan Documents (all of such obligations and liabilities being hereinafter referred to as the “Obligations”).  Capitalized terms which are used herein but not otherwise defined, shall have the meaning ascribed to them in the Loan Agreement.

                                E.             To induce the Lender Group to enter into an amendment to the Loan Agreement, and to continue to make advances and otherwise extend credit to the Borrowers thereunder, each Borrower has agreed to secure the payment and performance of the Obligations (as hereinafter defined) and to accomplish same by executing and delivering to Agent, for the benefit of the Lender Group, (i) this Agreement, (ii) the Security Interest in Trademarks, (iii) the Security Interest in Patent Collateral, (iv)  the Security Interest in Copyrights, (v) the Power of Attorney for Patent Collateral, (vi) the Power of Attorney for Trademarks, (vii) the Power of Attorney for Copyrights, and (viii) any and all other documents which Agent deems necessary to protect Lender Group’s interests hereunder or with respect to the Obligations.

                                F.             This Agreement is the Intellectual Property Security Agreement as defined and described in the Loan Agreement.

                                NOW, THEREFORE, IT IS AGREED that, for and in consideration of the premises set forth above, the terms and conditions contained herein, and other good  and

valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and as collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Obligations, each Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of such Borrower’s right, title and interest in and to the IP Collateral, except for the Excluded Intellectual Property described in Schedule D annexed hereto and made a part hereof, including:

                                (a)           all of Borrower’s customer lists and other records of such Borrower relating to the distribution of products bearing, constituting or incorporating the Trademarks, Patent Collateral and Copyrights; and

                                (b)           the proceeds and products, whether tangible or intangible, of any of the foregoing, including (w) proceeds from any claims by such Borrower against third parties for past, present or future infringement of the Trademarks, Patent Collateral or Copyrights and any royalties from licenses to third parties of the Trademarks, Patent Collateral or Copyrights, (x) proceeds of insurance covering any or all of the foregoing, and (y) any and all money, deposit accounts, or other tangible or intangible property, solely to the extent, in the case of each of the foregoing clauses (w), (x) and (y), resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof; provided, however, that the IP 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.             Each Borrower hereby represents, warrants, covenants and agrees as follows, except with respect to the Excluded Intellectual Property:

                                                (a)           Each Borrower has the sole, full and clear title to the Trademarks for the goods and services with which the Trademarks are used (except for Permitted Liens and as provided in paragraph 1(g) below and in Schedule A attached hereto).  The registrations of the Trademarks are valid and subsisting and in full force and effect.  Each Borrower has not granted a license or otherwise agreed to allow any third party to use any Trademark (except in the ordinary course of business consistent with such Borrower’s business judgment).  Each Borrower has used and will continue to use for the duration of this Agreement standards of quality in the manufacture of products sold under the Trademarks that are at least equal to those standards in effect as of the date of this Agreement to the extent that the failure to do so would cause a Material Adverse Change.

                                                (b)           Each Borrower (either itself or through its licensees) will continue to use the Trademarks on each and every trademark class of goods applicable to its current lines of goods as reflected in its current catalogs, brochures and price lists in order to maintain the Trademarks in full force and effect, in the ordinary course of business, free from any claim of abandonment for nonuse and each Borrower will not (and will not permit any licensee thereof to)

do any act or knowingly omit to do any act whereby any Trademark may become invalidated (except in the ordinary course of business consistent with such Borrower’s business judgment).

                                                (c)           Each Borrower has the sole, full and clear title to the Patent Collateral shown on Schedule B hereto and such Patent Collateral is valid and subsisting and in full force and effect and have not been adjudged or, to such Borrower’s knowledge, claimed invalid or unenforceable in whole or in part (except for Permitted Liens and as provided in paragraph l(g) below and in Schedule B attached hereto).  Each Borrower has not granted a license or otherwise agreed to allow any third party to use any Patent Collateral (except in the ordinary course of business consistent with such Borrower’s business judgment).  Each Borrower (either itself or through its licensees) shall mark products made and sold under the Patent Collateral in accordance with the U.S. Patent Act and other applicable laws.  Each Borrower shall preserve and maintain all rights of any kind in the Patent Collateral, which, in each case, such Borrower believes in its reasonable business judgment are in the best business interests of such Borrower.  Each Borrower believes that none of the Patent Collateral has been abandoned or dedicated and such Borrower will not do any act, or omit to do any act, nor permit any licensee thereof to do any act whereby any Patent Collateral may become abandoned or dedicated, except and to the extent Borrower believes in its reasonable business judgment that such action or inaction is in the best business interest of such Borrower including discretion to make Patent Collateral available to the “open source community,” and shall notify Agent immediately if it knows or has reason to believe that any material Patent Collateral may become abandoned or dedicated.

                                                (d)           Each Borrower (either itself or through its licensees) will place appropriate notice of copyright on all copies embodying copyrighted works covered by the Copyright which are publicly distributed and such Borrower will not (and will not permit any licensee thereof to) do any act or knowingly omit to do any act whereby any Copyright may become invalidated or dedicated to the public domain, except and to the extent Borrower believes in its reasonable business judgment that such action or inaction is in the best interest of such Borrower.

                                                (e)           Each Borrower will promptly perform all acts and execute all documents, including, without limitation, grants of security in forms acceptable to Agent and suitable for recording with (i) the United States Patent and Trademark Office and the United States Register of Copyrights, and (ii) the appropriate offices and agencies of foreign jurisdictions reasonably requested by Agent at any time to evidence, perfect, maintain, record or enforce Lender Group’s security interest in the IP Collateral or otherwise in furtherance of the provisions of this Agreement.  Each Borrower hereby authorizes Agent to execute and file one or more financing statements (and any similar documents) or copies thereof or of this Agreement with respect to the IP Collateral signed only by Agent (with a copy sent to the applicable Borrower).

                                                (f)            In the event that either Borrower, either itself or through any subsidiary, affiliate, agent, employee, licensee or designee, shall file an application for the registration of any trademark with the United States Patent and Trademark Office, or any similar office of the United States or in any office of the Secretary of State (or equivalent) of any state

thereof, or for the registration of any copyright with the United States Register of Copyrights, or for the registration of any Trademark or Copyright in any similar office or agency of any country or political subdivision thereof throughout the world, or shall obtain registration of any Trademark or Copyright previously applied for, or shall adopt, acquire or obtain rights to any new trademark, or work for which a copyright application has been or is expected to be filed, the applicable Borrower shall (i) inform Agent of any such event or action in annual reports which Borrowers are required to deliver to Agent pursuant to the Loan Agreement and, (ii) execute and deliver any and all assignments, agreements, instruments, documents and papers as are necessary or appropriate or as Agent may reasonably request to evidence Lender Group’s security interest in such Trademark, or Copyright and the goodwill and general intangibles of Borrowers relating thereto or represented thereby.   Each Borrower hereby constitutes Agent, or its agent, its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are indefeasibly paid in full.  Each Borrower authorizes the amendment of the schedules hereto to include any future Trademark, or Copyright registrations or applications which may be acquired or made by such Borrower.

                                                (g)           Each Borrower has the authority, right and power to enter into this Agreement and to perform its terms and to grant the security interest herein granted, and has not entered and will not enter into any oral or written agreements which would prevent such Borrower from complying with the terms hereof, provided, however, each Borrower may enter into or maintain in effect such license agreements with respect to the IP Collateral as such Borrower believes in its reasonable business judgment are in the best interest of such Borrower’s business.  The IP Collateral is not, to either Borrower’s knowledge, now, and at all times will not be, subject to any liens (other than “Permitted Liens”), charges, mortgages, assignments, security interests, claims, shop rights, covenants not to sue third persons, or encumbrances of any nature whatsoever, except in favor of Agent, for the benefit of the Lender Group; provided, however, each Borrower may enter into such non-exclusive license agreements with respect to the IP Collateral as such Borrower believes in its reasonable business judgment are in the best interest of such Borrower’s business.  To the best knowledge of each Borrower, none of the IP Collateral is subject to any claims of any other party, except as may be indicated on Schedules A, B and C to this Agreement.

                                                (h)           Except for Permitted Liens and to the extent that Agent, upon prior written notice from Borrowers, shall consent, no Borrower will assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or lien upon, encumber, grant an exclusive license, or otherwise dispose of any of the IP Collateral except as permitted herein, and nothing in this Agreement shall be deemed a consent by Agent to any such action except as expressly permitted herein.

                                                (i)            As of the date hereof no Borrower has any Trademarks, Patent Collateral or Copyrights registered, or which are the subject of any pending trademark or copyright application, in the United States Patent and Trademark Office, or any similar office of the United States or in any office of the Secretary of State (or equivalent) of any state thereof, or the United States Register of Copyrights, or in any similar office or agency of any country or

political subdivision thereof throughout the world, other than those identified in Schedules A, B and C hereto.

                                                (j)            Each Borrower will in its business judgment take commercially reasonable steps in any proceeding before the United States Patent and Trademark Office, United States Register of Copyrights or similar office or agency of the United States or 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, to maintain each trademark or copyright registration application and registration of the IP Collateral, including, without limitation, filing of renewals, extensions, affidavits of use and incontestability, and opposition, interference and cancellation proceedings.  Each Borrower shall notify Agent promptly in writing if any registration application or registration relating to any IP Collateral may become abandoned or dedicated or subject to an adverse final determination in any proceeding in the United States Patent and Trademark Office or United States Register of Copyrights or in any similar office or agency of any country or political subdivision thereof throughout the world or in any court regarding such Borrower’s ownership of such Patent Collateral or Trademark, its right to register same, or to keep or maintain the validity of same.

                                                (k)           In the event that any Borrower acquires actual knowledge that any Trademark, Patent Collateral or Copyright is infringed, misappropriated or diluted by a third party, such Borrower shall promptly sue for infringement, misappropriation and/or dilution and to obtain injunctive relief and recover damages therefor, unless such Borrower shall determine in its reasonable business judgment that such suit is not in the best interest of such Borrower’s business, and the applicable Borrower shall take such other actions reasonably required to protect such Trademark, Patent Collateral or Copyright as such Borrower shall deem appropriate in its reasonable business judgment under the circumstances.  Upon and during the continuance of an Event of Default, Agent shall have the right, but in no way shall be obligated, to bring suit in its own name to enforce the Trademarks, Patent Collateral and Copyrights and any licenses thereunder, in which event the applicable Borrower shall, at the request of Agent, do any and all lawful acts requested by Agent and execute any and all documents required by Agent to aid such enforcement, and the applicable Borrower shall, upon demand, promptly reimburse and indemnify Lender Group for all costs and expenses incurred in such enforcement.

                                2.             Upon the occurrence and during the continuance of an Event of Default, Agent may, except with respect to the Excluded Intellectual Property and except to the extent otherwise expressly provided or required below, do any one or more of the following, all of which are authorized by each Borrower, in addition to all other rights and remedies provided for in the Loan Documents, all such rights and remedies being cumulative, not exclusive, and enforceable alternatively, successively or concurrently, without (except as provided herein or in the other Loan Documents) notice to, or consent by, either Borrower:

                                                (a)           Agent may (without assuming any obligations or liability thereunder), at any time, enforce (and shall have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of the applicable Borrower in, to and under any one or more license agreements with respect to the IP Collateral, and take or refrain from taking any action under any thereof, and each Borrower hereby releases Lender Group from, and agrees

to hold Lender Group free and harmless from and against any claims arising out of, any action taken or omitted to be taken with respect to any such license agreement;

                                                (b)           Agent, for the benefit of the Lender Group, may, at any time and from time to time, upon ten (10) days’ prior notice to Borrowers, assign, sell, or otherwise dispose of the IP Collateral or any of it, either with or without special or other conditions or stipulations, with power to buy the IP Collateral or any part of it, and do all other acts and things for completing the assignment, sale or disposition which Agent shall, in its sole discretion, deem appropriate or proper;

                                                (c)           In addition to the foregoing, in order to implement the assignment, sale, license or other disposal of any of the IP Collateral pursuant to subparagraphs 2(b) hereof, Agent may, at any time, pursuant to the authority granted in the Powers of Attorney described in paragraph 3 hereof (such authority becoming effective upon an Event of Default), execute and deliver on behalf of any Borrower one or more instruments of assignment sale, license or other disposition of the IP Collateral.  Each Borrower agrees to pay when due all reasonable costs incurred in any such transfer of the IP Collateral, including any taxes, fees and reasonable attorneys’ fees, and all such costs shall be added to the Obligations.  Agent may apply the proceeds actually received from any such license, assignment, sale or other disposition in accordance with paragraph (d) of this Section 2; and each Borrower shall remain liable and will pay Agent on demand any deficiency remaining, together with interest thereon at a rate equal to the rate then payable on the Obligations and the balance of any expenses unpaid.  Nothing herein contained shall be construed as requiring Agent to take any such action at any time; and

                                                (d)           Except as otherwise herein expressly provided, the proceeds of any collection, sale or other realization of all or any part of the IP Collateral pursuant hereto, shall be applied to the Obligations until the Obligations shall have been paid in full in cash.  The application of proceeds hereunder to the Obligations shall be made pro-rata to the holders of such Obligations based on the aggregate outstanding principal amount of such Obligations held by such holders or as otherwise provided in the Loan Agreement.

                                3.             The following documents will be concurrently executed and delivered to Agent as conditions precedent to the execution and delivery of this Agreement:

                                                (a)           Three original Powers of Attorney,  in the form of Exhibit A, Exhibit B, and Exhibit C hereto, respectively, executed by Borrowers, for the implementation of any assignment, sale or other disposition of the Trademarks, Patent Collateral or Copyrights, respectively, pursuant to paragraphs 2(a) and (b) hereof;

                                                (b)           An opinion from Brobeck, Phleger & Harrison, LLP in form and substance satisfactory to Agent.

                                4.             No provision hereof shall be modified, altered or limited except by a written instrument expressly referring to this Agreement and executed by the party to be charged.  The execution and delivery of this Agreement has been properly authorized by the board of directors of each Borrower and by any necessary vote or consent of stockholders thereof.  This

Agreement shall be binding upon the successors, permitted assigns or other legal representatives of each Borrower, and shall, together with the rights and remedies of the Lender Group hereunder inure to the benefit of the Lender Group, its successors, permitted assigns or other legal representatives.  This Agreement, the Obligations and the IP Collateral, except for the Excluded Intellectual Property, shall be governed in all respects by the laws of the United States and the laws of the State of California.  If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby.  The obligations of Borrowers hereunder are joint and several.

                                5.             This Agreement shall continue to be effective and shall be reinstated in the event that at any time after the Obligations have been paid in full, any payment of the Obligations is rescinded or must otherwise be restored or returned by the Lender Group.

                                6.             Upon payment and performance in full in cash by Borrowers of all of the Obligations (other than indemnification obligations for which no claim has been made) and upon the termination of the Loan Agreement, this Agreement shall terminate and Agent shall execute, file and record in each office in which any financing statement or assignment relative to the IP Collateral, or any part thereof, shall have been filed, a termination statement, assignment or other appropriate instrument releasing its interest therein, all without recourse to or warranty by the Lender Group and at the sole cost and expense of the Borrowers.

                                7.             This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart.

                                IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered on the day and year first above written.

SILICON GRAPHICS, INC.,

a Delaware corporation

By:  /s/  Jean Furter

Its:   Vice President and Treasurer

SILICON GRAPHICS FEDERAL, INC.,

a Delaware corporation

By:  /s/  Jeffrey Zellmer

Its:  Vice President

FOOTHILL CAPITAL CORPORATION,

a California corporation, as Agent and as a Lender

FOOTHILL CAPITAL CORPORATION,

a California corporation, as Agent and as a Lender

By:   /s/  Teresa M. Bolick

Its:    Vice President

EX-10.17

Exhibit 10.17

LOAN AGREEMENT

(Kinsen Shohi Taishaku Keiyaku Shosho)

LOAN AGREEMENT, dated as of November 9, 2001, made by SILICON GRAPHICS, INC., a Delaware corporation (“SGI-US”), and SILICON GRAPHICS WORLD TRADE B.V., a private limited company incorporated in the Netherlands (“SGI-BV”), in favor of SGI JAPAN, LTD, a Japanese corporation (“Lender”).  SGI-US and SGI-BV are referred to herein individually as a “Borrower” and collectively as the “Borrowers”.

RECITALS

A.            WHEREAS, Lender has made advances to the Borrowers or their Affiliates and all of the obligations relating to the repayment of such advances have been assumed by the Borrowers, and Lender and the Borrowers desire to enter into this Agreement to evidence the amounts owing by the Borrowers to Lender and to set forth the terms of repayment and other applicable terms and conditions.

B.            WHEREAS, SGI-BV is the record and beneficial owner of 40% of the issued and outstanding capital stock of Lender, and pursuant to the Pledge Agreement dated the date hereof (the “Pledge Agreement”) by SGI-BV for the benefit of Lender and NEC Corporation (“NEC”), SGI-BV, in its capacity as pledgor thereunder (“Pledgor”) is pledging all of its ownership interest in the shares of capital stock of Lender to Lender and to NEC as collateral security for the obligations of the Borrowers under this Agreement and the obligations of Pledgor and the Borrowers in respect of a Buyback Event under the Stockholders’ Agreement, dated as of the date hereof (the “Stockholders’ Agreement”) by and among the Borrowers, Lender, Silicon Graphics World Trade Corporation, NEC and NEC Soft (“NEC Soft”).

NOW, THEREFORE, in consideration of the premises, the Borrowers hereby agree with Lender, as follows:

1.             The Loan

The Borrowers hereby acknowledge their joint and several obligation to pay to Lender an amount determined as set forth on Schedule 1 attached hereto (the “Loan”), together with interest thereon as provided herein, and all other amounts payable to Lender from time to time hereunder.

2.             Repayment

The Borrowers jointly and severally agree to repay the entire principal amount of the Loan in accordance with the amortization schedule set forth on Schedule 2 attached hereto (the “Amortization Schedule”) or, if any payment date set forth on the Amortization Schedule is not a Business Day, on the next succeeding Business Day to occur after such payment date; provided, however, that the entire unpaid principal balance of the Loan shall be due and payable in full on the Maturity Date.  Notwithstanding anything herein to the contrary, the entire unpaid principal balance of the Loan, and any accrued and unpaid interest thereon, shall be immediately

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due and payable upon the earlier to occur of (i) the Maturity Date and (ii) the acceleration of the Loan pursuant to Section 8 hereof.  As used herein, “Maturity Date” means December 31, 2004.

3.             Interest

(a)           The principal amount of the Loan remaining unpaid from time to time shall bear interest (i) from the date hereof until the Interim Period End Date, at a rate of two and seven one-hundredths percent (2.07%) per annum (the “Interim Interest Rate”) and (ii) from the Interim Period End Date, until paid in full, at a rate of ten percent (10%) per annum (the “Interest Rate”).  All interest on this Loan shall be calculated on the basis of a 365 day year and the actual number of days elapsed.  Accrued interest on all amounts outstanding hereunder shall be payable on each March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2002 or, if any such date is not a Business Day, on the next succeeding Business Day to occur after such date.  The Borrowers agree to pay all outstanding amounts of interest on the Maturity Date.

(b)           If an Event of Default shall occur, then, in lieu of interest payable under Section 3(a), interest shall accrue on the unpaid principal amount of the Loan and, to the extent permitted by law, on any other amount due under this Agreement, from and including the date such Event of Default occurred until such Event of Default is cured or waived in writing by Lender or all past due payments are made, at a rate per annum equal to two percent (2%) per annum above the Applicable Interest Rate.  Accrued interest payable under this Section 3(b) shall be payable on demand of Lender.

(c)           Notwithstanding anything herein to the contrary, the interest payable by the Borrowers with respect to the Loan shall not exceed the maximum amount permitted by applicable law and, to the extent that any payments in excess of such permitted amount are received by Lender, such excess shall be considered payments in respect of the principal amount of the Loan.

4.             Payments

Principal amount of the Loan and interest hereunder shall be payable to Lender without set-off or counterclaim in lawful money of Japan in immediately available funds to the bank account of Lender as notified in writing to the Borrowers.

5.             Prepayment

(a)           At their option, the Borrowers may prepay the Loan together with accrued and unpaid interest thereon in whole or in part at any time (the “Optional Redemption”).  If the Borrowers exercise such Optional Redemption, there shall be no prepayment penalty or premium.  Unless otherwise agreed by the Borrowers, all prepayments shall be applied to reduce scheduled payments of the principal amount of the Loan in order of stated maturity.

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(b)           The Borrowers shall prepay the Loan in full together with all accrued and unpaid interest thereon prior to or concurrently with the consummation of any SGI Change of Control (as defined in the Stockholders’ Agreement).

(c)           Any amounts required to be paid by Borrowers pursuant to Borrowers’ guarantee of the Existing Loans shall be deemed to be a prepayment on the Loan pursuant to this Section 5.  In addition, so long as Borrowers’ guarantee of the Existing Loans remains in effect, Borrowers may elect, upon written notice to Lender, to effect prepayments under Section 5(a) or 5(b) by making a prepayment in respect of the Existing Loans directly to the lenders under the Existing Loans (the “Bank Lenders”); provided, that prepayments are then permitted pursuant to the terms of the Existing Loans, and subject to the condition that concurrently with any such prepayment to the Bank Lenders, Borrowers shall pay to the Bank Lenders the full amount of any penalties or other charges payable in connection with such prepayment (it being understood that the amount of any such penalties or charges shall be excluded from the calculation of the amount to be applied in prepayment of the principal of and interest on the Loan).

6.             Representations and Warranties

The Borrowers hereby jointly and severally represent and warrant to Lender as follows:

(a)           Organization; Power and Authority.  Each Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate power and lawful authority to own, lease and operate its properties and to carry on its business as now being and heretofore conducted.  Each Borrower is duly qualified or otherwise authorized to transact business and is in good standing under the laws of all other jurisdictions that require such qualification or authorization, except where the failure to so qualify or be authorized could not reasonably be expected to have a Material Adverse Effect.

(b)           Authorization, etc.  Such Borrower has all necessary corporate power and authority required to enter into, execute and deliver this Agreement and to perform fully such Borrower’s obligations hereunder.  This Agreement has been duly authorized by all necessary corporate action on the part of each Borrower, and constitutes a legal, valid and binding obligation of such Borrower enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally.

(c)           Compliance with Laws, Other Instruments, etc.  The execution, delivery and performance by each Borrower of this Agreement will not (i) violate any provision of the Certificate or Articles of Incorporation or other material organizational instruments of such Borrower, (ii) require such Borrower to obtain any consent, approval, authorization or action of, or make any filing with or give any notice to, any Governmental Authority or any other Person, other than consents, approvals, authorizations or actions already obtained or taken (iii) violate, conflict with or result in the breach of any of the terms and conditions of, result in a material modification of the effect of, or otherwise cause the termination or give any contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default

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under, any material contract, agreement, indenture, note, bond, loan, instrument, lease, conditional sale contract, mortgage, license, franchise, commitment or other binding arrangement to which such Borrower is a party or by or to which such Borrower or any of its properties is or may be bound or subject, or result in the creation of any Lien upon any of the properties of such Borrower, (iv), violate any order, judgment, injunction, award, decree or ruling of any nature of any Governmental Authority, or any law, statute, code, ordinance, regulation or other requirement of any Governmental Authority, applicable to such Borrower.

7.             Covenants

In addition to the other undertakings herein contained, the Borrowers hereby covenant to Lender that so long as any amount payable hereunder is outstanding the Borrowers shall perform the following obligations:

(a)           Compliance with Law.  Each Borrower will comply with all laws, ordinances or governmental rules or regulations to which it is subject, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(b)           Existence.  Each Borrower shall at all times preserve and keep in full force and effect its corporate existence.

(c)           Information.  The Borrowers shall deliver to Lender:

(i)            if and when filed and within 5 days of filing, Form 10-Q quarterly reports, Form 10-K annual reports, Form 8-K current reports or comparable annual or periodic reports and any other filings made by either Borrower with the U.S. Securities and Exchange Commission or comparable regulatory body of any other jurisdiction;

(ii)           any other information that is provided by either Borrower to its shareholders generally, promptly upon delivery;

(iii)          as soon as either Borrower has knowledge of any event or condition that constitutes an Event of Default hereunder or a default or event of default under the Foothill Loan and Security Agreement or other agreement evidencing, securing or otherwise relating to Indebtedness of either Borrower in an amount exceeding $25 million, notice thereof and a statement of the curative action that the Borrowers propose to take with respect thereto; and

(iv)          Upon request of Lender, any other report reasonably requested relating to the financial condition of either Borrower.

(d)           Additional Indebtedness.  SGI-US shall not create, incur, assume, permit, guarantee or otherwise become or remain, directly or indirectly, liable with respect to any

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Indebtedness or permit any Subsidiary to do the same, except such Indebtedness the amount of which does not, in the aggregate, exceed $414,983,000; provided, that with respect to Indebtedness outstanding on the date hereof and denominated in non-U.S. currency, any increase in the dollar value of such Indebtedness that is attributable to currency exchange fluctuations shall be excluded for the purpose of this provision.

(e)           Liens.  SGI-US shall not create, incur, assume, permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, or permit any Subsidiary to do the same except: (i) Liens under the Foothill Loan Documents and any refinancings, renewals or extensions thereof; (b) any Lien of a type that is expressly permitted by the terms of the Foothill Loan Documents or, if the Foothill Loan Documents are refinanced, renewed or extended, by the terms of such refinancing, renewal or extension thereof (in each case, without regard to any waiver of such terms by the lenders); and (c) if the Foothill Loan Documents or any refinancing, renewal or extension thereof terminate and are no longer in effect, any Lien of a type that would have been permitted if created during the effectiveness of the Foothill Loan Documents or such refinancing, renewal or extension.

(f)            Reorganization, Recapitalization, Reclassification, Liquidation.  SGI-US shall not and shall not permit SGI-BV to (i) enter into any reorganization or recapitalization, except for transactions that do not materially diminish Lender’s rights and protections under this Agreement, and that do not result in a deterioration in the credit quality of the Borrowers taken as a whole or expose the Lender to additional credit risk, (ii) reclassify its capital stock other than pursuant to the terms thereof, or (iii) liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution).

(g)           Distributions.  Neither SGI-US nor (unless SGI-BV is at the time a direct or indirect wholly owned subsidiary of SGI-US) SGI-BV shall make any distribution or declare and pay any dividends (in cash or other property, other than common stock and other than the distribution to shareholders of interests in SGI’s Alias/Wavefront business) on, or purchase, acquire, redeem or retire any of such Borrower’s capital stock, of any class, whether now or hereafter outstanding.

(h)           Further Documents.  Each Borrower shall execute all such other documents and instruments and do all such other acts and things as Lender may from time to time reasonably require to carry out the transactions contemplated herein.

8.             Events of Default

Except upon the occurrence of an event under (d), (e) or (g) below, whereupon the Loan and all accrued and unpaid interest thereon shall become immediately due and payable without notice or declaration by Lender, Lender may, by written notice to the Borrowers, declare the Loan immediately due and payable, whereupon the Loan, all accrued and unpaid interest thereon, and all other sums due hereunder shall become immediately due and payable without protest, presentment, demand or notice (except the notice referred to above in this Section 8) or without petition to any court, all of which are expressly waived by the Borrowers, if any of the following events (each an “Event of Default”) shall occur:

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(a)           principal amount of the Loan or interest due under this Agreement shall not be paid as and when due, whether at maturity, by acceleration or otherwise; or

(b)           any representation by the Borrowers herein or by Pledgor in the Pledge Agreement shall prove to be false or incorrect in any material respect as of the date made; or

(c)           Either Borrower shall default in any material respect in the due performance of any term or covenant of this Agreement or Pledgor shall default in any material respect in the due performance of any term or covenant of the Pledge Agreement (which is not the subject of another subsection of this Section 8) which default, if remediable, shall continue unremedied for a period of thirty (30) days after the earlier of (i) the day an officer of either Borrower or Pledgor obtains actual knowledge of such default, and (ii) the day Lender gives written notice of such default to the Borrowers (any such written notice to be identified as a “notice of default” and to refer specifically to this paragraph (c) of this Section 8); or

(d)           Either Borrower shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator for itself or any of its assets or properties, (ii) admit in writing its inability to pay its debts as they mature, (iii) make a general assignment for the benefit of creditors, (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or any answer admitting the material allegations of a petition filed against it in any proceeding under any such law or action shall be taken by Borrower for the purpose of effecting any of the foregoing, (v) have commenced against it any case, proceeding or other action of a nature described in (i) through (iv) above which remains undismissed for a period of sixty (60) days, (vi) be adjudicated a bankrupt or insolvent, including by entry of an order in any case, proceeding or other action of a nature described in (i) through (iv) above or (vii) take or be subject to any action similar to those specified in clauses (i) through (vi) in any jurisdiction; or

(e)           an order, judgment or decree shall be entered with respect to either Borrower or all or a substantial part of the assets of such Borrower, appointing a receiver, trustee or liquidator of such Borrower, or any similar order, judgment or decree shall be entered or appointment made in any jurisdiction, and such order, judgment or decree or appointment shall continue unstayed and in effect for a period of sixty (60) days; or

(f)            a final judgment or judgments for the payment of money aggregating in excess of US$25,000,000 are rendered against either Borrower and which judgments are not, within sixty (60) days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; or

(g)           (i) either Borrower shall fail to pay when due, or within any applicable period of grace, any payment in respect of any obligation for borrowed money or other Indebtedness in an amount greater than $25 million, or (ii) any Indebtedness of such Borrower in an amount greater than $25 million shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof.

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(h)           this Agreement or the Pledge Agreement shall for any reason, fail or cease to create a valid and perfected, first priority Lien on and security interest in and to the Collateral.

(i)            any material provision of this Agreement or the Pledge Agreement shall at any time for any reason be declared null and void, or the validity or enforceability thereof shall be contested by the Borrowers in a proceeding commenced by either Borrower, or by any Governmental Authority having jurisdiction over either Borrower, seeking to establish the invalidity or unenforceability thereof.

9.             Application of Payments

Each payment or prepayment received by Lender hereunder, except as expressly set forth herein, shall be applied, first, to the payment of accrued interest on the Loan to the date of such payment and second, to the payment of the principal amount of the Loan.

10.          Additional Definitions

As used herein, the following terms have the respective meanings set forth below:

“Affiliate” or “Affiliates” means, with respect to any Person, at any time, any other Person that, directly or indirectly through one or more intermediaries controls, or is controlled by or is under common control with such Person.  For the purpose of this definition, “control” (including the terms “controlling”, “controlled by” and “under common control with”), as used with respect to any Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract, agency or otherwise.

“Applicable Interest Rate” means, prior to the Interim Period End Date, the Interim Interest Rate and, after the Interim Period End Date, the Interest Rate.

“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in Tokyo, Japan or the City of New York are authorized or required by law or executive order to close.

“Existing Loans” means the loans made pursuant to (i) the Banking Transaction Contract, dated February 21, 1992, between Sumitomo Mitsui Banking Corporation (as the successor to The Sumitomo Bank, Limited) and Lender and (ii) the Loan Agreement, dated December 20, 1996, between The Dai-Ichi Kangyo Bank, Ltd. and Lender.

“Foothill Loan and Security Agreement” means the Loan and Security Agreement, dated as of April 10, 2001, by and among SGI-US, each of SGI-US’s subsidiaries signatory thereto, the lenders party thereto, Foothill Capital Corporation, as arranger and administrative agent, and Bank of America, N.A., as documentation agent.

“Foothill Loan Documents” means the Foothill Loan and Security Agreement and the other Loan Documents referred to therein, as the same may be supplemented, amended or otherwise modified from time to time.

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“GAAP” means generally accepted accounting principles as in effect from time to time in the United States, consistently applied.

“Governmental Authority” means the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

“Indebtedness” of a Borrower means (a) all obligations of such Borrower for borrowed money, including pursuant to the Foothill Loan Documents and any refinancings, renewals or extensions thereof, (b) all obligations of such Borrower evidenced by bonds, debentures, notes or other similar instruments and all reimbursement or other obligations of such Borrower in respect of letters of credit (other than letters of credit issued in connection with transactions in the ordinary course of such Borrower’s business), bankers acceptances, interest rate swaps or other financial products, (c) all obligations of such Borrower under any lease that is required to be capitalized for financial reporting purposes under GAAP, (d) all obligations or liabilities of others secured by a Lien on any asset of such Borrower, irrespective of whether such obligation or liability is assumed, (e) all obligations of such Borrower for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of such Borrowers’ business and repayable in accordance with customary trade practices), and (f) any obligation of a Borrower guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse to such Borrower) any obligation of any other Person.

“Interim Period End Date” means the earlier to occur of (i) the effective date of any refinancing or extension of the Existing Loans and (ii) December 20, 2001.

“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, statutory or other lien, charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any financing lease having substantially the same economic effect as any of the foregoing).

“Material Adverse Effect” means a material adverse effect on (a) the properties, business, results of operations or financial condition of either Borrower or (b) the ability of either Borrower to perform its obligations under this Agreement and the Pledge Agreement, or (c) the validity or enforceability of this Agreement and the Pledge Agreement.

“Person” means any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Authority or other entity.

“Stock Purchase Agreement” means the Stock Purchase Agreement dated as of October 26, 2001, among the Borrowers, Silicon Graphics World Trade Corporation, NEC Corporation and NEC Soft, Ltd.

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“Subsidiary” means, with respect to any Person, a corporation or other entity in which such Person directly or indirectly owns or has the power to vote shares of any capital stock or other ownership interests having the power to elect a majority of the directors (or other persons performing similar functions) of such corporation or other entity.

11.          Unconditional Obligations

Except as expressly set forth herein, the obligations of the Borrowers hereunder are unconditional and no reference to any other document or agreement herein is intended or shall be deemed to render the Borrowers’ obligations hereunder conditional.  The illegality or unenforceability of, or the default by any party under, any other document or agreement referred to herein shall not constitute a defense to any claim by Lender for the payment of principal, interest or any other amount hereunder.

12.          Modification in Event of Extension of Existing Loans

From and after the date hereof, SGI-US shall use commercially reasonable efforts to negotiate an extension of the term of the Existing Loans for a period beyond the current due date of December 20, 2001 until at least December 20, 2004, without the provision of a guarantee or other form of credit support from NEC or any of its Affiliates.  If SGI-US is able to obtain such an extension on terms and conditions reasonably satisfactory to Lender and NEC, and without the provision of a guarantee or other form of credit support from NEC or any of its Affiliates, then the terms and conditions of this Agreement shall be amended to correspond, as nearly as practicable, to the terms and conditions of such extension (including provisions as to maturity, interest rate and payment, defaults and events of default, representations and warranties and covenants); provided, however, that (1) the Maturity Date will in no event be extended beyond December 20, 2006, and (2) the obligations of Lender hereunder shall continue to be secured by the Collateral (as defined in the Pledge Agreement) pursuant to the terms of the Pledge Agreement, subject only to such modifications thereto as Lender and NEC may in their discretion agree.

13.          Further Payment by Lender

If the Existing Loans are extended beyond December 20, 2001, unless and until SGI-US is relieved of its obligation to guarantee the entire amount of the Existing Loans in connection with or following such extension, then:

(a)           if the initial principal amount of the Loan is less than ¥6 billion, the Lender will, on or before February 28, 2002, to the extent it is able to do so under the terms of the Existing Loans, as extended, without incurring any prepayment penalties or other charges, make a payment under the Existing Loans so that, after such payment, the principal balance outstanding under the Existing Loans will, at such time, be no greater than the principal balance outstanding under the Loan; provided, that the Lender shall have no obligation to make the payment contemplated under this Section 13(a) if, in the Lender’s reasonable judgment, the working capital reserves of the Lender after such payment would be inadequate; and

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(b)           At any time that the Borrowers (i) make a scheduled payment of the principal amount outstanding under the Loan pursuant to Section 2 or (ii) make a prepayment of the principal amount outstanding under the Loan pursuant to Section 5(a) or (b), the Lender will, to the extent it is able to do so under the terms of the Existing Loans, as extended, without incurring any prepayment penalties or other charges, make a payment under the Existing Loans so that, after such payment, the principal amount outstanding under the Existing Loans will, at such time, be no greater than the principal amount outstanding under the Loan; provided, that the Lender shall not be required to make any payment under the Existing Loans pursuant to this Section 13(b) in excess of the amount of the prepayment received from the Borrowers.

14.          Indemnification

The Borrowers shall jointly and severally pay, indemnify, and hold Lender harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including attorneys’ fees and expenses) or disbursements of any kind or nature whatsoever (“Losses”) arising out of or in connection with (a) the enforcement of any rights of Lender under this Agreement or the Pledge Agreement, and (b) any claim (whether or not asserted in any legal proceeding), litigation, investigation, arbitration or proceeding relating to this Agreement or the Pledge Agreement (collectively, “indemnified liabilities”); provided, that the Borrowers shall have no obligation hereunder to Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of Lender.  The agreements in this section shall survive for twenty-four (24) months after repayment of the Loan and all other amounts payable hereunder.

15.          Severability

If any provision or any portion of any provision of this Agreement shall be held invalid or unenforceable, the validity and enforceability of the remaining portion of such provision and the remaining provisions of this Agreement, and the application thereof to any other Person or circumstance, shall not be affected thereby.

16.          Governing Law

This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of Japan.

17.          Submission to Jurisdiction

The parties hereby irrevocably submit to the exclusive jurisdiction of the Tokyo District Court in any action or proceeding arising out of or relating to this Agreement, and each party hereto hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such court.  Each party hereby irrevocably waives, to the fullest extent that it may legally do so, the defense of an inconvenient forum to the maintenance of such action or proceeding.  Each party irrevocably consents to the service of any and all process in any action or proceeding by the mailing or delivery of copies of such process to it at the office of such party set forth for notices hereunder.  Each party agrees that a final judgment in any such

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action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

18.          Delay, Amendment and Waiver

(a)           Lender shall not by any act (except by a written instrument signed by Lender), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof.  No failure to exercise, nor any delay in exercising, on the part of Lender, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy.  A waiver by Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Lender would otherwise have on any future occasion.  The remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any  remedies that may be available to Lender at law, in equity or otherwise.

(b)           Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective only if it is made or given in writing and signed by each of the parties hereto. Any such amendment, supplement, modification, waiver or consent shall be binding upon the parties hereto.

19.          Notices

All notices and other communications pursuant to this Agreement shall be delivered personally, delivered by facsimile or air-mailed by certified or registered mail, postage prepaid, return receipt requested, to the parties, their successors in interest or their assignees at the following address or at such other addresses as the parties may designate by written notice in the manner as aforesaid:

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If to the Borrowers, to:

Silicon Graphics, Inc.
1600 Amphitheatre Parkway
Mountain View, CA 94043-1351
Telephone:  +1 (650) 933-3009
Facsimile:  +1 (650) 933-0298
Attention: Sandra Escher, Senior Vice President 
                 and General Counsel

with a copy to:

Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, CA 94025
Telephone: +1 (650) 752-2003
Facsimile:  +1 (650) 752-2112
Attention:

If to Lender, to:

SGI Japan, Ltd.
Yebisu Garden Place Tower
4-20-3 Ebisu Shibuya-ku
Tokyo 150-6031, Japan
Telephone:  +81 (3) 5488-7300
Facsimile:  +81 (3) 5420-7020
Attention:  Norio Izumi, President

with a copy to:

SGI Japan, Ltd.
Yebisu Garden Place Tower
4-20-3 Ebisu Shibuya-ku
Tokyo 150–6031, Japan
Telephone:  +81 (3) 5488-6996
Facsimile:  +81 (3) 5420-1867
Attention:  Hisao Hattori, Legal Manager

A notice shall be deemed given when delivered, in the case of personal delivery or delivery by facsimile, or seven (7) Business Days after mailing in the manner prescribed herein.

20.          Entire Agreement

This Agreement and the Exhibits hereto contain the entire agreement among the parties hereto regarding the matters described herein and supersede all previous and contemporaneous

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oral and written discussions and all prior agreements and understandings among the parties regarding such matters.

21.          Specific Performance

Without limiting the rights of each party hereto to pursue all other legal and equitable rights available to such party for the other party’s failure perform its obligations under this Agreement, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure.

22.          Successors and Assigns

This Agreement shall be binding upon Borrower and its successors and permitted assigns  and shall inure to the benefit of Lender and its successors and assigns.  Neither Borrower may assign this Agreement or any of its rights or obligations hereunder without the prior written consent of Lender.  Lender may sell, assign or transfer this Agreement or any of its rights hereunder to NEC or any of its Affiliates without any requirement of consent by the Borrowers.

23.          Counterparts

                This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.

24.          Expenses

Except as otherwise specifically provided herein, the parties to this agreement shall bear their respective expenses incurred in connection with the negotiation, preparation, execution and performance of this Agreement, including all fees and expenses of agents, representatives, counsel and accountants.

25.          Descriptive Headings

The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered on the date first written above.

BORROWERS:
SILICON GRAPHICS, INC.
By	/s/  JEFFREY V. ZELLMER
	Name:  Jeffrey V. Zellmer
	Title:  Sr. Vice President and Chief Financial Officer
SILICON GRAPHICS WORLD TRADE B.V.
By	/s/  SANDRA ESCHER
	Name:  Sandra Escher
	Title:  Sr. Vice President and General Counsel
LENDER:
SGI JAPAN, LTD.
By	/s/  NORIO IZUMI
	Name:  Norio Izumi
	Title:  President

Schedule 1

Principal Amount of the Loan

The principal amount of the Loan shall be an amount equal to the lesser of (1) ¥6 billion and (2)  the amount of Advanced Payments appearing on the Closing Cash/Debt Statement (as defined in the Stock Purchase Agreement).

Schedule 2¹

Amortization Schedule

Payment Date	Payment Amount
March 31, 2002	¥0
June 30, 2002	¥0
September 30, 2002	¥301,400,533
December 31, 2002	¥500,000,000
March 31, 2003	¥500,000,000
June 30, 2003	¥500,000,000
September 30, 2003	¥500,000,000
December 31, 2003	¥500,000,000
March 31, 2004	¥500,000,000
June 30, 2004	¥500,000,000
September 30, 2004	¥500,000,000
December 31, 2004	¥500,000,000

¹ Subject to adjustment pursuant to Section 7.7(c) of the Stock Purchase Agreement upon completion of all closing adjustments contemplated by Section 2.3 of  the Stock Purchase Agreement.

This Amortization Schedule is hereby accepted and agreed on this ___ day of ____, 2001 by each of the following:

BORROWERS:
SILICON GRAPHICS, INC.
By
	Name:
	Title:
SILICON GRAPHICS WORLD TRADE B.V.
By
	Name:
	Title:
LENDER:
SGI JAPAN, LTD.
By
	Name:
	Title:

PLEDGE AGREEMENT

PLEDGE AGREEMENT, dated as of November 9, 2001, made by SILICON GRAPHICS WORLD TRADE B.V., a private limited company incorporated in the Netherlands (“Pledgor”), in favor of SGI JAPAN, LTD., a Japanese corporation (“Lender”), and NEC Corporation, a Japanese corporation (“NEC”).  Lender and NEC are sometimes referred to herein individually as a “Pledgee” and together as the “Pledgees.”

RECITALS

A.            WHEREAS, Lender has made advances to Pledgor and Silicon Graphics, Inc. (“SGI-US” and, together with Pledgor, the “Borrowers”) or their Affiliates and all of the obligations relating to the repayment of such advances have been assumed by the Borrowers, and Lender and the Borrowers have entered into a Loan Agreement dated as of the date hereof (the “Loan Agreement”) to evidence the amounts owing by the Borrowers to Lender.

B.            WHEREAS, pursuant to the Stock Purchase Agreement dated as of October 26, 2001 (“Stock Purchase Agreement”) by and among NEC, NEC Soft, Ltd. (“NEC Soft”), the Borrowers and Silicon Graphics World Trade Corporation (“SGWTC”), NEC and NEC Soft have purchased from Pledgor shares of capital stock of Lender representing in the aggregate 60% of the outstanding capital stock of Lender.

C.            WHEREAS, Pledgor is the legal and beneficial owner of 40% of the issued and outstanding capital stock of Lender.

D.            WHEREAS, pursuant to a Stockholders’ Agreement dated as of the date hereof (the “Stockholders’ Agreement”) by and among the Borrowers, Lender, SGWTC, NEC and NEC Soft, Pledgor has agreed that Lender and/or NEC (or NEC’s designee) shall have the right, upon the occurrence of a Buyback Event (as defined herein), to purchase all of the Pledged Stock (as defined herein) on the terms and conditions described in the Stockholders’ Agreement.

E.             WHEREAS, it is a condition precedent to the consummation of the transactions contemplated by the Stock Purchase Agreement that the Borrowers shall have entered into the Stockholders’ Agreement, that the Borrowers shall have executed and delivered the Loan Agreement, and that Pledgor shall have secured payment of Borrowers’ obligations to Lender under the Loan Agreement and the obligations of the SGI Entities (as defined herein) under the Stockholders’ Agreement in respect of a Buyback Event by executing this Agreement.

F.             WHEREAS, Pledgor is an indirect wholly-owned subsidiary of SGI-US, and it is to the advantage of Pledgor that Lender and NEC consummate the transactions contemplated by the Stock Purchase Agreement, the Stockholders’ Agreement and the Loan Agreement.

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G.            WHEREAS, Pledgor is the legal and beneficial owner of the shares of Pledged Stock (as hereinafter defined).

NOW, THEREFORE, in consideration of the premises, Pledgor hereby agrees with the Pledgees, as follows:

AGREEMENT

1.             Definitions

1.1           Defined Terms.

(a)           Unless otherwise defined herein, terms defined in the Loan Agreement and used herein shall have the meanings given to them in the Loan Agreement.

(b)           The following terms shall have the following meanings:

“Agreement” means this Pledge Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

“Appraiser” means an internationally recognized investment banking firm that is experienced in the valuation of corporations in Japan engaged in the business conducted by Lender.

“Borrowers’ Loan Obligations” means the unpaid principal and interest on the Loan and all other present and future obligations and liabilities (whether for principal, interest, indemnities, fees, expenses or otherwise) of the Borrowers under the Loan Agreement (including, without limitation, interest accruing at the then applicable rate provided in the Loan Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to either Borrower whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether due or to become due, mature or unmatured, liquidated or unliquidated, or contingent or noncontingent.

“Buyback Event” means a Buyback Event as such term is defined in the Stockholders’ Agreement.

“Collateral” means the Pledged Stock and all Proceeds.

“Collateral Account” means any account established to hold money Proceeds, maintained under the sole dominion and control of NEC for the benefit of the Pledgees, subject to application by NEC only as provided in Section 4(b).

“Event of Default” means an Event of Default as such term is defined in the Loan Agreement.

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“Governmental Authority” shall mean the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

“Issuer” means Lender in its capacity as the issuer of the Pledged Stock.

“Obligations” means (1) all of the Borrowers’ Loan Obligations and (2) the obligations of Pledgor to transfer the Pledged Stock to Lender and/or to NEC (or NEC’s designee) upon the occurrence of a Buyback Event in accordance with the terms and subject to the conditions set forth in the Stockholders’ Agreement.

“Person” means any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Authority or other entity.

“Pledged Stock” means all shares of capital stock of Issuer owned by Pledgor, including the shares of capital stock of Issuer listed on Schedule 1 hereto, together with all stock certificates, options or rights of any nature whatsoever that may be issued or granted by Issuer to Pledgor in respect of the Pledged Stock while this Agreement is in effect.

“Proceeds” means all property (a) acquired upon the sale, lease, license, exchange or other disposition of the Pledged Stock, (b) collected on, or distributed on account of, the Pledged Stock, and (c) consisting of any claims, rights or insurance proceeds arising out of the Pledged Stock; and Proceeds shall, in any event, include, without limitation, all dividends or other income from the Pledged Stock, collections thereon or distributions with respect thereto.

“Secured Obligations” means the collective reference to (1) the Obligations and (2) all obligations and liabilities of Pledgor which may arise under or in connection with this Agreement, whether on account of reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to Lender that are required to be paid by Pledgor pursuant to the terms of this Agreement).

“SGI Entities” means the SGI Entities as such term is defined in the Stockholders’ Agreement.

(c)           The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and paragraph references are to this Agreement unless otherwise specified.

(d)           The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

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2.             Grant of Pledge

Pledgor hereby grants to the Pledgees first priority pledges (shichi-ken) in the Collateral (including the Pledged Stock), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations and hereby delivers to NEC the share certificates representing all the Pledged Stock, which NEC shall hold on behalf of the Pledgees.

3.             Representations and Warranties

Pledgor represents and warrants that:

(a)           Pledgor’s exact legal name and jurisdiction of organization are as set forth on page one hereof.  Pledgor has the power and authority and the legal right to execute and deliver, to perform its obligations under, and to grant the pledges in the Collateral pursuant to, this Agreement and has taken all necessary action to authorize its execution, delivery and performance of, and grant of the pledges in the Collateral pursuant to, this Agreement.

(b)           This Agreement constitutes a legal, valid and binding obligation of Pledgor, enforceable in accordance with its terms, and upon delivery to NEC of the stock certificates evidencing the Pledged Stock, the pledges created pursuant to this Agreement will constitute valid, first priority pledges in the Collateral, enforceable in accordance with its terms against all creditors of Pledgor and any Persons purporting to purchase any Collateral from Pledgor.

(c)           The execution, delivery and performance of this Agreement will not violate any provision of any requirement of law or any contractual obligation of, applicable to or binding on Pledgor and will not result in the creation or imposition of any Lien on any of the properties or revenues of Pledgor pursuant to any such requirement of law or contractual obligation, except the pledges created by this Agreement.

(d)           No consent or authorization of, filing with, or other act by or in respect of, any arbitrator, court or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of Pledgor), is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement.

(e)           No litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or, to the knowledge of Pledgor, threatened by or against Pledgor or against any of its properties or revenues with respect to this Agreement or any of the transactions contemplated hereby.

(f)            All the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable.

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(g)           Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Stock, free of any and all Liens or options in favor of, or claims of, any other Person, except the pledges created by this Agreement.

4.             Covenants

Pledgor covenants and agrees with the Pledgees from and after the date of this Agreement until this Agreement is terminated and the pledges created hereby are released:

(a)           If Pledgor shall, as a result of its ownership of its Pledged Stock or otherwise, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, Pledgor shall accept the same as the agent of the Pledgees, hold the same in trust for the Pledgees and deliver the same forthwith to NEC on behalf of the Pledgees in the exact form received, duly endorsed by Pledgor to NEC, if required, and if NEC so requests, to be held by NEC, on behalf of the Pledgees, subject to the terms hereof, as additional collateral security for the Secured Obligations.  Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of Issuer shall be paid over to NEC to be held by it hereunder for the benefit of the Pledgees as additional collateral security for the Secured Obligations, and in case any distribution of capital shall be made on or in respect of any Pledged Stock or any property shall be distributed upon or with respect to any Pledged Stock pursuant to the recapitalization or reclassification of the capital of Issuer or pursuant to the reorganization thereof, the property so distributed shall, subject to Section 10(b), be delivered to NEC to be held by it hereunder for the benefit of the Pledgees as additional collateral security for the Secured Obligations.  Subject to Section 10(b), if any sums of money or property so paid or distributed in respect of any Pledged Stock shall be received by Pledgor, Pledgor shall, until such money or property is paid or delivered to NEC on behalf of the Pledgees, hold such money or property in trust for the Pledgees, segregated from other funds of Pledgor, as additional collateral security for the Secured Obligations.

(b)           All money Proceeds received by NEC hereunder shall be held by NEC in a Collateral Account for the benefit of the Pledgees, and while so held shall continue to be held as collateral security for all the Secured Obligations, until applied in accordance with the following provisions of this Section 4(b).  All money Proceeds received by NEC and deposited in a Collateral Account as provided herein, and all money Proceeds received by Pledgor and held in trust for Pledgees, shall promptly be applied to the prepayment of the principal amount of the Loan as provided in Section 5(a) of the Loan Agreement, unless an Event of Default has occurred or is continuing, in which case the provisions of Section 6(b) of this Agreement shall apply.

(c)           Without the prior written consent of NEC on behalf of the Pledgees, Pledgor will not (1) sell, assign, transfer, exchange, or otherwise dispose of, or

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grant any option with respect to, the Collateral, (2) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the pledges created by this Agreement or (3) enter into any agreement or undertaking restricting the right or ability of Pledgor or any Pledgee to sell, assign or transfer any of the Collateral.

(d)           Pledgor shall maintain the pledges created by this Agreement as first priority pledges and shall defend such pledges against claims and demands of all Persons whomsoever.  At any time and from time to time, upon the written request of NEC on behalf of the Pledgees, and at the sole expense of Pledgor, Pledgor shall promptly and duly execute and deliver such further instruments and documents and take such further actions as NEC may reasonably request for the purposes of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted.  If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to NEC for the benefit of the Pledgees, duly endorsed in a manner satisfactory to the Pledgees, to be held as Collateral pursuant to this Agreement.

(e)           Pledgor shall pay, and save each Pledgee harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.

5.             Cash Dividends; Voting Rights

Unless an Event of Default shall have occurred and is continuing, Pledgor shall be permitted to receive all cash dividends paid in the normal course of business of Issuer in respect of the Pledged Stock and Pledgor shall be permitted to exercise all voting and corporate rights with respect to the Pledged Stock; provided, however, that no vote shall be cast or corporate right exercised or other action taken which would be inconsistent with or result in any violation of any provision of this Agreement or the Loan Agreement or the Stockholders’ Agreement.

6.             Remedies for Event of Default

(a)           If an Event of Default shall have occurred and is continuing, (i) NEC on behalf of the Pledgees shall have the right to receive any and all cash dividends paid in respect of any of the Pledged Stock and make application thereof to the Secured Obligations in such order as NEC may determine and (ii) any shares of the Pledged Stock may, at NEC’s election, be registered in the name of NEC or its nominee, and NEC or its nominee, on behalf of the Pledgees, may thereafter exercise (1) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of shareholders of Issuer or otherwise and (2) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the

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right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of Issuer, or upon the exercise by Pledgor or the Pledgees of any right, privilege or option pertaining to such shares of the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as NEC on behalf of the Pledgees may determine), all without liability except to account for property actually received by it.  However, no Pledgee shall have any duty to Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.

(b)           If an Event of Default shall have occurred, at the election of NEC on behalf of Lender, Lender may apply all or any part of Proceeds held in any Collateral Account in payment of the obligations of  Pledgees under this Agreement and the Loan Agreement, as provided in Section 6(d) below.

(c)           If an Event of Default shall have occurred, NEC may, on behalf of Lender, exercise, in addition to all other rights and remedies granted in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of Lender.  Without limiting the generality of the foregoing, NEC on behalf of Lender, without demand, presentment, protest, advertisement or notice of any kind (except any notice required by law) to or upon Pledgor or any other Person, may in such circumstances collect, receive, appropriate and realize upon all or any of the Collateral, and/or may sell, assign, give option or options to purchase or otherwise dispose of and deliver all or any of the Collateral (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-ounter market, at any exchange, broker’s board or office of NEC or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk.  NEC shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Pledgor, which right or equity is hereby waived or released.  Pledgor recognizes that Lender may be unable to effect a public sale of any or all of the Pledged Stock, by reason of certain prohibitions contained in applicable securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a limited group of purchasers.

(d)           The Proceeds and the proceeds of any such collection, recovery, receipt, appropriation, realization or sale of any of the Collateral by NEC pursuant to the terms hereof after an Event of Default shall be applied as follows:

FIRST:  To the payment of the costs and expenses associated therewith, including the out-of-pocket expenses of NEC and the reasonable fees and out-of-pocket expenses of counsel employed by NEC in connection therewith;

SECOND:  To the payment of all amounts then owing to Lender under the Loan Agreement, in the order provided in the Loan Agreement;

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THIRD:  To the payment of all remaining amounts then owing to in respect of the Secured Obligations; and

FOURTH:  The balance (if any) of the proceeds shall be paid to the Pledgor or its successors or assigns.

7.             Realization Events

(a)           If Lender or NEC (on behalf of Lender), in the exercise of its rights and remedies hereunder, elects (i) to receive, appropriate or otherwise realize upon all or any of the Pledged Stock (a “Realization”) or (ii) to sell, assign or otherwise transfer and  deliver the Pledged Stock in one or more parcels at public or private sale or sales (a “Sale”), NEC (on behalf of Lender) shall first send a written notice to Pledgor (a “Proposal Notice”) that shall state: (i) the maximum number of shares subject to the Realization or Sale (each, a “Realization Event”) (the “Subject Shares”); and (ii) the purchase price per share proposed to be realized or paid for the Subject Shares (the “Proposed Realization Price”).

(b)           Within fifteen (15) days after delivery of the Proposal Notice pursuant to Section 7(a) (the “Request Period”), Pledgor shall have the right to request that the Fair Value (as hereinafter defined) of the Subject Shares be determined by an Appraiser in accordance with the procedure set forth in Section 7(c).  The right of Pledgor to request that a determination of Fair Value be made with respect to the Subject Shares under this Section 7(b) shall be exercisable by delivering written notice of the exercise thereof (a “Valuation Request Notice”) to each of Lender and NEC, prior to the expiration of the Request Period.  The failure of Pledgor to deliver notice to each of Lender and NEC within the Request Period shall be deemed to be a waiver of Pledgor’s rights under this Section 7(b); provided, that Pledgor may waive its rights under this Section 7(b) prior to the expiration of the Request Period by giving written notice to each of Lender and NEC.

(c)           If Pledgor delivers a Valuation Request Notice within the Request Period, and Lender or NEC (on behalf of Lender), elects to proceed with the Realization Event, NEC (on behalf of Lender) shall cause the Fair Value of the Subject Shares to be determined by an Appraiser (appointed pursuant to the provisions of Section 7(d)).  For purposes of this Section 7, the “Fair Value” of the Subject Shares means the fair market value of each Subject Share that would be paid by a willing buyer to a willing seller in an arms’ length negotiation, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of all relevant facts and taking into account all relevant circumstances and information, including Issuer’s historical operating results and reasonable good faith projections for future periods.  The Appraiser shall conduct its determination of Fair Value as promptly as practicable.

(d)           If Pledgor delivers a Valuation Request Notice within the Request Period, and Lender or NEC (on behalf of Lender), elects to proceed with the Realization Event, as soon as reasonably practicable following delivery of the Valuation Request Notice NEC (on behalf of Lender) shall, by delivery of written notice to Pledgor (the

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“Appraiser Notice”), propose three (3) potential Appraisers to Pledgor; provided, that any Person who has been engaged by NEC for any purpose during the one (1) year period preceding delivery of the Appraiser Notice shall not be proposed as a potential Appraiser by NEC.  Within ten (10) days of the delivery of the Appraiser Notice, Pledgor shall have the right, by written notice to each of Lender and NEC (the “Response Notice”), to choose one of the potential Appraisers proposed by NEC in the Appraiser Notice as the Appraiser to determine Fair Value of the Subject Shares.  If Pledgor fails to timely deliver a Response Notice, then NEC shall choose one of the potential Appraisers proposed by NEC in the Appraiser Notice as the Appraiser to determine Fair Value of the Subject Shares.  Notwithstanding the foregoing, NEC may deliver an Appraiser Notice at any time after its delivery of a Proposal Notice (including before Pledgor has delivered a Valuation Notice), in which case Pledgor shall be required to deliver its Response Notice within ten (10) days following the delivery by NEC of its Appraiser Notice, provided that Pledgor shall not be required to deliver its Response Notice unless and until it delivers a Valuation Request Notice.

(e)           Lender or NEC (on behalf of Lender), shall be entitled to proceed with the Realization Event; provided, that: (i) if Pledgor has delivered a Valuation Request Notice within the Request Period pursuant to Section 7(b), the price per share to be realized or paid is no less than the Fair Value thereof as determined by the Appraiser and the Realization Event is consummated (or, in the case of a Sale, such sale is made pursuant to a contract entered into) within one hundred eighty (180) days after the date on which Fair Value is determined; or (ii) if Pledgor does not exercise its right to request that a determination of Fair Value be made with respect to the Subject Shares under Section 7(b) within the Request Period, the price per share to be realized or paid is no less than the Proposed Realization Price and the Realization Event is consummated (or, in the case of a Sale, such Sale is made pursuant to a contract entered into) within one hundred eighty (180) days after the date of delivery by NEC of the Proposal Notice.

(f)            Pledgor shall be responsible for any fees and expenses of the Appraiser unless the Fair Value per share of the Pledged Stock determined by the Appraiser exceeds the Proposed Realization Price by an amount greater than five percent (5%) of the Proposed Realization Price, in which case Pledgor and Lender shall each pay one half of any fees and expenses of the Appraiser.  Unless Pledgor has paid, or provided adequate security or other assurances of payment satisfactory to NEC in respect of, the Appraiser’s fees and expenses for which it is responsible under this Section 7(f) prior to the consummation of the Realization Event, then NEC shall be entitled to deduct  the amount for which Pledgor is responsible from the aggregate price realized or received by Lender upon consummation of the Realization Event.

(g)           Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such Realization Event pursuant to this Section 7 valid and binding and in compliance with any and all other applicable requirements of law.  Pledgor further agrees that a breach of any of the covenants contained in this Section 7 will cause irreparable injury to the Pledgees, that the Pledgees have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 7 shall be specifically enforceable

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against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred.

(h)           Notwithstanding any other provision contained in this Agreement, this Section 7 shall not apply to any Realization Event if (i) the Issuer’s common stock is  publicly traded; and (ii) the purchase price per share realized or paid pursuant to such Realization Event, at the time of closing of the Realization or Sale (as the case may be), is not less than the 30-day average of the closing price of the Issuer’s common stock on the principal securities market on which such stock is traded.

8.             Remedies for Buyback Event

If a Buyback Event shall have occurred, Lender and/or NEC (or its designee) shall have the right to purchase the Pledged Stock then in possession of NEC, in accordance with the Stockholders’ Agreement.  Upon exercise of such right and payment for the Pledged Stock as provided in the Stockholders’ Agreement, Lender or NEC (or its designee), as applicable, (i) shall become the absolute owner of the Pledged Stock (which shall no longer be subject to the pledges created by this Agreement), without any further action on the part of Pledgor and (ii) shall be entitled to hold the share certificates representing the Pledged Stock as the owner thereof and to register its name as the owner of the Pledged Stock, and to enjoy all the rights and benefits of the owner of the Pledged Stock.

9.             Defenses of Pledgor

To the extent permitted by applicable law, Pledgor waives all defenses, claims, damages and demands it may acquire against the Pledgees or either of them arising out of the exercise by it of any rights hereunder.  If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 15 days before such sale or other disposition.

10.          Priority of Borrower’s Loan Obligations

(a)           As between NEC and Lender only, NEC and Lender agree that the Collateral shall secure all of the Secured Obligations; provided, that, in the event of the occurrence of a Buyback Event which occurrence also constitutes an Event of Default and shall entitle NEC and Lender to exercise their remedies hereunder, NEC and Lender agree that (i) the Borrowers’ Loan Obligations shall be entitled to a first priority security interest in the Collateral, superior and prior to the rights of NEC with respect thereto, which rights of NEC to any and all Collateral shall be subject to the prior interest of Lender; (ii) NEC shall not be entitled to purchase the Pledged Stock under the Stockholders’ Agreement and to receive in respect of the Secured Obligations held by it, any of the Proceeds or proceeds of any Collateral received as a result of the enforcement of rights pursuant to this Agreement until all Borrowers’ Loan Obligations have been paid in full; and (iii) Lender shall have sole and exclusive right to exercise the remedies set forth hereunder and to apply any Proceeds and proceeds received in repayment of the

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Borrowers’ Loan Obligations until the Borrower’s Loan Obligations have been paid in full.  This Section 10(a) shall apply unless NEC and Lender agree to a different priority, in which case the rights of NEC shall have such priorities and may be exercisable in any order NEC and Lender may agree.

(b)           In the event that all Borrowers’ Loan Obligations have been paid in full but the obligations of the SGI Entities under the Stockholders’ Agreement in respect of a Buyback Event are still outstanding, NEC shall pay the balance of all money Proceeds in the Collateral Account and shall deliver all other property held as Collateral other than the Pledged Stock to the Pledgor or its successors or assigns and, except for property consisting of the Pledged Stock, Pledgor shall no longer be required to hold money or property paid or distributed in respect of the Pledged Stock in trust for the Pledgees or pay or deliver such money or property to NEC on behalf of the Pledgees as required under Section 4(a).

11.          Irrevocable Authorization and Instruction to the Pledgees

Pledgor hereby authorizes and instructs Issuer to comply with any instruction received by it from NEC in writing without any other or further instructions from Pledgor, and Pledgor agrees that Issuer shall be fully protected in so complying.  Without limitation to the foregoing, Pledgor acknowledges that the Issuer shall comply with any instructions received from NEC for registration pursuant to Article 209 of the Commercial Code of Japan, and Issuer agrees to register NEC as pledgee of the shares of Pledged Stock in its register of shareholders and record NEC as pledgee on the share certificate representing such shares.

12.          No Subrogation

Notwithstanding anything to the contrary in this Agreement, Pledgor hereby irrevocably waives all rights which may have arisen in connection with this Agreement to be subrogated to any of the rights (whether contractual, under applicable laws or otherwise) of the Pledgees against Issuer, the Borrowers or against any collateral security or right of offset held by either of the Pledgees for the payment of Borrowers’ Loan Obligations.  Pledgor hereby further irrevocably waives all contractual, statutory or other rights of reimbursement, contribution, exoneration or indemnity (or any similar right) from or against Issuer, the Borrowers or any other Person which may have arisen in connection with this Agreement.  So long as Borrowers’ Loan Obligations remain outstanding, if any amount shall be paid by or on behalf of Issuer to Pledgor on account of any of the rights waived in this paragraph, such amount shall be held by Pledgor in trust, segregated from other funds of Pledgor, and shall, forthwith upon receipt by Pledgor, be turned over to NEC for the benefit of the Pledgees in the exact form received by Pledgor (duly indorsed by Pledgor to NEC, if required), to be applied against the Secured Obligations, whether matured or unmatured, in such order as NEC may determine.  The provisions of this paragraph shall survive the term of this Agreement and the payment in full of the Secured Obligations.

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13.          Amendments, etc. with respect to the Obligations; Waiver of Rights

The obligations of the Pledgor and the pledge of the Collateral hereunder shall remain in full force and effect without regard to, and shall not be impaired by (a) any exercise or nonexercise, or any waiver, by NEC on behalf of the Pledgees, or by any Pledgee, of any right, remedy, power or privilege under or in respect of any of the Obligations or any security thereof (including this Agreement); (b) any amendment to the Loan Agreement or the Stockholders’ Agreement or any of the Obligations or any instrument (other than this Agreement) securing any of the Obligations; or (c) the taking of additional security for, or any other assurances of payment or performance of, any of the Obligations or the release or discharge or termination of any security or other assurances of payment or performance for any of the Obligations; whether or not the Pledgor shall have notice or knowledge of any of the foregoing. The prior recourse by NEC on behalf of the Pledgees, or by any Pledgee, to any part or all of the Collateral shall not constitute a condition of any demand, suit or proceeding for payment or collection of any of the Obligations. Neither of the Pledgees shall have any obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Obligations or any property subject thereto.

14.          NEC’s Appointment as Attorney-in-fact

(a)           Effective upon the occurrence and during the continuance of an Event of Default and/or Buyback Event, Pledgor hereby irrevocably constitutes and appoints NEC and any officer or agent of NEC, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Pledgor and in the name of Pledgor or in NEC’s own name, from time to time in NEC’s discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, including, without limitation, any financing statements, endorsements, assignments or other instruments of transfer.

(b)           Pledgor hereby ratifies all that said attorneys shall lawfully do or cause to be done pursuant to the power of attorney granted in Section 14(a).  All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

15.          Duty of Pledgees

Each Pledgee’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession shall be to deal with it in the same manner as such Pledgee deals with similar securities and property for its own account, except that no Pledgee shall have any obligation to invest funds held in any Collateral Account and may hold the same as demand deposits.  None of the Pledgees, nor any of their respective respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under

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any obligation to sell or otherwise dispose of any Collateral upon the request of Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof.

16.          Independent Relationship

This Agreement is entered into solely for the purposes set forth in the Recitals above, and, except as is expressly provided otherwise herein, no party to this Agreement assumes any responsibility to any other party to advise such other party of information known to such party regarding the financial condition of the Pledgor or the Borrowers or regarding the Collateral or of any other circumstances bearing upon the risk of nonpayment of the obligations of the Pledgor to the parties hereto.  Each party shall be responsible for managing its relation with the Pledgor and no party shall be deemed the agent of any other party for any purpose.  Each Pledgee may alter, amend, supplement, release, discharge or otherwise modify any terms of its respective Obligations, without notice to or consent of the other.  Each Pledgee agrees for itself and its successors and assigns, not to contest in any proceeding the priority, validity or enforceability of the Liens held by a Pledgee in the Collateral or the Obligations or the provisions of this Agreement.

17.          Severability

If any provision or any portion of any provision of this Agreement shall be held invalid or unenforceable, the validity and enforceability of the remaining portion of such provision and the remaining provisions of this Agreement, and the application thereof to any other Person or circumstance, shall not be affected thereby.

18.          Governing Law

This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of Japan.

19.          Submission to Jurisdiction

The parties hereby irrevocably submit to the exclusive jurisdiction of the Tokyo District Court in any action or proceeding arising out of or relating to this Agreement. Each party hereby irrevocably waives, to the fullest extent that it may legally do so, the defense of an inconvenient forum to the maintenance of such action or proceeding.  Each party irrevocably consents to the service of any and all process in any action or proceeding by the mailing or delivery of copies of such process to it at the office of such party set forth for notices hereunder.  Each party agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

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20.          Delay, Amendment and Waiver

(a)           The Pledgees shall not by any act (except by a written instrument signed by the Pledgees), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof.  No failure to exercise, nor any delay in exercising, on the part of the Pledgees, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy.  A waiver by  the Pledgees of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Pledgees would otherwise have on any future occasion.  The remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any remedies that may be available to the Pledgees at law, in equity or otherwise.

(b)           Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective only if it is made or given in writing and signed by each of the parties hereto.  Any such amendment, supplement, modification, waiver or consent shall be binding upon the parties hereto.

21.          Notices

All notices and other communications pursuant to this Agreement shall be delivered personally, delivered by facsimile or air-mailed by certified or registered mail, postage prepaid, return receipt requested, to the parties, their successors in interest or their assignees at the following address or at such other addresses as the parties may designate by written notice in the manner as aforesaid:

If to the Pledgor, to:

Silicon Graphics World Trade B.V.
c/o Silicon Graphics, Inc.
1600 Amphitheatre Parkway
Mountain View, CA 94043-1351
USA
Telephone:      +1 (650) 933-3009
Facsimile:+1 (650) 933-0298
Attention:        Sandra Escher, Senior Vice President
and General Counsel

with a copy to:

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Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, CA 94025
USA
Telephone:      +1 (650) 752-2003
Facsimile:+1 (650) 752-2112
Attention:        William M. Kelly

If to the Pledgees, to:

NEC Corporation
7-1, Shiba 5-chome
Minato-ku, Tokyo 108-8001
Japan
Telephone:      +81 (3) 3798-6119
Facsimile:+81 (3) 3798-9564
Attention:        Kounosuke Kashima, Associate Senior
Manager Vice President and Executive General

and to:

SGI Japan, Ltd.
Yebisu Garden Place Tower
4-20-3 Ebisu Shibuya-ku
Tokyo 150-6031, Japan
Telephone:      +81 (3) 5488-7300
Facsimile:+81 (3) 5420-7020
Attention:        Norio Izumi, President

with copies to:

SGI Japan, Ltd.
Yebisu Garden Place Tower
4-20-3 Ebisu Shibuya-ku
Tokyo 150-6031, Japan
Telephone:      +81 (3) 5488-6996
Facsimile:+81 (3) 5420-1867
Attention:        Hisao Hattori, Legal Manager

and to:

Paul, Weiss, Rifkind, Wharton & Garrison
2-2, Uchisaiwai-cho 2-chome
Chiyoda-ku, Tokyo 100-0011
Telephone:      +81 (3) 3597-8101

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Facsimile:+81 (3) 3597-8120
Attention:        Lisa Yano

A notice shall be deemed given when delivered, in the case of personal delivery or delivery by facsimile, or seven (7) business days after mailing in the manner prescribed herein.

22.          Entire Agreement

This Agreement and the Exhibits hereto contain the entire agreement among the parties hereto regarding the matters described herein and supersede all previous and contemporaneous oral and written discussions and all prior agreements and understandings among the parties regarding such matters.

23.          Specific Performance

Without limiting the rights of each party hereto to pursue all other legal and equitable rights available to such party for the other party’s failure perform its obligations under this Agreement, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure.

24.          Successors and Assigns

This Agreement shall be binding upon Pledgor and its successors and permitted assigns and shall inure to the benefit of the Pledgees and their respective successors and assigns.  Pledgor may not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of NEC on behalf of the Pledgees. The Pledgees may sell, assign or transfer this Agreement or any of their respective rights hereunder without any requirement of consent by Pledgor.

25.          Counterparts

This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.

26.          Expenses

Except as otherwise specifically provided herein, the parties to this agreement shall bear their respective expenses incurred in connection with the negotiation, preparation, execution and performance of this Agreement, including all fees and expenses of agents, representatives, counsel and accountants.

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27.          Descriptive Headings

The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

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IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written.

PLEDGOR:
SILICON GRAPHICS WORLD
TRADE B.V.
By:	/s/  SANDRA ESCHER
	Name:  Sandra Escher
	Title:  Sr. Vice President and General Counsel
PLEDGEES:
SGI JAPAN, LTD
By:	/s/  NORIO IZUMI
	Name:  Norio Izuma
	Title:  President
NEC CORPORATION
By:	/s/  TAKASHI MIMURA
	Name:  Takashi Mimura
	Title:  Department Manager
	Company Planning Department
	Company Planning Office

SCHEDULE 1

TO PLEDGE AGREEMENT

DESCRIPTION OF PLEDGED STOCK

Class of Stock	Certificate Number	Number of shares
Common stock	H001	3,260,000

EX-10.18

Exhibit 10.18

April 25, 2001

Warren Pratt

[address omitted]

SGI

1600 Amphitheatre Pkwy.

Mountain View,

CA 94043-1389

Tel 650.960.1980

Robert R. Bishop

Chairman and CEO

Dear Warren:

The purpose of this letter is to modify the supplemental payment arrangement entered into in May 2000.

You will be entitled to receive forgivable loans of up to an aggregate of $5 million from SGI in four annual advances according to the schedule and terms set forth below if you remain continuously employed by SGI through the applicable dates.  The loan advance schedule will be:

May 15, 2001         $2 million

May 15, 2002         $1 million

May 15, 2003         $1 million

May 15, 2004         $1 million

Interest will not accrue on the loans.  To the extent that in any year interest is imputed to you in respect of the loans under the Internal Revenue Code or other income tax laws, SGI will, as promptly as practicable after December 31 of such year, make an additional payment to you equal to [a] the interest imputed to you as a result of the loans for that year plus the tax payable on payments under this paragraph, minus [b] the net after-tax income you have received with respect to that year with respect to the principal amount of the loans; it being agreed that, while you shall invest the funds in bank or money market or similar conservative investments and shall provide SGI with sufficient information to make a reasonable accounting, you shall not be required to segregate these funds from other investments.

At the Measurement Date, the Adjustment Balance will be calculated.  If you are an active employee in good standing on May 15, 2005, the loan will be settled based on the Adjustment Balance.  If your employment with SGI is terminated at any time on or prior to May 15, 2005 [i] by SGI [or any designated responsible person or entity acting on behalf of SGI or its assets] other than for Cause, [ii] by you for Good Reason or [iii] as a result of death or Disability, the

April 25, 2001

Page 2

loan will be settled based on the Adjustment Balance.  In the event of a Change in Control of SGI, the loan will be settled based on the Adjustment Balance.  Absent a Change in Control, you will not be entitled to any additional advances or any forgiveness of the outstanding loan amount if you terminate your employment with SGI prior to May 15, 2005 voluntarily other than for Good Reason or SGI terminates your employment on or prior to May 15, 2005 for Cause.

For the purpose of this agreement:

“Cause” means 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 with willful dishonesty 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.  No act, or failure to act, by you will be considered “willful” if done, or omitted to be done, by you in good faith and in your reasonable belief that your act or omission was in the best interests of SGI or required by applicable law.

“Change in Control” has the meaning set forth in the employment continuation agreement between you and SGI dated as of May 8, 2000.

“Disability” means a physical or mental illness or injury that, as determined by SGI in good faith, continuously prevents you from performing your duties with SGI for a period of six months prior to termination.

“Fair Market Value” will mean the closing price of SGI’s common stock on the relevant date [or if that day is not a trading day on the New York Stock Exchange, the immediately prior trading day].  In the event of a Change in Control, “Fair Market Value” will mean the consideration paid per share of SGI’s common stock in the Change in Control transaction.

“Good Reason” for your voluntary resignation from SGI means your resignation

[1]as a result of the assignment to you of duties or responsibilities that are inconsistent with the role of a senior executive of SGI,

[2]as a result of a fundamental disagreement with the Board of Directors, the Chief Executive Officer or the President regarding corporate strategy,

April 25, 2001

Page 3

[3]upon the occurrence of an Insolvency Event; provided that if the Insolvency Event is a Chapter 11 case, whether it is commenced voluntarily or involuntarily, your resignation occurs not less than 6 months following the commencement of such Chapter 11 Case and not more than 6 months after a plan of reorganization is confirmed by the Bankruptcy Court,

[4]as a result of SGI’s failure to advance a loan installment or other payment to be made hereunder within 15 days following the scheduled date,  or

[5]as a result of the occurrence of one or more of the following events, unless such event[s] apply generally to all senior officers of SGI:

[a]without your express written consent, the substantial reduction, without good business reasons, of the facilities and perquisite [including office space and location] available to you,

[b]a reduction by SGI of your salary or annual incentive bonus compensation formula as currently in effect,

[c]a material reduction by SGI in the kind or level of employee benefits to which you are currently entitled with the result that your overall benefits package is significantly reduced, or the taking of any action by SGI which would materially and adversely affect your participation in any plan, program or policy generally applicable to executives or employees of SGI [including but not limited to paid vacation days], or

[d]Without your consent, SGI’s requiring you to be based [i] anywhere other than your present location, except for required travel on SGI’s business to an extent substantially consistent with your present business travel obligations, or [ii] at a location more than 25 miles from your present location.

“Insolvency Event” means [i] a receiver, trustee, liquidator or custodian is appointed on behalf of SGI or a substantial part of its property, [ii] SGI makes a general assignment for the benefit of its creditors, [iii] SGI is dissolved or liquidated in full or in part, or [iv] a case or other proceeding seeking liquidation, reorganization or other relief with respect to SGI or its debts is commenced under any bankruptcy, insolvency or other similar law now or hereafter in effect.

“Measurement Period” means the period that begins May 15, 2000 and ends on the date [the “Measurement Date”] that is the first to occur of the termination date of your employment, a Change in Control, or May 15, 2005.

April 25, 2001

Page 4

The loan will be forgiven and/or be repaid at the Measurement Date based on an Adjustment Balance determined as follows:

B = X–[Y + Z], where

B is the Adjustment Balance;

X is $1 million for the period from May 15, 2000 through May 14, 2001, then $2 million from May 15, 2001 through May 14, 2002, then $3 million from May 15, 2002 through May 14, 2003, then $4 million from May 15, 2003 through May 14, 2004, and $5 million from May 15, 2004 until May 15, 2005;

Y is the sum of all payments received or to be received by you in connection with a change in control of SGI as defined in the employment continuation agreement between you and SGI; and

Z is the total value of vested stock options and restricted stock held or sold during the Measurement Period, whether granted before or after the date of this agreement, and including the MIPS Technologies shares issued as a dividend on SGI restricted stock in June 2000.  In computing such total value, the value of any particular option or share of restricted stock [other than the MIPS shares] will be equal to the difference between the exercise price, if any, and the highest of the following:

[a]the per share proceeds of sale of shares sold by you prior to the Measurement Date;

[b]the Fair Market Value on the Measurement Date [or in the case of options that expire during the Measurement Period, the expiration date] of options or shares [whether or not exercised or sold] that were vested at any time during the Measurement Period.  If on the Measurement Date you are not able to exercise and sell your vested options or shares due to insider trading or other restrictions established by SGI, the Measurement Date will be extended to the nearest future date that you are able to exercise your options and sell your shares; and

[c]$12.00, in the case of vested shares or options held during a period of ten consecutive trading days on which you were free to sell shares under SGI’s insider trading policy and the Fair Market Value was $12.00 or greater.

April 25, 2001

Page 5

Upon vesting of restricted stock, you are authorized to have SGI cancel shares equal to the amount of taxes SGI is required to withhold and these shares will be valued at their Fair Market Value on the cancellation date for the calculation of “Z”.

The MIPS shares received as a dividend on SGI restricted stock will be valued at their actual gross sale price per share or, if not sold prior to the Measurement Date, at their Fair Market Value on the Measurement Date.

If during the Measurement Period, there occurs with respect to SGI’s Common Stock any forward or reverse stock split, or any dividend payable in Common Stock of SGI, or any distribution to SGI stockholders of cash or securities, then the calculation of the total value of restricted stock and stock options shall be adjusted in a manner determined by the Compensation Committee of the SGI Board of Directors in order to appropriately reflect the impact of such events.

If the Adjustment Balance is positive at the Measurement Date, you agree to repay the loan in an amount equal to [Y + Z].  The remaining balance of the loan will be deemed to be forgiven as of the repayment date upon your delivery to SGI of a release satisfactory in form to SGI releasing SGI and its officers, directors, and affiliates from all claims and liabilities that might otherwise arise from or be asserted with respect to your employment at SGI or the termination thereof.  The forgiveness of the loan will be reported as income to you for that tax year.  If the Adjustment Balance is negative at the Measurement Date, you will repay the loan in full.

Other than in the event of a Change in Control, SGI will give you a written calculation of the Adjustment Balance within 10 days after a Measurement Date and to the extent the Adjustment Balance indicates the loan is to be repaid, the repayment will be due within 30 days.  The repayment will be made in cash unless SGI, in its sole discretion, offers you the option of tendering shares or vested options in satisfaction of the obligation.  In the event of any dispute regarding the circumstances of your termination, the repayment date will be extended by the time periods set out in the next paragraph.  In the event of a Measurement Date resulting from a Change in Control, the written calculation of the Adjustment Balance will be delivered at the earlier of 10 days following the termination of your employment or within three months if you continue to be employed by SGI or its successor following the Change in Control.  If a Measurement Date occurs as a result of a Change in Control prior to May 15, 2004, and if you continue to be employed by SGI or its successor for more than three months following the Change in Control [or through the date of a scheduled loan advance, if earlier], then you and SGI or its successor will negotiate a successor agreement that will be intended to provide you with economic benefits no less favorable than what would have occurred under this agreement if such Change in Control had not occurred.  The successor agreement will, at a minimum, provide for the annual loan advances contemplated by this agreement and will guarantee that

April 25, 2001

Page 6

you realize supplemental compensation [compensation in addition to your salary, bonus, benefits and perquisites] on an annual basis in the amount of the loan advances so long as you continue to be employed on the terms described in this agreement through May 15, 2005.  The guaranteed supplemental compensation can be realized in the form of a return on your equity position with the successor company, through loan forgiveness, or through other cash payments.  With regard to this supplemental compensation, you will have no obligation to the successor company beyond May 15, 2005.

Unless you provide written notification of your intention to resign for Good Reason 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 Good Reason 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 Good Reason for purposes of this agreement.  To dispute a termination by the Company or any failure to make payments claimed to be due hereunder you must give written notice of such dispute to the Company within 30 days after receiving a notice of termination, or within 30 days after the date on which a payment claimed by you to be due hereunder was due to be made, as the case may be.

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.

April 25, 2001

Page 7

SGI will 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 SGI’s obligations under this agreement.

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.

This Agreement 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.  This Agreement restates our prior agreements to reflect amendments through October 5, 2001 and is made effective in its entirety as of April 25, 2001.  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,

Robert R. Bishop

Chairman and Chief Executive Officer

ACCEPTED AND AGREED TO AS OF

THE DATE FIRST SET FORTH ABOVE:

/s/  WARREN PRATT

Warren Pratt

EX-10.19

Exhibit 10.19

AMENDED AND RESTATED PROMISSORY NOTE

SECURED BY DEED OF TRUST

AND STOCK PLEDGE AGREEMENT

(Amended as of April 25, 2001)

NOTICE:  THIS PROMISSORY NOTE PROVIDES FOR A BALLOON PAYMENT.

$250,000.00	Mountain View, California
	September 27, 2000

For value received, the undersigned, WARREN C. PRATT (“Employee”) and ELIZABETH PRATT (collectively, “Borrower”) jointly and severally promise to pay to SILICON GRAPHICS, INC., a Delaware corporation (“SGI”), or order, at 1600 Amphitheatre Pkwy. Mountain View, California 94043, or such other place as SGI may designate in writing from time to time, in lawful money of the United States of America, without abatement, demand, deduction, setoff or counterclaim (except as provided in Paragraph 5), the principal sum of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00), together with interest thereon at the rate of six and seventy-five hundredths percent (6.75%) per annum, compounded annually, from the date first set forth above (“Effective Date”) until all principal, interest and other charges under this Promissory note are paid in full.

1.             Payments.  All outstanding principal and accrued interest under this Promissory note shall be due and payable on the Due Date (as defined below).  Interest shall be computed based upon a three hundred sixty (360) day year and thirty (30) day month.  Every payment received by SGI with respect to this Promissory note shall be applied as follows: first, to the payment of any late charges; second, to the payment of accrued but unpaid interest; and, third, to the payment of the outstanding principal balance of this Promissory Note.  Notwithstanding the foregoing, outstanding principal and accrued interest under this Promissory Note shall be due and payable prior to the Due Date to the extent of fifty percent (50%) of the sales proceeds payable to Borrower in connection with the sale of any Shares (as defined below); provided, however, if SGI’s employment of Employee shall terminate or cease for any reason, whether voluntary or involuntary, and whether with or without cause, or if Borrower shall be in default hereunder, outstanding principal and accrued interest under this Promissory Note shall be due and payable prior to the Due Date to the extent of one hundred percent (100%) of these proceeds payable to Borrower in connection with the sale of any such Shares.  In no event shall the preceding sentence be deemed a limit of SGI’s recourse or Borrower’s liability under this Promissory Note.  Borrower may prepay the principal amount outstanding under this Promissory Note in whole or in part at any time without penalty.

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2.             Due Date.  The “Due Date” shall be the earlier of (i) thirty (30) days after the date of termination or cessation of SGI’s employment of Employee, whether voluntarily or involuntarily, and whether with or without cause, (ii) the date that Borrower sells, leases, transfers or otherwise conveys all or any interest in the New Residence (as defined below), or (iii) the fifth (5th) anniversary of the date first set forth above.

3.             Purpose of Loan.  Borrower acknowledges and agrees that SGI is making this loan to Borrower for the express purpose of facilitating Employee’s relocation to the area of SGI’s corporate headquarters located in Mountain View, California.  Borrower represents and warrants to SGI that Borrower will use all proceeds of this Promissory Note for purposes of purchasing Borrower’s new principal residence located at (address omitted) (“New Residence”).

4.             Default.  In the event that Borrower fails to timely pay any amount or perform any other obligation of Borrower under this Promissory Note, the Deed of Trust (as defined below), the Pledge Agreement (as defined below), that certain Promissory  Note of even date herewith in the principal sum of $250,000.00 or any other agreement or instrument now or hereafter executed by Borrower to evidence or secure the performance of Borrower’s obligations thereunder, SGI may, at its option, declare the entire principal sum under this Promissory Note immediately due and payable.  In the event that SGI exercises this option, or the principal balance of this Promissory Note otherwise becomes due and payable, all principal then outstanding under this Promissory Note shall thereafter bear simple interest at the lesser of ten percent (10%) per annum or the maximum rate permitted by law.  Failure to exercise this option shall not constitute a waiver of SGI’s right to exercise the same with respect to any prior or subsequent defaults.

5.             Right to Offset.  Borrower will have the right to deduct or offset from or against amounts payable by Borrower to SGI under this Promissory Note (1) amounts due but not yet paid by SGI to Borrower under the letter agreement between Borrower and SGI dated April 25, 2001, relating to forgiveable loan advances in an aggregate amount of up to $5,000,000, or (2) to the extent not paid by SGI when due, the amount of the tax gross-up to be provided by SGI under paragraph 9 of the Promissory Note for a forgiveable loan in the principal amount of $500,000 dated September 27, 2000 and amended as of April 25, 2001.

6.             Security.  Borrower’s obligations under this Promissory Note are secured by (i) that certain Deed of Trust with Assignment of Rents of even date herewith (“Deed of Trust”) encumbering the New Residence, as more particularly described in the Deed of Trust, and (ii) that certain Pledge Agreement of even date herewith (“Pledge Agreement”) encumbering Borrower’s right, title and interest in and to certain stock options and other pledged collateral, as more particularly described in the Pledge Agreement (“Pledged Collateral”).

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7.             Due on Sale.  The Deed of Trust provides as follows:

If the trustor shall sell, convey or alienate said property, or any part thereof, or any interest therein, or shall be divested of his title or any interest therein in any manner or way, whether voluntarily or involuntarily, without the written consent of the beneficiary being first had and obtained, beneficiary shall have the right, at its option, except as prohibited by law, to declare any indebtedness or obligations secured hereby, irrespective of the maturity date specified in any not evidencing the same, immediately due and payable.

8.             Attorneys’ Fees.  In the event any legal action or proceeding is required to enforce or interpret any provision of this Promissory Note, Borrower shall pay to SGI upon demand all costs of collection and reasonable attorneys’ fees incurred by SGI in connection therewith.

9.             Tax Liability.  Borrower understands and agrees that any and all income tax liability to Borrower resulting from this Promissory Note shall be the sole responsibility of Borrower.

10.           Miscellaneous.  If any provision of this Promissory Note shall be invalid or unenforceable for any reason, the same shall be ineffective, but the remainder of this Promissory Note shall not be affected thereby and shall remain in full force and effect. Time is of the essence of each and every obligation of Borrower hereunder.  Presentment and demand for payment, notice of dishonor, protest and notice of protest are hereby waived by Borrower.  If the due date for any payment under this Promissory Note falls on a Saturday, Sunday or legal holiday, then such due date shall be extended to the next business day.  None of the terms or provisions of this Promissory note may be waived, altered, modified or amended except by a writing signed by SGI and Borrower.  The provisions of this Promissory Note shall be governed by California law.  The covenants, terms and conditions hereof shall bind the heirs, successors and assigns of Borrower and shall insure to the benefit of the successors and assigns of SGI.

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IN WITNESS WHEREOF, Borrower has executed this Promissory Note as of the date first set forth above.

BORROWER:

/s/  WARREN C. PRATT

WARREN C. PRATT

/s/  ELIZABETH PRATT

ELIZABETH PRATT

Amendment Agreed and Accepted by SGI:

By:	/s/  SANDRA ESCHER
Sandra Escher
Senior Vice President and General Counsel

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EX-10.20

Exhibit 10.20

PLEDGE AGREEMENT

                This Pledge Agreement (“Agreement”) is made and entered into as of this 27th day of September, 2000 (“Effective Date”) by and between Silicon Graphics, Inc., a Delaware corporation (“SGI”), and WARREN C. PRATT (“Pledgor”).

                RECITALS

                A.            SGI has agreed to make a loan (“Loan”) to Pledgor in the original principal amount of Two Hundred Fifty Thousand Dollars and 00/100 ($250,000.00) pursuant to the terms of that certain promissory note of even date herewith.

                B.            SGI has granted or may hereafter grant to Pledgor certain stock options for the purchase of shares of common stock of SGI pursuant to the terms and conditions of that certain Incentive Stock Option Grant Agreement and/or Non-qualified Stock Option Agreement, as the same may be amended from time to time (collectively, “Option Agreement”).

                C.            Pledgor now desires to pledge all of its right, title and interest in and to the Pledged Collateral (as defined below) to SGI upon the terms and conditions set forth hereinbelow.

                NOW, THEREFORE, Pledgor hereby covenants and agrees as follows:

                1.             Pledge of Collateral.  Pledgor hereby pledges, assigns, grants and delivers to SGI a security interest in all of Pledgor’s right, title and interest in and to the Option Agreement, all options and shares of common stock of SGI now or hereafter issued or issuable to Pledgor thereunder (“Shares”) and all cash and non-cash proceeds and substitutions thereof (collectively, the “Pledged Collateral”) as security for the prompt performance of Pledgor’s obligations under the Loan.  Pledgor’s stock options under the Option Agreement as of the Effective Date are more particularly set forth in Exhibit A attached hereto.

                2.             Pledgor’s Covenants.  Pledgor hereby represents, warrants and covenants to SGI as follows:

                                (a)           The Pledged Collateral is free and clear of any security interests, liens, encumbrances or other interests other than this Agreement.

                                (b)           Pledgor has full power and authority to create a lien on the Pledged Collateral in favor of SGI and no disability or contractual obligation exists which would prohibit Pledgor from pledging the Pledged Collateral pursuant to this Agreement.

                                (c)           Pledgor shall not assign, create or permit to exist any other claim to, lien or encumbrance upon, or security interest in any of the Pledged Collateral, and

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shall not permit Pledgor’s rights in the Pledged Collateral to be reached by attachment, levy or other judicial process.

                                (d)           At SGI’s request, Pledgor shall execute and acknowledge such other documents and instruments which SGI deems necessary or desirable to evidence, continue or preserve SGI’s security interest in the Pledged Collateral and/or to otherwise effect any of the terms of this Agreement.

                The foregoing representations, warranties and covenants shall survive the termination of this Agreement.

                3.             Payment of Proceeds.

                                (a)  With regard to the Balloon Payment Note, fifty percent (50%) of all monies or other proceeds payable to Pledgor in connection with the sale or transfer of any Shares shall be applied first to the payment of principal, accrued interest and other charges then outstanding under the Balloon Note; provided, however, that if SGI’s employment of Employee shall terminate or cease for any reason, whether voluntary or involuntary, and whether with or without cause, or if Pledgor shall be in default hereunder, all monies or other proceeds payable to Pledgor in connection therewith shall be applied to the payment of principal, accrued interest and other charges then outstanding under the Balloon Note.  Upon Pledgor’s payment to SGI of all principal, accrued interest and other charges under the Loan, the security interest created under this Agreement shall automatically terminate, and SGI shall promptly deliver to Pledgor all remaining Shares then held by SGI.

                                (b)  With respect to the concurrent exercise and disposition of Shares by “Same Day Sale,” Pledgor shall instruct Pledgor’s stock broker (“Broker”) to pay directly to SGI from Broker’s account an amount equal to the lesser of (i) the gross proceeds from the sale of such Shares, less applicable commissions, to the extent payable by Pledgor pursuant to subparagraph (a) above or (ii) the amount of principal, accrued interest and other charges then outstanding under the Loan.  SGI shall have no obligation to deliver the Shares to Broker unless and until SGI receives written confirmation from Broker that the foregoing payment shall be promptly made by Broker to SGI.

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                                (c)  With respect to the exercise of Shares by “Cash Exercise,” the exercise price paid by Pledgor shall be applied to the payment of the exercise price for such Shares, the applicable shares of SGI’s common stock shall be issued and deemed delivered to Pledgor, and SGI shall retain possession of such shares until either (i) all principal, accrued interest and other charges under the Loan have been paid in full, in which event the security interest under this Agreement shall terminate as to all of the Shares, or (ii) the applicable proceeds from the sale of such Shares have been paid to SGI and applied to the payment of principal, accrued interest and other charges then outstanding under the Loan, in which event the security interest under this Agreement shall terminate as to such Shares sold by Pledgor.  If Pledgor desires to sell any such Shares, Pledgor shall instruct Broker to pay directly to SGI from Broker’s account an amount equal to the lesser of (i) the sales price of the Shares, less commissions, to the extent payable by Pledgor pursuant to subparagraph (a) above or (ii) the amount of principal, accrued interest and other charges then outstanding under the Loan.  SGI shall have no obligation to deliver the Shares to Pledgor or Broker unless and until SGI receives written confirmation from Broker that the foregoing payment shall be promptly made by Broker to SGI.

                                (d)  All instructions required to be submitted by Pledgor to Broker shall be irrevocable and in writing, with a copy thereof delivered concurrently to SGI.  All proceeds paid for the Shares (less commissions) and otherwise payable to SGI hereunder shall be deposited directly into the account of Broker for payment to SGI.  SGI’s delivery of any Shares to Broker shall be for the sole purpose of facilitating the sale of such Shares, and SGI’s security interest therein shall continue until Broker shall have paid to SGI all applicable sums as required hereinabove.

                4.             Events of Default.  Each of the following shall constitute an event of default (“Event of Default”) hereunder:

                                (a)           The failure by Pledgor to observe or perform any of the provisions of this Agreement or to pay any amount due under the Loan, including, without limitation, the Forgivable Note, and/or this Agreement.

                                (b)           The inaccuracy or breach of any warranty, representation or statement made or furnished to SGI by or on behalf of Pledgor.

                                (c)           The assignment for the benefit of creditors or the commencement of any proceeding under any bankruptcy or insolvency law by or against Pledgor.

                                (d)           The seizure or attachment of, or a levy on all or any portion of the Pledged Collateral.

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                5.             SGI’s Remedies Upon Default.

                                (a)           Upon the occurrence of an Event of Default, SGI shall have the right to:

                                                (i)            Declare all of the obligations and liabilities of Pledgor under the Loan immediately due and payable.

                                                (ii)           Repurchase all or part of the Shares from Pledgor for a purchase price equal to the lesser of (i) the fair market value of such Shares as of the date of the Event of Default, or (ii) the fair market value of such Shares as of the date of repurchase.  The fair market value of the Shares, as of any date, shall be the closing price for a share of SGI’s common stock as reported in The Wall Street Journal or a similar readily available public source.  If no sales of Shares were made on such date, the fair market value of the Shares shall be determined using the closing price of a Share as reported for the preceding day on which a sale of Shares occurred.  Notwithstanding the foregoing, the fair market value of any stock options comprising Shares shall be determined using the fair market value of SGI’s common stock as of the applicable date set forth above less the applicable exercise price under such stock options and any costs incurred by SGI pursuant to subparagraph (b) below.

                                                (iii)          Exercise any and all rights of a secured party under the Uniform Commercial Code of the State of California which SGI, in its sole judgment,  deems necessary or appropriate, including without limitation the right to sell or otherwise dispose of all or any part of the Pledged Collateral.

                                (b)           After the repurchase, sale or transfer of any of the Pledged Collateral, SGI may deduct all reasonable attorneys’ fees, brokerage commissions and other expenses incurred by SGI in preserving, collecting, selling, repurchasing and/or delivering the Pledged Collateral and for enforcing its rights with respect to the Loan and this Agreement, and shall apply the residue of the proceeds to, or hold as a reserve against, the Loan in such manner as SGI in its reasonable discretion shall determine, and shall pay the balance, if any, to Pledgor.

                6              SGI’s Duties.  SGI shall have no duty or liability for the Pledged Collateral except for the exercise of reasonable care of the Pledged Collateral while in the possession of SGI.

                7.             General Provisions.

                                (a)           Successors and Assigns.  This Agreement shall bind and insure to the benefit of the respective heirs, successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Pledgor without SGI’s prior written consent, which consent may be granted or withheld in SGI’s sole discretion.

                                (b)           Severability of Provisions.  Each provision of this Agreement shall

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be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.  In case one or more of the provisions contained in this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, the invalidity, illegality or unenforceability of that provision shall not affect any other provision of this Agreement.

                                (c)           Joint and Several Obligations.  If Pledgor consists of more than one person, the obligations of Pledgor shall be the joint and several obligations of all such persons.  When the context and construction so require, all words used in the singular herein shall be deemed to have been used in the plural and the masculine shall include the feminine and neuter and vice versa.

                                (d)           No Waiver.  No delay or omission by SGI in exercising any right or remedy arising from any default of Pledgor shall be construed as a waiver of such default or as an acquiescence therein, nor shall any single or partial exercise thereof preclude any further exercise thereof.  SGI may, at its option, waive any of the conditions herein and any such waiver shall not be deemed the waiver of SGI’s rights hereunder.  The waiver of any Event of Default shall not be construed as any waiver of or acquiescence in or consent to any preceding or subsequent Event of Default by Pledgor hereunder.

                                (e)           Collection Costs.  Pledgor shall promptly pay SGI all reasonable attorneys’ fees and all costs and other expenses paid or incurred by SGI in enforcing or exercising its rights or remedies created by, connected with or provided in this Agreement, and payment thereof shall be secured by the Pledged Collateral.

                IN WITNESS WHEREOF, this Pledge Agreement has been executed as of the Effective Date.

PLEDGOR:

/s/  Warren C. Pratt

WARREN C. PRATT

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EX-10.21

Exhibit 10.21

AMENDED AND RESTATED PROMISSORY NOTE

SECURED BY DEED OF TRUST

(FORGIVABLE LOAN)

Amended as of April 25, 2001

$500,000.00	Mountain View, California
	September 27, 2000

For value received, the undersigned, Warren C. Pratt (“Employee”) and Elizabeth Pratt (collectively, “Borrower”) jointly and severally promise to pay to SILICON GRAPHICS, INC., a Delaware corporation (“SGI”), or order, at 1600 Amphitheatre Parkway, Mountain View, California 94039-7311, or such other place as SGI may designate in writing from time to time, in lawful money of the United States of America, without abatement, demand, deduction, setoff or counterclaim (except as provided in Paragraph 5), the principal sum of Five Hundred Thousand and  00/100 Dollars ($500,000.00).  This Promissory Note shall bear no interest, except as provided in Paragraph 4 below.

1.             Payments.  All outstanding principal and accrued interest under this Promissory Note shall be due and payable on the Due Date (as defined below); provided, however, that so long as Employee remains employed by SGI on a regular and full-time basis, Borrower’s obligation to pay principal and interest under this Promissory Note shall be forgiven as follows: (i) principal in the amount of Eight Thousand Three Hundred Thirty-Three and 33/100 ($8,333.33) per month shall be forgiven on October 22, 2000 and on the twenty-second (22nd) day of each of the fifty-eight(58) calendar months thereafter, and (ii) principal in the amount of Eight Thousand Three Hundred Thirty-Three and 53/100 ($8,333.53) shall be forgiven on September 22, 2005.  Every payment received by SGI with respect to this Promissory Note shall be applied as follows: first, to the payment of any late charges; second, to the payment of accrued but unpaid interest; and, third, to the payment of the outstanding principal balance of this Promissory Note.

2.             Due Date.  The “Due Date” shall be the earlier of (i) the date of termination or cessation of SGI’s employment of Employee, involuntarily with cause, or (ii) September 22, 2005.The loan will be forgiven in full if employment is terminated prior to the end of the five-year term (i) by SGI other than for Cause (ii) by Employee for Good Reason or (iii) as a result of death or Disability.  Defined terms not otherwise set forth in this promissory note will have the meaning given to those terms in our letter agreement dated April 25, 2001 relating to forgiveable loan advances in an aggregate amount of up to $5,000,000 (the “2001 Letter Agreement”).

3.             Purpose of Loan.  Borrower acknowledges and agrees that SGI is making this loan to Borrower for the express purpose of facilitating Employee’s relocation to the area of SGI’s corporate headquarters located in Mountain View, California.  Borrower represents and warrants to SGI that Borrower will use all proceeds of this Promissory Note for purposes of purchasing

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and improving Borrower’s new principal residence located at (address omitted)(“New Residence”).

4.             Default.  In the event that Borrower fails to timely pay any amount or perform any other obligation of Borrower under this Promissory Note, the Deed of Trust (as defined below), or any other agreement or instrument now or hereafter executed by Borrower to evidence or secure the performance of Borrower’s obligations thereunder, SGI may, at its option, declare the entire principal sum under this Promissory Note immediately due and payable.  In the event that SGI exercises this option, or the principal balance of this Promissory Note otherwise becomes due and payable, all principal then outstanding under this Promissory Note shall thereafter bear simple interest at the lesser of ten percent (10%) per annum or the maximum rate permitted by law.  Failure to exercise this option shall not constitute a waiver of SGI’s right to exercise the same with respect to any prior or subsequent defaults.

5.             Right to Offset.  Borrower will have the right to deduct or offset (1) amounts due but not yet paid by SGI to Borrower under the 2001 Letter Agreement or (2) to the extent not paid by SGI when due, the amount of the tax gross-up to be provided by SGI under paragraph 9 of this Promissory Note, from or against amounts payable by Borrower to SGI under this Promissory Note.

6.             Security.  Borrower’s obligations under this Promissory Note are secured by that certain Deed of Trust with Assignment of Rents of even date herewith (“Deed of Trust”) encumbering the New Residence, as more particularly described in the Deed of Trust.

7.             Due on Sale.  The Deed of Trust provides as follows:

If the trustor shall sell, convey or alienate said property, or any part thereof, or any interest therein, or shall be divested of his title or any interest therein in any manner or way, whether voluntarily or involuntarily, without the written consent of the beneficiary being first had and obtained, beneficiary shall have the right, at its option, except as prohibited by law, to declare any indebtedness or obligations secured hereby, irrespective of the maturity date specified in any not evidencing the same, immediately due and payable.

8.             Attorneys’ Fees.  In the event any legal action or proceeding is required to enforce or interpret any provision of this Promissory Note, Borrower shall pay to SGI upon demand all costs of collection and reasonable attorneys’ fees incurred by SGI in connection therewith.

9.             Tax Liability. The income tax liability to Borrower resulting from this Promissory Note (including, imputed interest or the forgiveness of principal and interest hereunder) shall be offset by the tax gross-up provided by SGI.  Borrower agrees that the non-interest bearing nature of this Promissory Note is personal to Borrower and non-transferable, and is conditioned upon the future performance of substantial

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services by Employee.  Borrower certifies to SGI that Borrower reasonably expects to itemize deductions for each year that principal is outstanding under this Promissory Note.

10.           Miscellaneous.  If any provision of this Promissory Note shall be invalid or unenforceable for any reason, the same shall be ineffective, but the remainder of this Promissory Note shall not be affected thereby and shall remain in full force and effect.  Time is of the essence of each and every obligation of Borrower and SGI hereunder.  Presentment and demand for payment, notice of dishonor, protest and notice of protest are hereby waived by Borrower and SGI with respect to amounts owed by each of them respectively under the provisions of this Note.  If the due date for any payment under this Promissory Note falls on a Saturday, Sunday or legal holiday, then such due date shall be extended to the next business day.  None of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except by a writing signed by SGI and Borrower.  The provisions of this Promissory Note shall be governed by California law.  The covenants, terms and conditions hereof shall bind the heirs, successors and assigns of Borrower and shall inure to the benefit of the successors and assigns of SGI.

IN WITNESS WHEREOF, Borrower has executed this Promissory Note as of the date first set forth above.

BORROWER:

/s/  WARREN C. PRATT

WARREN C. PRATT

/s/  ELIZABETH PRATT

ELIZABETH PRATT

Amendment Agreed and Accepted by SGI:

By:	/s/  SANDRA ESCHER
Sandra Escher
Senior Vice President and General Counsel

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EX-10.22

Exhibit 10.22

Private and Confidential

October 5, 2001

Jeff Zellmer

Dear Jeff,

This letter agreement amends and restates our agreement regarding your forgiveable loan in its entirety as set forth below:

SGI also will make you a $500,000 forgiveable loan.  The loan will be funded in July 2001, within five days of signature of this letter, and will be forgiven over a two year period at the rate of $62,500 at the end of each three month period starting with the three months ended October 31, 2001, provided you are actively employed by SGI  at those dates. You will be responsible for any taxation that results from  the forgiveness of the principal amount of the loan.  Should you voluntarily terminate your employment prior to the loan being fully forgiven, you agree to repay SGI within 30 days, on a pro-rated basis, the portion of the loan that has not been forgiven. This loan will also be forgiven in full if you die or your employment with SGI is terminated due to your becoming physically or mentally disabled.   The unpaid principal amount of the loan shall not bear interest.  To the extent you are subject to income tax as a result of the interest-free nature of the loan, SGI will pay you an amount (the “Gross Up Amount”) such that after payment by you of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes) on the Gross Up Amount will equal the amount of income tax attributable to the imputed interest in accordance with Section 7872 of the Internal Revenue Code of 1986, as amended, and any relevant state or local taxes.

SGI will 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 SGI’s obligation with respect to the forgiveable loan in the same manner and to the same extent that SGI would be

required to perform if no such succession or assignment had taken place.  The loan will be forgiven in full if it is not assumed as provided in this paragraph.

The loan will also be forgiven in full if: (i) a receiver, trustee, liquidator or custodian is appointed on behalf of SGI or a substantial part of its property, (ii) SGI makes a general assignment for the benefit of its creditors, (iii) SGI is dissolved or liquidated in full or in part, or (iv) a case or other proceeding seeking liquidation, reorganization or other relief with respect to SGI or its debts is commenced under any bankruptcy, insolvency or other similar law now or hereafter in effect; provided that in connection with a voluntary or involuntary SGI Chapter 11 Case, the loan will be forgiven in full if (x) you resign not less than 6 months following the commencement of such Chapter 11 Case and not more than 6 months after a plan of reorganization is confirmed by the Bankruptcy Court or (y) SGI or any designated responsible person or entity acting on behalf of SGI or its assets terminates your employment for any reason other than Cause (defined below).

“Cause” means that you are terminated for one of the following reasons: (i) willfully refusing or failing to carry out specific directions of the Board of Directors or the Chief Executive Officer of SGI; (ii) for acting fraudulently or with willful dishonesty in your relations with SGI; (iii) for committing larceny, embezzlement, conversion or any act involving the misappropriation of funds from SGI in the course of your employment; (iv) for having been convicted of a crime involving an act of moral turpitude, fraud or misrepresentation; or (v) for willfully engaging in misconduct which materially injured the reputation, business or business relationship of SGI.  No act, or failure to act, by you will be considered “willful” if done, or omitted to be done, by you in good faith and in your reasonable belief that your act or omission was in the best interests of SGI or required by applicable law.

In the event of any dispute, claim, question, or disagreement arising out of or relating to the loan, we agree to first use our best efforts to settle such matters in an amicable manner.  Initially, we will consult and negotiate with each other, in good faith and, recognizing our mutual interests, attempt to reach a just and equitable solution satisfactory to both of us.  If we do not reach a resolution within sixty days, either of us may notify the other in writing that the unresolved dispute, claim or differences are being submitted to confidential mediation in

Santa Clara County, CA by a mutually agreed upon mediator.  Either one of us may apply to any court having jurisdiction over this agreement to seek injunctive relief to maintain the status quo until the mediation is concluded or the controversy is otherwise resolved.  Each of us will each bear its own costs and expenses and an equal share of the mediators’ and any similar administrative fees.

If any dispute is finally determined in your favor through a judicial proceeding, SGI will 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, SGI will reimburse such fees to the extent you received half or more of the amount in dispute.

This letter agreement will 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.

Sincerely,

/s/  BOB BISHOP

Bob Bishop

Chief Executive Officer

Accepted:

/s/  JEFF ZELLMER
Jeff Zellmer	Today’s Date

Please return signed letter to Larry Hicks

EX-10.23

Exhibit 10.23

Private and Confidential

October 5, 2001

Sandra Escher

Dear Sandra,

SGI will provide you with a $280,000 forgiveable loan.  The loan will be funded in October 2001, within five business days of signature of this letter, and will be forgiven over a two year period at the rate of $35,000 at the end of each three month period starting with the three months ended December 31, 2001, provided you are actively employed by SGI   at those dates. You will be responsible for any taxation that results from  the forgiveness of the principal amount of the loan.  Should you voluntarily terminate your employment prior to the loan being fully forgiven, you agree to repay SGI within 30 days, on a pro-rated basis, the portion of the loan that has not been forgiven. This loan will also be forgiven in full if you die or your employment with  SGI is terminated due to your becoming physically or mentally disabled.  The unpaid principal amount of the loan shall not bear interest.  To the extent you are subject to income tax as a result of the interest-free nature of the loan, SGI will pay you an amount (the “Gross Up Amount”) such that after payment by you of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes) on the Gross Up Amount will equal the amount of income tax attributable to the imputed interest in accordance with Section 7872 of the Internal Revenue Code of 1986, as amended, and any relevant state or local taxes.  SGI will 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 SGI’s obligation with respect to the forgiveable loan in the same manner and to the same extent that SGI would be required to perform if no such succession or assignment had taken place.  The loan will be forgiven in full if it is not assumed as provided in this paragraph.

The loan will also be forgiven in full if: (i) a receiver, trustee, liquidator or custodian is appointed on behalf of SGI or a substantial part of its property, (ii) SGI makes a general assignment for the benefit of its creditors, (iii) SGI is dissolved or liquidated in full or in part, or (iv) a case or other proceeding seeking liquidation, reorganization or other relief with respect to SGI or its debts is commenced under any bankruptcy, insolvency or other similar law now or hereafter in effect; provided that in connection with a voluntary or involuntary SGI Chapter 11 Case, the loan will be forgiven in full if (x) you resign not less than 6 months following the commencement of such Chapter 11 Case and not more than 6 months after a plan of reorganization is confirmed by the Bankruptcy Court or (y) SGI or any designated responsible person or entity acting on behalf of SGI or its assets terminates your employment for any reason other than Cause (defined below).

“Cause” means that you are terminated for one of the following reasons: (i) willfully refusing or failing to carry out specific directions of the Board of Directors or the Chief Executive Officer of SGI; (ii) for acting fraudulently or with willful dishonesty in your relations with SGI; (iii) for committing larceny, embezzlement, conversion or any act involving the misappropriation of funds from SGI in the course of your employment; (iv) for having been convicted of a crime involving an act of moral turpitude, fraud or misrepresentation; or (v) for willfully engaging in misconduct which materially injured the reputation, business or business relationship of SGI.  No act, or failure to act, by you will be considered “willful” if done, or omitted to be done, by you in good faith and in your reasonable belief that your act or omission was in the best interests of SGI or required by applicable law.

In the event of any dispute, claim, question, or disagreement arising out of or relating to the loan, we agree to first use our best efforts to settle such matters in an amicable manner.  Initially, we will consult and negotiate with each other, in good faith and, recognizing our mutual interests, attempt to reach a just and equitable solution satisfactory to both of us.  If we do not reach a resolution within sixty days, either of us may notify the other in writing that the unresolved dispute, claim or differences are being submitted to confidential mediation in Santa Clara County, CA by a mutually agreed upon mediator.  Either one of us may apply to any court having jurisdiction over this agreement to seek injunctive relief to maintain the status quo until the mediation is concluded or the controversy

is otherwise resolved.  Each of us will each bear its own costs and expenses and an equal share of the mediators’ and any similar administrative fees.

If any dispute is finally determined in your favor through a judicial proceeding, SGI will 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, SGI will reimburse such fees to the extent you received half or more of the amount in dispute.

This letter agreement will 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.

Sincerely,

/s/  BOB BISHOP

Bob Bishop

Chief Executive Officer

Accepted:

/s/  SANDRA ESCHER
Sandra Escher	Today’s Date

Please return signed letter to Larry Hicks

EX-10.24

Exhibit 10.24

SILICON GRAPHICS, INC.

CONSULTING AGREEMENT

This CONSULTING AGREEMENT is made and entered into as of June 1, 2002, by and between Arthur L. Money, a                            organized under the laws of                              (“Consultant”), having a place of business at 210 W. Alexandria Ave., Alexandria, VA 22302 and Silicon Graphics, Inc., a Delaware corporation (“SGI”), having a place of business at 1600 Amphitheatre Parkway, Mountain View, CA 94043-1351.

WHEREAS, Consultant is in the business of providing consulting services; and

WHEREAS, SGI desires Consultant to provide its consulting services to SGI, and Consultant desires to provide such services to SGI.

NOW, THEREFORE, the parties hereto agree as follows:

1.0. DEFINITIONS.

        1.1. “Agreement” means this Consulting Agreement.

        1.2. “Confidential Information” means any information of SGI, including, but not limited to that regarding SGI’s business, customers, employees, marketing, operations, technology, products and the like, which should reasonably be understood to be non-public, proprietary and/or confidential in nature.

        1.3. “Consultant” means the individual or independent business entity identified above and, individually and collectively, the agents, employees, officers, partners and principals of such individual or business entity.

        1.4. “Licensed Rights” means any preexisting intellectual property rights owned and/or licensable by Consultant, its employees or any third party that are required for SGI to exercise its rights in the Work Product or benefit from Services.

        1.5. “Services” means the services to be performed by Consultant hereunder, which shall be described on Exhibit A hereto.

        1.6. “Work Product” means any and all concepts, data, designs, ideas, information, inventions, know-how, processes, techniques, and works of authorship or the like developed or created by Consultant during the course of performing Services, regardless of the form of embodiment. Work Product shall (i) include all copyrights, patents, trademarks, trade secrets or other intellectual property rights associated therewith, and (ii) in the case of copyrights, be considered (to the extent permitted by law) works made for hire within the meaning of the Copyright Act (17 U.S.C. § 101 et seq.). Work Product does not and is not intended to include off the shelf training materials or training products developed by a trainer or training company for group or individual learning, regardless of whether the materials or product are modified for use at SGI.

2.0. INDEPENDENT CONTRACTOR STATUS.  The parties acknowledge and agree that Consultant is an independent contractor and not an employee, agent, joint venturer or partner of SGI. Consultant acknowledges and agrees that, as an independent contractor, Consultant will not be entitled to (i) make a claim for unemployment, worker’s compensation or disability, or (ii) receive any vacation, health, retirement or other benefits, pursuant to this Agreement or Consultant’s relationship with SGI. SGI will not make state or federal unemployment insurance contributions on behalf of Consultant, or withhold FICA (Social Security) contributions or state and federal income taxes from its payments to Consultant. Consultant agrees that it shall make such contributions and withhold such taxes for any of its employees performing Services. Consultant’s Federal taxpayer identification number is ###-##-#### and local business license/permit number is N/A - pending.

3.0. PERFORMANCE OF SERVICES.

3.1. Services; Progress Reports. Consultant agrees to provide the Services to SGI, and to promptly deliver to SGI any Work Product resulting from the performance of Services. Consultant will report its progress on its performance of Services to SGI at the time and in the manner reasonably requested by SGI.

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        3.2. Method of Performing and Scheduling of Services. Consultant will determine the general method, details and means of performing the Services, provided that Consultant shall strictly observe any SGI policies or procedures applicable to the workplace if using the premises and/or equipment of SGI. Consultant will use its best efforts to complete the Services in accordance with the schedule set forth on Exhibit A.

        3.3. Changes in Scope of Work. SGI shall have the right to change the scope of the Services, if, (i) such change is reasonably acceptable to Consultant; and (ii) the parties mutually agree on the terms applicable to any such change, including changes to Consultant's compensation (if any), which shall be set forth in a signed, written amendment to this Agreement.

4.0. COMPENSATION; INVOICES AND PAYMENT.

        4.1. Compensation and Expenses. SGI will pay the applicable amount(s) set forth on Exhibit A to Consultant following Consultant's completion and delivery, and SGI's acceptance of, the Services and Work Product. Consultant shall be responsible for all costs and expenses incidental to its performance of the Services, except as otherwise expressly set forth on Exhibit A.

        4.2. Invoices and Payment. Consultant shall submit invoices to SGI at least every thirty (30) days, but not more often than weekly (once every five (5) working days), together with sufficiently detailed information for SGI to verify all invoice items. SGI will pay Consultant net thirty (30) days after SGI's receipt of Consultant's invoice or acceptance of Services and/or Work Product, whichever is later. SGI will not be liable for and will not pay any invoice that Consultant submits to SGI more than ninety (90) days after Consultant performed and SGI accepted the associated Services.

5.0. CONFIDENTIAL INFORMATION.

        5.1. Confidential Information. Consultant shall maintain in strict confidence all Confidential Information that Consultant receives in the course of providing Services or otherwise in connection with its relationship with SGI, and shall use Confidential Information only for the specific purposes of performing Consultant's obligations hereunder, and to comply in all respects with federal securities and other applicable laws with respect to Confidential Information.

        5.2. Exclusions. The restrictions in Section 5.1 above shall not apply to information that Consultant can clearly show (i) was already lawfully known to Consultant; (ii) was independently developed by Consultant; (iii) becomes rightfully known to Consultant from another source, without restriction on subsequent disclosure or use; or (iv) is or becomes part of the public domain through no wrongful act of Consultant.

6.0. OWNERSHIP OF WORK PRODUCT; LICENSED AND RESIDUAL RIGHTS.

        6.1. Ownership of Work Product. Consultant agrees that, in consideration for SGI's payment to Consultant hereunder, Consultant agrees to assign on an exclusive basis all of Consultant's right, title and interest in and to the Work Product to SGI. Accordingly, Consultant agrees that it shall (i) not use any Work Product for the benefit of any party other than SGI, (ii) execute an assignment agreement in the form attached hereto as Exhibit B on completion of Services, and (iii) perform such other acts (including, but not limited to, cooperating with and assisting SGI in the protection and enforcement of SGI's rights in the Work Product, by adjudication or otherwise) and execute such other documents and instruments as SGI may now or hereafter deem reasonably necessary or desirable to evidence the transfer of sole ownership of all Work Product to SGI. If, by operation of law, Consultant is deemed to retain any rights in and to any intellectual property created hereunder, Consultant, to the extent that any such rights conflict with any assignment of rights made by Consultant to SGI hereunder, hereby waives all such rights.

        6.2. Licensed Rights. To the extent Licensed Rights are required under this Agreement, Consultant grants or will cause to be granted to SGI before the expiration of the term hereof a fully-paid, irrevocable, worldwide, non-exclusive license and right to make, have made, sell, possess, use, disclose, reproduce, prepare derivative works based on, distribute, perform and display works, products or the like that incorporate or are based on, in whole or in part, Licensed

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Rights, Consultant represents that there shall be no Licensed Rights required hereunder unless specifically noted and described on Exhibit A.

        6.3. Residual Rights of Consultant. Notwithstanding anything to the contrary herein, Consultant shall be free to use its general skills, know-how and expertise in the course of providing its services to others, provided that Consultant shall not specifically disclose any Confidential Information and/or provide Work Product to any third party in so doing.

7.0. WARRANTIES.

        7.1. Warranties. Consultant represents and warrants to SGI that:

                a. General. Consultant has all requisite right and authority to enter into this Agreement, and the performance of its obligations hereunder will not conflict with any of its agreements with or obligations to any third party.

                b. Independent Contractor. Consultant will establish and maintain its status as an independent contractor by participating in SGI's independent contractor evaluation and scoring process from time to time as specified by SGI.

                c. Performance of Services. Consultant will perform all Services in a good and workmanlike manner, in accordance with the best practices of Consultant's industry, and the Services and Work Product will conform to the applicable specification and/or statement of work set forth herein.

                d. Year 2000 Compliance. To the extent that Work Product, Licensed Rights and any other deliverable items hereunder are comprised of computer hardware and/or software, such items will use a four (4) digit representation of the year and process (including, without limitation, inputting, outputting, retrieving and storing) without error information and/or data that includes or refers to dates and/or time on any day in any year before, during, and after the twenty-first century, including any leap day or year.

                e. Intellectual Property Rights. The Work Product, Licensed Material and any associated deliverables shall not violate any patent, copyright, trademark, trade secret or other intellectual property right of any third party.

        7.2. Warranty Exclusions. THE FOREGOING WARRANTIES ARE EXCLUSIVE, AND CONSULTANT DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

8.0. INSURANCE. Consultant shall obtain and maintain in full force and effect during the term of this Agreement (i) commercial general liability insurance (including contractual liability coverage) with coverage limits of not less than One Million Dollars ($1,000,000) per occurrence, naming SGI as an additional insured thereunder, (ii) auto liability insurance with coverage limits of not less than One Million Dollars ($1,000,000) per occurrence, naming SGI as an additional insured thereunder, and (iii) worker's compensation insurance as required by law. At the time of execution of this Agreement, Consultant shall provide SGI with a certificate of insurance evidencing the insurance coverages required under this Section 8. The insurance companies now or hereafter issuing the foregoing insurance policies shall be reasonably acceptable to SGI. Any modification, renewal, replacement or cancellation of such insurance coverages shall require at least thirty (30) days prior written notice to SGI.

9.0. INDEMNIFICATION. Consultant shall indemnify, defend and hold SGI harmless from and against any and all third party claims, suits, proceedings, damages, costs, liabilities and expenses (including, without limitation, reasonable attorneys' fees) arising from the negligence or willful misconduct of Consultant in connection with Consultant's performance of Services or relationship with SGI hereunder. The foregoing indemnification shall also apply to damage or loss to the property of SGI arising from the actions or inactions of Consultant's employees or agents, whether in the course of their employment or not, including but not limited to acts of theft, vandalism or the like.

10.0. TERM; TERMINATION.

        10.1. Term. This Agreement will become effective on the date first set forth above and will continue in effect through the earlier of the completion of the Services and delivery of the Work

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Product, or the completion date set forth on Exhibit A, unless terminated earlier in accordance with this Section 10.

10.2. Termination of Services and/or Agreement for Convenience by SGI. SGI may terminate this Agreement and/or all or any portion of the Services by giving written notice to Consultant.  On receipt of such notice, Consultant shall cease providing Services, advise SGI of the extent to which Consultant has completed, and collect and deliver to SGI whatever Work Product then exists, regardless of the form of embodiment, in the manner requested by SGI.  After SGI receives and accepts Consultant’s detailed statement of any termination-related expenses and costs incurred by Consultant, SGI shall make a final settlement payment to Consultant for all work performed through the date of such termination within thirty (30) days.

10.3. Termination of Agreement for Default. If a party fails to cure any breach of its obligations hereunder within ten (10) days after its receipt of written notice thereof from the other party, then the other party may terminate this Agreement at any time thereafter by providing the defaulting party with written notice of termination.

10.4. Delivery Of Materials Upon Termination. Consultant agrees, covenants and promises that, in the event of termination or expiration of this Agreement for any reason, Consultant will promptly and without request surrender and deliver to SGI all materials containing, embodying or otherwise evidencing any Confidential Information, regardless of whether any such item or the information therein was prepared, produced or authored by Consultant, except that Consultant may retain a copy of this Agreement for its records.

10.5. Survival. Sections 5,6,7,10.5,11.1,11.2 and 11.8 hereof shall survive the expiration of earlier termination of this Agreement.

11.0. EXPORT CONTROL REGULATIONS AND DEEMED EXPORTS

11.1. Consultant will not directly or indirectly transmit, by way of transshipment, export, re-export diversion or otherwise, any Work Product or Confidential Information to any destination or location outside the United States except as authorized by SGI and in accordance with the U.S. export control laws and regulations.

11.2. Consultant acknowledges that the export control laws may apply to the disclosure or release of certain technology and software to a foreign national located in the United States, and that Consultant will not release to any unprotected foreign national any Work Product or Confidential Information except as authorized by SGI and in accordance with U.S. export control laws and regulations.

11.3. In order to comply with U.S. export control laws and regulations, Consultant agrees that it will not assign any unprotected foreign national to work on SGI projects unless Consultant has: (i) identified the unprotected foreign national to SGI; (ii) provided SGI with all information necessary for SGI to make an export licensing determination; and, (3) has received from SGI permission to assign such unprotected foreign national to SGI’s work. “Unprotected foreign national” shall mean a person who is not a protected individual under the immigration and Naturalization Act ("INA") (8 U.S.C. sec. 1324b(a)(3)), Protected individuals generally include U.S. citizens, U.S. nationals, lawful permanent residents, lawful temporary residents, refugees and asylees. Possession of a valid work visa does not necessarily confer protected individual status on an individual.

12.0. GENERAL.

12.1. Resolution of Disputes.  The parties agree that they will make good faith efforts to settle any dispute, claim or controversy arising out of or relating to this Agreement by discussion, negotiation and/or mediation.

12.2. Governing Law; Venue, Waiver of Jury Trial.  This Agreement shall be governed by and interpreted in accordance with the laws of the State of California, excluding its choice of law rules.  Any adjudicated dispute regarding the interpretation or validity of or otherwise arising out of this Agreement, or relating to Services provided under this Agreement, shall be subject to the exclusive jurisdiction of the California state courts in and for Santa Clara, County, California (or, if there is federal jurisdiction, the U.S. District Court for the Northern District of California), and SGI and Consultant agree to submit to the personal and exclusive jurisdiction and venue of

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these courts.  The parties hereto expressly waive any right they have to a jury trial and agree that any court proceeding under this Agreement shall be tried by a judge without a jury.

12.3. Non-exclusive Relationship.  This Agreement is non-exclusive.  Consultant shall have the right to perform work for others during the term of this Agreement.  SGI may cause similar work to be performed by its own personnel or other contractors or consultants during the term of this Agreement.

12.4. Record Keeping.  Consultant agrees to keep records regarding its performance of Services and invoices to SGI for a period of at least three (3) years after the expiration or termination of this Agreement, and that it shall produce such records for inspection and audit by SGI on SGI’s written request.

12.5. Representation by Counsel.  Consultant herby certifies and represents that it has been, or had the opportunity to be, represented by counsel in the negotiation of this Agreement.

12.6. Assignment.  No portion of this Agreement or any of Consultant’s rights (including, without limitation, the right to payment hereunder) duties or obligations hereunder may be assigned and/or delegated by Consultant.

12.7. Modifications.  Any modifications of this Agreement shall be in writing and signed by both parties.

12.8. Complete Agreement.  This Agreement, including all attachments hereto, constitutes the complete and exclusive statement of the agreement between SGI and Consultant, and it supersedes all proposals, oral or written, and all other communications between SGI and Consultant relating to the subject matter of this Agreement.

SILICON GRAPHICS, INC.		CONSULTANT
By:	/s/ LANG CRAIGHILL	By:	/s/ ARTHUR L. MONEY
LANG CRAIGHILL		ARTHUR L. MONEY
NAME (PRINT OR TYPE)		NAME (PRINT OR TYPE)
Sr. Director, SGI Federal		—
TITLE		TITLE
May 30, 2002		May 30, 2002
DATE		DATE

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EXHIBIT A
DESCRIPTION OF SERVICES, WORK PRODUCT, AND COMPENSATION

Item #	Description of Services and Work Product	Completion Date	Payment on Completion (if any)
	Review of SGI DOD & Intelligence programs	6/1/02	$3000
	Review of SGI core capabilities & technologies	6/15/02	$3000
	Provide overview of DOD C4I initiatives part 1	7/5/02	$3000
	Provide overview of DOD C4I initiatives part 2	7/20/02	$3000
	Provide info on current Administration directions	8/5/02	$3000
	Review of key technology issues in DOD	8/20/02	$3000
	Review of key technology issues in Intel Community	9/5/02	$3000
	Evaluate SGI's strategies concerning DISA part 1	9/20/02	$3000
	Evaluate SGI's strategies concerning DISA part 2	10/6/02	$3000
	Evaluate SGI's strategy in C4I visualization	10/25/02	$3000
	Review SGI SWC CRADA	11/6/02	$3000
	Review SGI USAF & Space program efforts (SBIRS)	11/25/02	$3000
	Provide Pentagon Leadership overview	12/8/02	$3000
	Review DARPA initiatives	12/30/02	$3000
	Evaluate SGI Hill Agenda items for FY 2003	1/10/03	$3000
	Review technology leadership in DOD C4I	1/25/03	$3000
	Establish & participate in executive meeting	2/15/03	$3000
	With the Sr. Mgt. of Key Systems Integrators
	Such as Boeing, Lockheed Martin, Raytheon, TRW, Etc.
	Additional work products will be added by 12/31/01
	Mileage, parking, and meal expenses will be reimbursed. Mileage will be reimbursed at a rate of $.346 per mile.

Statement of Work or Project Description/Quotation of Consultant Attached:    Yes                No    ü

/s/ ARTHUR L. MONEY	/	May 30, 2002
Consultant (by/date)
/s/ LANG CRAIGHILL	/	May 30, 2002
SGI (by/date)

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EXHIBIT B
ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS

[NOT APPLICABLE TO PROVIDERS OF OFF THE SHELF
TRAINING MATERIALS OR TRAINING PRODUCTS]

This ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS ("Assignment") is made and entered into this 1 day of June 2001, by and between Mr. Arthur L. Money ("Consultant") and Silicon Graphics, Inc. ("SGI").

Consultant and SGI have entered into a Consulting Agreement (the "Agreement") of even date herewith pursuant to which Consultant has agreed to provide Services and/or create certain Work Product for SGI. Unless otherwise defined herein, the defined terms used in this Assignment shall have the same meanings as set forth in the Agreement.

1.0. DESCRIPTION OF WORK PRODUCT.  Work Product consists of and is described as:  DOD C4I related efforts, as outlined in Exhibit A.

2.0. ASSIGNMENT AND TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. In consideration of SGI's obligation to pay Consultant the compensation described on Exhibit A to the Agreement, Consultant hereby grants, assigns, conveys and transfers, and agrees to grant, assign, convey and transfer from time to time, on an exclusive basis, to SGI all of Consultant's right, title and interest in and to all Work Product now or hereafter created or developed by Consultant during the course of performing the Services, without the necessity of further consideration. This Assignment shall be operative with respect to all intellectual property rights in and to all Work Product, including, without limitation, (i) all copyrights worldwide, including all rights of registration and publication, rights to create derivative works, and all other rights incident to copyright ownership, for the residue now unexpired of the present term of any and all such copyrights and any term thereafter during which the Work Product shall be entitled to copyright, and (ii) all trade secrets, inventions, know-how, ideas and confidential information embodied or reflected in Work Product, for the longest period of protection accorded to such interests under applicable law. This Assignment shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives.

/s/ ARTHUR L, MONEY	/	May 30, 2002
Consultant (by/date)
/s/ LANG CRAIGHILL	/	May 30, 2002
SGI (by/date)

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EX-21.1

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 A. E.	Greece
Silicon Graphics Limited	Hong Kong
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
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

Name	Jurisdiction of Incorporation
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, 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

-2-

EX-23.1

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 July 23, 2002 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 28, 2002.

/s/ ERNST & YOUNG LLP

Palo Alto, California

September 20, 2002