SILICON GRAPHICS INC /CA/, 10-Q, 1997-11-14

SILICON GRAPHICS INC /CA/
10-Q, 1997-11-14
ELECTRONIC COMPUTERS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- -- Exchange Act of 1934. For the quarterly period ended SEPTEMBER 30, 1997.
or
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 94-2789662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2011 N. SHORELINE BOULEVARD, MOUNTAIN VIEW, CALIFORNIA 94043-1389
(Address of principal executive offices) (Zip Code)

(415) 960-1980
(Registrant's telephone number, including area code)

__________________

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO
--- ---

As of October 31, 1997 there were 187,229,469 shares of Common Stock
outstanding.

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SILICON GRAPHICS, INC.
QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PAGE NO.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets.............................. 3

Condensed Consolidated Statements of Operations.................... 4

Condensed Consolidated Statements of Cash Flows.................... 5

Notes to Condensed Consolidated Financial Statements............... 6

Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition............................ 7

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.................................................. 14

Item 4. Submission of Matters to a Vote of Security Holders................ 14

Item 6. Exhibits and Reports on Form 8-K................................... 15

Signatures.................................................................. 16

Index to Exhibits........................................................... 17

TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics and Onyx are registered
trademarks and O2, Octane, Origin and Onyx2 are trademarks of Silicon Graphics,
Inc. in the United States and other countries. MIPS is a registered trademark
of MIPS Technologies, Inc. and CRAY is a registered trademark of Cray Research,
Inc. in the United States and other countries. UNIX is a registered trademark
of The Open Group in the United States and other countries. Windows NT is
either a registered trademark or a trademark of Microsoft Corporation in the
United States and other countries. Other products and company names mentioned
in this report may be the trademarks of their respective owners.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

September 30, June 30,
1997 1997(1)
---- ----
(unaudited)

ASSETS
Current assets:

Cash and cash equivalents................... $ 484,605 $ 227,222
Short-term marketable investments........... 115,438 60,109
Accounts receivable, net.................... 694,775 1,131,647
Inventories................................. 631,011 628,064
Prepaid expenses and other current assets... 258,086 268,552
---------- -----------
Total current assets................... 2,183,915 2,315,594

Other marketable investments.................... 57,208 86,961

Property and equipment, net..................... 520,347 525,452

Other assets.................................... 494,697 416,585
---------- -----------
$3,256,167 $3,344,592
---------- -----------
---------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts and notes payable................... $ 201,848 $ 303,647
Other current liabilities.................... 767,718 782,559
---------- -----------
Total current liabilities............... 969,566 1,086,206

Long-term debt and other......................... 421,058 419,144

Total stockholders' equity....................... 1,865,543 1,839,242
---------- -----------
$3,256,167 $3,344,592
---------- -----------
---------- -----------

(1) The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

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SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share amounts)

Three Months Ended September 30,
--------------------------------
1997 1996
---- ----

Product and other revenue........................ $ 620,696 $ 623,413
Service revenue.................................. 147,297 142,189
---------- ----------
Total revenue................................ 767,993 765,602

Costs and expenses:
Cost of product and other revenue............ 351,660 372,960
Cost of service revenue...................... 86,263 77,735
Research and development..................... 116,354 108,279
Selling, general and administrative.......... 261,421 232,167
Write-off of acquired in-process technology
and merger-related expenses................ 19,101 2,834
---------- ----------
Total costs and expenses................ 834,799 793,975
---------- ----------

Operating loss................................... (66,806) (28,373)

Interest and other expense, net.................. (2,307) (818)
---------- ----------
Loss before income taxes......................... (69,113) (29,191)

Benefit for income taxes......................... (13,575) (7,590)
---------- ----------
Net loss......................................... (55,538) (21,601)

Preferred stock dividend requirement............. (131) (131)
---------- ----------
Net loss available to common stockholders........ $ (55,669) $ (21,732)
---------- ----------
---------- ----------

Net loss per common share........................ $ (0.31) $ (0.13)
---------- ----------
---------- ----------

Common shares used in the calculation of net
loss per common share.......................... 182,160 172,974
---------- ----------
---------- ----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

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SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)

Three Months Ended September 30,
--------------------------------
1997 1996
---- ----

<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss..................................................................... $ (55,538) $ (21,601)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................................ 80,009 94,940
Write-off of acquired in-process technology............................ 16,900 --
Other.................................................................... (4,868) (6,458)
Changes in operating assets and liabilities (net of effects of
ParaGraph acquisition):
Accounts receivable................................................... 437,699 156,953
Inventories........................................................... (9,771) (26,534)
Accounts payable...................................................... (59,398) (18,649)
Other assets and liabilities.......................................... (10,293) (12,203)
-------- --------
Total adjustments........................................................ 450,278 188,049
-------- --------
Net cash provided by operating activities................................ 394,740 166,448

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (44,112) (44,542)
Increase in other assets..................................................... (65,692) (26,507)
Acquisition of Paragraph, net of cash acquired............................... 831 --
Available-for-sale investments:
Purchases................................................................ (25,171) (484)
Sales.................................................................... -- 29
Maturities............................................................... -- 8,237
-------- --------
Net cash used in investing activities.................................... (134,144) (63,267)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt............................................................. 5,134 11,625
Payments of debt principal................................................... (48,444) (138,487)
Sale of common stock......................................................... 40,228 12,513
Cash dividends - preferred stock............................................. (131) (131)
-------- --------
Net cash used in financing activities.................................... (3,213) (114,480)
-------- --------

Net increase (decrease) in cash and cash equivalents......................... 257,383 (11,299)
Cash and cash equivalents at beginning of period............................. 227,222 257,080
-------- --------
Cash and cash equivalents at end of period................................... $ 484,605 $ 245,781
-------- --------
-------- --------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

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SILICON GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. CONSOLIDATED FINANCIAL STATEMENTS.

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of significant intercompany
transactions and balances. The unaudited results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire fiscal year. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position, results of operations and cash flows for all periods presented have
been made. The unaudited condensed consolidated financial statements included
in this Form 10-Q should be read in conjunction with the audited consolidated
financial statements and notes thereto for the fiscal year ended June 30, 1997.
Certain amounts for the prior year have been reclassified to conform to current
year presentation.

2. BUSINESS COMBINATIONS.

On September 30, 1997, the Company completed its acquisition of ParaGraph
International, Inc. ("ParaGraph"), a software company, in exchange for cash
and shares of the Company's common stock for an aggregate purchase price of
approximately $50 million, including direct acquisition costs. The Company
accounted for the acquisition using the purchase method. The following is a
summary of the purchase price allocation (in thousands):

Completed product technology...................... $ 3.6
Assembled workforce............................... 1.1
Goodwill.......................................... 33.9
Other liabilities, net............................ (5.5)
Acquired in-process technology.................... 16.9
-------
$ 50.0
3. INVENTORIES.

Inventories consist of (in thousands):

September 30, 1997 June 30, 1997
------------------ -------------
Components and subassemblies $ 247,553 $ 235,492
Work-in-process 193,045 235,426
Finished goods 86,560 74,519
Marketing 103,853 82,627
--------- ---------

Total inventories $ 631,011 $ 628,064
--------- ---------
--------- ---------

4. PROPERTY AND EQUIPMENT.

September 30, 1997 June 30, 1997
------------------ -------------
Property and equipment, at cost $ 945,088 $ 940,695
Accumulated depreciation and
amortization (424,741) (415,243)
--------- ---------

Net property and equipment $ 520,347 $ 525,452
--------- ---------
--------- ---------

5. EARNINGS PER SHARE.

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new standard, basic earnings per share is computed as
earnings available to common stockholders divided by weighted average shares
outstanding excluding the dilutive effects of stock options and other
potentially dilutive securities. Diluted earnings per share includes the
dilutive effect of these securities. The new requirements are not expected to
affect reported earnings per share for the quarters ended September 30,
1997 and September 30, 1996.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

The matters addressed in this discussion, with the exception of the
historical information presented, are forward looking statements involving
risks and uncertainties, including the risks discussed under the heading,
"Risks That Affect Our Business."

RESULTS OF OPERATIONS

OPERATING ITEMS AS A PERCENTAGE OF TOTAL REVENUE
- --------------------------------------------------------------------------------
(PERCENTAGES MAY NOT ADD DUE TO ROUNDING)

Three Months
Ended Sept. 30,
------------------------
1997 1996
---- ----

Product and other revenue.................. 80.8% 81.4%
Service revenue............................ 19.2 18.6
------ ------
Total revenue.............................. 100.0% 100.0%

Gross margin............................... 43.0 41.1(1)

Research and development................... 15.2 14.1
Selling, general and administrative........ 34.0 30.3
Write-off of acquired in-process
technology and merger-related expenses.. 2.5 0.4
------ ------
Operating loss............................. (8.7) (3.7)

Interest and other expense, net............ (0.3) (0.1)
------ ------
Loss before income taxes................... (9.0) (3.8)

Benefit for income taxes................... (1.8) (1.0)
------ ------
Net loss................................... (7.2)% (2.8)%
------ ------
------ ------

_________
(1) 43.6% before the effects of Cray Research purchase accounting adjustments.

REVENUE BY GEOGRAPHY
- --------------------------------------------------------------------------------

Three Months Ended September 30,
-------------------------------- Year/Year
($ in millions) 1997 1996 Increase (Decrease)
---- ---- -------------------

<S> <C> <C> <C>
United States $ 402 $ 428 (6)%
Europe 191 179 7 %
Rest of World 175 159 11 %
---- ----
Total revenue $ 768 $ 766 0 %
---- ----
---- ----

</TABLE>

Three Months Ended September 30,
--------------------------------
1997 1996
---- ----
(as a percentage of total revenue)

United States 52% 56%
Europe 25% 23%
Rest of World 23% 21%

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REVENUE BY PRODUCT LINE
- --------------------------------------------------------------------------------

(as a percentage of product
revenue, excluding other revenue)

Three Months Ended September 30,
--------------------------------
1997 1996
---- ----
Servers (primarily from the CRAY-Registered
Trademark- and Origin-TM- families) 49% 48%

Graphics Systems (primarily from the
O2-TM-, Octane-TM- and Onyx2-TM- families) 51% 52%

REVENUE. The Company's product and other revenue are derived primarily from
shipment of computer system products, with subsystem and software revenue,
license fees and non-recurring engineering (NRE) contract payments
comprising the remainder. Service revenue is comprised of hardware and
software support and maintenance.

Revenue for the first quarter of fiscal 1998 was significantly below Company
expectations due in part to a shortfall in the Company's server business,
particularily in the United States. The Company's revenue of $768 million
for the first quarter of fiscal 1998 was essentially flat compared with
revenue of $766 million for the first quarter of fiscal 1997. Product
revenue for the Company's servers for the first quarter of fiscal 1998
decreased 2% compared with the same period a year ago. Product revenue for
the Company's graphics systems decreased 4% compared with the same period a
year ago.

The Company's consolidated backlog at September 30, 1997 was $398 million,
compared with backlog of $537 million at June 30, 1997.

GROSS MARGIN. Gross margin of 43.0% for the first quarter of fiscal 1998
increased compared with gross margin of 41.1% for the first quarter of fiscal
1997. Gross margin for the first quarter of fiscal 1997 would have been
43.6% without purchase accounting adjustments related to acquired Cray
Research inventory and service contracts of approximately $19 million.
Excluding the impact of purchase accounting adjustments, gross margins were
down only slightly primarily due to lower than expected revenue, continued
competitive pricing pressures and proportionately higher service revenue.

OPERATING EXPENSE. Operating expenses for the first quarter of fiscal 1998
grew 11% compared with the same period a year ago and increased from 44.4% to
49.2% as a percentage of revenue. The increase in expenses as a percentage
of revenue resulted from revenue that was well below expectations.

The Company acquired ParaGraph during the first quarter of fiscal 1998. As a
result, approximately $17 million of acquired in-process technology was
written off in the quarter. Merger-related expenses in fiscal 1998 relate to
the acquisitions of ParaGraph and Cray Research. Expenses related to these
mergers are not expected to be significant for the remainder of fiscal 1998.

OTHER OPERATING RESULTS. Interest and other expense, net for the first
quarter of fiscal 1998 was $2.3 million compared with $0.8 million for
the first quarter of fiscal 1997. The increase in expense primarily reflects
one-time charges related to fees incurred in connection with the Company's
exchange of its newly issued Senior Convertible Notes for its existing Zero
Coupon Debentures during the first quarter of fiscal 1998, the write-off of
an investment and costs associated with the Company's economic hedging
program.

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These charges were partially offset by higher interest income attributable to
much higher invested cash balances during the quarter and decreased interest
expense due to lower average short-term borrowings.

TAXES. The Company's combined federal, state and foreign effective income
tax rate for the first quarter of both fiscal 1998 and 1997 was 26%,
excluding the impact of the $17 million non-deductible write-off of acquired
in-process technology in the first quarter of fiscal 1998. No provision for
residual federal taxes has been made on accumulated undistributed earnings of
certain of the Company's foreign subsidiaries since it is the Company's
intention to permanently invest such earnings in foreign operations.

As a result of the acquisition by Silicon Graphics, Cray Research experienced
a "change in ownership" as defined under Section 382 of the Internal Revenue
Code and is subject to certain limitations on the utilization of its
pre-acquisition net operating loss and tax credit carryforward. The Company
has provided a valuation allowance to offset the deferred tax asset relating
to foreign tax credits that may expire prior to utilization due to this
annual limitation. The valuation allowance for deferred tax assets of
approximately $59.9 million will be applied to reduce the noncurrent
intangible assets related to the acquisition of Cray Research if future tax
benefits are subsequently realized.

FINANCIAL CONDITION

At September 30, 1997, cash and cash equivalents and marketable investments
totaled $657 million, up from $374 million at June 30, 1997. Operating
activities generated $395 million during the first three months of fiscal
1998 compared with $166 million during the first three months of fiscal 1997.
Despite the net loss during the first three months of fiscal 1998, cash flow
from operating activities was positive principally due to a significant
decrease in accounts receivable and charges that did not use cash, including
a $17 million write-off of acquired in-process technology related to the
acquisition of ParaGraph. Investing activities, other than changes in the
Company's marketable investments, consumed $109 million in cash during the
first quarter of fiscal 1998, principally for the acquisition of spare parts
in support of the Company's service organization. The principal financing
activities during the first quarter of fiscal 1998 included repayment of $41
million in short-term borrowings, offset by proceeds from employee stock
option exercises.

As announced in October 1997, the Company is currently implementing a
restructuring program aimed at bringing operating expenses more in line with
the current environment and restoring profitability to the Company's
operations. The program will include a reduction in workforce that is
expected to eliminate 700 to 1,000 positions worldwide, including
contractors. The Company expects to take a restructuring charge in the
second quarter, the majority of which will be attributable to the workforce
reductions. The restructuring actions will be financed through current
working capital.

As of September 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents and marketable investments of $657 million
and up to $250 million available under its three-year revolving credit
facility. The Company believes that these principal sources of liquidity
along with cash generated from operations and other resources available to
the Company, should be adequate to fund the Company's projected cash flow
needs. The Company believes that the level of financial resources is an
important competitive factor in the computer industry, and accordingly, may
elect to raise additional capital through debt or equity financing in
anticipation of future needs.

RISKS THAT AFFECT OUR BUSINESS

Silicon Graphics operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The
following discussion highlights some of these risks.

UNCERTAIN OPERATING ENVIRONMENT. The Company is operating in an environment
that makes it unusually difficult to predict its future results with any
degree of assurance. The Company has

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implemented changes in its sales and marketing organization and programs in
response to the significant revenue shortfall in the first quarter of fiscal
1998, but the impact of these programs is uncertain. In addition, the Company
has announced that Edward R. McCracken, its Chairman and Chief Executive
Officer, intends to resign once a successor is named, and that Gary L. Lauer,
who has run the Company's sales and marketing organizations, has resigned.
The Company has implemented an interim management structure in which Robert
H. Ewald, Executive Vice President, Computer Systems, has assumed the role of
acting chief operating officer. Nevertheless, uncertainties surrounding key
leadership positions may adversely affect the Company's ability to execute
effectively and may also affect customers' buying decisions.

RESTRUCTURING PROGRAM. As announced in October 1997, the Company is
implementing a restructuring program aimed at bringing operating expenses
more in line with the current environment and restoring profitability to the
Company's operations. The Company is seeking to reduce costs in ways that
will not have a material impact on revenue levels, but there can be no
assurance that these goals will be achieved.

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

PERIOD TO PERIOD FLUCTUATIONS. The Company's operating results may fluctuate
for a number of reasons. Delivery cycles are typically short, other than for
certain large-scale server products. Well over half of each quarter's
revenue results from orders booked and shipped during the third month, and
disproportionately in the latter half of that month. These factors make the
forecasting of revenue inherently uncertain. Because the Company plans its
operating expenses, many of which are relatively fixed in the short term, on
expected revenue, even a relatively small revenue shortfall may cause a
period's results to be substantially below expectations. Such a revenue
shortfall could arise from any number of factors, including lower than
expected demand, supply constraints, delays in the availability of new
products, transit interruptions, overall economic conditions or natural
disasters. 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 geographical
mix, the mix of service and non-recurring engineering revenue, the mix of
high-end and desktop products and application software, as well as the mix of
configurations within these product categories.

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

The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenue or earnings in any quarter fail
to meet the investment community's expectations, there could be an immediate
impact on the Company's stock price. The stock price may also be affected by
broader market trends unrelated to the Company's performance.

PRODUCT DEVELOPMENT AND INTRODUCTION. The Company's continued success
depends on its ability to develop and rapidly bring to volume production
highly differentiated, technologically complex and innovative products.
Product transitions are a recurring part of the Company's business. During
fiscal 1997, for example, the Company replaced most of its product line,
including both graphics and server systems. A number of risks are inherent
in this process.

The development of new technology and products is increasingly complex and
uncertain, which increases the risk of delays. The introduction of a new
computer system requires close collaboration and continued technological
advancement involving multiple hardware and software design and manufacturing
teams within the Company as well as teams at outside suppliers of key
components such as semiconductor and storage products. The failure of any
one of these elements could cause the Company's new products to fail to meet

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specifications or to miss the aggressive timetables that the Company
establishes. As the variety and complexity of the Company's product families
increase, the process of planning production and inventory levels also
becomes more difficult. In addition, the extent to which a new product gains
rapid acceptance is strongly affected by the availability of key software
applications optimized for the new systems. There is no assurance that
acceptance of the Company's new systems will not be affected by delays in
this process.

Short product life cycles place a premium on the Company's ability to manage
the transition from current products to new products. The Company often
announces new products in the early part of a quarter, while the product is
in the final stages of development, and seeks to manufacture and ship the
product in volume in the same quarter. The Company's 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, delays in customer
purchases of existing products in anticipation of the introduction of new
products, and excess inventories of older products and components.

PROCESS RE-ENGINEERING. The Company is undertaking a series of programs
aimed at redesigning some of its core business processes, including
forecasting, supply chain management, order fulfillment and collection of
accounts receivable. The goals of these programs include more predictable
results of operations, greater quality and customer satisfaction, and
improved asset management. The Company believes that the success of these
programs is critical to its long-term competitive position. Implementing
these changes will require, among other things, enhanced information systems,
substantial training and disciplined execution. There can be no assurance
that these programs will be implemented successfully, or that disruptions of
the Company's operations will not occur in the process.

COMPETITION. The computer industry is highly competitive, with rapid
technological advances and constantly improving price/performance. As most
of the segments in which the Company operates continue to grow faster than
the industry as a whole, the Company is experiencing an increase in
competition, and it expects this trend to continue. This competition comes
not only from the Company's traditional UNIX workstation rivals and
traditional supercomputing competitors, but also from new sources including
the personal computer industry. Many of the Company's competitors have
substantially greater technical, marketing and financial resources and, in
some segments, a larger installed base of customers and a wider range of
available applications software. Competition may result in significant
discounting and lower gross margins.

DESKTOP SYSTEM STRATEGY. The Company has under development a desktop system
that will be based upon Intel microprocessors and the Windows NT operating
system. There can be no assurance that this system will be introduced, and
in any event the system will not account for any material revenues in fiscal
1998. Success in this market segment will require that the Company adapt to
the very different requirements of this higher volume, lower margin market,
including lower-cost manufacturing and distribution, marketing to a broader
audience in markets that could extend beyond the Company's traditional
markets, and new approaches to customer interface and support. The Company
will also be required to manage a complex product transition and to support a
product line including multiple operating systems. In particular, although
the Company plans to continue to invest in and support its current line of
UNIX/MIPS-based workstations, there is a risk that revenue from this business
will be materially reduced by the announcement of the new product. The
Company believes that its future success will depend in significant part on
its making the right strategic choices in this market segment and on
executing its strategy effectively.

IMPACT OF GOVERNMENT CUSTOMERS. A significant portion of the Company's
revenue is derived from sales to the U.S. government, either directly by the
Company 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.

EXPORT REGULATION. The Company's sales to foreign customers are subject to
export regulations. Sales of many of the Company's high-end products require
clearance and export licenses from the U.S. Department

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of Commerce under these regulations. The Departments of Commerce and Justice
are currently investigating the Company's compliance with the export
regulations in connection with the sale of several computer systems to a
customer in Russia in fiscal 1997. The Company believes that it has complied
in all material respects with all applicable laws and that this matter will
be resolved without a significant adverse effect on the Company's business.
However, there is no assurance that this matter will not have an unforeseen
outcome that could impair the conduct of the Company's business outside the
United States.

The Company's 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 the Company's products.

DEVELOPMENT AND ACCEPTANCE OF MIPS RISC ARCHITECTURE. Most of the Company's
system products incorporate microprocessors based upon the Company's
MIPS-Registered Trademark- RISC microprocessor architecture. The Company
licenses the manufacturing and distribution rights to these microprocessors
to selected semiconductor manufacturing companies. The Company believes that
the continued development of the MIPS architecture is critical to its
success.

INTELLECTUAL PROPERTY. The Company routinely receives communications from
third parties asserting patent or other rights covering the Company's
products and technologies. Based upon the Company's evaluation, it may take
no action or it may seek to obtain a license. In any given case there is a
risk that a license will not be available on terms that the Company considers
reasonable, or that litigation will ensue. The Company currently has patent
infringement lawsuits pending against it. The Company expects that, as the
number of hardware and software patents issued continues to increase, and as
the Company's business grows, the volume of these intellectual property
claims will also increase.

BUSINESS DISRUPTION. The Company's corporate headquarters, including most of
its research and development operations and manufacturing facilities, are
located in the Silicon Valley area of Northern California, a region known for
seismic activity. Operating results could be materially affected by a
significant earthquake. The Company is predominantly self-insured for losses
and business interruptions of this kind.

GLOBAL FINANCIAL MARKET RISKS. The Company's business and financial results
are affected by fluctuations in world financial markets, including foreign
currency exchange rates and interest rates. The Company's hedging policy
attempts to reduce some of these risks, based on management's best judgment
of the appropriate tradeoffs among risk, opportunity and expense. The
Company regularly reviews its overall hedging policies, and it continually
monitors its hedging activities to ensure that they are consistent with the
Company's policy and are appropriate and effective in light of changing
market conditions. Management may as part of this review determine at any
time to change its hedging policies. Though the Company intends for its risk
management policy to be comprehensive, there are inherent risks which may be
only partially offset by the Company's program should there be unfavorable
movements in either foreign exchange or interest rates.

Because a significant portion of the Company's revenue is from sales outside
the United States, and many key components are produced outside the United
States, the Company's results can be significantly affected by changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products. The Company is
primarily exposed to changes in exchange rates on the German mark, British
pound, Japanese yen, French franc, and Korean won. When the U.S. dollar
strengthens against these currencies, the value (as expressed in U.S.
dollars) of non-U.S. dollar-based sales and costs decrease. The opposite
happens when the U.S. dollar weakens. Because the Company is a net receiver
of currencies other than the U.S. dollar, it benefits from a weaker dollar
and is adversely affected by a stronger dollar relative to major currencies
worldwide. Accordingly, a strengthening of the U.S. dollar tends to affect
negatively the Company's revenue and gross margins.

The Company's currency hedging program currently involves hedging (i) net
non-U.S. dollar monetary assets and liabilities and generally all server
backlog where the delivery cycle is expected to exceed three months using
currency forward contracts and (ii) a significant portion of anticipated
quarterly revenue using currency options which expire within each fiscal
quarter. The Company has generally not hedged capital expenditures,

-12-

<PAGE>

investments in subsidiaries or inventory purchases. However, because the
Company procures inventory and its international operations incur expenses in
local currencies, the financial effects of fluctuations in the U.S. dollar
values of non-U.S. dollar-based transactions frequently mitigate or tend to
offset each other on a consolidated basis.

-13-

<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is defending a securities class action lawsuit involving MIPS
Computer Systems, Inc., which the Company acquired in June 1992. The MIPS
case, which was filed in the U.S. District Court for the Northern District of
California in 1992, alleges that MIPS and certain of its officers and
directors made material misrepresentations and omissions during the period
from January to October of 1991. In September 1996, the U.S. Court of
Appeals for the Ninth Circuit reversed the summary judgment granted in
defendants' favor in June 1994. In October 1997, the defendants' petition for
review by the U.S. Supreme Court was denied. The Company believes it has
good defenses to the claims alleged in this lawsuit and is defending it
vigorously.

The Company also is defending a securities class action lawsuit involving
Alias Research Inc., which the Company acquired in June 1995. The Alias
case, which was filed in the U.S. District Court for the District of
Connecticut in 1991, alleges that Alias and certain of its former officers
and directors made material misrepresentations and omissions during the
period from May 1991 to April 1992. In October 1997, the defendants' motion
to dismiss the amended complaint was granted. Plaintiffs may decide to
appeal this decision. The Company believes it has good defenses to the
claims alleged in this lawsuit and is defending it vigorously.

The Company also is defending a patent infringement lawsuit filed by Martin
Marietta Corp. in the U.S. District Court for the Middle District of Florida
in September 1995. The Company has filed a counterclaim seeking to invalidate
the principal patent at issue in the lawsuit and the U.S. Patent and
Trademark Office is re-examining the patent at Martin Marietta's request. The
Company's motion for summary judgment is pending with the District Court. A
trial date for the lawsuit has been set for February 1998.

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

(a) The Company held its Annual Meeting of Stockholders on October 29,
1997. Proxies for the meeting were solicited pursuant to
Regulation 14A.

(b) The Company's Board of Directors is divided into three classes, with
directors in each class serving for three-year terms. Accordingly,
not all Directors are elected at each Annual Meeting of Stockholders.
Robert R. Bishop, Robert A. Lutz, and James A. McDivitt were
re-elected as Directors at the meeting. The Directors whose terms of
office continued after the meeting are C. Richard Kramlich, Edward
R. McCracken, Lucille Shapiro, Robert B. Shapiro, Allen F. Jacobson,
and James G. Treybig.

(c) The matters described below were voted on at the Annual Meeting of
Stockholders, and the number of votes cast with respect to each matter
and, with respect to the election of directors, for each nominee, were
as indicated.

1. To elect three Class II Directors of the Company to serve for a
three-year term.

ROBERT R. BISHOP:

For: 158,815,767 Withheld: 2,438,509

ROBERT A. LUTZ:

For: 158,661,470 Withheld: 2,121,942

JAMES A. MCDIVITT:

For: 158,815,635 Withheld: 2,438,641

2. To ratify the appointment of Ernst & Young LLP, as independent
auditors of the Company for the fiscal year ending June 30, 1998.

For: 160,421,276 Against: 406,122 Abstain: 426,878

-14-

<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.37 Two promissory notes dated October 31, 1997 issued to the Company
by Robert H. Ewald.

11.1 Statement of Computation of Per Share Earnings.

27.1 Financial Data Schedule.

(b) Reports on Form 8-K.

A current report on Form 8-K dated August 7, 1997 was filed with the
Securities and Exchange Commission (the "SEC)" to report under Item 5 of
that Form the press release issued to the public on July 24, 1997 regarding
the Company's fourth quarter results.

A current report on Form 8-K dated October 6, 1997 was filed with the SEC
to report under Item 5 of that Form the press release issued to the public
on October 6, 1997 regarding the Company's expected first quarter results.

A current report on Form 8-K dated October 10, 1997 was filed with the SEC
to report under Item 9 of that Form the issuance of securities pursuant to
Regulation S in connection with the acquisition of ParaGraph International,
Inc.

A current report on Form 8-K dated October 31, 1997 was filed with the SEC
to report under Item 5 of that Form the press release issued to the public
on October 27, 1997 regarding the Company's first quarter results and the
press releases issued to the public on October 29, 1997 regarding the
intention of the Company's chairman and chief executive officer to resign
once a successor is named, the Company's restructuring program and certain
other senior management changes.

-15-

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: November 13, 1997 SILICON GRAPHICS, INC.
a Delaware corporation

By: William M. Kelly
------------------------------------
William M. Kelly
Senior Vice President
(Principal Financial Officer)

By: Dennis P. McBride
-------------------------------------
Dennis P. McBride
Senior Vice President
(Principal Accounting Officer)

-16-

<PAGE>

SILICON GRAPHICS, INC.

INDEX TO EXHIBITS

Exhibit Description
- ------- -----------

10.37 Two promissory notes dated October 31, 1997 issued to the
Company by Robert H. Ewald.

11.1 Statement of Computation of Per Share Earnings

27.1 Financial Data Schedule

-17-

<PAGE>

PROMISSORY NOTE
SECURED BY DEED OF TRUST
(FORGIVABLE LOAN)

$1,000,000.00 Mountain View, California
October 31, 1997

1. PAYMENTS.

(a) All outstanding principal and accrued interest under this
Promissory Note shall be due and payable on the Due Date (as defined below).
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.

(b) Notwithstanding subparagraph 1(a) to the contrary, so long as
Borrower remains employed by SGI on a regular and full-time basis, Borrower's
obligation to pay principal under this Promissory Note shall be forgiven as
follows: (i) principal in the amount Sixteen Thousand Six Hundred Sixty-Six
and 67/100 Dollars ($16,666.67) per month shall be forgiven on November 30,
1997 and on the thirtieth (30th) day of each of the fifty-eight (58) calendar
months thereafter, and (ii) principal in the amount of Sixteen Thousand Six
Hundred Sixty-Six and 47/100 Dollars ($16,666.47) shall be forgiven on
October 31, 2002.

(c) Notwithstanding any provision of this Promissory Note to the
contrary, if Borrower's employment with SGI is actually terminated without
cause by SGI at any time prior to the Due Date (other than under
circumstances which would entitle Borrower to receive a change-in-control
payment under that certain Employment Continuation Agreement, as the same may
be amended, modified, restated or superseded from time to time) (an
"Involuntary Termination"), Borrower's obligation to pay the then outstanding
balance of principal under this Promissory Note shall be forgiven as of the
date of the Involuntary Termination.

2. DUE DATE. The "Due Date" shall be the earlier of (i) the thirtieth
(30th) day after the date of termination or cessation of SGI's employment of
Borrower, 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.

<PAGE>

3. PURPOSE OF LOAN. Borrower acknowledges and agrees that SGI is
making this loan to Borrower for the express purpose of facilitating
Borrower'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 Alexis Drive, Palo
Alto, California ("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), that certain promissory note of even date
herewith in the stated principal amount of $2,000,000, that certain Pledge
Agreement of even date herewith 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. 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.

6. 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.

7. 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.

8. TAX LIABILITY. Borrower understands and agrees that any and all
income tax liability to Borrower resulting from this Promissory Note
(including, without limitation, any tax liability resulting from imputed
interest or the forgiveness of principal and interest hereunder) shall be the
sole responsibility of Borrower. Borrower agrees that

2
<PAGE>

the forgivable and non-interest bearing nature of this Promissory Note is
personal to Borrower and non-transferable, and is conditioned upon the future
performance of substantial services by Borrower. Borrower certifies to SGI
that Borrower reasonably expects to itemize deductions for each year that
principal is outstanding under this Promissory Note.

9. 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.

IN WITNESS WHEREOF, Borrower has executed this Promissory Note as of the date
first set forth above.

BORROWER:

/s/ Robert H. Ewald
------------------------
ROBERT H. EWALD

3
<PAGE>

PROMISSORY NOTE
SECURED BY DEED OF TRUST
AND STOCK PLEDGE AGREEMENT

NOTICE: THIS PROMISSORY NOTE PROVIDES FOR A BALLOON PAYMENT.

$2,000,000.00 Mountain View, California
October 31, 1997

For value received, the undersigned, Robert H. Ewald ("Borrower"), promises
to pay to SILICON GRAPHICS, INC., a Delaware corporation ("SGI"), or order,
at 2011 N. Shoreline Boulevard, Mountain View, California 94043-1389, 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, the principal sum of Two Million and 00/100 Dollars
($2,000,000.00), or so much thereof as may be advanced by SGI pursuant to the
terms of this Promissory Note, together with interest thereon at the rate of
seven and four tenths percent (7.4%) per annum, compounded annually, until
all principal, interest and other charges under this Promissory Note are paid
in full. Interest shall accrue at the rate stated above on each advance from
the date of disbursement; all interest so accrued shall be compounded
annually from and after the date that such advance is made by SGI.

1. PAYMENTS.

(a) 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.

(b) Notwithstanding subparagraph 1(a) to the contrary, the
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 gross sales proceeds payable to Borrower in connection with the sale
of any Pledged Collateral (as defined below); provided, however, if SGI's
employment of Borrower 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 to the extent of one
hundred percent (100%) of the gross sales proceeds payable to Borrower in
connection with the sale of any such Pledged Collateral. In no event shall
the preceding sentence be deemed to limit 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.

4
<PAGE>

(c) Notwithstanding any provision of this Promissory Note to the
contrary, in the event of an Involuntary Termination (as defined below),
Borrower's obligation to pay outstanding principal and accrued interest under
this Promissory Note shall be forgiven in an amount equal to (but not less
than zero nor greater than the amount set forth in item (i)(A)) (i) the sum
of (A) Three Hundred Eighteen Thousand Seven Hundred Fifty and 00/100 Dollars
($318,750), which is the amount of Borrower's original down payment for the
purchase of the land comprising a portion of the New Residence (as defined in
paragraph 4 below), plus (B) the outstanding principal and accrued interest
under this Promissory Note as of the date of the Involuntary Termination,
less (ii) the "net proceeds" from the sale of the New Residence, provided
that all of the following conditions precedent have been satisfied:

(1) Borrower's employment with SGI is actually terminated
without cause by SGI prior to the Due Date (other than under circumstances
which would entitle Borrower to receive a change-in-control payment under
that certain Employment Continuation Agreement, as the same may be amended,
modified, restated or superseded from time to time) (an "Involuntary
Termination");

(2) After such Involuntary Termination, Borrower sells and
conveys the New Residence to an independent third-party purchaser in an arm's
length transaction within one hundred eighty (180) days following the date of
the Involuntary Termination; and

(3) Borrower is not in default under this Promissory Note or
any Loan Documents (as defined below).

For purposes of this subparagraph 1(c), the "net proceeds" shall mean the
cash portion of the gross purchase price payable by the third-party
purchaser, plus the net present value of any financing to be provided by
Borrower in connection with said sale, less broker's commissions and
reasonable and customary closing costs paid by Borrower. In the event of any
casualty or condemnation, the net proceeds shall be increased by the amount
of any insurance and condemnation proceeds paid or otherwise payable to
Borrower in connection therewith. For purposes of this paragraph, the net
present value of any financing provided by Borrower shall be calculated by
discounting the principal amount of such financing by an interest rate equal
to the prevailing reference rate charged by Bank of America N.T.&S.A. on the
fifth (5th) business day preceding the closing of the transaction.

2. ADVANCES. Subject to the terms and conditions of this Section 2, the
principal sum under this Promissory Note shall be advanced by SGI to Borrower
as follows:

(a) INITIAL ADVANCE. On the date first set forth above, SGI shall
make an initial advance to Borrower equal to Eight Hundred Six Thousand Two
Hundred Fifty and 00/100 Dollars ($806,250) ("Initial Advance").

5
<PAGE>

(b) INTERIM ADVANCES. Within five (5) business days following
Borrower's written request for an interim advance ("Interim Advance") (which
request may be made by Borrower not more than once every thirty (30) calendar
days) and satisfaction of the conditions set forth below, SGI shall make the
requested Interim Advance to Borrower.

(i) AMOUNT OF INTERIM ADVANCE. The amount of the Interim
Advance shall reflect the current amount payable by Borrower to its architect
and/or general contractor for the design and construction of the New
Residence (on a percentage of completion basis and net of retainage);
provided, however, that in no event shall the aggregate amount of all Interim
Advances (including the requested Interim Advance) exceed seventy-five
percent (75%) of the total design and construction costs set forth in the
Construction Budget (as defined below).

(ii) CONDITIONS TO INTERIM ADVANCES. Prior to making an
Interim Advance, the following conditions precedent shall have been satisfied:

(A) SGI shall have received a written certification from
Borrower that Borrower has obtained all governmental approvals required for
the development and construction of the New Residence;

(B) SGI shall have received copies of (i) the agreement
between Borrower and its architect with regard to the design of the New
Residence, and (ii) the agreement between Borrower and its general contractor
with regard to the construction of the New Residence (collectively,
"Construction Agreements");

(C) Borrower shall have received a copy of the budget for
the design and construction of the New Residence ("Construction Budget") and
a certification by Borrower and its architect and general contractor that,
based upon their knowledge, information and belief, the Construction Budget
is accurate and complete and is sufficient to cover the work contemplated
under the Construction Agreements and construction documents.

(D) With regard to each Interim Advance, SGI shall have
received, no later than the Completion Date (as defined below), a written
request from Borrower to make the Interim Advance, together with (i) an
application and certificate for payment, signed by Borrower's architect and
general contractor, supporting the percentage of completion and the amount of
the Interim Advance so requested, (ii) copies of any invoices from the
general contractor and/or architect supporting the amount of the Interim
Advance so requested, and (iii) copies of conditional partial releases of
lien (in statutory form) from the general contractor, architect,
subcontractors, materialman and/or suppliers for the portion of the
improvements covered by the Interim Advance request;

(E) With regard to each Interim Advance, SGI shall have
received a written certification of Borrower, certifying that (i) neither
Borrower, its architect nor its general contractor are in default under the
Construction Agreements, (ii) the work contemplated under the Construction
Agreements will be completed by the

6
<PAGE>

Completion Date, (iii) no mechanic's lien exists with regard to the
construction of the New Residence, and (iv) the aggregate amount of all
Interim Advances (including the requested Interim Advance) does not exceed
seventy-five percent (75%) of the total design and construction costs as set
forth in the Construction Budget; and

(F) Borrower shall not be in default under this
Promissory Note or any Loan Documents (as defined in paragraph 5 below).

For purposes of this Promissory Note, the "Completion Date" shall mean
the date of substantial completion of the construction of the New Residence,
but in no event later than twenty-seven (27) months following the date first
set forth above (subject to extension for each day of "force majeure delay").
A "force majeure delay" shall include any delay caused by conditions beyond
the reasonable control of Borrower, including acts of God, weather or
elements, fire, strikes, labor disputes, delays in delivery, but excluding
Borrower's inability to pay or finance the cost of construction.

(c) COMPLETION ADVANCE. Within five (5) business days following
Borrower's written request for a completion advance ("Completion Advance")
and satisfaction of the conditions set forth below, SGI shall make the
Completion Advance to Borrower.

(i) AMOUNT OF COMPLETION ADVANCE. The amount of the
Completion Advance shall reflect the current amount payable by Borrower to
its architect and/or general contractor for the design and construction of
the New Residence following substantial completion of the New Residence;
provided, however, that in no event shall the aggregate amount of the
Completion Advance and all Interim Advances (including the requested Interim
Advance) exceed eighty-five percent (85%) of the total design and
construction costs set forth in the Construction Budget (as defined below).

(ii) CONDITIONS TO COMPLETION ADVANCE. Prior to making the
Completion Advance, the following conditions precedent shall have been
satisfied:

(A) All conditions to the Interim Advances shall have
been satisfied;

(B) No later than sixty (60) days following the
Completion Date, SGI shall have received a written request from Borrower with
regard to the Completion Advance, together with (i) an application and
certificate for payment, signed by Borrower's architect and general
contractor, supporting substantial completion and the amount of the
Completion Advance so requested, (ii) copies of any invoices from the general
contractor and/or architect supporting the amount of the Completion Advance,
(iii) a certificate of substantial completion, signed by Borrower and its
architect and general contractor, (iv) a copy of the notice of completion
signed by Borrower and its architect and general contractor, together with
evidence that Borrower has caused the same to be recorded in the Official
Records of Santa Clara County, California, and (v) copies of conditional full
releases of lien from the general contractor,

7
<PAGE>

architect and all subcontractors, materialman and/or suppliers who have
performed work or furnished materials for the construction of the
improvements;

(C) SGI shall have received a written certification of
Borrower, certifying that (i) neither Borrower, its architect nor its general
contractor are in default under the Construction Agreements, (ii) the work
contemplated under the Construction Agreements has been completed by the
Completion Date, (iii) no mechanic's lien exists with regard to the
construction of the New Residence, and (iv) the aggregate amount of the
Completion Advance and all Interim Advances does not exceed eighty-five
percent (85%) of the total design and construction costs as set forth in the
Construction Budget; and

(D) Borrower shall not be in default under this
Promissory Note or any of the Loan Documents.

(d) FINAL ADVANCE. Within five (5) business days following
Borrower's written request for a final advance ("Final Advance") and
satisfaction of the conditions set forth below, SGI shall make such Final
Advance to Borrower.

(i) AMOUNT OF FINAL ADVANCE. The amount of the Final Advance
shall not exceed the lesser of: (i) an amount equal to (A) eighty-five
percent (85%) of the fair market value of the New Residence as set forth in
the Appraisal (as defined below), less (B) the sum of (1) the original
principal balance of the Forgivable Loan (as defined in subparagraph
(2)(d)(ii)(B) below), plus (2) the then outstanding balance of principal
under this Promissory Note, or (ii) an amount equal to (A) Two Million
Dollars ($2,000,000), less (B) the then outstanding balance of principal
under this Promissory Note; and

(ii) CONDITIONS TO FINAL ADVANCE. Prior to making the Final
Advance, the following conditions precedent shall have been satisfied:

(A) All conditions to the Completion Advance shall have
been satisfied;

(B) SGI shall have received a written appraisal
("Appraisal") prepared by a real estate appraiser with at least three (3)
years experience appraising residential property in the Santa Clara County,
California, establishing a fair market value for the New Residence which is
greater than one hundred fifteen percent (115%) of the sum of (i) the
original principal balance of that certain promissory note of even date
herewith in the original principal amount of $1,000,000, executed by Borrower
in favor of SGI ("Forgivable Loan"), plus (ii) the outstanding balance of
principal under this Promissory Note.

(C) No later than sixty (60) days following SGI's
disbursement of the Completion Advance (or, if no Completion Advance is
requested by Borrower, no later than sixty (60) days following the Completion
Date), SGI shall have received a written request for the Final Advance; and

8
<PAGE>

(D) Borrower shall not be in default under this
Promissory Note or any of the Loan Documents.

(e) DISBURSEMENT OF ADVANCES. SGI shall make the foregoing
advances directly to Borrower or, at SGI's option, directly to Borrower's
general contractor, architect, subcontractors, materialmen or suppliers. In
no event shall SGI have any obligation to advance any principal hereunder in
excess of the lesser of the following: (i) if Borrower does not request the
Final Advance in accordance with Paragraph 2(d) above, an amount equal to (A)
eighty-five percent (85%) of the cost of designing and constructing the New
Residence, plus (B) the Initial Advance; (ii) if Borrower requests the Final
Advance in accordance with Paragraph 2(d) above, an amount equal to (A)
eighty-five percent (85%) of the fair market value of the New Residence as
set forth in the Appraisal, less (B) the then outstanding principal balance
of the Forgivable Loan; or (iii) Two Million Dollars ($2,000,000).

(f) AUDIT RIGHT. SGI shall have the right from time to time to
engage an architect to review, inspect and audit the progress of construction
of the New Residence, applications and certifications for payment and such
other supporting documentation with regard to the construction of the New
Residence. Borrower agrees to reasonably cooperate with SGI in connection
with the foregoing. Borrower shall reimburse SGI for the cost of such review
if SGI's architect determines that the amount of any advance requested by
Borrower was materially inaccurate or inconsistent with the applicable
amounts and/or percentages of completion determined by SGI's architect. Upon
SGI's written demand, Borrower shall refund any amounts advanced by SGI in
excess of the proper amounts determined by SGI's architect.

3. DUE DATE. The "Due Date" shall be the earlier of (i) the thirtieth
(30th) day following the date of termination or cessation of SGI's employment
of Borrower, 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 in
paragraph 4 below), or (iii) the fifth (5th) anniversary of the date first
set forth above. Notwithstanding the preceding to the contrary, if Borrower's
employment with SGI is terminated as a result of an Involuntary Termination,
the date set forth in (i) above shall be the one hundred eightieth (180th)
day following the date of the Involuntary Termination.

4. PURPOSE OF LOAN. Borrower acknowledges and agrees that SGI is
making this loan to Borrower for the express purpose of facilitating
Borrower'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 and constructing Borrower's new principal residence located at
Alexis Drive, Palo Alto, California ("New Residence").

5. 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),
the Forgivable Loan, or any other agreement or instrument now or hereafter
executed by Borrower to evidence or secure the performance of Borrower's
obligations thereunder (collectively, "Loan

9
<PAGE>

Documents"), or Borrower fails to complete the construction of the New
Residence by the Completion Date, 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.

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").

7. DUE ON SALE. The Deed of Trust provides as follows:

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
(including, without limitation, any tax liability resulting from the
forgiveness of principal and interest hereunder) shall be the sole
responsibility of Borrower. Borrower agrees that any forgiveness under this
Promissory Note is personal to Borrower and non-transferable, and is
conditioned upon the future performance of substantial services by Borrower.
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 hereunder. Presentment and demand for payment, notice of dishonor,
protest and notice of protest

10
<PAGE>

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.

IN WITNESS WHEREOF, Borrower has executed this Promissory Note as of the date
first set forth above.

BORROWER:

/s/ Robert H. Ewald
------------------------
ROBERT H. EWALD

<PAGE>

EXHIBIT 11.1
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share amounts)

Three Months Ended
PRIMARY: September 30,
----------------------
1997 1996
---- ----
Weighted average shares outstanding:

Common shares........................................ 182,160 172,974

Convertible preferred shares......................... -- --

Stock options........................................ -- --
-------- --------

Total weighted average shares outstanding............ 182,160 172,974
-------- --------
-------- --------

Loss per share:

Net loss............................................. $( 55,538) $(21,601)

Preferred stock dividend requirement................. (131) (131)
-------- --------

Net loss available to common stockholders............ $(55,669) $(21,732)
-------- --------
-------- --------

Net loss per share................................... $ (0.31) $ (0.13)
-------- --------
-------- --------

FULLY DILUTED:

Weighted average shares outstanding:

Common shares........................................ 182,160 172,974

Convertible preferred shares......................... -- --

Zero coupon convertible subordinated debentures...... -- --

Stock options........................................ -- --
-------- --------

Total weighted average shares outstanding............ 182,160 172,974
-------- --------
-------- --------
Loss per share:

Net loss............................................. $(55,538) $(21,601)

Zero coupon convertible subordinated debenture....... -- --

Preferred stock dividend requirement................. (131) (131)
-------- --------

Net loss available to common stockholders............ $(55,669) $(21,732)
-------- --------
-------- --------

Net loss per share................................... (0.31) $ (0.13)
-------- --------
-------- --------

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 484,605
<SECURITIES> 115,438
<RECEIVABLES> 720,163
<ALLOWANCES> 25,388
<INVENTORY> 631,011
<CURRENT-ASSETS> 2,183,915
<PP&E> 945,088
<DEPRECIATION> 424,741
<TOTAL-ASSETS> 3,256,167
<CURRENT-LIABILITIES> 969,566
<BONDS> 364,752
0
16,998
<COMMON> 166
<OTHER-SE> 1,848,379
<TOTAL-LIABILITY-AND-EQUITY> 3,256,167
<SALES> 620,696
<TOTAL-REVENUES> 767,993
<CGS> 351,660
<TOTAL-COSTS> 437,923
<OTHER-EXPENSES> 118,555
<LOSS-PROVISION> 2,970
<INTEREST-EXPENSE> 5,679
<INCOME-PRETAX> (69,113)
<INCOME-TAX> (13,575)
<INCOME-CONTINUING> (55,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,538)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)

</TABLE>