SILICON GRAPHICS INC /CA/, 10-K, 2000-09-20

SILICON GRAPHICS INC /CA/
10-K, 2000-09-20
ELECTRONIC COMPUTERS

Previous: DRESDNER RCM GLOBAL STRATEGIC INCOME FUND INC, DEF 14A, 2000-09-20

Next: SILICON GRAPHICS INC /CA/, 10-K, EX-10.17, 2000-09-20

<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

(MARK ONE)

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>

FOR THE FISCAL YEAR ENDED JUNE 30, 2000.

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 1-10441
------------------------

SILICON GRAPHICS, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 94-2789662
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>

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:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED:
------------------- ---------------------
<S> <C>
Common Stock, $0.001 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
5 1/4% Senior Convertible Notes New York Stock Exchange
</TABLE>

------------------------------

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

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

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 September 8, 2000 on the New York Stock Exchange as reported in
The Wall Street Journal, was approximately $676 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 SEPTEMBER 8, 2000, THE REGISTRANT HAD OUTSTANDING 188,924,877 SHARES OF
COMMON STOCK.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for registrant's Annual Meeting of Stockholders
to be held October 25, 2000 are incorporated by reference into Part III of this
Report on Form 10-K.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART I

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

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

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

ITEM 1. BUSINESS

GENERAL

SGI is a leading provider of scalable, high-performance computing and
visualization solutions for technical and creative users. The company focuses on
five principal market segments -- manufacturing, the sciences, government,
telecommunications and media -- where it helps Fortune 500 companies and major
institutions solve large and complex computing problems using a combination of
SGI's professional skills, system performance and visualization technologies.
SGI's system solutions enable customers to enhance their core competencies and
gain a competitive edge in the markets they serve.

Our Alias--Wavefront subsidiary creates applications software targeted at
engineering and creative professionals in the digital content creation and
manufacturing sectors.

PRODUCTS

Most of our computer systems are designed around SGI-developed
MIPS-Registered Trademark- RISC processors and our IRIX-Registered Trademark-
operating system, which is an enhanced version of the UNIX-Registered Trademark-
operating system. We also

1
<PAGE>
offer desktop and server products based on the Intel-Registered Trademark-
processor architecture and the Linux-Registered Trademark- and Windows
NT-Registered Trademark- operating systems.

VISUAL COMPUTING PRODUCTS

DESKTOP SYSTEMS SGI desktop workstations combine key elements of workgroup
collaboration, interactive media and computing at a range of prices and
performance. Systems in this family can be used for tasks as diverse as
manipulating 3D models for computer-aided design ("CAD"), crunching numbers for
chemistry and geographic information systems applications, or functioning as a
tool for video editing, animation rendering, technical publishing, World Wide
Web and intranet authoring and serving and software development.

Our O2-Registered Trademark- and Octane-Registered Trademark- families of
MIPS and IRIX desktop workstations provide key functionality for digital content
creation in graphics-intensive markets such as industrial design and
entertainment. The O2 family of entry-level desktop workstations features
advanced 3D graphics and imaging, real-time video capability and interactive and
professional quality graphics, audio and imaging capabilities. The O2
workstation has significant appeal in markets such as mechanical CAD, chemistry,
color publishing, film and video, software development, education and media
authoring. The Octane family of single and dual processor workstations is
designed to provide the strongest graphics and computational capability
available in the desktop category, for applications such as 3D solids modeling,
mechanical CAD, digital prototyping, 3D visualization, animation, architectural
design and professional audio and video production.

We entered the market for Intel-based workstations in 1999. These products
range from entry-level single processor systems to advanced dual processor
graphics workstations. The products are based on a combination of
industry-standard components and SGI-specific added value in the form of SGI's
VPro-TM- graphics subsystem. They support both Linux and the Windows NT
operating systems.

ADVANCED GRAPHICS SYSTEMS Based on a high-bandwidth ccNUMA architecture and
offering SGI's InfiniteReality3-TM- graphics, the Onyx2-Registered Trademark-
Series has been the industry's leading family of visualization systems for the
past few years. The Onyx 3000 Series, SGI's latest generation of Onyx
visualization systems, delivers on the promise of modular computing with
NUMAflex-TM-. Built on the Origin 3000 platform, these systems provide new
levels of graphic performance and realism, along with all the benefits of a
Modular Computer. Powered by SGI Onyx systems, the SGI-TM-Reality Center-TM-
provides a collaborative computing environment designed to support multiple
business processes-including engineering and design review, data analysis,
training and presentations. In addition to the Reality Center "Rooms," we've
also introduced transportable Reality Center "Walls" for installation in
existing conference rooms.

SERVER PRODUCTS

ORIGIN 200 The Origin-TM- 200 is a MIPS and IRIX deskside server employing
from one to four processors. The Origin 200 server is designed for departmental
and other workgroup serving applications as well as Web serving.

ORIGIN 2000/3000 The Origin-TM- 2000 family of high-performance servers is
based on our innovative cache coherent non-uniform memory access (ccNUMA)
architecture, which offers the ability to scale from as few as four to as many
as hundreds of processors while maintaining almost linear performance per
processor. The new Origin-TM- 3000 family, introduced in July 2000, takes this
architecture to the next level through SGI's proprietary NUMAflex modular
technology, a "brick"-style system for constructing small to very large systems
from a common set of building blocks. This system allows users to build the
optimum configuration one component at a time and adopt new technologies that
map to their specific business or research needs. Key applications in the
technical and scientific markets include finite element analysis (to determine
the impact of elements like stress and

2
<PAGE>
temperature), quantum chemistry calculation, seismic analysis and computational
fluid dynamics. The Origin line is also targeted at certain enterprise segments
that have bandwidth and computational requirements similar to those of the
technical market. SGI has accepted the challenge of the technical and creative
user communities, working to provide them with the most advanced computational
tools.

SGI 1000 FAMILY Based on Intel's industry-standard
Pentium-Registered Trademark- processors and an SMP architecture, SGI's
entry-level server family includes the SGI 1200, SGI 1400 and SGI 1450.

OTHER PRODUCTS

ALIAS--WAVEFRONT Our Alias--Wavefront subsidiary supplies modeling and
animation application software for creative professionals in the entertainment,
industrial design and visualization and graphic design markets. Its
industry-leading products run on the Windows NT and IRIX operating systems and
include the Maya-Registered Trademark- family of 3D entertainment products,
Alias StudioPaint 3D-TM- and the Alias Studio-TM- and Alias AutoStudio-TM-
industrial design and visualization products. Alias--Wavefront is based in
Toronto, with sales offices and distribution worldwide.

APPLICATIONS SOFTWARE

We maintain active programs to encourage independent software development
for our systems, including training, technology support and cooperative
marketing.

MARKETING, SALES AND DISTRIBUTION

We sell our system products through our direct sales force and through
several indirect channels. In fiscal 2000 direct sales accounted for
approximately 56% of our product revenues. The direct sales and support
organization operates throughout the United States and in all significant
international markets. We serve smaller international markets through
distributors.

Our principal indirect channels are:

- VARS, or value added resellers, are software companies that develop or
customize their proprietary software specifically for use with our
systems. VARs incorporate their applications software and resell our
systems to end-users.

- VADS, or value added dealers, are typically direct sales organizations
that sell primarily into a single vertical market and incorporate
appropriate specialized third-party software with our hardware for sale to
their customers.

- SYSTEMS INTEGRATORS incorporate SGI systems in much larger systems
customized for use by the federal government and large commercial clients.

Many of our resellers are served through GE Access, which functions as a
master reseller for our system products.

Information with respect to international operations and export sales may be
found in Note 8 to the Consolidated Financial Statements included in Part II,
Item 8 of this Form 10-K. See also "Risks That Affect Our Business" included in
Part II, Item 7 of this Form 10-K. No single end-user customer accounted for 10%
or more of our revenues for each of the last three fiscal years, but agencies of
the United States federal government, both directly and indirectly through
systems integrators and other resellers, accounted for approximately 20% of our
revenues in fiscal 2000.

CUSTOMER SERVICE AND SUPPORT

We believe that the quality and reliability of our products and the support
we provide to customers are critical to our success. Our customer service
organization includes field service engineers, field

3
<PAGE>
product and applications specialists, product support engineers, training
specialists and administrative support personnel. We also provide customer
education through regularly scheduled courses in system software administration,
applications programming and hardware maintenance. We provide local customer
support from offices in North America, Western Europe and the Pacific Rim, with
spare parts inventories at each location. International distributors provide
training and support for products sold by them.

We typically provide a standard "return to factory" hardware warranty
against defects in materials and workmanship for periods of up to three years.

PROFESSIONAL SERVICES

We have been placing increasing emphasis on building our own professional
services organization to enable us to offer a wider variety of
solutions-oriented services, including consulting, custom engineering and
systems integration services. At June 30, 2000 we had just over 400
professionals engaged in this effort, compared with just over 300 at June 30,
1999.

RESEARCH AND DEVELOPMENT

Our research and development program is directed principally toward
maintaining and enhancing our competitive position through incorporating the
latest advances in microprocessor, hardware, software and networking
technologies. This effort is focused specifically on developing and enhancing
our computing architectures, graphics subsystems, MIPS microprocessors, compiler
software, operating system, applications software and development tools. We are
also developing new ways to increase product reliability, reduce manufacturing
costs and improve product development lead times.

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 2000, 1999 and 1998, we spent approximately $301 million,
$380 million and $459 million, respectively, on research and development. Those
amounts represented 12.9%, 13.8% and 14.8%, respectively, of total revenue. 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.

MANUFACTURING

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

Our main manufacturing facilities are in Chippewa Falls, Wisconsin and near
Neuchatel, Switzerland. Both of these facilities focus on MIPS-based servers and
graphics systems. Our Intel-based products are manufactured by third party
manufacturing partners. We continually evaluate the allocation of manufacturing
activities among our own operations and those of suppliers and subcontractors.

Most of our products incorporate components that are available from only one
or limited sources. Key components that are sole-sourced include application
specific integrated circuits ("ASICs"), storage products, especially RAID-based
products, and certain cable and memory products. We have chosen to deal with
sole sources in these cases because of unique technologies, economic advantages
or other factors. But reliance on single or limited source vendors involves
several risks, including the possibility

4
<PAGE>
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 or interruptions
or price increases would, at least in the short term, adversely affect our
results.

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

COMPETITION

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

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

PROPRIETARY RIGHTS AND LICENSES

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

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

Our business will be affected by our success in protecting proprietary
information and obtaining necessary licenses. Litigation or changes in the
interpretation of intellectual property laws could expand or reduce the extent
to which we or our competitors are able to protect intellectual property or
could require significant changes in product design. The computer industry has
seen a substantial increase in litigation with respect to intellectual property
matters, and we have been engaged in several intellectual property lawsuits both
as plaintiff and defendant. Although no such proceedings were pending as of
June 30, 2000, we expect that litigation of this sort will reoccur from time to
time.

EMPLOYEES

As of June 30, 2000, we had 6,726 full-time employees, compared with 9,191
at June 30, 1999. Our future success will depend, in part, on our ability to
continue to attract, retain and motivate highly qualified technical, marketing
and management personnel, who are in great demand. 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.

5
<PAGE>
ITEM 2. PROPERTIES

We believe that, while we currently have or are developing sufficient
facilities to conduct our operations during fiscal 2001, we will continue to
acquire both leased land and owned facilities throughout the world as our
business requires. We lease sales, service, R&D, and administrative offices
worldwide and have principal corporate and manufacturing facilities in the
following locations:

CALIFORNIA Our corporate offices and primary R&D and administrative
operations are located in Mountain View, California, where we lease and own a
total of about 1,432,000 square feet. Our principal facilities include: a four
building, 518,000 square foot owned campus facility completed in fiscal 1997 on
22 acres of leased land; a campus facility with 2 of 4 planned R&D buildings
occupied in early fiscal 2000, totaling approximately 252,000 square feet of
owned space on 13 acres of leased land; and a sales headquarters building
comprising approximately 116,000 square feet, located on 7.5 acres owned by us
near our Mountain View headquarters. We also lease eleven other buildings near
our Mountain View headquarters, comprising approximately 546,000 square feet.

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

SWITZERLAND Our European manufacturing and support center near Neuchatel,
Switzerland is located in an owned facility, consisting of about 170,000 square
feet.

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of SGI and their ages as of September 8, 2000 are as
follows:

<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION AND PRINCIPAL OCCUPATION SINCE
---- -------- --------------------------------------------------- ---------
<S> <C> <C> <C>
Robert R. Bishop............... 57 Chairman, Chief Executive Officer and Director 1999

Kenneth L. Coleman............. 57 Executive Vice President, Global Sales, Service & 1987
Marketing

Harold L. Covert............... 53 Executive Vice President, Chief Financial Officer 2000
and Chief Administrative Officer

Warren Pratt................... 47 Executive Vice President, Engineering and 2000
Manufacturing Operations

Sandra M. Escher............... 40 Vice President and General Counsel 1999

Jeffrey Zellmer................ 40 Vice President, Corporate Controller 2000
</TABLE>

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.

6
<PAGE>
Except as set forth below, all of the officers have been associated with SGI
in their present positions for more than five years.

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

Mr. Coleman was appointed Executive Vice President, Global Sales, Service &
Marketing in July 2000. Prior to that, he was Senior Vice President, Global
Sales, Service & Marketing since June of 1999. Between 1997 and 1999, he was
Senior Vice President, Customer and Professional Services. From 1987 to 1997 he
served as Senior Vice President, Administration of SGI.

Mr. Covert joined SGI in July 2000 as Executive Vice President, Chief
Financial Officer and Chief Administrative Officer. Prior to joining SGI and
since March 2000, he was employed as Chief Financial Officer of Red Hat, Inc.
Mr. Covert was with Adobe Systems, Inc. from March 1998 until March 2000 and was
Executive Vice President and Chief Financial Officer upon his departure. From
January 1991 to March 1998, Mr. Covert was a partner in the firm of DHJ &
Associates, Inc., Consultants and Certified Public Accountants. During the last
three and half years of this period he acted in a full time capacity as Chief
Financial Officer for three companies. Prior to that time Mr. Covert held senior
financial management positions with ISC Systems Corporation and Northern
Telecom Inc.

Mr. Pratt has held a variety of general and engineering management positions
at SGI since 1992, including most recently as President and General Manager of
Alias--Wavefront from 1998 until taking his current position in May 2000.

Ms. Escher 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.

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

7
<PAGE>
PART II

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

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

PRICE RANGE FOR COMMON STOCK

<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999
------------------------------ ------------------------------
LOW HIGH CLOSE LOW HIGH CLOSE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter...................................... $10.56 $18.88 $10.94 $ 9.06 $15.00 $ 9.38
Second Quarter..................................... 6.88 12.81 9.69 7.38 13.94 12.88
Third Quarter...................................... 8.25 13.50 10.56 13.13 20.88 16.69
Fourth Quarter..................................... 3.06 11.25 3.75 11.69 16.63 16.38
</TABLE>

SGI had 7,549 stockholders of record as of June 30, 2000. We have not paid
any cash dividends on our common stock. We currently intend to retain earnings
for use in our business and do not anticipate paying cash dividends to common
stockholders.

8
<PAGE>
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.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------------------------------------
2000(3) 1999 1998 1997 1996(4)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Data:
Total Revenue............................ $2,331,134 $2,748,957 $3,100,610 $3,662,601 $2,921,316
Costs and expenses:
Cost of revenue........................ 1,503,525 1,603,250 1,963,551 2,022,546 1,482,439
Research and development............... 301,248 380,346 459,188 479,101 353,461
Selling, general and administrative.... 785,196 907,612 1,068,429 1,038,313 807,830
Other operating expense(1)............. 102,861 (15,107) 205,543 10,757 103,193
---------- ---------- ---------- ---------- ----------
Operating (loss) income.................. (361,696) (127,144) (596,101) 111,884 174,393
Interest and other income (expense),
net(2)................................. (20,188) 252,865 (818) (13,694) 14,395
---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes........ (381,884) 125,721 (596,919) 98,190 188,788
Net (loss) income........................ (829,544) 53,829 (459,627) 78,551 115,037
Net (loss) income per share:
Basic.................................. $ (4.52) $ 0.29 $ (2.47) $ 0.44 $ 0.70
Diluted................................ $ (4.52) $ 0.28 $ (2.47) $ 0.43 $ 0.65
Shares used in the calculation of net
(loss) income per share:
Basic.................................. 183,528 186,374 186,149 175,548 162,658
Diluted................................ 183,528 189,427 186,149 182,637 175,790
Balance Sheet Data:
Cash, cash equivalents and marketable and
restricted investments................. $ 384,489 $ 782,369 $ 736,720 $ 374,292 $ 456,937
Working capital.......................... 58,781 869,980 968,700 1,229,388 994,817
Total assets............................. 1,839,211 2,788,257 2,964,706 3,344,592 3,158,246
Long-term debt and other................. 385,133 387,005 403,522 419,144 381,490
Stockholders' equity..................... 592,550 1,424,199 1,464,512 1,839,242 1,675,318
Statistical Data:
Number of employees...................... 6,726 9,191 10,286 10,930 10,485
Long-term debt and other/total
capitalization......................... 39% 21% 22% 19% 19%
</TABLE>

------------------------

(1) Fiscal 2000 amount represents restructuring charges. Fiscal 1999 amount
includes a reduction in previously estimated restructuring charges
($14 million). Fiscal 1998 amount includes restructuring charges
($144 million), a charge for long-lived asset impairment ($47 million) and a
write-off of acquired in-process technology ($17 million). Fiscal 1997
amount represents merger-related expenses. Fiscal 1996 amount includes the
write-off of acquired in-process technology ($98 million) and merger-related
expenses.

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

(3) Amounts reflect the March 31, 2000 sale of our Cray product line.

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

9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The past three fiscal years for SGI have seen declining revenues and
unprofitable operations as we have felt the impact of technologies and product
families in transition, management and employee turnover and strong competition.
During fiscal 2000, we took several major steps to refocus our operations,
including the spin-off of our majority interest in MIPS, the sale of our Cray
product line, and the discontinuance of our proprietary Silicon
Graphics-Registered Trademark- 320 and 540 Visual Workstation product line in
favor of products based on industry standard architectures. We also continued to
manage significant reductions in operating expenses compared with fiscal 1999
levels. While these steps are all important parts of our plan to restore growth
and profitability, in the short-term they had a pronounced impact on our fiscal
2000 financial results, which makes the comparison of these results to those for
prior years difficult. The discussion that follows is limited to a discussion of
the historical results of operations and financial condition.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------
2000 1999 1998
-------- -------- --------
(NUMBERS MAY NOT ADD
DUE TO ROUNDING)
$ IN MILLIONS
<S> <C> <C> <C>
Total revenue............................................... $2,331 $2,749 $3,101
Cost of revenue............................................. 1,504 1,603 1,964
------ ------ ------
Gross profit................................................ 828 1,146 1,137
Gross profit margin......................................... 35.5% 41.7% 36.7%
Total operating expenses.................................... 1,189 1,273 1,733
------ ------ ------
Operating loss.............................................. (362) (127) (596)
Interest and other income (expense), net.................... (20) 253 (1)
------ ------ ------
(Loss) income before income taxes........................... (382) 126 (597)
------ ------ ------
Net (loss) income........................................... $ (830) $ 54 $ (460)
------ ------ ------
Net (loss) income per share-basic........................... $(4.52) $ 0.29 $(2.47)
------ ------ ------
Net (loss) income per share-diluted......................... $(4.52) $ 0.28 $(2.47)
====== ====== ======
</TABLE>

REVENUE

The following discussion of revenue is based on the results of our
reportable segments as described in Note 17 to the Consolidated Financial
Statements. Total revenue is principally derived from three reportable segments:
Servers, Visual Workstations and Global Services, which were determined based on
factors such as customer base, homogeneity of products, technology, delivery
channels and other factors.

Total revenue in fiscal 2000 decreased $418 million or 15% compared with
fiscal 1999 and fiscal 1999 revenue decreased $352 million or 11% compared with
fiscal 1998. These decreases primarily reflect the maturity of our current
Origin brand scalable server product line for which new products were introduced
in the beginning of fiscal 2001, the sale of our Cray product line in fiscal
2000 and continuing trends in the declining UNIX workstation and vector
supercomputer markets which are part of our Visual Workstation and Server
segments, respectively.

10
<PAGE>
The following table presents the percentage of total revenue by reportable
segment:

Fiscal 2000 Server revenue decreased $272 million or 22% compared with
fiscal 1999. The decrease primarily reflects lower revenue within our Origin
brand scalable server business due to a mature product line for which the next
generation Origin 3000 family of high-performance servers were introduced in the
first quarter of fiscal 2001, coupled with continuing declines in the
supercomputer market. Our Onyx-Registered Trademark- graphics systems revenue
also declined during fiscal 2000 compared with fiscal 1999, due to a mature
product line for which the next generation Onyx 3000 family of graphics systems
were introduced in the first quarter of fiscal 2001. We also believe both our
Origin and Onyx server revenue were adversely impacted by manufacturing process
issues that delayed delivery of our R12000-TM- 400 megahertz processors. We
began receiving shipments of these processors during the fourth quarter of
fiscal 2000. For fiscal 2000, the Cray product line, including product and
service revenue, represented less than 10% of total revenue. On March 31, 2000,
SGI completed the sale of its Cray product line. See Note 5 to the Consolidated
Financial Statements, "Sale of Cray Product Line," for further information.

Fiscal 1999 Server revenue decreased $199 million or 14% compared with
fiscal 1998. Although our fiscal 1999 Origin brand scalable server business
returned to growth in fiscal 1999, our Cray-branded business declined
significantly. As we exited fiscal 1999, this business represented less than 10%
of total revenue. Our Onyx graphics system revenue declined in fiscal 1999, but
the rate of decline slowed in fiscal 1999 to 6% compared with 24% in fiscal
1998.

Fiscal 2000 Visual Workstation revenue decreased $147 million or 23%
compared with fiscal 1999 and fiscal 1999 Visual Workstation revenue decreased
$218 million or 25% compared with fiscal 1998. These decreases reflect the
effects of strong competition in the shrinking UNIX workstation market and the
disappointing sales performance of our visual workstations based on the Windows
NT operating system introduced in the second half of fiscal 1999. In light of
the disappointing sales performance of our proprietary architecture Silicon
Graphics 320 and 540 visual workstations, we decided to discontinue this product
family in favor of products with more industry standard architectures. In light
of this transition, we recorded charges to cost of revenue during fiscal 2000
related to these products. See "Gross Profit Margin" and "Operating Expenses."

Global Services revenue is comprised of hardware and software support and
maintenance, professional services and remanufactured systems sales. Fiscal 2000
Global Services revenue decreased $4 million or less than 1% compared with
fiscal 1999 and fiscal 1999 Global Services revenue increased $52 million or 8%
compared with fiscal 1998. The slight decrease in Global Services revenue for
fiscal 2000 reflects a decline in our traditional customer support revenue,
offset in part by the impact of our investment in our professional services
business as well as increases in the level of our remanufactured systems
business. Growth in Global Services revenue in fiscal 1999 reflects the impact
of our investment

11
<PAGE>
in our professional services business, as well as increases in the level of our
remanufactured systems business.

Other revenue is principally comprised of our operating units that are not
reportable segments, including the product and service revenue of our software
subsidiary, Alias--Wavefront. In addition, revenue from MIPS, an operating unit
that develops and markets microprocessors and related intellectual property,
which was a majority-owned subsidiary until SGI distributed its interest in MIPS
to its shareholders through a spin-off effective June 20, 2000, is also included
in other revenue. For both fiscal 2000 and fiscal 1999, revenue from MIPS
represented less than 4% of total revenue.

Total revenue by geographic area for fiscal 2000, 1999 and 1998 was as
follows (in millions):

<TABLE>
<CAPTION>
AREA 2000 1999 1998
---- -------- -------- --------
<S> <C> <C> <C>
Americas............................................ $1,314 $1,536 $1,729
Europe.............................................. 551 754 831
Rest of World....................................... 466 459 541
------ ------ ------
Total revenue....................................... $2,331 $2,749 $3,101
====== ====== ======
</TABLE>

Geographic revenue as a percentage of total revenue for fiscal 2000, 1999
and 1998 was as follows:

<TABLE>
<CAPTION>
AREA 2000 1999 1998
---- -------- -------- --------
<S> <C> <C> <C>
Americas................................................... 56% 56% 56%
Europe..................................................... 24% 27% 27%
Rest of World.............................................. 20% 17% 17%
== == ==
</TABLE>

The increase in Rest of World business in fiscal 2000 primarily reflected
increased sales in Japan as a percentage of total revenue.

Our consolidated backlog at June 30, 2000 was $298 million, down from
$376 million at June 30, 1999. The decline primarily reflects the sale of our
Cray product line, the discontinuance of our Silicon Graphics 320 and 540 visual
workstations and the continuing decline in our UNIX workstation market, offset
in part by an increase in our professional services business.

GROSS PROFIT MARGIN

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

Our overall gross profit margin decreased to 35.5% in fiscal 2000 compared
with 41.7% in fiscal 1999 and our fiscal 1999 gross profit margin increased
compared with our fiscal 1998 gross profit margin of 36.7%. Gross profit margin
for fiscal 2000 included certain adjustments related to our Silicon Graphics 320
and 540 visual workstations. Product gross margin reflects charges of
approximately $46 million for third party manufacturing contract cancellations
and purchase commitments and for excess product and demonstration inventory
related to our Silicon Graphics 320 and 540 visual workstations. During fiscal
2000, we also 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-TM- 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 39.8%, representing a
decrease of 1.9 percentage points, compared with the corresponding period of
fiscal 1999. In addition, for fiscal 2000, the Cray product

12
<PAGE>
line, including product and service cost of revenue, represented less than 4% of
total cost of revenue which accounted for less than 1 percentage point of the
decline in gross profit margin year over year. On March 31, 2000, SGI completed
the sale of its Cray product line. See Note 5 to the Consolidated Financial
Statements, "Sale of Cray Product Line," for further information. Gross profit
margin for fiscal 1998 included a number of non-recurring charges related to
refocusing our supercomputer product roadmap, as well as a write-down of excess
spares. Without those charges, our fiscal 1998 gross profit margin would have
been 41.3%.

MIPS was a majority owned subsidiary until SGI distributed its remaining
interest in MIPS to its stockholders through a spin-off effective June 20, 2000.
Excluding the results of MIPS, our fiscal 2000 overall gross profit margin would
have decreased from 35.5% to 33.0%.

Our gross profit margin over the past three years reflects decreased volumes
and continuing pricing pressures in both the Server and Visual Workstation
segments, as well as in our Global Services business. We have been able to
partially mitigate these effects by consolidation and outsourcing of certain
manufacturing operations and continued improvements in manufacturing
efficiencies and procurement practices.

OPERATING EXPENSES

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
$ IN MILLIONS
<S> <C> <C> <C>
Research and development......................... $ 301 $ 380 $ 459
% of total revenue............................... 12.9% 13.8% 14.8%
Selling, general and administrative.............. $ 785 $ 908 $1,068
% of total revenue............................... 33.7% 33.0% 34.5%
Other............................................ $ 103 $ (15) $ 206
% of total revenue............................... 4.4% (0.5%) 6.6%
</TABLE>

Our total fiscal 2000 operating expenses decreased $84 million compared with
fiscal 1999 and fiscal 1999 operating expenses decreased $460 million compared
with fiscal 1998. Included in fiscal 2000, 1999 and 1998 results are
approximately $29 million, $31 million and $84 million, respectively, of direct
operating expenses related to Cray that, as a result of the sale of the Cray
product line, will not be incurred on a go-forward basis. Included in fiscal
2000, 1999, and 1998 results are approximately $46 million, $35 million, and
$56 million of direct operating expenses related to MIPS that, as a result of
the distribution of our interest in MIPS to our stockholders, will also not be
incurred on a go-forward basis. Fiscal 2000 and fiscal 1998 operating expenses
included $103 million of restructuring charges and $206 million of
restructuring, long-lived asset impairment and merger-related charges,
respectively.

RESEARCH AND DEVELOPMENT Research and development spending decreased
$79 million or 21% in fiscal 2000 compared with fiscal 1999 and decreased
$79 million or 17% in fiscal 1999 compared with fiscal 1998. The fiscal 2000
decrease reflects reductions in our investment in Windows NT-based visual
workstation development as we transition to more industry standard
architectures, as well as reductions in our investment in UNIX workstation
development as the market for UNIX workstations continues to shrink. Decreases
year over year were also noted in our investments in scalable servers and
graphics systems as we completed development and introduced the next generation
of these products in early fiscal 2001. The fiscal 1999 decrease reflects
reductions in investments in vector supercomputer and UNIX workstation
development. These decreases were offset somewhat by increased investments in
scalable server and Windows NT-based visual workstation development. We expect
research and development spending in fiscal 2001 to decline as a result of the
sale of the Cray product line and the spin-off of our majority interest in MIPS.

13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expenses decreased $122 million or 13% in fiscal 2000 compared with fiscal 1999
and decreased $160 million or 15% in fiscal 1999 compared with fiscal 1998. The
fiscal 2000 decrease reflects the impact of the current year restructuring
actions including lower compensation expense, reduced occupancy costs and
overall general expense control. Marketing expenses decreased significantly,
particularly in corporate programs. The fiscal 1999 decrease reflects the impact
of the restructuring actions taken in fiscal 1998, as well as lower selling
commissions due to lower revenue, reduced outside consulting and business
process re-engineering costs, continued focus on productivity and general
expense controls. Marketing expenses decreased significantly as well,
particularly in corporate and vector supercomputer programs. Fiscal 1999
selling, general and administrative expenses include a number of non-recurring
charges, including a $16 million write-down of certain capitalized internal
use-software deemed obsolete as a result of changes in strategic direction. We
expect selling, general and administrative expenses in fiscal 2001 to decline
compared with fiscal 2000.

OTHER OPERATING EXPENSE Other operating expense for fiscal 2000 represents
a charge for estimated restructuring costs of $103 million. Other operating
expense for fiscal 1999 includes a $14 million reduction to the restructuring
costs we estimated at the end of fiscal 1998. Other operating expense for fiscal
1998 consists of restructuring charges of $144 million, a charge for impairment
of long-lived assets of $47 million and merger-related expenses of $15 million.
See Note 3 to the Consolidated Financial Statements, "Other Operating Expense,"
for further information regarding these activities.

INTEREST AND OTHER

INTEREST EXPENSE Interest expense declined 16% in fiscal 2000 compared with
fiscal 1999 and declined 8% in fiscal 1999 compared with fiscal 1998 primarily
due to a reduction in long-term borrowings of $6 million and $10 million in
fiscal 2000 and fiscal 1999, respectively. We do not expect a significant change
in the level of interest expense in fiscal 2001.

INTEREST INCOME AND OTHER, NET Interest income and other, net includes
interest income on our cash investments, gains and losses on other investments,
the minority interest in the earnings of MIPS and other non-operating items.
Interest income and other, net for fiscal 2000 decreased $4 million from fiscal
1999 and decreased $21 million in fiscal 1999 from fiscal 1998. The decrease in
interest and other income, net in fiscal 2000 was primarily due to a loss on the
sale of our Cray product line, non-recurring costs associated with the spin-off
of MIPS, a decrease in interest income due to significantly lower cash balances
and the minority interest in MIPS earnings, offset in part by the write-down of
investments in certain technology companies in fiscal 1999 that did not recur in
fiscal 2000. The decrease in interest and other income, net in fiscal 1999 was
primarily due to the write-down of investments in certain technology companies,
the minority interest in MIPS earnings and other non-operating items. We expect
a decline in the level of interest income based on anticipated lower cash
investments in fiscal 2001.

PROVISION FOR (BENEFIT FROM) INCOME TAXES

Although we incurred a loss for fiscal 2000, we made a provision for income
taxes totaling $448 million. Included in this provision was $46 million in taxes
currently payable in federal, state and foreign jurisdictions and a charge of
$93 million related to our change in investment policy of no longer permanently
investing accumulated earnings attributable to certain foreign affiliates which
manufacture in foreign jurisdictions. We intend to utilize such earnings to
satisfy liquidity requirements in the U.S. and other jurisdictions in which we
operate. Also included in this provision was a $369 million increase in the
valuation allowance against deferred tax assets which, due to the distribution
of MIPS in a manner that was tax-free for SGI in the fourth quarter of fiscal
2000, no longer met the realizability criteria under SFAS No. 109. Offsetting
these charges was a reduction of $67 million in previously

14
<PAGE>
provided income tax reserves related to certain exposures that were no longer
necessary given the increase in the valuation allowance against our net deferred
tax assets.

The effective tax benefit rate for fiscal 1999 was 23%, excluding the impact
of the MIPS gain and a change in previously estimated restructuring costs, which
were tax effected at 38%. The effective tax benefit rate for fiscal 1998 was
23%. The fiscal 1999 benefit rate differs from the federal statutory rate
primarily due to foreign losses for which no benefit was recognized. The fiscal
1998 benefit rate differs from the federal statutory rate primarily due to
foreign losses for which no benefit has been recognized, the write-off of
acquired in-process technology and goodwill for which there was no tax benefit
and the establishment of reserves for certain deferred tax assets not expected
to be realized.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), and amended it in March and June 2000. SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements for
all public registrants. Changes in our revenue recognition policy, if any,
resulting from the interpretation of SAB 101 would be reported as a change in
accounting principle. We are currently reviewing the impact of SAB 101 on our
previously reported results of operations and anticipate that we will adopt SAB
101 during the fourth quarter of fiscal 2001.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 with respect to stock-related
compensation. FIN 44 is effective July 1, 2000. Management does not expect the
adoption of FIN 44 to have a material effect on the financial position or
results of operations of SGI.

FINANCIAL CONDITION

At June 30, 2000, cash and cash equivalents and marketable and restricted
investments totaled $384 million compared with $782 million at June 30, 1999.
Included in the balance at June 30, 2000 and June 30, 1999 is approximately
$126 million and $94 million, respectively, of restricted investments that serve
as collateral for letters of credit and an equity forward purchase agreement.

Operating activities used $76 million in cash for fiscal 2000, compared with
providing $145 million in fiscal 1999 and $643 million in fiscal 1998. To
present cash flows from operating activities, net (loss) income for each of the
past three years had to be adjusted for certain significant items that did not
either provide or use cash. Included in these fiscal 2000 adjustments is a
$369 million increase in our valuation allowance against our remaining deferred
tax asset and a $93 million charge related to repatriating accumulated foreign
earnings. Partially offsetting these charges is a $67 million reduction in
previously provided income taxes related to certain exposures that were no
longer necessary given the increase in the valuation allowance against our
deferred tax assets. Fiscal 1999 net income is adjusted to remove the impact of
the $273 million gain on the sale of a portion of our interest in MIPS stock
that is reflected as a cash flow from investing activities and $27 million in
non-cash charges for the write-off of investments in certain technology
companies. Fiscal 1998 net loss is adjusted for a $47 million non-cash charge
for long-lived asset impairment, a $32 million non-cash charge for the write-off
of purchased intangibles and goodwill resulting from the disposal of ParaGraph
International Inc. ("ParaGraph") and a $30 million non-cash charge for the
write-down of excess spares.

In addition to the adjustments noted above, the negative operating cash flow
in fiscal 2000 was partially due to approximately $68 million in cash payments
for severance, contractual obligations and facilities obligations related to
restructuring activities. These activities are expected to result in future cash
outlays of approximately $10 million, the majority of which will occur in fiscal
2001 and will be funded through current working capital. Negative operating cash
flows were partially offset by a

15
<PAGE>
decrease in accounts receivable attributable to lower revenue levels and
continued improved collections. Aside from the adjustments noted above,
operating cash flow in both fiscal 1999 and 1998 was positive primarily due to
our focus on asset management that resulted in significant reductions in
accounts receivable and inventories which generated $195 million and
$731 million, respectively, in cash.

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 as a result of the spin-off of MIPS which is no longer included in
our consolidated balance sheet. Investing activities, other than changes in our
marketable and restricted investments and the MIPS transactions, consumed
$261 million in cash during fiscal 1999 and $269 million in fiscal 1998,
principally for the acquisition of capital equipment and spare parts. Fiscal
1999 investing activities also used $35 million to fund a portion of our
investment in WAMINET Inc.

Financing activities over the past three years have included the issuance of
common stock under employee stock purchase and option plans and repurchases of
common stock. Our board of directors has authorized the repurchase of up to
27.5 million shares of common stock to mitigate the dilutive effect of the stock
plans. Since commencement of this repurchase program in 1996 we have repurchased
21.4 million shares of common stock at a cost of $335 million. We utilize equity
instrument contracts to facilitate the repurchase of common stock and, at
June 30, 2000, we have outstanding commitments to buy an aggregate of
6.0 million shares of common stock for aggregate consideration of $97.5 million
under our equity forward purchase arrangement. At June 30, 2000, 0.1 million
shares remain available for purchase under this program.

At June 30, 2000, our principal sources of liquidity included cash, cash
equivalents and marketable investments of $258 million. Other sources of
liquidity include equity investments and financeable real estate. For example,
during the first quarter of fiscal 2001 we sold substantially all of our
investment in VA Linux Systems, Inc. ("VA Linux") for net proceeds of
$42 million. For the remaining investment in VA Linux, we entered into a
derivative contract that guarantees minimum net proceeds of $11 million and
matures on December 15, 2000. We believe that these principal sources of
liquidity, along with cash generated from operations, and other resources
available to us, should be adequate to fund our projected cash flow needs. We
believe that the level of financial resources is an important competitive factor
in the computer industry and, accordingly, we may elect to raise additional
capital through either debt or equity financing or the sale of non-strategic
assets in anticipation of future needs.

RISKS THAT AFFECT OUR BUSINESS

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

BUSINESS TRANSITION. SGI has had declining revenue and has been
unprofitable on an operating basis for each of the past three fiscal years. Our
plan to restore growth and profitability will require significant transitions in
product strategy and in operating expenses. We have announced product roadmaps
for both the server and workstation businesses that will, over the next five
years, supplement our products based on the MIPS processor architecture with
products based on the Intel processor architecture, and from the IRIX operating
system to Linux and Windows NT. This process will involve our supporting both
architectures indefinitely in order to provide flexibility and support to our
customers. Risks associated with this strategy include uncertainty among
employees, customers and partners, potential customer defection and higher
operating expenses. There can be no assurance that we will introduce the new
products required for these transitions as planned, successfully support our
customer and partner base as they adopt these new products or otherwise manage
this process in a way that will allow us to recover from this uncertainty.

16
<PAGE>
NEW PRODUCTS. In the last quarter of fiscal 2000 and the first quarter of
2001 we introduced major new products in every segment of our computer system
business, including the Origin 3000 server family, new graphics subsystems both
in our workstation and our Onyx2 graphics server families, and new Intel-based
workstations and servers. Our ability to meet our objectives for fiscal 2001 is
highly dependent on the success of these new products, and on our success in
ramping these new products to commercial volumes as scheduled. While we had
recorded approximately $100 million in orders for Origin 3000 and other new
products as of June 30, 2000, our ability to fulfill these orders in the first
half of the year will require that we resolve issues regarding various
industry-wide and world-wide supply constraints, including, in particular
constraints on the ceramic packaging for many of our ASICS.

EXPENSE REDUCTION PROGRAM. While our operating expenses, excluding other
operating expenses, have declined from $1.5 billion in fiscal 1998 to
$1.3 billion in fiscal 1999 and to $1.1 billion in fiscal 2000, our expenses
remain out of line with our revenues, and we expect that we will be taking
additional steps in fiscal 2001 to address this issue While our objective is to
reduce our costs in ways that will not have a material impact on revenue levels,
there is no assurance that this will be achieved.

DEPENDENCE ON PARTNERS AND SUPPLIERS. Our business has always involved
close collaboration with partners and suppliers. However, many elements of our
current business strategy, including the longer-term transition to the Intel
architecture and additional outsourcing of manufacturing, will increase our
dependence on Intel and other partners, and on our manufacturing partners and
other component suppliers. Our business could be adversely affected, for
example, if Intel fails to meet product release schedules, or if unanticipated
quality issues arise with products from suppliers. The competitiveness of our
system products, particularly our servers, is significantly affected by the
availability on our platform of third-party software applications that are
important to customers in our target markets. Our ability to work with our
software partners to ensure porting of these applications to our IRIX operating
system and, in the future, to Linux, is a key factor to our business success.

EMPLOYEES. Our success depends on our ability to continue to attract,
retain and motivate highly qualified technical, marketing and management
personnel, who are in great demand. The uncertainties surrounding SGI's business
prospects have increased the challenges of retaining world-class talent. We have
initiated hiring and retention programs to attract and retain key employees, but
there is no assurance that these programs will succeed.

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

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

Short product life cycles place a premium on our ability to manage the
transition to new products. We often announce new products in the early part of
a quarter while the product is in the final stages of development, and 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

17
<PAGE>
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.

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

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

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

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

IMPACT OF GOVERNMENT CUSTOMERS. A significant portion of our revenue is
derived from sales to the U.S. government, either directly by us or through
system integrators and other resellers. Sales to the government present risks in
addition to those involved in sales to commercial customers, including potential
disruptions due to appropriation and spending patterns and the government's
reservation of the right to cancel contracts for its convenience. A portion of
our business requires security clearances from the United States government. We
have implemented measures to maintain our clearances in light of the fact that
our CEO, Mr. Robert Bishop, is not a United States citizen. However, these
arrangements are subject to customer review and approval and periodic review by
the Defense Security Service of the Department of Defense. Any disruption or
limitation in our ability to do business with the United States government could
have an adverse impact on SGI.

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

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

18
<PAGE>
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.

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

To perform sensitivity analysis, we assess the risk of loss in fair values
from the impact of hypothetical changes in interest rates and foreign currency
exchange rates on market sensitive instruments. We compute the market values for
interest risk based on the present value of future cash flows as impacted by the
changes in rates attributable to the market risk being measured. We selected the
discount rates used for the present value computations based on market interest
rates in effect at June 30, 2000 and 1999. We computed the market values for
foreign exchange risk based on spot rates in effect at June 30, 2000 and 1999.
The market values that result from these computations are compared to the market
values of these financial instruments at June 30, 2000 and 1999. The differences
in this comparison are the hypothetical gains or losses associated with each
type of risk.

The results of the sensitivity analysis at June 30, 2000 and 1999 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
$14 million at June 30, 2000 and 1999, 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 $13 million, respectively.

Foreign Currency Exchange Rate Risk: A 10% strengthening of foreign currency
exchange rates (with the exception of Asia where a 20% strengthening in exchange
rates was used for 1999 only) 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 $5 million at June 30, 2000, and an increase in the fair values
of our financial instruments by $8 million at June 30, 1999. A 10% weakening of
foreign currency exchange rates (with the exception of Asia where a 20%
weakening in exchange rates was used for 1999 only) 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 $5 million at June 30, 2000, and a decrease in
the fair values of our financial instruments by $3 million at June 30, 1999. Due
to the increased volatility in fiscal 1999, the financial instruments
denominated in Asian currencies were tested with a 20% strengthening and
weakening. As the foreign currency exchange rates in Asia stabilized in fiscal
2000, we performed the test with only a 10% fluctuation.

19
<PAGE>
The financial instruments measured in the foreign currency exchange rate
sensitivity analysis are used in our hedging program to reduce our overall
corporate exposure to changes in exchange rates to an immaterial amount.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
------------------------------------------ --------
<S> <C>
Financial Statements:
Report of Ernst & Young LLP, Independent Auditors......... 21
Consolidated Statements of Operations for the three fiscal
years ended June 30, 2000............................... 22
Consolidated Balance Sheets as of June 30, 2000 and June
30, 1999................................................ 23
Consolidated Statements of Cash Flows for the three fiscal
years ended June 30, 2000............................... 24
Consolidated Statements of Shareholders' Equity for the
three fiscal years ended June 30, 2000.................. 25
Notes to Consolidated Financial Statements................ 26
Financial Statement Schedule:
For each of the three fiscal years ended June 30, 2000
Schedule II--Valuation and qualifying accounts.......... 49
</TABLE>

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.

20
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Silicon
Graphics, Inc. as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Silicon
Graphics, Inc. at June 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects, the information set forth
therein.

/s/ Ernst & Young LLP

Palo Alto, California
July 21, 2000

21
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Product and other revenue.............................. $1,688,859 $2,090,194 $2,489,983
Service revenue........................................ 642,275 658,763 610,627
---------- ---------- ----------
Total revenue........................................ 2,331,134 2,748,957 3,100,610

Costs and expenses:
Cost of product and other revenue...................... 1,007,562 1,202,562 1,580,647
Cost of service revenue................................ 495,963 400,688 382,904
Research and development............................... 301,248 380,346 459,188
Selling, general and administrative.................... 785,196 907,612 1,068,429
Other operating expense................................ 102,861 (15,107) 205,543
---------- ---------- ----------
Total costs and expenses............................. 2,692,830 2,876,101 3,696,711
---------- ---------- ----------
Operating loss........................................... (361,696) (127,144) (596,101)

Gain on sale of a portion of SGI interest in MIPS........ -- 272,503 --
Interest expense......................................... (18,980) (22,562) (24,665)
Interest income and other, net........................... (1,208) 2,924 23,847
---------- ---------- ----------
(Loss) income before income taxes........................ (381,884) 125,721 (596,919)
Provision for (benefit from) income taxes................ 447,660 71,892 (137,292)
---------- ---------- ----------
Net (loss) income........................................ $ (829,544) $ 53,829 $ (459,627)
========== ========== ==========
Net (loss) income per share:
Basic.................................................. $ (4.52) $ 0.29 $ (2.47)
========== ========== ==========
Diluted................................................ $ (4.52) $ 0.28 $ (2.47)
========== ========== ==========
Shares used in the calculation of net (loss) income per
share:
Basic.................................................. 183,528 186,374 186,149
========== ========== ==========
Diluted................................................ 183,528 189,427 186,149
========== ========== ==========
</TABLE>

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

22
<PAGE>
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AT JUNE 30
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents................................. $ 251,811 $ 571,117
Short-term marketable investments......................... 6,270 117,026
Accounts receivable, net of allowance for doubtful
accounts of $12,383 in 2000; $15,407 in 1999............ 347,515 582,383
Inventories............................................... 181,594 195,181
Deferred tax assets....................................... -- 243,867
Prepaid expenses.......................................... 73,281 69,233
Other current assets...................................... 59,838 68,226
---------- ----------
Total current assets.................................... 920,309 1,847,033
Restricted investments.................................... 126,408 94,226
Property and equipment, net of accumulated depreciation
and
amortization............................................ 466,726 380,768
Other assets.............................................. 325,768 466,230
---------- ----------
$1,839,211 $2,788,257
========== ==========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable.......................................... 147,366 192,974
Accrued compensation...................................... 79,289 104,362
Income taxes payable...................................... 54,478 48,629
Other current liabilities................................. 282,848 317,107
Deferred revenue.......................................... 292,772 308,281
Current portion of long-term debt......................... 4,775 5,700
---------- ----------
Total current liabilities............................... 861,528 977,053

Long-term debt.............................................. 354,296 360,671
Other liabilities........................................... 30,837 26,334
---------- ----------
Total liabilities....................................... 1,246,661 1,364,058
---------- ----------
Commitments and contingencies

Stockholders' equity:
Preferred stock, $.001 par value; issuable in series,
2,000,000 shares authorized, share issued and
outstanding: 17,500..................................... 16,998 16,998
Common stock, $.001 par value, and additional paid-in
capital; 500,000,000 shares authorized; shares issued:
188,016,158 in 2000; 189,555,187 in 1999................ 1,410,663 1,421,028
Retained (deficit) earnings............................... (832,219) 92,449
Treasury stock, at cost: 1,540,501 shares in 2000;
7,010,263 shares in 1999................................ (21,458) (104,633)
Accumulated other comprehensive income (loss)............. 18,566 (1,643)
---------- ----------
Total stockholders' equity.............................. 592,550 1,424,199
---------- ----------
$1,839,211 $2,788,257
========== ==========
</TABLE>

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

23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
2000 1999 1998
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income........................................... $(829,544) $ 53,829 $(459,627)
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Depreciation and amortization............................. 168,524 221,508 314,581
Loss on sale of Cray product line......................... 7,693 -- --
Gain on sale of a portion of SGI interest in MIPS......... -- (272,503) --
Write-off of acquired in-process technology............... -- -- 16,900
Restructuring............................................. 102,861 (14,000) 143,998
Changes in deferred tax assets and liabilities............ 351,264 60,067 (162,540)
Other..................................................... 15,745 54,640 171,608
Changes in operating assets and liabilities:
Accounts receivable....................................... 225,116 83,036 467,055
Inventories............................................... (19,900) 111,908 264,226
Accounts payable.......................................... (40,781) (22,529) (44,257)
Other assets and liabilities.............................. (56,843) (130,592) (68,566)
--------- -------- ---------
Total adjustments....................................... 753,679 91,535 1,103,005
--------- -------- ---------
Net cash (used in) provided by operating activities... (75,865) 145,364 643,378
Cash Flows From Investing Activities:
Available-for-sale investments:
Purchases................................................. (43,982) (396,807) (230,368)
Sales..................................................... -- 207,740 43,000
Maturities................................................ 154,831 314,718 104,485
Purchases of restricted investments......................... (322,915) (219,579) --
Proceeds from the maturities of restricted investments...... 290,733 113,893 --
Spin-off of interest in MIPS................................ (84,358) -- --
Proceeds from the sale of a portion of SGI interest in
MIPS...................................................... -- 272,503 --
Capital expenditures........................................ (261,087) (147,516) (195,137)
Increase in other assets.................................... (3,991) (113,611) (73,805)
--------- -------- ---------
Net cash (used in) provided by investing activities... (270,769) 31,341 (351,825)
Cash Flows From Financing Activities:
Issuance of debt............................................ 2,988 7,461 18,735
Payments of debt principal.................................. (16,541) (25,918) (62,838)
Sale of SGI common stock.................................... 65,826 61,527 95,241
Repurchase of SGI common stock.............................. (24,420) (172,426) (62,749)
Sale of MIPS common stock................................... -- 17,654 --
Cash dividends-preferred stock.............................. (525) (525) (525)
--------- -------- ---------
Net cash provided by (used in) investing activities... 27,328 (112,227) (12,136)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents........ (319,306) 64,478 279,417
Cash and cash equivalents at beginning of year.............. 571,117 506,639 227,222
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 251,811 $571,117 $ 506,639
========= ======== =========
</TABLE>

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

24
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 30, 2000
-----------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK RETAINED OTHER TOTAL
PREFERRED AND ADDITIONAL EARNINGS TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK PAID-IN CAPITAL (DEFICIT) STOCK INCOME (LOSS) EQUITY
--------- --------------- --------- -------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997................... $16,998 $1,263,185 $ 537,238 $ -- $21,821 $1,839,242
Components of comprehensive income:
Net loss............................... -- -- (459,627) -- -- (459,627)
Currency translation adjustment........ -- -- -- -- (21,416) (21,416)
Change in unrealized loss on
available-for-sale investments, net
of tax of $134....................... -- -- -- -- 562 562
----------
Total comprehensive loss............. (480,481)
Common stock issued under employee plans
including related tax benefits (7,551
shares)................................ -- 95,194 -- -- -- 95,194
Common stock issued for ParaGraph
acquisition (2,935 shares)............. -- 48,729 -- -- -- 48,729
Convertible preferred stock, Series A
preferred dividends.................... -- -- (525) -- -- (525)
Purchase (4,700 shares) and issuance
(2,704 shares) of treasury stock under
employee plans--net.................... -- -- (11,671) (25,976) -- (37,647)
------- ---------- --------- -------- ------- ----------
Balance at June 30, 1998................... 16,998 1,407,108 65,415 (25,976) 967 1,464,512
Components of comprehensive income:
Net income............................. -- -- 53,829 -- -- 53,829
Currency translation adjustment........ -- -- -- -- (2,562) (2,562)
Change in unrealized loss on
available-for-sale investments, net
of tax of $12........................ -- -- -- -- (48) (48)
----------
Total comprehensive income........... 51,219
Common stock issued under employee plans
including related tax benefits (36
shares)................................ -- 794 -- -- -- 794
Convertible preferred stock, Series A
preferred dividends.................... -- -- (525) -- -- (525)
Purchase (12,112 shares) and issuance
(7,097 shares) of treasury stock under
employee plans--net.................... -- -- (29,744) (78,657) -- (108,401)
Common stock issued by MIPS.............. -- 16,600 -- -- -- 16,600
Other.................................... -- (3,474) 3,474 -- -- --
------- ---------- --------- -------- ------- ----------
Balance at June 30, 1999................... 16,998 1,421,028 92,449 (104,633) (1,643) 1,424,199
Components of comprehensive income:
Net loss............................... -- -- (829,544) -- -- (829,544)
Currency translation adjustment........ -- -- -- -- (7,947) (7,947)
Change in unrealized gain on
available-for-sale investments, net
of tax of $18,065.................... -- -- -- -- 30,817 30,817
Change in unrealized loss on derivative
instruments designated and qualifying
as cash flow hedges.................. -- -- -- -- (2,661) (2,661)
----------
Total comprehensive loss............. (809,335)
Convertible preferred stock, Series A
preferred dividends.................... -- -- (525) -- -- (525)
Purchase (2,132 shares) and issuance
(7,602 shares) of treasury stock under
employee plans--net.................... -- 6,235 (58,354) 83,175 -- 31,056
Common stock issued by MIPS.............. -- 14,750 -- -- 14,750
Spin-off of interest in MIPS............. -- (31,350) (36,245) -- -- (67,595)
------- ---------- --------- -------- ------- ----------
Balance at June 30, 2000................... $16,998 $1,410,663 $(832,219) $(21,458) $18,566 $ 592,550
======= ========== ========= ======== ======= ==========
</TABLE>

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

25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF OPERATIONS

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

CASH EQUIVALENTS AND MARKETABLE AND RESTRICTED INVESTMENTS Cash equivalents
consist of high quality money market instruments with maturities of 90 days or
less at the date of purchase. Short-term marketable investments and restricted
investments consist of both high quality money market instruments and high
quality debt securities with maturities of one year or less, and are stated at
fair value. Other marketable investments consist primarily of high quality debt
securities with maturities greater than one year and less than two years, and
are stated at fair value. At June 30, 2000 and 1999, our cash equivalents and
marketable investments are all classified as available-for-sale. At June 30,
2000 and 1999, our restricted investments are classified as available-for-sale
but are pledged as collateral against letters of credit and an equity forward
purchase arrangement. Restricted investments are held in SGI's name by major
financial institutions.

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

26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying values of short-term debt
and cash equivalents approximate fair value due to the short period of time to
maturity. Fair values of marketable investments, long-term debt, foreign
exchange forward contracts and currency options are based on quoted market
prices or pricing models using current market rates.

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

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

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

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

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

PROPERTY AND EQUIPMENT Property and equipment is stated at cost, and
depreciation is computed using the straight-line method. Useful lives of two to
five years are used for machinery and equipment and furniture and fixtures;
leasehold improvements are amortized over the shorter of their useful lives

27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or the term of the lease. Our buildings are depreciated over twenty-five to
forty-five years and improvements over eight to fifteen years.

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

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

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

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

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

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

ADVERTISING COSTS We account for advertising costs as expense in the period
in which they are incurred. Advertising expense for the years ended June 30,
2000, 1999 and 1998 was $25 million, $49 million and $56 million, respectively.

PER SHARE DATA Basic earnings per share is based on the weighted effect of
all common shares issued and outstanding, and is calculated by dividing net
income available to common stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income available to common stockholders, adjusted for the effect,
if any, from assumed conversion of all potentially dilutive common shares
outstanding, by the weighted average number of common shares used in the basic
earnings per share calculation plus the number of common shares that would be
issued assuming conversion of all potentially dilutive common shares
outstanding.

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

28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS On July 1, 1999, we adopted Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), as amended. SFAS 133 requires the
recognition of all derivatives on the balance sheet at fair value. Derivatives
that are not hedges of underlying transactions are adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative are offset against the change
in fair value of the hedged assets, liabilities or firm commitments through
earnings or are recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a derivative's fair value
is immediately recognized in earnings. The adoption of this standard did not
have a material effect on our financial position or results of operations.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25. ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 with respect to stock-related
compensation. FIN 44 is effective July 1, 2000. Management does not expect the
adoption of FIN 44 to have a material effect on the financial position or
results of operations of SGI.

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

NOTE 3. OTHER OPERATING EXPENSE

Other operating expense is as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Write-off of acquired in-process technology
and other merger-related expenses........... $ -- $ (1,107) $ 14,905
Restructuring................................. 102,861 (14,000) 143,998
Charge for impairment of long-lived assets.... -- -- 46,640
-------- -------- --------
$102,861 $(15,107) $205,543
======== ======== ========
</TABLE>

WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY AND OTHER MERGER-RELATED
EXPENSES The 1999 amount represents an adjustment to previously estimated
merger-related expenses. The 1998 amount includes a $17 million charge for
acquired in-process technology from the $50 million acquisition of ParaGraph,
which was accounted for using the purchase method, partially offset by
adjustments to previously estimated merger-related expenses. Merger-related
expenses were incurred in connection with the June 1996 acquisition of Cray
Research, Inc. and consist principally of costs associated with the integration

29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. OTHER OPERATING EXPENSE (CONTINUED)
of SGI and Cray information systems, accounting processes and marketing and
human resources activities.

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

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

During fiscal 2000, we paid approximately $2 million in severance and
related costs and costs to vacate facilities associated with the fiscal 1998
actions. We determined that the remaining accrual associated with the fiscal
1998 restructuring activities was deemed unnecessary and recorded an adjustment
of approximately $7 million. The adjustment primarily reflects lower than
estimated severance and related costs attributable to higher than expected
attrition and lower per person costs. To a lesser extent, estimated costs of
contract cancellations and to exit certain facilities were also adjusted.

During the first quarter of fiscal 2000, we announced and began to implement
restructuring actions that resulted in aggregate charges of $145 million. These
charges included $65.8 million for the elimination of approximately 1,100
positions across essentially all of our functions and locations. We also
recorded operating asset write downs of $26.6 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 540 visual
workstations and certain high-end graphics development projects that were
canceled. Third party contract cancellation charges associated with the above
actions totaled $8.5 million. Our plan also included 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
action would require ongoing lease payments of $26 million until subleases could
be arranged, abandoning $11 million of leasehold improvements and other fixed
assets and incurring $7 million in exit costs, including costs to restore
facilities to original condition.

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

30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. OTHER OPERATING EXPENSE (CONTINUED)
facilities in Mountain View, California. It also reflects our new senior
management's 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. Our revised
estimate of the number of involuntary employee terminations associated with the
fiscal 2000 restructuring activity is 900. As of June 30, 2000, approximately
890 of the estimated 900 positions have been eliminated. All severance payments
and related charges, which consist primarily of expected payroll taxes, extended
medical benefits, statutory legal obligations and outplacement services, are
expected to be paid by September 30, 2000. Estimated costs of contract
cancellations were also adjusted due to favorable settlements. The remaining
facilities related accrual balance of $6 million at June 30, 2000 is expected to
result in cash expenditures through fiscal 2004.

The following table depicts the restructuring activity in fiscal 1998, 1999
and 2000 (in thousands):

<TABLE>
<CAPTION>
SEVERANCE
AND OPERATING
RELATED ASSET CANCELED VACATED
CATEGORY CHARGES WRITE-DOWN CONTRACTS FACILITIES OTHER TOTAL
-------- --------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Fiscal 1998
restructuring charges..... $83,962 $37,780 $4,675 $ 8,960 $8,621 $143,998
Adjustments: increase/
(decrease)................ (15,500) 4,216 (1,916) (1,300) 500 (14,000)
Expenditures:
Cash...................... (57,188) -- (324) (6,408) (4,104) (68,024)
Non-cash.................. (6,056) (41,996) (2,435) (203) (2,851) (53,541)
------- ------- ------ ------- ------ --------
Balance at June 30, 1999.... $ 5,218 $ -- $ -- $ 1,049 $2,166 $ 8,433
------- ------- ------ ------- ------ --------
Additions--fiscal 2000
restructuring............. 65,820 26,584 8,468 43,666 -- 144,538
Adjustments: Decrease....... (13,010) -- (3,285) (23,216) (2,166) (41,677)
Expenditures:
Cash...................... (54,763) -- (5,183) (8,289) -- (68,235)
Non-cash.................. -- (26,584) -- (6,770) -- (33,354)
------- ------- ------ ------- ------ --------
Balance at June 30, 2000.... $ 3,265 $ -- $ -- $ 6,440 $ -- $ 9,705
======= ======= ====== ======= ====== ========
</TABLE>

CHARGE FOR IMPAIRMENT OF LONG-LIVED ASSETS As a result of the fiscal 1998
processes described above, we also found it necessary to downsize our vector
supercomputer business, necessitating an evaluation of the ongoing value of the
associated plant and equipment and intangible assets. Based on this evaluation,
we determined that assets (principally a specific-use manufacturing facility;
supercomputers used in product design, support and manufacturing and other
machinery and equipment) with a carrying amount of $50 million were impaired and
wrote them down by $47 million to their fair value. Fair value was principally
based on estimated exchange and resale value.

31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted (loss)
income per share:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-----------------------------------------
2000 1999 1998
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net (loss) income......................... $(829,544) $53,829 $(459,627)
Less preferred stock dividends............ (525) (525) (525)
--------- ------- ---------
Net (loss) income available to common
stockholders............................ $(830,069) $53,304 $(460,152)
========= ======= =========
Weighted average shares
outstanding--basic...................... 183,528 186,374 186,149
Employee stock options and restricted
shares.................................. -- 3,053 --
--------- ------- ---------
Weighted average shares
outstanding--diluted.................... 183,528 189,427 186,149
========= ======= =========
Net (loss) income per share:
Basic................................... $ (4.52) $ 0.29 $ (2.47)
========= ======= =========
Diluted................................. $ (4.52) $ 0.28 $ (2.47)
========= ======= =========
Potentially dilutive securities excluded
from computations because they are
anti-dilutive........................... 10,244 8,843 12,187
========= ======= =========
</TABLE>

NOTE 5. SALE OF CRAY PRODUCT LINE.

On March 31, 2000, we completed the sale of our Cray product line to 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. In the event the promissory note is not paid in full by
December 31, 2000, an additional $5 million in cash will become payable to us.
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 will record 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
will account for the promissory note proceeds when the cash payments are
received. Included in the pre-tax loss of $8 million at June 30, 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:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
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
======
</TABLE>

NOTE 6. MIPS TECHNOLOGIES, INC.

On July 6, 1998, we closed an initial public offering of the common stock of
our MIPS 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 MIPS common stock for net proceeds of
approximately

32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. MIPS TECHNOLOGIES, INC. (CONTINUED)
$54 million and MIPS' sale of 1,250,000 shares of MIPS common stock for net
proceeds to MIPS of approximately $16 million.

In April 1999, the outstanding common stock of MIPS was recapitalized into
Class A and Class B Common Stock to permit a multi-step divestiture of SGI's
ownership interest in MIPS. In May 1999, SGI and MIPS closed a secondary public
offering of 6,680,241 shares of the Class A Common Stock of MIPS owned by SGI
for net proceeds of approximately $219 million. We accounted for the MIPS
transactions in accordance with APB 18, the Equity Method of Accounting for
Investments in Common Stock and the Securities and Exchange Commission's Staff
Accounting Bulletin Topic 5:H. For the offerings of MIPS shares held by us, we
included the excess of the net proceeds over the carrying value of those shares,
or $273 million, in income in our consolidated statement of operations for
fiscal 1999. For the offering of newly issued MIPS 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 MIPS 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 MIPS 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 MIPS Class B Common Stock. SGI received no consideration in connection
with the distribution.

NOTE 7. FINANCIAL INSTRUMENTS

CASH EQUIVALENTS AND MARKETABLE AND RESTRICTED INVESTMENTS The following
table summarizes by major security type the fair value of SGI's cash equivalents
and marketable and restricted investments at June 30, 2000 and 1999 (in
thousands):

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Money market funds...................................... $189,915 $128,600
Certificates of deposit and time deposits............... 91,770 147,403
U.S. commercial paper................................... 60,908 253,227
Corporate notes and bonds............................... -- 64,480
Repurchase agreements................................... -- 40,000
U.S. government securities.............................. -- 26,217
-------- --------
Total................................................. 342,593 659,927
Less amounts classified as cash equivalents............. (209,915) (448,675)
-------- --------
Total marketable and restricted investments........... $132,678 $211,252
======== ========
</TABLE>

At June 30, 2000 and 1999, the amortized cost of cash equivalents and
marketable investments approximates fair value. Gross unrealized gains and
losses were not significant in fiscal 2000 or 1999. Gross realized gains and
losses on sales of available-for-sale securities were not significant in fiscal
2000, 1999 or 1998.

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

33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. FINANCIAL INSTRUMENTS (CONTINUED)
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 of paid related to a recognized
asset or liability. We purchase currency options and currency forward contracts
generally expiring within one year as hedges of anticipated sales that are
denominated in foreign currencies. These contracts are entered into to protect
against the risk that the eventual cash flows resulting from such transactions
will be adversely affected by changes in exchange rates. For derivative
instruments that are designated and qualify as a cash flow hedge, the effective
portion of the gain or loss on the derivative instrument is reported as a
component of Other Comprehensive Income and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings. The
amount in accumulated Other Comprehensive Income as of June 30, 2000 will be
reclassified into earnings within the next twelve months.

ACCUMULATED DERIVATIVE GAINS OR LOSSES--The following table summarizes
activity in Other Comprehensive Income related to derivatives classified as cash
flow hedges held by us during the period from July 1, 1999 through June 30, 2000
(in thousands):

<TABLE>
<S> <C>
Cumulative effect of adopting SFAS 133...................... $ --
Reclassified into earnings from Other Comprehensive Income,
net....................................................... $(7,283)
Changes in fair value of derivatives, net................... $ 4,622
Unrealized loss on derivative instruments included in Other
Comprehensive Income...................................... $(2,661)
=======
</TABLE>

The effect on earnings for the fiscal year ended June 30, 2000 relating to
the ineffectiveness of hedging activities was not material.

FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair
values of SGI's financial instruments at June 30, 2000 and 1999 are summarized
as follows (in thousands):

<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $251,811 $251,811 $571,120 $571,120
Marketable investments.............. 132,678 132,678 211,252 211,252
Debt instruments.................... 354,296 247,875 360,671 329,065
Currency forward contracts.......... (3,413) (3,413) 2,181 2,790
Currency options.................... (3,773) (3,773) -- --
</TABLE>

NOTE 8. CONCENTRATION OF CREDIT AND OTHER RISKS

CREDIT RISK Financial instruments that potentially subject SGI to
concentration of credit risk consist principally of cash investments, currency
forward contracts and trade receivables. We place our investments and transact
our currency forward contracts with high-credit-quality counterparties and, by
policy, limit the amount of credit exposure to any one counterparty, and
generally do not require collateral. The credit risk on receivables due from
counterparties related to currency forward contracts is immaterial at June 30,
2000 and 1999. 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

34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. CONCENTRATION OF CREDIT AND OTHER RISKS (CONTINUED)
could occur due to interruption of supply or increased demand in the industry.
In addition, we increasingly outsource certain aspects of our production,
including the entire Windows NT-based workstation product line, to third
parties. If we were unable to procure certain such components or sustain our
outsourced production capacity, it could affect our ability to meet demand for
our products which would have an adverse effect upon our results.

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

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

NOTE 9. CONSOLIDATED FINANCIAL STATEMENT DETAILS

INVENTORIES

Inventories at June 30, 2000 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Components and subassemblies............................ $ 38,855 $ 19,988
Work-in-process......................................... 50,051 71,406
Finished goods.......................................... 45,896 41,694
Demonstration systems................................... 46,792 62,093
-------- --------
Total inventories....................................... $181,594 $195,181
======== ========
</TABLE>

PROPERTY AND EQUIPMENT

Property and Equipment at June 30, 2000 and 1999 are as follows (in
thousands):

<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
Land and buildings.................................... $ 224,461 $ 92,564
Machinery and equipment............................... 586,233 505,592
Furniture and fixtures................................ 106,687 110,277
Leasehold improvements................................ 133,610 129,370
---------- ---------
1,050,991 837,803
Accumulated depreciation and amortization............. (584,265) (457,035)
---------- ---------
Net property and equipment............................ $ 466,726 $ 380,768
========== =========
</TABLE>

35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. OTHER ASSETS

Other assets at June 30, 2000 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Spare parts............................................. $ 98,601 $157,539
Investments............................................. 152,642 82,561
Net long-term deferred tax assets....................... -- 126,562
Software licenses, goodwill and other, net of
amortization of $67,669 in 2000 and $125,914 in
1999.................................................. 74,525 99,568
-------- --------
$325,768 $466,230
======== ========
</TABLE>

Included in investments at June 30, 2000 is our investment in VA Linux. This
investment was originally purchased in June 1999 for $5 million and is reflected
in the June 30, 2000 Consolidated Balance Sheet at its market value at that date
of approximately $56 million.

NOTE 11. LONG TERM DEBT

Long-term debt at June 30, 2000 and 1999 is as follows (in thousands):

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
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 $10,106
($12,651 in 1999)..................................... 46,670 54,674
Swiss Franc mortgage due June 2017 at 4.47% (3.79% in
1999), which resets quarterly......................... 15,041 18,116
Japanese Yen fixed rate loan due December 2001 at
2.06%................................................. 56,770 49,493
Other................................................... 5,224 7,797
-------- --------
354,296 360,671
Less amounts due within one year........................ (4,775) (5,700)
-------- --------
Amounts due after one year.............................. 349,521 $354,971
======== ========
</TABLE>

The Senior Convertible Notes (the "Senior Notes") are convertible into
shares of common stock at a conversion price equal to $18.70 per share. This is
down from $36.25 per share for the previous year as a result of the spin-off of
MIPS. The Senior Notes are redeemable at our option beginning in 2002, at
varying prices based on the year of redemption. The Senior Notes are redeemable
at the holder's option in the event of the sale of all, or substantially all, of
our common stock for consideration other than common stock traded on a U.S.
exchange or approved for quotation on the Nasdaq National Market.

In connection with the Cray acquisition, SGI assumed the Cray Research
Convertible Debentures. These debentures are convertible into SGI's common stock
at a conversion price of $39.17 per share at any time prior to maturity and may
be redeemed at our option at a price of 100%. This is down from $78 per share
for the previous year as a result of the MIPS spin-off. Prior to our acquisition
of Cray, Cray repurchased a portion of the debentures with a face value of
$33 million. The repurchase satisfied the first six required annual sinking fund
payments of $6 million originally scheduled for the years 1997 through 2002. In
fiscal 2000 and fiscal 1999, we repurchased additional portions of the
debentures with a face value of $11 million and $15 million, respectively. These
repurchases satisfied the next four

36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11. LONG TERM DEBT (CONTINUED)
required annual sinking fund payments of $6 million originally scheduled for the
years 2003 through 2006. Remaining annual sinking fund payments of $6 million
each are scheduled from 2007 to 2010 with a final maturity payment of
$35 million in 2011.

Principal maturities of long-term debt at June 30, 2000 are as follows (in
millions): 2001--$5; 2002--$59; 2003--$2; 2004--$.3; 2005--$231 and $57
thereafter.

NOTE 12. LEASING ARRANGEMENTS AS LESSOR

We have entered into certain lease arrangements which are accounted for as
sales. The net investment in sales-type leases at June 30, 2000 and 1999 is
summarized as follows (in thousands):

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Total minimum lease payments receivable.................... $6,739 $10,457
Less unearned interest income.............................. (562) (1,091)
------ -------
Net investment in sales-type leases........................ 6,177 9,366
Less current portion....................................... (3,018) (2,847)
------ -------
Long-term portion included in other assets................. $3,159 $ 6,519
====== =======
</TABLE>

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

NOTE 13. LEASING ARRANGEMENTS AS LESSEE

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

Future minimum annual lease payments under operating leases, net of
subleases and rental income of approximately $24 million, at June 30, 2000 are
as follows (in millions): 2001--$42; 2002--$32; 2003--$27; 2004--$24; 2005--$17,
and thereafter $211.

Aggregate operating lease rent expense in fiscal 2000, 1999 and 1998 was (in
millions): $57, $71 and $77, respectively.

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 14. STOCKHOLDERS' EQUITY

PREFERRED STOCK TRANSACTIONS NKK Corporation ("NKK") owns 17,500 shares of
Series A convertible preferred stock (see Note 19). The preferred stock pays a
3% cumulative annual dividend on the original issuance price of $10.00 per
share, has preference upon liquidation equal to $10.00 per share and has
aggregate voting rights equivalent to 1,400,000 shares of common stock. The
preferred stock is convertible into our common stock at certain times by
dividing the original issuance price by the then-current price of the common
stock. The preferred stock is perpetual, but is subject to redemption at our
option at certain times if the market price of the common stock is below $8.75
per share.

37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK AWARD PLANS We have various stock award plans which provide for the
grant of incentive and nonstatutory stock options and the issuance of restricted
stock to employees and certain other persons who provide consulting or advisory
services to SGI. We grant incentive stock options with an exercise price of no
less than the fair market value on the date of grant. The board of directors
determines the prices of nonstatutory stock option grants and restricted stock.
Under the plans, options and restricted stock generally vest over a fifty-month
period from the date of grant.

In addition, we had a Directors' Stock Option Plan which allowed for the
grant of nonstatutory stock options to nonemployee directors at an exercise
price of no less than the fair market value at the date of grant. Eligible
directors were granted an option to purchase 30,000 shares of common stock on
the date of their initial election as a director. On the date of the annual
stockholder's meeting of each year, each eligible director was granted an option
to purchase an additional 10,000 shares of common stock. These options generally
vested in installments over a three-year period. At June 30, 2000, 856,200
shares were available for future option grants under the Directors' Stock Option
Plan. As the Directors Stock Option Plan expired in July 2000, beginning in
fiscal 2001, grants to directors will be made pursuant to one of the existing
employee stock option plans.

At June 30, 2000, 1999 and 1998, there were 20,905,393, 18,437,793 and
10,832,173 unused shares available for grant, respectively, and there were
467,878, 820,625 and 580,316 shares of restricted stock, respectively, subject
to repurchase.

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

<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES UNDER EXERCISE SHARES UNDER EXERCISE SHARES UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1................... 30,615,342 $13.15 34,394,843 $16.59 34,753,548 $16.92
Options granted................... 38,267,284 $ 7.79 20,013,148 $12.14 11,536,447 $13.18
Options exercised................. (2,432,670) $ 7.99 (3,151,195) $ 8.05 (6,146,202) $ 8.93
Options forfeited................. (24,555,131) $11.22 (12,803,398) $19.70 (5,748,950) $19.86
Options canceled.................. (18,067,157) $13.51 (7,838,056) $17.15 -- $ --
----------- ----------- ----------
Balance at June 30.................. 23,827,668 $ 6.78 30,615,342 $13.15 34,394,843 $16.59
=========== =========== ==========
Exercisable at June 30.............. 12,923,200 $ 7.34 $13,286,532 $13.86 17,337,552 $17.12
=========== =========== ==========
</TABLE>

Additional information about options outstanding at June 30, 2000 is as
follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED
AVERAGE
NUMBER OF WEIGHTED AVERAGE CONTRACTUAL NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE RANGE SHARES EXERCISE PRICE LIFE (YEARS) SHARES EXERCISE PRICE
-------------------- ---------- ---------------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
$1.05 - $5.74................ 9,408,281 $ 4.61 8.68 3,362,474 $ 4.79
$5.87 - $9.99................ 12,879,644 $ 7.28 6.56 8,150,461 $ 6.87
$10.05 - $18.12.............. 1,090,485 $12.84 5.95 982,519 $13.01
$19.37 - $37.49.............. 449,258 $23.17 4.50 427,746 $23.37
---------- ------ ---------- ------
23,827,668 $ 6.78 12,923,200 $ 7.34
========== ====== ========== ======
</TABLE>

38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14. STOCKHOLDERS' EQUITY (CONTINUED)
In conjunction with the June 20, 2000 spin-off of our remaining interest in
MIPS to SGI stockholders, we adjusted the exercise price of outstanding stock
options under the criteria set forth in the Emerging Issues Task Force 90-9,
"Changes to Fixed Employee Stock Option Plans as a result of Equity
Restructuring." As a result of this adjustment, the weighted average exercise
price of the 24.5 million outstanding stock options changed from $11.22 to
$6.41.

STOCK PURCHASE PLAN We have an employee stock purchase plan under which
eligible employees may purchase stock at 85% of the lower of the closing prices
for the stock at the beginning of a twenty four-month offering period or the end
of each six-month purchase period. The purchase periods generally begin in May
and November. Purchases are limited to 10% of each employee's compensation. At
June 30, 2000, we had issued 27,481,771 shares under the plan and we have
reserved 1,471,365 shares for future issuance.

GRANT DATE FAIR VALUES The weighted average estimated fair value of
employee stock options granted at grant date market prices during fiscal 2000,
1999 and 1998 was $4.40, $5.18, and $6.32 per share, respectively. The weighted
average exercise price of employee stock options granted at grant date market
prices during fiscal 2000, 1999 and 1998 was $10.48, $12.14 and $13.20 per
share, respectively. The weighted average estimated fair value of employee stock
options granted at below grant date market prices during fiscal 2000 and 1998
was $6.44 and $10.92 per share, respectively. The weighted average exercise
price of employee stock options granted at below grant date market prices during
fiscal 2000 and 1998 was $5.29 and $8.91 per share, respectively. There were no
employee stock options granted at below grant date market prices during fiscal
1999. The weighted average fair value of restricted stock granted during fiscal
2000, 1999 and 1998 was $9.00, $12.51 and $20.79 per share, respectively. The
weighted average estimated fair value of shares granted under the Stock Purchase
Plan during fiscal 2000, 1999 and 1998 was $2.69, $4.97 and $5.81 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:

<TABLE>
<CAPTION>
STOCK PURCHASE PLAN
EMPLOYEE STOCK OPTIONS SHARES
---------------------------------- ----------------------------------
YEARS ENDED JUNE 30 2000 1999 1998 2000 1999 1998
------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)....... 1.5 1.9 2.3 0.5 0.5 0.5
Risk-free interest rate........ 5.57% 5.26% 5.58% 5.45% 4.97% 5.68%
Volatility..................... .79 0.71 0.61 .78 0.56 0.76
Dividend yield................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>

PRO FORMA INFORMATION We have elected to follow APB 25 in accounting for
our employee stock options. Under APB 25, we recognize no compensation expense
in our financial statements except in connection with the grant of restricted
stock for nominal consideration and unless the exercise price of our employee
stock options is less than the market price of the underlying stock on the grant
date. Total compensation expense recognized in our financial statements for
stock-based awards under APB 25 for fiscal 2000, 1999 and 1998 was $7 million,
$5 million and $13 million, respectively.

39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14. STOCKHOLDERS' EQUITY (CONTINUED)

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Pro forma net loss........................... $(880,868) $(13,696) $(538,260)
Pro forma net loss per share:
Basic...................................... $ (4.80) $ (0.08) $ (2.89)
Diluted.................................... $ (4.80) $ (0.08) $ (2.89)
</TABLE>

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

STOCK REPURCHASE PROGRAM Our board of directors has authorized a program to
repurchase up to 27.5 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 21,396,400 shares of common stock at a cost of
$335 million since commencement of the repurchase program in 1996. We utilize
equity instrument contracts to facilitate our repurchase of common stock. At
June 30, 2000, we have outstanding commitments to buy an aggregate of
6.0 million shares of common stock for aggregate consideration of $97.5 million
under our equity forward purchase arrangement, including obligations that were
transferred from previous sold put contracts. Under this arrangement, the
purchase price will be paid within the next two years at a pre-determined price
based on the third-party's acquisition cost. The timing and method of payment
(net-share or full physical settlement) is at our discretion. The purchase
commitment under the equity forward is secured in part by collateral, reflected
in our financial statements as restricted investments. As of June 30, 2000,
103,600 shares remained uncommitted and available for our use under this stock
repurchase program.

COMMON SHARES RESERVED We have reserved in the aggregate 65,402,929 shares
of common stock issuable upon conversion of the Senior Notes and Convertible
Subordinated Debentures, as well as shares issuable under our stock award and
purchase plans.

NOTE 15. COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Unrealized gain (loss) on available-for-sale
investments............................................. $30,699 $ (118)
Unrealized loss on derivative instruments designated and
qualifying as cash flow hedges.......................... (2,661) --
Foreign currency translation adjustments.................. (9,472) (1,525)
------- -------
Accumulated other comprehensive income (loss)............. $18,566 $(1,643)
======= =======
</TABLE>

40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16. INCOME TAXES

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
United States............................... $(367,033) $ 10,699 $(601,962)
International............................... (14,851) 115,022 5,043
--------- -------- ---------
$(381,884) $125,721 $(596,919)
========= ======== =========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
Federal:
Current..................................... $(33,528) $(44,972) $ 26,346
Deferred.................................... 352,757 58,618 (185,555)
State:
Current..................................... 3,821 93 25,488
Deferred.................................... 58,260 5,455 (31,762)
Foreign:
Current..................................... 29,492 38,244 12,727
Deferred.................................... 36,858 14,454 15,464
-------- -------- ---------
$447,660 $ 71,892 $(137,292)
======== ======== =========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate........... $(133,659) $44,003 $(208,922)
State taxes, net of federal tax benefit...... 40,353 3,606 (4,078)
Effect of change in investment policy with
respect to undistributed earnings of
certain foreign affiliates................. 92,972 -- --
Acquired in-process technology and
non-deductible goodwill.................... -- -- 16,800
Net operating loss with no tax benefit....... 152,202 14,705 43,606
Foreign tax credits with no tax benefit...... 25,868 4,020 13,355
Reduction in previously provided tax
contingencies.............................. (67,000) -- --
Valuation allowance on net deferred tax
assets..................................... 329,965 -- --
Other........................................ 6,959 5,558 1,947
--------- ------- ---------
Provision for (benefit from) income taxes.... $ 447,660 $71,892 $(137,292)
========= ======= =========
</TABLE>

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

41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16. INCOME TAXES (CONTINUED)
In addition, during the fourth quarter of the year ended June 30, 2000, we
recorded an additional valuation allowance of approximately $331 million related
to U.S. and foreign tax effects associated with prior year net operating loss
and tax credit carryforwards and temporary differences not currently deductible.
A valuation allowance for the state tax effect of similar items in the amount of
$38 million, net of federal benefit, increased the provision for state taxes in
the fourth quarter. Such increases in the valuation allowance were required
since the underlying deferred tax assets no longer met the realizability
criteria under SFAS No. 109.

The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities at June 30, 2000 and
1999 are as follows (in thousands):

<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 423,047 $191,145
General business credit carryforwards................ 63,000 63,000
Depreciation......................................... 37,659 49,226
Capitalized research expenses........................ 28,856 33,661
Inventory valuation.................................. 68,969 93,070
Reserves not currently deductible.................... 23,812 39,441
Other................................................ 98,573 124,422
--------- --------
Subtotal........................................... 743,916 593,965
Valuation allowance................................ (632,324) (105,364)
--------- --------
Total deferred tax assets............................ 111,592 488,601
Deferred tax liabilities:
Foreign taxes on unremitted foreign earnings, net of
related U.S. tax liability......................... 86,320 38,191
Other................................................ 43,302 --
--------- --------
Total deferred tax liabilities..................... 129,622 38,191
--------- --------
Total................................................ $ (18,030) $450,410
========= ========
</TABLE>

At June 30, 2000, we had gross deferred tax assets arising from deductible
temporary differences, tax losses, and tax credits of $744 million. The gross
deferred tax assets are offset by a valuation allowance of $632 million and
deferred tax liabiilities of $130 million. The valuation allowance of
$632 million includes $23 million attributable to benefits of stock option
deductions, which, if recognized, will be allocated directly to paid-in-capital.

At June 30, 2000, we had United States federal and foreign jurisdictional
net operating loss carryforwards of approximately $1 billion and $158 million,
respectively. The federal losses will begin expiring in fiscal year 2007 and the
foreign losses will begin expiring in fiscal year 2001. At June 30, 2000, we
also had general business credit carryovers of approximately $46 million for
United States federal tax purposes, which will begin expiring in fiscal year
2001.

NOTE 17. SEGMENT INFORMATION

SGI is a leader in high-performance computing and advanced graphics
solutions, offering powerful servers and visual workstations. We have three
reportable segments: Visual Workstations, Servers and Global Services.
Reportable segments are determined based on several factors including customer
base, homogeneity of products, technology, delivery channels and other factors.
The Visual Workstations

42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17. SEGMENT INFORMATION (CONTINUED)
segment has three operating units and the Server segment have four operating
units. The CEO evaluates performance and allocates resources to each of these
operating units based on profit or loss from operations before interest and
taxes. The CEO has been identified as the Chief Operating Decision Maker as
defined by Statement of Financial Accounting Standards 131.

The Server segment's current products include the Onyx2 family of graphics
systems, the Origin 200 family of servers, the SGI 1000 family of servers, the
Origin 2000 family of high-performance servers and the Cray supercomputers.
During the first quarter of fiscal 2001, we introduced the next generation
Origin 3000 family of high-performance servers as well as the next generation
Onyx-Registered Trademark- 3000 family of graphics systems. In addition, in the
third quarter of fiscal 2000, the Cray product line was sold to Tera Computer
Company ("Tera"). See Note 5, "Sale of Cray Product Line", for further
information. Our servers are high-performance multi-purpose computers designed
to be the market leaders in technical computing applications, empowering insight
in key industries such as manufacturing, government, entertainment,
communications, energy, science and education. Our servers also have a growing
presence in the commercial market with an emphasis on strategic business
analysis, internet applications and digital media serving. In addition, our
servers are used as storage management servers for managing very large data
repositories that contain company critical information. These products are
distributed through our direct sales force, as well as through indirect channels
including resellers and distributors.

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

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

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

We do not identify or allocate assets or depreciation by operating segment,
nor does the CEO evaluate segments on these criteria. Operating units do not
sell product to each other, and accordingly,

43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17. SEGMENT INFORMATION (CONTINUED)
there is no inter-segment revenue to be reported. The accounting policies for
segment reporting are the same as those described in Note 2, Summary of
Significant Accounting Policies.

Information on reportable segments is as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------
VISUAL GLOBAL
SERVERS WORKSTATIONS SERVICES
---------- ------------ ---------
<S> <C> <C> <C>
2000:
Revenue from external customers........... $ 946,452 $ 500,404 $ 678,205
Segment loss.............................. $ (163,395) $(148,750) $ (462)
Significant non-cash items:
Non-recurring charges for contract
cancellations and inventory and future
support costs related to the Silicon
Graphics 320 and 540 visual
workstations.......................... $ -- $ (46,453) $ (20,950)
Vector supercomputer warranty-related
charges............................... $ -- $ -- $ (15,300)
Write-off of excess spares.............. $ -- $ -- $ (17,900)
1999:
Revenue from external customers........... $1,217,965 $ 647,182 $ 682,362
Segment profit (loss)..................... $ (44,790) $(235,895) $ 113,915
Significant non-cash item:
Asset valuation adjustments............. $ -- $ (16,000) $ --
1998:
Revenue from external customers........... $1,417,487 $ 865,005 $ 630,416
Segment profit (loss)..................... $ (215,562) $(155,961) $ 39,952
Significant non-cash items:
Asset valuation adjustments............. $ -- $ (18,800) $ --
Write-off of excess spares.............. $ -- $ -- $ (30,000)
Vector supercomputer inventory and
warranty-related charges.............. $ (98,500) $ -- $ (15,700)
</TABLE>

Reconciliation to SGI as reported (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Total reportable segments................ $2,125,061 $2,547,509 $2,912,908
Other.................................... 206,073 201,448 187,702
---------- ---------- ----------
Total SGI consolidated................... $2,331,134 $2,748,957 $3,100,610
========== ========== ==========
OPERATING LOSS:
Total reportable segments................ $ (312,607) $ (166,770) $ (331,571)
Other.................................... 53,772 24,519 (58,987)
Restructuring............................ (102,861) 14,000 (143,998)
Write-off of acquired in-process
technology and other merger-related
expenses............................... -- 1,107 (14,905)
Write-down of impaired long-lived
assets................................. -- -- (46,640)
---------- ---------- ----------
Total SGI consolidated................... $ (361,696) $ (127,144) $ (596,101)
========== ========== ==========
</TABLE>

44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17. SEGMENT INFORMATION (CONTINUED)
No single customer represented 10% or more of our total revenue.

Geographic revenue for the three years ended June 30, 2000 is based on the
location of the customer. Long-lived assets include all non-current assets
except long-term restricted and other long-term investments and net long-term
deferred tax assets. Geographic information is as follows (in thousands):

<TABLE>
<CAPTION>
REVENUE LONG-LIVED ASSETS
------------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Americas............. $1,313,789 $1,535,729 $1,728,680 $507,830 $370,981 $376,358
Europe............... 551,099 753,904 830,819 242,006 301,088 288,995
Rest of World........ 466,246 459,324 541,111 42,657 48,367 44,175
---------- ---------- ---------- -------- -------- --------
Total.............. $2,331,134 $2,748,957 $3,100,610 $792,493 $720,436 $709,528
========== ========== ========== ======== ======== ========
</TABLE>

NOTE 18. BENEFIT PLANS

401(K) RETIREMENT SAVINGS PLAN We provide a 401(k) investment plan covering
substantially all of our U.S. employees. The plan provides for a minimum 25%
Company match of an employee's contribution up to a specified limit, but allows
for a larger matching subject to certain regulatory limitations. The Company's
matching contributions for fiscal 2000, 1999 and 1998, were $5 million,
$6 million and $7 million, respectively.

DEFERRED COMPENSATION PLAN We have a Non-Qualified Deferred Compensation
Plan that allows eligible executives and directors to defer a portion of their
compensation. The deferred compensation, together with Company matching amounts
and accumulated earnings, is accrued but unfunded. Such deferred compensation is
distributable in cash and at June 30, 2000 and 1999, amounted to approximately
$4 million and $5 million, respectively. A participant may elect to receive such
deferred amounts in one payment or in annual installments no sooner than two
years following each annual election. Participant contributions are always 100%
vested and our matching contributions vest as directed by the board of
directors. There have been no matching contributions to date.

NOTE 19. RELATED PARTY TRANSACTIONS

We have from time to time engaged in significant transactions with related
parties in the ordinary course of business. Related parties include: NKK through
its indirect ownership of 100% of Series A Convertible Preferred Stock (see
Note 14) and WAM!NET Inc., a privately owned company in which we hold an
investment.

Total revenue for the years ended June 30, 2000, 1999 and 1998 included, in
the aggregate, sales to related parties in the amount of $34 million,
$49 million and $87 million, respectively. Purchases and aggregate amounts
receivable from and amounts payable to such related parties were immaterial at
June 30, 2000, 1999 and 1998.

NOTE 20. CONSOLIDATED STATEMENT OF CASH FLOWS

Other adjustments to reconcile net income (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.

45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 20. CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Supplemental disclosures of cash flow information (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest...................................... $18,100 $ 21,100 $14,100
Income taxes, net of refunds.................. $40,000 $(42,000) $ 9,200
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Tax benefit from stock options................... $ -- $ 906 $ 11,700
Capital lease financings......................... $1,600 $ 2,800 $ 6,300
Exchange of property and equipment and accounts
receivable for minority interest Investment in
Wam!Net........................................ $3,700 $37,600 $ --
Exchange of Senior Notes for Zero Coupon
Debentures..................................... $ -- $ -- $230,600
</TABLE>

NOTE 21. CONTINGENCIES

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

We are defending putative securities class action lawsuits filed in the U.S.
District Court for the Northern District of California and in California
Superior Court for the County of Santa Clara in December 1997 and January 1998
alleging that SGI and certain of its officers made material misrepresentations
and omissions during the period from July to October 1997. The U.S. District
Court is considering plaintiffs' motion for a voluntary dismissal of the case
without prejudice and defendants' motion for partial summary judgment. Discovery
is proceeding in the California Superior Court case.

We are also defending a securities class action lawsuit involving Alias
Research Inc., which we acquired in June 1995. The Alias case, which was filed
in 1991 in the U.S. District Court for the District of Connecticut, alleges that
Alias and a former officer and director made material misrepresentations and
omissions during the period from May 1991 to April 1992. The case has been
remanded to the U.S. District Court and is proceeding through discovery.

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

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

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

46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL 2000
-------------------------------------------------
JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
--------- -------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue................................... $ 534,051 $563,687 $648,193 $ 585,203
Costs and expenses:
Cost of revenue............................... 345,267 327,324 389,671 441,263
Research and development...................... 67,727 69,564 78,607 85,350
Selling, general and administrative........... 188,152 185,197 183,487 228,360
Other operating expense(1).................... (8,000) (17,677) (16,000) 144,538
--------- -------- -------- ---------
Operating (loss) income......................... (59,095) (721) 12,428 (314,308)
Interest and other income (expense), net(2)..... 4,226 (22,560) 2,165 (4,019)
--------- -------- -------- ---------
(Loss) income before income taxes............... (54,870) (23,281) 14,594 (318,327)
Net (loss) income............................... (607,591) (18,133) 9,081 (212,901)
Net (loss) income per share:
Basic......................................... $ (3.27) $ (0.10) $ 0.05 $ (1.17)
Diluted....................................... $ (3.27) $ (0.10) $ 0.05 $ (1.17)
Shares used in the calculation of net (loss)
income per share:
Basic......................................... 185,573 183,826 182,789 181,924
Diluted....................................... 185,573 183,826 183,143 181,924
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1999
------------------------------------------------
JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
-------- -------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue.................................... $828,603 $619,175 $684,823 $616,356
Costs and expenses:
Cost of revenue................................ 469,901 359,636 394,973 378,740
Research and development....................... 87,698 93,331 97,179 102,138
Selling, general and administrative............ 237,105 215,574 222,005 232,928
Other operating expense(3)..................... (1,107) (6,000) (8,000) --
-------- -------- -------- --------
Operating income (loss).......................... 35,006 (43,366) (21,334) (97,450)
Interest and other income (expense), net(4)...... 212,493 (7,358) (3,524) 51,254
-------- -------- -------- --------
Income (loss) before income taxes................ 247,499 (50,724) (24,858) (46,196)
Net income (loss)................................ 157,793 (39,957) (20,341) (43,666)
Net income (loss) per share:
Basic.......................................... $ 0.85 $ (0.21) $ (0.11) $ (0.24)
Diluted........................................ $ 0.81 $ (0.21) $ (0.11) $ (0.24)
Shares used in the calculation of net income
(loss) per share:
Basic.......................................... 186,197 186,685 186,417 186,329
Diluted........................................ 196,839 186,685 186,417 186,329
</TABLE>

------------------------

(1) Amounts represent a $145 million charge for estimated restructuring costs in
the first quarter and changes in previously estimated restructuring costs of
$42 million in the second through fourth quarters.

(2) Amounts include a net loss on the sale of our Cray product line of
$8 million, comprised of a gain of $13 million in the fourth quarter and a
loss of $21 million in the third quarter.

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

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

47
<PAGE>
SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
--------------------- -----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND WRITE-OFFS/ END OF
DESCRIPTION OF PERIOD EXPENSES OTHER OTHER PERIOD
----------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998
Accounts receivable allowance............. $ 24,056 $ 622 $ -- $ (7,215) $ 17,463
Warranty reserve.......................... $ 17,949 $ 42,110 $ -- $(27,327) $ 32,732
Deferred tax asset allowance.............. $ 69,047 $ 62,528 $10,600(1) $(51,470)(2) $ 90,705
Year ended June 30, 1999
Accounts receivable allowance............. $ 17,463 $ 351 $ -- $ (2,407) $ 15,407
Warranty Reserve.......................... $ 32,732 $ 36,111 $ 9,945(3) $(40,168) $ 38,620
Deferred tax asset allowance.............. $ 90,705 $ 13,511 $11,439(1) $(10,291) $105,364
Year ended June 30, 2000
Accounts receivable allowance............. $ 15,407 $ 2,964 $ -- $ (5,988) $ 12,383
Warranty Reserve.......................... $ 38,620 $ 56,158 $ 295(3) $(67,194) $ 27,879
Deferred tax asset allowance.............. $105,364 $525,979 $ 981(1) $ -- $632,324
</TABLE>

------------------------

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

(2) Reduction in valuation allowance resulting in an adjustment to purchased
intangibles from the Cray acquisition

(3) Reclassification from other accrual accounts

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

Not applicable.

48
<PAGE>
PART III

Certain information required by Part III is omitted from this Report in that
the we filed our definitive proxy statement pursuant to Regulation 14A (the
"2000 Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning our directors required by this Item is
incorporated by reference to the information set forth in the 2000 Proxy
Statement on pages 3 and 4 under the heading "Proposal No. 1--Election of
Directors--Directors and Nominee for Director."

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

The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, required by this Item is incorporated by
reference to information set forth on page 12 of the 2000 Proxy Statement under
the heading "Executive Officer Compensation--Compliance with Section 16(a) of
the Exchange Act."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to
information set forth in the 2000 Proxy Statement on page 5 under the headings
"Proposal No. 1--Election of Directors--Compensation Committee Interlocks and
Insider Participation" and "--Director Compensation"; on pages 10 through 12
under the headings "Executive Officer Compensation--Summary Compensation Table",
"--Option Grants in Fiscal 2000" and "--Option Exercises in Fiscal Year 2000 and
Fiscal Year-End Option Values"; on pages 8 through 10 under the heading "Report
of the Compensation and Human Resources Committee of the Board of Directors";
and on page 14 under the heading "Company Stock Price Performance Graph".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
information set forth in the 2000 Proxy Statement on pages 1 and 2 under the
headings "Information Concerning Solicitation and Voting--Record Date and
Principal Share Ownership" and "--Voting and Solicitation" and on page 8 under
the heading "Other Information--Security Ownership of Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the
information set forth in the 2000 Proxy Statement on pages 12 and 13 under the
heading "Certain Transactions."

PART IV

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

(a) The following documents are filed as a part of this Report:

1. FINANCIAL STATEMENTS. The following consolidated financial statements of
Silicon Graphics, Inc. and Report of Ernst & Young LLP, Independent auditors
are filed as part of this Report on pages 22 through 47;

Consolidated Statement of Operations -- Years ended June 30, 2000, 1999 and
1998

49
<PAGE>
Consolidated Balance Sheets -- June 30, 2000 and 1999

Consolidated Statements of Cash Flows -- Years ended June 30, 2000, 1999,
and 1998

Notes to Consolidated Financial Statements

Report to Independent Auditors

2. FINANCIAL STATEMENT SCHEDULES. The following financial statements 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.

<TABLE>
<CAPTION>
Schedule Description Page
<S> <C> <C>
II Valuation and Qualifying Accounts 48
</TABLE>

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:

<TABLE>
<C> <S>
3.1.1(9) Restated Certificate of Incorporation of the Company.

3.1.2(13) Certificate of Designation of the Series E Preferred Stock
filed June 13, 1995.

3.2(16) Bylaws of the Company, as amended.

4.1(5) Amended and Restated Preferred Shares Rights Agreement,
dated as of May 6, 1992 between the Company and The First
National Bank of Boston, including the Certificate of
Designation of Rights, Preferences and Privileges of
Series B Participating Preferred Stock, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibits A, B, and C respectively.

4.2(10) First Amendment to Rights Agreement dated as of May 2, 1995
between the Company and The First National Bank of Boston.

4.3(16) Indenture dated February 1, 1986 between Cray
Research, Inc. and Manufacturers Hanover Trust Company, as
Trustee.

4.4(16) First Supplemental Indenture dated June 30, 1996 between the
Company, Cray Research, Inc., and Chemical Bank (formerly
Manufacturers Hanover Trust Company).

4.5(20) 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(13) Voting and Exchange Trust Agreement between the Company and
Montreal Trust Company of Canada dated June 15, 1995.

10.1(1) Software Agreement dated as of January 4, 1986, as
supplemented June 6, 1986, and Sublicensing Agreement dated
as of June 9, 1986 between the Company and AT&T Information
Systems Inc.

10.2(2) Software License Agreement dated January 24, 1986, between
the Company and AT&T Information Systems Inc.

10.3(3) Stock Purchase Agreement dated March 2, 1990 among the
Company, NKK Corporation and NKK U.S.A. Corporation.

10.4(6) Exchange Agreement dated August 14, 1992 among the Company,
NKK Corporation and NKK U.S.A. Corporation.

10.5(6) Form of Indemnification Agreement entered into between the
Company and its directors, executive officers and certain
other agents.
</TABLE>

50
<PAGE>
<TABLE>
<C> <S>
10.6(6) Form of Indemnification Agreement entered into between the
Company and its directors, executive officers and certain
other agents. (Revised)

10.7(22)* Form of Employment Continuation Agreement entered into
between the Company and its executive officers, as amended
and restated as of November 14, 1997.

10.8(22) Form of Agreement entered into by the Company with its
executive officers, dated as of November 14, 1997.

10.9(21)* Promissory Note dated June 18, 1997 issued to the Company by
William M. Kelly.

10.10(19)* 1984 Incentive Stock Option Plan, as amended, and amended
form of Incentive Stock Option Agreement.

10.11(9)* Directors' Stock Option Plan and form of Stock Option
Agreement as amended as of October 31, 1994.

10.12(6)* 1985 Stock Incentive Program.

10.13(6)* 1986 Incentive Stock Option Plan, as amended, and amended
forms of Incentive Stock Option Agreement and Nonstatutory
Stock Option Agreement.

10.14(4)* 1987 Stock Option Plan and form of Stock Option Agreement.

10.15(15)* Amended and Restated 1989 Employee Benefit Stock Plan and
form of stock option agreement.

10.16(7)* 1993 Long-Term Incentive Stock Plan and form of stock option
agreement.

10.17 1996 Supplemental Non-Executive Equity Incentive Plan and
form of stock option agreement, as amended

10.18(17)* Employee Stock Purchase Plan, as amended as of October 30,
1996.

10.19(23)* 1998 Employee Stock Purchase Plan

10.20(8)* Non-Qualified Deferred Compensation Plan dated as of
September 9, 1994.

10.21(19)* Addendum to the Non-Qualified Deferred Compensation Plan.

10.22(11)* Alias Research Inc.'s 1988 Employee Share Ownership Plan
Option Agreement.

10.23(11)* Alias Research Inc.'s 1989 Employee Share Ownership Plan
Option Agreement.

10.24(11)* Alias Research Inc.'s 1990 Employee Share Ownership Plan and
standard forms of Option Agreements.

10.25(11)* Alias Research Inc.'s 1994 Stock Plan and standard forms of
Option Agreements.

10.26(12)* Wavefront Technologies, Inc. 1990 Stock Option Plan with
standard form of Option Agreement.

10.27(15)* Cray Research, Inc. 1989 Non-Employee Directors' Stock
Option Plan and form of stock option agreement.

21.1 List of Subsidiaries.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

27.1 Financial Data Schedule.
</TABLE>

------------------------

* 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.

51
<PAGE>
(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 Current Report on
Form 8-K dated March 16, 1990.

(4) Incorporated by reference to exhibits to the Company's Post-Effective
Amendment to Registration Statement on Form S-8 (No. 33-16529), which
became effective June 18, 1990.

(5) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1992.

(6) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1992.

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

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

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

(10) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1995.

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

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

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

(14) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (No. 333-06403), which became effective June 20,
1996.

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

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

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

(18) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1991.

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

(20) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.

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

52
<PAGE>
(22) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1999.

(b) REPORTS ON FORM 8-K.

A current report on Form 8-K dated May 16, 2000 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 May 16, 2000 regarding
the Company's plan to spin-off it's interest in MIPS Technologies, Inc.

A current report on Form 8-K dated June 8, 2000 was filed with the
Securities and Exchange Commission (the "SEC") to report under Item 5 of
that Form the issuance to the SGI stockholders of an Information Statement
describing the terms and tax consequences of the spin-off of MIPS
Technologies, Inc. stock to the Company's stockholders.

A current report on Form 8-K dated June 20, 2000 was filed with the
Securities and Exchange Commission (the "SEC") to report under Item 2 the
completion of the distribution by the Company of its shares of common stock
of MIPS Technologies, Inc. to the SGI stockholders.

TRADEMARKS USED IN THE FORM 10-K

InfiniteReality3, NUMAflex, SGI-TM-Reality Center-TM-, Silicon Graphics,
InfiniteReality, IRIX, O2, Octane Onyx and Onyx2 are registered trademarks, and
Origin, SGI and VPro are trademarks, of Silicon Graphics, Inc. MIPS is a
registered trademark and R12000 is a trademark of MIPS Technologies, Inc. used
under license by Silicon Graphics, Inc. Cray is a registered trademark and
Cray T90 is a trademark of Cray, Inc. Alias is a registered trademark, and Alias
Studio, Alias StudioPaint 3D and Alias AutoStudio 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.

UNIX is a registered trademark in the United States and other countries,
licensed exclusively through X/Open Company Limited. Windows NT is a registered
trademark of Microsoft Corporation. Intel and Pentium are registered trademarks
of Intel Corporation. Linux is a registered trademark of Linus Torvalds in the
U.S. and other countries. Red Hat is a registered trademark of Red Hat, Inc.

53
<PAGE>
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.

<TABLE>
<S> <C> <C>
Dated: September 14, 2000 SILICON GRAPHICS, INC.

By: /s/ ROBERT R. BISHOP
-----------------------------------------
Robert R. Bishop
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>

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.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman, Chief Executive
/s/ ROBERT R. BISHOP Officer and Director
------------------------------------------- (Principal Executive September 14, 2000
Robert R. Bishop Officer)

Executive Vice President,
/s/ HAROLD L. COVERT Chief Financial Officer
------------------------------------------- and Chief Administrative September 14, 2000
Harold L. Covert Officer (Principal
Financial Officer)

/s/ JEFFREY ZELLMER Vice President, Corporate
------------------------------------------- Controller (Principal September 14, 2000
Jeffrey Zellmer Accounting Officer)

/s/ RICHARD KRAMLICH
------------------------------------------- Director September 14, 2000
Richard Kramlich

/s/ ROBERT A. LUTZ
------------------------------------------- Director September 14, 2000
Robert A. Lutz

/s/ JAMES A. MCDIVITT
------------------------------------------- Director September 14, 2000
James A. McDivitt

/s/ ROBERT B. SHAPIRO
------------------------------------------- Director September 14, 2000
Robert B. Shapiro
</TABLE>