Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission File Number 1-10441

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

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:

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

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on December 27, 2002 on the New York Stock Exchange, was approximately $216 million. Shares of voting stock held by each executive officer and director and by each person who owns 5% or more of any class of registrant's voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of August 29, 2003, the registrant had 210,589,850 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Parts of the Proxy Statement for registrant's Annual Meeting of Stockholders to be held December 2, 2003 are incorporated by reference into Part III of this Report on Form 10-K.

PART I

        This Form 10-K includes forward-looking statements regarding our business, objectives, financial condition and future performance. These forward-looking statements include, among others, statements relating to expected levels of revenue, gross margin, operating expense, future profitability, our expectations for new product introductions and market conditions, our liquidity and capital resources, our belief that we have sufficient capital to meet our requirements for fiscal 2004, headcount reductions and the expected impact on our business of legal proceedings and government 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; risks related to liquidity and the adequacy of our capital resources; ability to achieve profitable operations or limit losses; adverse business conditions; changes in customer order patterns; the impact of employee attrition rates; heightened competition, reflecting rapid technological advances and constantly improving price/performance, which may result in significant discounting and lower gross profit margins; continued success in technological advancements and new product introduction, including timely development and successful introduction of strategic products for specific markets; risks related to the acceptance of new products, including the SGI® Altix™ family of servers and superclusters, and storage offerings based on our CXFS™ shared file system; risks related to dependence on our partners and suppliers; risks related to market perceptions regarding proprietary versus open standard technologies; risks related to foreign operations (including weak or disrupted economies, unfavorable currency movements and export compliance issues); risks associated with implementation of new business practices, processes and information systems; uncertainties arising from claims and litigation; 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 products, services and solutions for use in high-performance computing, storage and visualization. We sell highly scalable servers, advanced visualization systems, desktop workstations, storage solutions and a range of software products which enable our customers in the scientific, technical and creative communities to solve their most challenging problems and provide them with strategic and competitive advantages in their marketplace. We also offer a range of services and solutions, including professional services, Reality Center® immersive visualization centers, customer support and education. These products and services are targeted primarily towards five market segments: Government and Defense, Science, Manufacturing, Energy, and Media.

3

Products

        SGI® systems are designed specifically to meet the needs of the scientific, technical and creative marketplaces. SGI systems utilize either the IRIX® operating system, which is a proprietary enhanced version of UNIX® based upon the MIPS® RISC microprocessor, or the Linux® operating system based upon Intel® Itanium® 2 microprocessors. Both the MIPS/IRIX and Intel/Linux-based product lines feature our innovative SGI NUMA™ architecture and provide unique levels of performance and scalability to our customers.

        Scalable Servers    The SGI Origin® family of high-performance servers includes the Origin 3000 and Origin 300 series of systems. The Origin family of servers features the SGI NUMA architecture and IRIX operating system, as well as SGI® NUMAflex™, which allows customers to configure systems to meet their unique needs by constructing systems of modular components or "bricks". These bricks can be CPU, storage, or input/output ("I/O") components, which can be configured independently within each system. The modularity of the NUMAflex approach enables the computer system to meet the exact requirements of the customer, while maintaining optimum flexibility in meeting changing needs over time. The SGI® Altix™ 3000 family of superclusters and servers also features the SGI NUMA architecture and is based on the Linux operating system. Altix systems achieve high performance through the combination of the proven NUMAflex approach, the flexibility of open source computing and the power of up to 64 Itanium 2 processors in a single node. Altix systems of up to 128 processors each can be clustered together, a supercluster, to create supercomputers that are among the most powerful in the world today.

        Advanced Graphics Systems    For more than 20 years, Silicon Graphics has been synonymous with the most powerful and advanced computer graphics capabilities in the industry. Today, the SGI® Onyx® family of products continues that tradition, providing the greatest resolution, the most realism and the highest levels of performance in the industry. The Onyx family of systems is built on the same high-bandwidth SGI NUMA architecture as the Origin and Altix servers and features our industry-leading SGI® Onyx4™ UltimateVision™ graphics. Onyx series systems integrate high-performance computing, data management, and high-performance visualization into a single system.

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

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

        Desktop Systems    Our Silicon Graphics Fuel™ and Tezro™ families of MIPS processor and IRIX operating system-based desktop workstations each feature advanced 3D graphics and powerful integrated imaging capabilities. Silicon Graphics Fuel workstations are cost-effective single-processor systems, while the single-, dual- or quad-processor Tezro systems are targeted at users who require advanced visualization capability and the most powerful 64-bit computing available in a desktop system.

        SAN and Data Management    Customers across the high-performance computing ("HPC") markets desire ever increasing performance from their servers, creating a parallel need to manage massive

4

amounts of data generated by these servers. To address the problem of managing such large amounts of complex data, SGI has developed a series of products and solutions to help customers access and utilize their data in a more efficient manner, resulting in better workflow management, faster cycle times, and higher levels of access, availability, and security.

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

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

Marketing, Sales, and Distribution

        We sell our system products and solutions through both a direct sales force and indirect channel partners. In fiscal year 2003 direct sales accounted for more than half of our product revenues. The direct sales and support organization operates throughout the United States and in all significant international markets. We also have channel partners in almost all the countries in which we have a presence; in other countries, we work through an SGI authorized distributor.

        Our indirect channel partners include service providers, systems integrators, value-added resellers, independent software vendors, distributors and master resellers.

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

        Our Solutions Finance organization works with customers to arrange third party financing for products and services, and assists its financial partners in the remarketing of off-lease systems.

        Information with respect to international operations and export sales may be found in Note 7 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.

Technology Solutions

        The quality and reliability of our products and our understanding of our customer's technical and business challenges is critical to our success. SGI's Technology Solutions portfolio offers system solution engineering services, professional and managed services, and traditional customer support and education. We provide customer support services online, through SGI global support centers and through authorized local service providers in countries where SGI does not have a local office. International distributors also provide training and support for products sold by them. We typically provide a standard hardware warranty against defects in materials and workmanship for periods of up to three years.

5

Research and Development

        We are concentrating our research and development efforts on products and technologies that we believe hold the highest growth potential, including global shared memory system architectures, visualization and storage. Our strategy is to derive maximum leverage from these efforts by using a foundation of industry-standard components such as the Intel Itanium family of microprocessors and the Linux operating systems. We also continue to invest, although at a lower rate than in the past, both on a percentage and absolute dollar basis, in our own MIPS microprocessors and IRIX operating system. There are no assurances that we will maintain or create sufficient differentiation to achieve and sustain a competitive advantage.

        During fiscal 2003, 2002 and 2001, we spent approximately $171 million, $177 million and $236 million, respectively, on research and development that represented approximately 18% of total revenue in fiscal 2003 and 13% of total revenue in both fiscal 2002 and 2001. 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 revenue. However, declines in total revenue over the last several fiscal years have led us to reduce the absolute level of our investment in research and development.

Manufacturing

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

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

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

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

        Certain of our suppliers are located outside the United States. Pricing from these suppliers can be strongly affected by such factors as trade protection measures and changes in currency exchange rates. In addition, the markets for memory chips (DRAMs and SRAMs), which are a significant component of our overall systems cost, can be 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, product quality and reliability, ease

6

of use, capabilities of the system software, availability of third party applications software, customer support, product availability, corporate reputation and price. Significant discounting from list price has been the norm in the industry.

        Our principal competitors are IBM, Hewlett-Packard, NEC, Cray, Sun Microsystems and, in some markets, Dell. Our unique market focus on technical and creative users provides advantages in being able to design our systems specifically for these users. Our competitors, however, are generally far larger companies with much greater resources. As our Linux-based systems business grows, the list of competitors may grow commensurate with the increased market opportunity. Specifically, Dell and other PC vendors market products that can be clustered together to produce systems that may compete with our mid-range products.

Proprietary Rights and Licenses

        We own and have applied for more than 500 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 operating system, 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 27, 2003, we are in discussions with several parties that have asserted intellectual property infringement claims and we expect that litigation of this sort will reoccur from time to time. See "Risks That Affect Our Business".

Employees

        As of June 27, 2003, we had 3,714 regular employees compared with 4,443 at June 28, 2002. In August 2003, we effected a reduction in force that is expected to eliminate about 600 positions. Our future success will depend, in part, on our ability to continue to retain and motivate highly qualified technical, marketing and management personnel. We have never had a work stoppage, and no employees are represented by a labor union. We have workers' councils where required by European Union or other applicable laws. We believe that our employee relations are good.

Corporate Data

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

ITEM 2. PROPERTIES

        SGI owns and leases sales, service, R&D, and administrative offices worldwide and has its principal facilities in California, Wisconsin and Minnesota. Our corporate headquarters and certain R&D operations are located in Mountain View, California, where we lease a total of about 868,000 square feet. Our primary manufacturing facility is located in Chippewa Falls, Wisconsin, where we own and lease about 449,000 square feet for manufacturing, service and R&D activities. We also have leased sales, administrative and R&D facilities of about 85,000 square feet in Eagan, Minnesota.

7

        As a result of restructuring over the last several years, we also own and lease additional space that we do not currently expect to use in our operations. We own a facility consisting of about 170,000 square feet in Cortaillod, Switzerland that was used until December 2001 as our European manufacturing site. This property is currently being offered for sale. A portion of this facility (about 87,000 square feet) is leased to a third party company with an option to purchase. We also lease 3 other buildings near our Mountain View headquarters (about 154,000 square feet) and an additional 31 facilities worldwide (about 231,000 square feet), under leases that expire through fiscal 2010. The anticipated costs associated with these facilities, net of estimated sublease income, have been accrued in prior restructuring charges. See Note 3 to the Consolidated Financial Statements.

        On July 10, 2003, we announced that we had entered into an arrangement to sublease our Amphitheatre Technology Center campus in Mountain View, California. We will relocate our headquarters to our nearby Crittenden Technology Center campus, where we will lease additional space. In combination, these actions will substantially reduce our facilities occupancy costs beginning in fiscal 2005. For additional information regarding this sublease agreement and further restructuring actions that affect leased facilities see Note 23 to the Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

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

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

        None.

Executive Officers of the Registrant

        The executive officers of SGI and their ages as of August 31, 2003 are as follows:

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

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

        Mr. Pratt was appointed Chief Operating Officer of SGI in May of 2001. He has held a variety of general and engineering management positions at SGI since 1991 and was made Executive Vice

8

President of Engineering and Manufacturing in May of 2000. Prior to that and beginning in 1998, he served as President and General Manager of Alias.

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

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

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

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

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

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

        Mr. Silverman was appointed Senior Vice President, Strategic Technology Initiatives in August 2003. Prior to that, he was appointed Senior Vice President, Marketing in April of 2001. He joined SGI in May of 1999 as Vice President of server marketing. Prior to joining SGI, he held a number of marketing director and product management positions, including the head of marketing for Internet imaging operations at Hewlett-Packard from September 1996 through April 1999.

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

9

PART II

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

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

Price Range for Common Stock

        SGI had 6,173 stockholders of record as of June 27, 2003. We have not paid any cash dividends on our common stock. As a result of our accumulated deficit position and restrictions in certain debt instruments, we do not anticipate paying cash dividends to common stockholders.

ITEM 6. SELECTED FINANCIAL DATA

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

10

(1)

Fiscal 2003 amounts include net restructuring charges ($27 million) and asset impairment charges ($3 million). Fiscal 2002 amounts include net restructuring charges ($33 million) and asset impairment charges ($12 million). Fiscal 2001 amounts include net restructuring charges ($82 million) and asset impairment charges ($20 million). Fiscal 2000 amounts include net restructuring charges ($65 million) and asset impairment charges ($38 million). Fiscal 1999 amount includes a reduction in previously estimated restructuring charges ($14 million).

(2)

Fiscal 2003 amounts include net interest expense of $23 million and a $3 million other than temporary decline in the value of an investment. Fiscal 2002 amounts include a $64 million gain on sale of 60% interest in SGI Japan, Ltd. ("SGI Japan") and $24 million in class action lawsuit settlement expense. Fiscal 2001 amounts include an $83 million write-off of our investment in a private company and $50 million in gains from the sale of marketable investments. Fiscal 2000 amounts include a $8 million loss on the sale of the Cray product line. Fiscal 1999 amount includes a $273 million gain on the sale of a portion of SGI's interest in MIPS Technologies, Inc. ("MTI").

(3)

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

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

Introduction

        The following tables and discussion present certain financial information on a comparative basis. SGI has had declining revenue and has been unprofitable on an operating basis for each of the past six fiscal years as we have felt the impact of the slowdown in the economy, strong competition from much larger companies, technologies and product families in transition and management and employee turnover. As part of our plan to restore growth and profitability to SGI, we have restructured our overall operations, sustained gross margin levels despite a decline in revenue and significantly reduced our on-going operating expenses. Although we made some progress in fiscal 2003, we have continued to

11

experience lower revenues and significant operating losses. We will continue to focus on actions intended to improve revenue levels, reduce expenses and restore long-term growth and profitability.

Results of Operations

Revenue

        The following discussion of revenue is based on the results of our reportable segments as described in Note 18 to the Consolidated Financial Statements. Total revenue is principally derived from three reportable segments: Servers, Workstations and Global Services, which were determined based on factors including customer base, homogeneity of products, technology, delivery channels and other factors. Effective for fiscal 2002, we reorganized our Global Services segment and removed the remanufactured systems sales from this segment. Revenue from remanufactured systems is included in the servers and workstations segments. Fiscal 2001 amounts have been reclassified to conform to the fiscal 2003 and 2002 presentation.

        Total revenue in fiscal 2003 decreased $379 million or 28% compared with fiscal 2002, and fiscal 2002 revenue decreased $513 million or 28% compared with fiscal 2001. The decline in revenue from both fiscal 2002 to fiscal 2003 and from fiscal 2001 to fiscal 2002 reflected the continued economic slowdown, a significant downturn in IT spending, strong competition from much larger companies, the impact of changing SGI Japan's status to a distribution model and other factors discussed below that affected particular product families. The decline in revenue from fiscal 2001 to fiscal 2002 also reflected the impact of discontinuing certain visualization workstations based on Pentium® III microprocessors. Revenue for fiscal 2002 included a one-time receipt of $63 million from Microsoft resulting from an agreement involving a patent cross-license and the transfer of certain of SGI's intellectual property rights. We expect certain of the factors mentioned above to continue to have an adverse impact on our future revenue levels. See "Risks That Affect Our Business."

12

        The following table presents total revenue by reportable segment:

        Fiscal 2003 Server revenue (which includes visualization systems, high-performance servers and integrated storage solutions) decreased $150 million or 29% compared with fiscal 2002. The decline was primarily noted within the high-performance server family and to a lesser extent within the visualization systems product family. These declines reflect delays in the acquisition of technology by private sector businesses concerned about the economy as well as competitive factors including processor speeds, the suitability of low-cost cluster solutions for certain application segments, and the timing of releases of key software applications on the IRIX operating system. Reduced volumes, lower average selling prices caused by a mix shift away from richer configuration systems and the introduction of the Altix 3000 family of servers, sold at a lower price point than the Origin family of servers, contributed to the decline in high-performance server revenue compared with fiscal 2002. Although volumes increased slightly, a shift in mix from the high-end visualization systems to the lower-end visualization systems with a lower average selling price contributed to the decline in visualization system revenue. Fiscal 2002 Server revenue decreased $231 million or 31% compared with fiscal 2001. The decrease primarily reflected declines across all product families within this segment. This decline was primarily attributable to concerns about the slowdown in the economy that were causing private sector businesses to delay the acquisition of technology wherever possible. Fiscal 2002 Server revenue levels were also affected by competitive factors, including processor speeds, improvements in commodity graphics performance, the suitability of low-cost cluster solutions for certain application segments, and the late release of key software applications on the IRIX operating system. See "Risks That Affect Our Business."

        Fiscal 2003 Workstation revenue decreased $86 million or 36% compared with fiscal 2002. The decrease was primarily attributable to the continuing decline in the overall UNIX workstation market. The decline reflected reduced volumes as we completed the end of life of our O2® and Octane® families of visual workstations, partially offset by volume increases associated with the introduction of our Silicon Graphics Fuel® visual workstation in fiscal 2003. Declines in workstation revenue were also partially offset by increases in workstation overall average selling prices as the product mix shifted from the lower-end O2 workstations with lower average selling prices to Octane and Fuel workstations with higher average selling prices. Fiscal 2002 Workstation revenue decreased $160 million or 40% compared with fiscal 2001. The decrease was primarily attributable to the continuing decline in the overall UNIX workstation market. In addition, during the fourth quarter of fiscal 2001, we announced the discontinuance of certain workstations based upon Intel 32-bit microprocessors, the impact of which also contributed to the year over year decline in Workstation revenue.

        Global Services revenue is comprised of hardware and software support and maintenance and professional services. Fiscal 2003 Global Services revenue decreased $74 million or 16% compared with fiscal 2002. This decline was primarily attributable to a reduction in our traditional customer support revenue that is being affected by lower selling prices for new contracts compared with existing contracts, coupled with a decline in the overall installed base reflecting lower system sales volumes in

13

recent periods. Professional Services revenue, which includes SGI product, third party product, SGI consulting services and SGI maintenance services, also declined slightly due to the same factors influencing the decline in Server, Workstation and Global Services revenue. Fiscal 2002 Global Services revenue decreased $141 million or 24% compared with fiscal 2001. This decrease was primarily attributable to declines in our Professional Services revenue as a result of the restructuring of our service organization as well as declines in traditional customer support revenue as a result of lower system sales.

        Other revenue is generally comprised of our operating units that are not reportable segments, including the product and service revenue of our application software subsidiary, Alias. Fiscal 2003 other revenue decreased $69 million or 53% principally due to the absence of a transaction similar to the fiscal 2002 receipt of $63 million from Microsoft resulting from an intellectual property agreement involving a patent cross-license and the transfer of certain of SGI's intellectual property rights. Revenue from Alias remained relatively consistent in fiscal 2003 compared to fiscal 2002. Fiscal 2002 other revenue increased $19 million or 17% compared with fiscal 2001. The increase was primarily due to the receipt of $63 million from Microsoft, offset in part by a decline in Alias revenue.

        Total revenue by geographic area for fiscal 2003, 2002 and 2001 was as follows (in millions):

        Geographic revenue as a percentage of total revenue for fiscal 2003, 2002, and 2001 was as follows:

        The fluctuation in geographic revenue as a percentage of total revenue between Europe and Rest of World business in fiscal 2003 compared with fiscal 2002 was primarily due to a decline in revenue generated in Japan caused by an overall economic decline in the Japanese economy and the impact of no longer consolidating the financial results of SGI Japan, as a result of our sale of a majority interest in that company. The fluctuation in geographic revenue as a percentage of total revenue between the Americas and Rest of World business in fiscal 2002 compared with fiscal 2001 was primarily due to the impact of no longer consolidating the revenue of SGI Japan. A decrease in sales in the Asia Pacific region in fiscal 2002 compared to fiscal 2001 also contributed to the decline in Rest of World revenue as a percentage of total revenue.

        Our consolidated backlog at June 27, 2003 was $140 million, down from $159 million at June 28, 2002. Backlog is comprised of committed purchase orders for products and professional services deliverable within three to nine months, depending on the product family. Backlog declined in both the Americas and Europe, offset slightly by a minor increase in Rest of World. From a segment standpoint, the decline was primarily noted in the workstation segment as the overall UNIX workstation market continues to decline, offset in part by an increase in Server backlog, primarily for high-performance servers and integrated storage solutions, and backlog for professional services.

14

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.

        Overall gross profit margin decreased from 43% in fiscal 2002 to 40% in fiscal 2003. Included in fiscal 2002 results was $63 million in revenue recognized from the Microsoft intellectual property agreement recorded at 100% margin which accounted for 2.8 percentage points of the change in gross margin from fiscal 2002 to fiscal 2003. Operationally, we were able to sustain gross profit margins in fiscal 2003 compared with fiscal 2002 due to our continued improvements in manufacturing efficiencies and procurement practices. Fiscal 2003 product and other gross profit margin, excluding the Microsoft revenue noted above, declined 2.3 percentage points compared with fiscal 2002. This decline was primarily due to unfavorable product mix and lower volumes, offset in part by favorable manufacturing variances resulting from improved efficiencies in material procurement. Fiscal 2003 service gross profit margin improved 5.2 percentage points despite declining revenue levels primarily due to the restructuring of the service organization in fiscal 2002.

        Overall gross profit margin increased to 43% in fiscal 2002 compared with 33% in fiscal 2001. Included in fiscal 2002 results was $63 million in revenue recognized from the Microsoft intellectual property agreement recorded at 100% margin which accounted for 2.8 percentage points of the change in gross margin from fiscal 2001 to fiscal 2002. The remaining improvement in gross margin in fiscal 2002 was primarily attributable to decreases in manufacturing overhead expense in the second half of fiscal 2002 due to the closure of our manufacturing facility in Switzerland, the completion of the restructuring that was announced in the first quarter of fiscal 2002, and a higher margin product mix. The restructuring included the closure of our manufacturing facility in Switzerland and the reorganization of our services business, which has had a significant impact on the increase in our service margins. Gross margin improvements in fiscal 2002 were offset slightly due to deconsolidating SGI Japan during the second quarter of fiscal 2002, which negatively affects gross margin. See "Impact of SGI Japan Transaction."

Operating Expenses

        Total fiscal 2003 operating expenses decreased $151 million or 23% compared with fiscal 2002. Fiscal 2003 operating expenses included $30 million of charges for restructuring and asset impairment costs. The significant decline in operating expenses was due to an overall expense reduction program aimed at bringing expenses in line with lower revenue levels. Total fiscal 2002 operating expenses decreased $383 million or 36% compared with fiscal 2001. Fiscal 2002 operating expenses included $44 million of charges for restructuring and asset impairment costs. Fiscal 2001 operating expenses included $102 million of charges for restructuring and asset impairment and $18 million of charges as a result of the implementation of an ERP system and costs associated with a business reorganization.

15

        Research and development    Fiscal 2003 research and development spending decreased $6 million or 3% compared with fiscal 2002. The fiscal 2003 decrease reflects a 7% decline in headcount and an overall reduction in research and development activities as a result of continued restructuring actions in order to align expenses with lower revenue levels. Research and development spending decreased $59 million or 25% in fiscal 2002 compared with fiscal 2001. The fiscal 2002 decrease reflected similar factors.

        Selling, general and administrative    Fiscal 2003 selling, general and administrative expenses decreased $131 million or 29% compared with fiscal 2002. This decrease in operating expenses resulted primarily from a 14% decline in headcount as a result of restructuring and personnel attrition, and the impact of our overall expense control measures aimed at bringing operating expenses more in line with revenues. Selling, general and administrative expenses decreased $267 million or 37% in fiscal 2002 compared with fiscal 2001. The fiscal 2002 decrease reflected reduced headcount as a result of restructuring activities and attrition, significantly reduced commission and outside service expenses and the impact of our overall expense control measures aimed at bringing operating expenses more in line with revenues.

        Other operating expense    Other operating expense for fiscal 2003 represented a charge for estimated restructuring of $29 million and charges of $3 million associated with the impairment of assets, partially offset by $2 million of adjustments to previously recorded restructuring charges. Other operating expense for fiscal 2002 represented a charge for estimated restructuring of $46 million and charges of $12 million associated with the impairment of assets, partially offset by adjustments to previously recorded restructuring charges of $13 million. Other operating expense for fiscal 2001 represented a charge for estimated restructuring of $88 million and charges of $20 million associated with the impairment of assets, partially offset by $6 million of adjustments to previously recorded restructuring charges. As a result of these restructuring actions, we anticipate cash outflows of $7 million through fiscal 2004 for severance and related charges and $25 million through fiscal 2010 for facilities related expenditures, net of estimated sublease income. See Note 3, "Other Operating Expense," for further information regarding these activities And Note 23 to the Consolidated Financial Statements for restructuring activities initiated in August 2003.

Interest and Other

        Interest Expense    Interest expense increased 18% in fiscal 2003 compared with fiscal 2002 primarily due to the full year impact of higher interest rates on our Yen-based loan, which was restructured in mid-fiscal 2002, as well as interest expense resulting from the inclusion of a prior year tax refund in taxable income. Interest expense increased 16% in fiscal 2002 compared with fiscal 2001 primarily due to a full year of interest expense associated with our financing arrangement (see Note 11) and higher interest associated with the reset interest rate on our restructured Yen-based loan compared with fiscal 2001 (see Note 6).

16

        Interest Income and Other, Net    Interest income and other, net includes interest income on our cash investments, gains and losses on other investments, and other non-operating items. Interest income and other, net for fiscal 2003 included the receipt of $2 million associated with an investment tax credit refund, $2 million in minority interest income related to our interest in SGI Japan, a $2.5 million impairment charge against an investment held at cost and a $6 million overall loss on the sale of certain parcels of land that occurred throughout the fiscal year. Interest income and other, net for fiscal 2002 included a $64 million gain from the sale of 60% of our interest in SGI Japan recognized in the second quarter of fiscal 2002, a charge of $24 million for the settlement of a securities class action lawsuit involving a payment of $4 million in cash and the issuance of 8 million shares of common stock and a $4 million loss on the sale of a building recognized in the first quarter of fiscal 2002.

Provision for Income Taxes

        Our net benefit for income taxes for fiscal 2003 totaled $26 million and arose principally from the reassessment of our global tax exposures as well as the receipt of income tax refunds related to prior fiscal years. We did not recognize a benefit for our fiscal 2003 loss, since the resulting deferred tax asset does not meet the criteria for realization under SFAS No. 109.

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

        At June 27, 2003, we had gross deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $804 million. The gross deferred tax assets are offset by a valuation allowance of $727 million and deferred tax liabilities of $79 million. The valuation allowance of $727 million includes $23 million attributable to benefits of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital.

        At June 27, 2003, we had United States federal, state, and foreign jurisdictional net operating loss carryforwards of approximately $1.3 billion, $333 million and $200 million, respectively. The federal losses will begin expiring in fiscal year 2010, the state losses will begin expiring in fiscal 2005, and the foreign losses will begin expiring in fiscal year 2004. At June 27, 2003, we also had general business credit carryovers of approximately $43 million for United States federal tax purposes, which will begin expiring in fiscal year 2004, and state R&D credits of $29 million, which do not have fixed expiration dates.

Impact of SGI Japan Transaction

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

17

Financial Condition

        At June 27, 2003, cash and cash equivalents and marketable investments totaled $141 million compared with $218 million at June 28, 2002. Also, included in the balance sheet at June 27, 2003 and June 28, 2002 is approximately $37 million and $45 million, respectively, of restricted investments. Restricted investments at June 27, 2003 and June 28, 2002 consist of short- and long-term investments pledged as collateral against bank credit facilities. The decrease in cash and cash equivalents compared with the prior year is primarily the result of our fiscal 2003 operating and investing activities. Fiscal 2002 cash and cash equivalents and marketable investments increased by $88 million due principally to the sale 60% of our interest in SGI Japan and corporate real estate assets and the $63 million in revenue generated from the Microsoft transaction, which along with strong working capital management, offset a $101 million loss from operations.

        Primarily as a result of net losses, operating activities used $42 million in cash in fiscal 2003, compared with using $13 million and $282 million in fiscal 2002 and 2001, respectively. Operating cash flows for fiscal 2002 benefited from $63 million in revenue from the Microsoft intellectual property agreement that was received in the first quarter. To present cash flows from operating activities, net loss for each of the past three years had to be adjusted for certain significant items. Fiscal 2003 net loss was adjusted to remove the impact of the $30 million restructuring charge. Fiscal 2002 net loss is adjusted to remove the impact of the $45 million restructuring charge and a gain of $64 million from the sale of the 60% interest in SGI Japan that was reflected as a cash flow from investing activities. Fiscal 2001 net loss is adjusted to remove the impact of the $102 million restructuring charge, a non-cash charge of $83 million for the write-off of an investment in a private company and a gain of $50 million on the sale of marketable investments that is reflected as a cash flow from investing activities.

        The negative operating cash flow in fiscal 2003 was partially due to approximately $39 million in cash payments for severance, contractual obligations and facilities obligations related to restructuring activities. These restructuring actions are expected to result in additional future cash outlays of approximately $32 million, of which approximately $19 million are projected to occur in fiscal 2004. The negative operating cash flows in both fiscal 2003 and fiscal 2002 were partially offset by a decrease in accounts receivable attributable to lower revenue levels coupled with increased focus on customer cash collections and decreased inventory levels. Due to enhanced visibility provided through our global ERP system, we have been able to improve cash management programs to more effectively manage the timing of collections and disbursements within normal business cycles. As a result of these programs, our days sales outstanding improved from an average of 74 days in fiscal 2001 to 61 and 50 days in fiscal 2002 and fiscal 2003, respectively. Our investments in inventory have decreased in the past two fiscal years as our revenue levels have declined. Inventory turnover improved 31% and 5% in fiscal 2003 and fiscal 2002, respectively, compared with the prior periods.

        Investing activities, other than changes in our marketable and restricted investments, consumed $36 million in cash during fiscal 2003. The principal investing activities during fiscal 2003 consisted of increases in prepaid software licenses, equity income resulting from our investment in SGI Japan and capital expenditures of $19 million, offset in part by $8 million in proceeds received from the sale of land. Investing activities, other than changes in our marketable and restricted investments, provided $78 million in cash during fiscal 2002. The principal investing activity during fiscal 2002 was the sale of a 60% interest in SGI Japan for proceeds of $91 million and the sale of corporate real estate and other assets for proceeds of $29 million. These proceeds were offset in part by capital expenditures of $28 million in fiscal 2002. Investing activities, other than changes in our marketable and restricted investments, provided $194 million in cash during fiscal 2001. The principal investing activity during fiscal 2001 was the sale of certain corporate real estate for total cash proceeds of $278 million. These proceeds were partially offset by $139 million of capital expenditures, including capitalized costs associated with our global ERP system.

18

        Financing activities over the past three years have included the issuance of common stock under employee stock purchase and option plans, the repurchase of common stock and the repayment of debt. Financing activities during fiscal 2003 consumed $8 million compared with using $5 million during fiscal 2002 and providing $11 million during fiscal 2001. Principal financing activities during the fiscal 2003 included $11 million in debt payments, partially offset by $3 million in proceeds from the sale of common stock through the employee stock purchase plan and employee stock options. The principal financing activity during fiscal 2002 included the retirement of a $13 million mortgage on our manufacturing facility in Switzerland and the non-cash restructuring of the yen denominated debt from $50 million to $37 million in the second quarter in conjunction with the sale of a majority equity interest in SGI Japan.

        We have incurred net losses and negative cash flows from operations during each of the past several fiscal years. At June 27, 2003, our principal sources of liquidity included unrestricted cash and marketable investments of $141 million, down from $218 million at June 28, 2002. For the year ended June 27, 2003, we used $42 million in cash from operations. We expect to continue to consume cash from operations through the first half of fiscal 2004. We also experience significant intra-quarter fluctuations in our cash levels due to timing differences between our payments to vendors and our collections from customers, with the result that our cash balances are generally at their highest point at the end of each quarter and significantly lower at other times. As a result, we continue to focus on expense controls and working capital efficiencies to maintain adequate levels of unrestricted cash within each quarter. We also are exploring alternatives for generating additional cash through financing transactions and dispositions of non-core assets. For example, in September 2003 we completed the sale of our facility in Cortaillod, Switzerland for net cash proceeds of approximately $10.5 million.

        We are committed to our goal of re-establishing profitable operations and positive cash flow. While a forecast of future events is inherently uncertain, we believe that the combination of our current resources and cash expected to be generated from our fiscal 2004 financial plan will be sufficient to meet our financial obligations through fiscal 2004. If we experience a material shortfall versus our plan for fiscal 2004, we will take all appropriate actions to ensure the continued operation of our business and to mitigate any negative impact on our profitability and cash reserves. We have a range of actions we can take to achieve this outcome, including but not limited to expense-related actions such as further reductions in headcount-related expenses, additional consolidation of administrative functions, re-evaluation of our global distribution model, and delayed implementation of information systems initiatives. We also can take actions to generate cash by selling non-core businesses, licensing intellectual property, seeking funding from marketing partners and key government customers, and seeking further equity or debt financing from strategic partners or financial sources. See "Risks That Affect Our Business."

        We have approximately $230 million of 5.25% senior convertible notes that will mature in September 2004. If we are not able to restructure a substantial portion of these notes to extend the maturity on terms satisfactory to our secured lender by March 2004, our secured credit facility will become due in June 2004. At June 27, 2003, our obligation under this facility, net of restricted cash collateral, was $25 million.

        During fiscal 2003 we commenced an exchange offer with the goal of exchanging new debt securities maturing in 2009 for the outstanding 2004 notes. Although the exchange offer as amended was supported by the holders of approximately 71% of the 2004 notes, we did not achieve the 85% participation level upon which the offer was conditioned, and so we withdrew the offer in August 2003. We are continuing our dialogue with the principal holders with the goal of exchanging a substantial majority of the 2004 notes for notes with a later maturity. It is likely that these new notes would carry significantly higher interest rates than the 2004 notes and, to the extent that they are convertible obligations, would involve a conversion price close to our recent stock price of approximately $1.00.

19

The nonconvertible notes offered in our recent exchange offer, for example, had an interest rate of 11.75%.

        As of June 27, 2003, future payments due under debt and lease obligations, including facilities vacated as part of our restructuring activities and excluding the benefit of sublease income on our vacated facilities, are as follows (in thousands):

        Included in the above table under non-cancelable operating leases are lease payments associated with our Amphitheatre Technology Center campus for which we entered into an agreement to sublease on July 10, 2003. In addition, the table does not reflect the lease payments for the space we will relocate to on the Crittenden Technology Center campus. Adjusting for the impact of this agreement, the non-cancelable operating lease payments, excluding the benefit of any sublease income, would be as follows (in thousands): 2004—$49,092; 2005—$49,438; 2006—$43,225; 2007—$37,421; 2008—$35,858 and $159,876 thereafter.

Critical Accounting Policies and Estimates

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

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

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

20

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

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

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

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

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

        Income Taxes.    Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from temporary

21

differences and carryforwards. We regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the realization criteria set forth under SFAS 109, "Accounting for Income Taxes," and we record a valuation allowance to reduce our deferred tax assets to the amount that we believe to be more likely than not realizable. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

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

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

        Other Significant Accounting Policies.    Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies regarding financial instruments, stock-based compensation and consolidation require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standards setters appear likely to cause a material change in our accounting policies, outcomes cannot be predicted with confidence.

Recent Accounting Pronouncements

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and

22

Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity should be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS 146 is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS146, in certain cases, would be recognized in future periods as certain events occur rather than up front. The FASB decided that if the benefit arrangement requires employees to render future service beyond a "minimum retention period," a liability should be recognized as employees render service over the future service period even if the benefit formula used to calculate an employee's termination benefit is based on length of service. Contract termination costs under SFAS 146 would be recognized and measured at their fair value when an entity terminates the contract in accordance with the contract terms. Contract costs that will continue to be incurred under a contract for its remaining term without economic benefit to an entity would be recognized and measured at its fair value when the entity ceases using the right conveyed by the contract, for example, the right to use a leased property. Under SFAS 146, a liability for future lease obligations, reduced by actual or estimated sublease rentals, would be recognized and measured at its fair value at the cease-use date, rather than being accrued at the date of an entity's commitment to an exit plan under Issue 94-3. We adopted the provisions of SFAS 146 in connection with restructuring activities initiated after December 31, 2002.

        In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which clarifies the requirements for a guarantor's accounting and disclosures of certain guarantees issued and outstanding. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Consistent with the Interpretation, we have adopted the requirements in this Annual Report on Form 10-K. The adoption of Interpretation 45 did not have a material impact on our consolidated financial position, results of operations or cash flows.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition & Disclosure"—an Amendment of SFAS No. 123. This Statement provides three alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The new disclosure requirements of SFAS 148 related to interim financial information are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Consistent with the Statement, we have adopted all disclosure requirements in this Form 10-K.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". The Interpretation establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. Interpretation 46 applies to any business enterprise, both public and private, that has a

23

controlling interest, contractual relationship or other business relationship with a variable interest entity. The provisions of Interpretation No. 46 are effective immediately for all variable interests in variable interest entities created after January 31, 2003 and no later than the first fiscal period beginning after June 15, 2003 for all variable interests in variable interest entities created before February 1, 2003. The adoption of Interpretation 46 did not have a material impact on our consolidated financial position, results of operations or cash flows. If we enter into any such arrangement with a variable interest entity in the future, our consolidated financial position or results of operations may be adversely impacted.

        In March 2003, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on accounting for arrangements involving the delivery or performance of multiple products, services and/or rights to use assets. Specifically, EITF 00-21 addresses: (1) how to determine whether an arrangement with multiple deliverables contains more than one unit of accounting, and (2) how the arrangement consideration should be measured and allocated among the separate units of accounting. The provisions of Issue 00-21 are effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of EITF 00-21 will not have a material impact on our results of operations or financial position.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Most of the provisions of SFAS 149 should be applied prospectively. We believe the adoption of SFAS 149 will have no impact on our results of operations or financial position.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards for how an entity classifies and measures certain financial instruments with both the characteristics of a liability and equity. The Statement requires that an issuer classify a financial instrument that is within its scope as a liability, while many of these instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We believe the adoption of SFAS 150 will have no impact on our results of operations or financial position.

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.

        We have recently introduced a number of new products, including the SGI Altix product family, but we cannot assure you they will achieve market acceptance.    In January 2003, we introduced the SGI Altix family of servers and superclusters based on the Intel® Itanium® 2 processor and the Linux® operating system. Risks associated with this new product line include dependence on Intel in terms of price, supply, performance, and product roadmaps; the availability of Linux applications optimized for the 64-bit Itanium platform or our scalable systems architecture; acceptance of the Linux operating system in demanding environments; and competition from other suppliers of Intel-based servers. There can be no assurance that this new product line will achieve market acceptance or provide significant incremental revenue. In July 2003, we introduced new highly scalable visualization products.Our ability to achieve future revenue growth will depend significantly on the market success of these products. If one or more of the product lines were to fail in the market, it could have an adverse effect on our business.

24

        We are concentrating our R&D investments.    As an increasing percentage of our R&D and marketing budget is devoted to potential growth areas, including the SGI Altix family, visualization and storage, a declining amount both in percentage and absolute terms is being devoted to the traditional MIPS/IRIX products, which continue to supply the bulk of our revenue. Managing this transition without unduly compromising the competitiveness of the MIPS/IRIX family and the quality of support received by customers will be key to our success. There can be no assurance that this transition will not impair our customer relationships and our competitive position.

        We have been incurring losses and consuming cash in our operations and must reverse these trends and generate cash from other sources in fiscal 2004.    We have incurred net losses and negative cash flows from operations during each of the past several fiscal years. At June 27, 2003, our principal sources of liquidity included unrestricted cash and marketable investments of $141 million, down from $218 million at June 28, 2002. We expect to continue to consume cash from operations through the first half of fiscal 2004. Due to the significant intra-quarter fluctuations in our cash levels that result from timing differences between our payments to vendors and our collections from customers, our cash levels tend to be at their highest at the end of the quarter. As a result, we continue to focus on expense controls and working capital efficiencies to maintain adequate cash levels. We also are exploring alternatives for generating cash through financing transactions and dispositions of non-core assets and will consider a range of alternatives in the event of a material revenue shortfall. See "Financial Condition." If we fail to reduce the cash consumption from operations and to generate cash from these other sources on a timely basis, or if the cash requirements of our business change as the result of changes in terms from vendors or other causes, we could no longer have the cash resources required to run our business.

        We must restructure most or all of our senior convertible notes before their maturity in September 2004.    We have approximately $231 million of 5.25% senior convertible notes that will mature in September 2004. Following our withdrawal in August 2003 of an exchange offer for the notes, we are continuing our dialogue with the principal holders with the goal of exchanging a substantial majority of the 2004 notes for bonds with a later maturity. We cannot assure that we will be able to complete this restructuring at all or on terms that will be favorable to our shareholders or us. It is likely that these new bonds would carry significantly higher interest rates than the 2004 bonds and, to the extent that they are convertible obligations, would involve a conversion price close to our recent stock price of approximately $1.00. The nonconvertible bonds offered in our recently withdrawn exchange offer, for example, carried an interest rate of 11.75%. Our secured credit facility will become due and payable in June 2004 if the restructuring of the 2004 notes is not completed by March 2004 on terms satisfactory to our secured lender.

        We may not be able to obtain additional capital when needed.    We have an asset-based credit facility that may be declared to be in default if we fail to meet certain financial and other covenants. This facility matures in April 2005, subject to acceleration upon various events of default or the failure to successfully extend the maturity of of our senior convertible notes due September 2004 on terms satisfactory to the secured lender on or before March 5, 2004. The facility is secured by our U.S. and Canadian accounts receivable, U.S. inventory and equipment, the pledge of certain intellectual property and $10 million cash collateral. We also deposit additional cash when eligible accounts receivable and other collateral, which fluctuate within the quarter, are below the level needed to secure our letters of credit. At June 27, 2003, this facility was secured by a total of $21 million cash collateral. We obtained waivers of compliance with the covenants of the facility from the lenders in the first, third and fourth quarters of fiscal 2003 and the second, third and fourth quarters of fiscal 2002. If we are not able to comply with the financial and other covenants of this facility or there is a material adverse change impairing our ability to repay the outstanding balance, the facility may be declared to be in default. If a default is declared and not waived or if the facility matures and is not renewed, we may not be able to obtain alternative sources of financing on acceptable terms.

25

        In the future, we may need to obtain additional financing to fund our business or repay our debt, and there can be no assurance that financing will be available in amounts or on terms acceptable to us. In addition, if funds are raised through further incurrence of debt, our operations and finances may become subject to further restrictions and we may be required to limit our service or product development activities or other operations, or otherwise modify our business strategy. If we obtain additional funds by selling any of our equity securities or if we issue equity derivative securities in connection with obtaining debt financing, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights, preferences or privileges senior to the common stock.

        We may become involved in intellectual property disputes.    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. We are in discussions with several parties that have asserted intellectual property infringement claims. 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.

        In addition, our increasing visibility as a supplier of Linux-based systems and as a participant in the open source software movement increases our risk of becoming embroiled in the intellectual property disputes concerning these subjects, such as the current widely reported litigations between SCO Group on the one hand and IBM and Red Hat on the other. We recently received a notice from SCO Group stating its intention to terminate our fully paid license to certain UNIX-related code, under which we distribute our IRIX operating system, on the basis that we have breached the terms of such license. We believe that the SCO Group's allegations are without merit and that our fully paid license is nonterminable. Nonetheless, there can be no assurance that this dispute with SCO Group will not escalate into litigation, which could have a material adverse effect on SGI, or that SCO Group's intellectual property claims will not impair the market acceptance of the Linux operating system.

        We are increasingly dependent 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 recent addition of scalable servers based on Itanium 2 processors and the Linux operating system, will increase our dependence on Intel and other partners, and on our manufacturing partners and other component suppliers. Our business could be adversely affected, for example, if Intel fails to meet product release schedules, if we experience supply constraints, or if we experience any other interruption or delay in the supply chain. The competitiveness of our system products, particularly our servers, is significantly affected by the availability on our platform of third-party software applications that are important to customers in our target markets. Our ability to work with our software partners to ensure porting of these applications to our IRIX operating system and to Linux is a key factor to our business success.

        We are dependent on sales to the U.S. government.    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. The U.S. government can typically terminate or modify its contracts with us at any time for its convenience. Any disruption or limitation in our ability to do business with the U.S. Government could have an adverse impact on SGI.

        A portion of our business requires security clearances from the U.S. government. We have implemented measures to maintain our clearances in light of the fact that our Chairman and Chief

26

Executive Officer, Robert Bishop, is an Australian citizen. These arrangements are subject to periodic review by customer agencies and the Defense Security Service of the Department of Defense.

        Our business experiences period-to-period fluctuations in operating results.    Our operating results may fluctuate for a number of reasons. Delivery cycles, other than those for large-scale server products, are typically short. Over half of each quarter's product revenue results from orders booked and shipped during the third month, and disproportionately in the latter half of that month. These factors make the forecasting of revenue inherently uncertain. Because we plan our operating expenses, many of which are relatively fixed in the short term, on expected revenue, even a relatively small revenue shortfall may cause a period's results to be substantially below expectations. Such a revenue shortfall could arise from any number of factors, including lower than expected demand, supply constraints, delays in the availability of new products, transit interruptions, overall economic conditions, military or terrorist actions, or natural disasters. Demand can also be adversely affected by concerns specifically associated with our financial health, and 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 revenue levels, mix considerations, including geographic concentrations, the mix of product and service revenue, and the mix of server and desktop product revenue as well as the mix of configurations within these product categories.

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

        Many of our international sales require export licenses.    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. 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.

        In December 2002 we reached agreements with the U.S. Departments of Commerce and Justice to settle civil and criminal export licensing issues related to the sale of four deskside computers in 1996 to a Russian government laboratory, as well as administrative claims related to sales to other countries. Although there can be no assurance that the settlement will not have an adverse effect on our U.S. government business, we do not believe the settlement should have a significant impact on revenues or important customer relationships.

        The Swiss authorities are investigating compliance with their export regulations in connection with exports from the Swiss manufacturing facility we closed during the second quarter of fiscal 2002. We believe that this matter will be resolved without a significant adverse effect on our business, operating results or financial condition.

        We may not be able to develop and introduce new products on a timely basis.    Meeting our objectives for the future will require that our recently introduced products achieve success in the marketplace and that we succeed in the timely development and introduction of more successful new products. Product transitions are a recurring part of our business. A number of risks are inherent in this process.

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

27

is no assurance that development or acceptance of our new systems will not be affected by delays in this process.

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

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

        Downward fluctuations in the price of our common stock may cause our common stock to be delisted.    On October 24, 2002 we were notified by the New York Stock Exchange that we were not in compliance with its requirement that listed securities trade at a minimum per share price of $1.00 averaged over a thirty day trading period. Our stock price subsequently recovered, but if it were to decline again and not recover, the NYSE could terminate the listing of our common stock. As of September 23, 2003, the 30-day trading average of our stock was $1.04. Declines in the price of our common stock may be caused by our failure to meet the investment community's expectations for quarterly revenue or earnings or by broader market trends unrelated to our performance. Delisting would adversely affect the liquidity and market price of our common stock.

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

        We may not be able to retain and attract qualified employees.    Our success depends on our ability to continue to attract, retain and motivate highly qualified technical, sales and marketing and management personnel. The uncertainties surrounding our business prospects and our continuing restructuring actions have increased the challenges of retaining world-class talent. We implemented further restructuring actions during fiscal 2003 and the first quarter of fiscal 2004. As we continue to work through the turnaround process, there is no guarantee that we will not lose highly qualified employees or that we will be able to hire highly qualified candidates as new skills are needed.

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 the collectibility of accounts receivable. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, we do not anticipate material losses in these areas.

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

28

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

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

        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 27, 2003. We computed the market values for foreign exchange risk based on spot rates in effect at June 27, 2003. The market values that result from these computations are compared to the market values of these financial instruments at June 27, 2003. 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 27, 2003 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 increase in the aggregate fair values of our financial instruments by $3 million at June 27, 2003. A percentage point increase 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 $2 million at June 27, 2003.

        Foreign Currency Exchange Rate Risk: A 10% strengthening of foreign currency exchange rates against the U.S. dollar with all other variables held constant would result in a decrease in the fair values of our financial instruments by $6 million June 27, 2003. A 10% weakening of foreign currency exchange rates against the U.S. dollar with all other variables held constant would result in an increase in the fair values of our financial instruments by $5 million at June 27, 2003.

        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 foreign currency exchange rates.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

        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.

30

Report of Ernst & Young LLP, Independent Auditors

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

        We have audited the accompanying consolidated balance sheets of Silicon Graphics, Inc. as of June 27, 2003 and June 28, 2002, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended June 27, 2003. 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 27, 2003 and June 28, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 27, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

                                                                                                                             /s/ ERNST & YOUNG LLP

Palo Alto, California
September 29, 2003

31

CONSOLIDATED STATEMENTS OF OPERATIONS

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

32

CONSOLIDATED BALANCE SHEETS

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

33

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

34

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY