INDUSTRY

Results Reflect Sequential Improvement: SGI announced financial results for the second quarter of its fiscal 2007 ended December 29, 2006. On a GAAP basis, revenue for the quarter was $108 million, and operating loss was $41 million. GAAP gross margin was 17.1% and operating expenses were $59 million. Proforma revenue was $134 million in the second quarter of fiscal 2007, compared with $127 million in the first quarter of fiscal 2007. Proforma revenue excludes the impact of fresh start accounting and a change in accounting for certain of our transactions where software is more than incidental to the overall solution. Proforma gross margin for the second quarter adjusted for similar items was 38.1% compared with 38.7% in the prior quarter. Excluding restructuring, bankruptcy-related expenses, stock-based compensation expense and amortization of intangibles, proforma operating expenses were $54 million in the second quarter compared with $58 million in the prior quarter, reflecting the impact of the company's cost reduction initiatives. Adjusted EBITDA for the quarter, as defined in the company's debt agreements, was $4.2 million, compared with ($2.6) million for the first quarter of fiscal 2007. As of December 29, 2006 SGI had backlog of $139 million, compared with backlog of $113 million on September 29, 2006, attributable to improved bookings in server and storage products. Backlog is comprised of product and professional services expected to be delivered within the next nine months, which have not yet been reflected in revenue. Backlog does not include customer support maintenance contracts. SGI ended the second quarter with $75 million in total unrestricted cash, compared with $83 million at the end of the first quarter of fiscal 2007. The Company utilized approximately $38 million in cash during the quarter in settlement of bankruptcy related obligations. Excluding these items SGI generated cash from operations during the quarter. Availability under the company's revolving line of credit is $30 million and no borrowings were outstanding on the revolver at the end of the quarter. "We are pleased with our Q2 results considering we exited Chapter 11 on October 17th, 2006. The sequential improvements on an adjusted basis in bookings, revenue, lower operating expense, EBITDA and also maintaining stable gross margins is indicative of a new business model underway at SGI," said Dennis McKenna, SGI CEO. "We expect to show continued improvement in the second half of the fiscal year as compared to the first half using our adjusted numbers for both periods as comparisons, and we will invest to fund fulfillment of our increased backlog and upcoming new product rollouts during the second half of our fiscal year," said Kathy Lanterman, SGI CFO. As a policy, the Company does not provide specific forward-looking guidance. "Our performance reflects the hard work and determination of our employees, who have helped us to move SGI in a new and exciting direction," added McKenna. "We know that we must continue to strengthen our business and improve our processes, but we are ready to meet these challenges and to expand our leadership role in advancing high-performance computing into a broader market opportunity." A detailed reconciliation of GAAP to non GAAP numbers follows as an attachment. This reconciliation is also available at its Web site. For more details on the Company's Fresh Start accounting and the impact of the implementation of Statement of Accounting Position 97-2, "Software Revenue Recognition" (SOP 97-2), please see below. Fresh Start Accounting Adjustments The fresh start accounting adjustments that had the most significant impact on the financial statements in Q2 and will continue to impact SGI's financial results going forward are as follows: 1. Deferred Revenue Revaluation -- Fresh Start accounting requires that liabilities be restated to actual cost which will be incurred to service the liability in the future, plus a reasonable margin. Deferred Revenue is a liability that in the normal course of business would be expected to convert to revenue in the future. There were two primary components of deferred revenue that were significantly impacted by fresh start accounting: a. Customer Support (CS) Deferred revenue -- SGI enters into maintenance contracts with customers for periods ranging from one month to seven years. The costs to service these contracts include direct labor costs, corporate overhead and infrastructure cost. The fresh start valuation resulted in a reduction of $34 million to our September 29, 2006 CS Deferred revenue balance. As a result of this reduction, in future periods we will recognize $34 million less revenue. Approximately 81% of the impact will flow through the P&L in the first year. This reduction does not impact the service to be provided to our customers or the cash collected by the company related to these contracts and does not impact our service maintenance business on a go-forward basis. Approximately $12 million of the non-GAAP reconciliation of revenue in the second quarter was driven by the reduction to CS Deferred Revenue. b. Product and Professional Services Revenue -- SGI records deferred revenue under sales arrangements when various milestones under the contracts are met. The impairment to Deferred Revenue recorded for this category was approximately $7 million, with the future period impact happening over the next four years. 2. Inventory valuation -- SGI has raw materials, work-in-progress, finished goods, delivered systems, and demonstration inventory. Fresh Start accounting requires that assets be restated to fair value. A write-up was required to record these inventories at fair value. The valuation adjustment increased net inventory balances by $28 million as of September 29, 2006. The result of the valuation adjustment on SGI's P&L is that costs will increase by the magnitude of the valuation adjustment, as the revalued inventory is sold and converts to cost of goods sold. This resulted in a $13 million increase to Cost of Goods Sold in the second quarter. We expect the impact on the third quarter of fiscal 2007 to be $6 million, with the remaining amount to be recorded through the first quarter of fiscal 2008. 3. Property, Plant & Equipment (PP&E) -- The value of SGI's Property, Plant & Equipment was restated to estimated fair value as a result of fresh start accounting, resulting in a $15 million increase in the September 29, 2006 Net Book Value of PP&E. The impact of this adjustment on Q2 FY07 results was $0.3m. The total FY07 impact is expected to be $1.0 million, and the impact on the subsequent five years is approximately $2.0 million per year. 4. Intangibles -- As a result of fresh start accounting, new intangibles were established. The total value of the newly created intangibles itemized below is $87 million. SGI must amortize the value of these intangibles into the results of operation for each period starting in the second quarter of fiscal year 2007. The amortization period varies from immediately (for In-Process R&D), to as long as seventeen years (for Trademark/Tradename). Future amortization from each of the items listed below is expected to be recorded as follows: a. $0.5 million In Process R&D -- R&D expense in Q2 FY07 b. $28 million Developed Process Technology -- COGS over 6 years c. $3 million Customer Backlog -- COGS $1m in Q2 FY07, $1m for remainder of FY07, and balance over next five years d. $2 million Technology Licensing -- COGS over 5 years e. $6 million Trademark/Tradename -- Sales Opex over 17 years f. $48 million Customer Relationships -- Sales Opex over 6 years