Silicon Graphics International (SGI) 10-Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2012

Or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                 to

Commission File Number 000-51333

SILICON GRAPHICS INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

Delaware	32-0047154
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

46600 Landing Parkway

Fremont, California 94538

(Address of principal executive offices, including zip code)

(510) 933-8300

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filerx	Non-accelerated filero	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No   x

As of November 1, 2012, there were 33,128,803 shares of the registrant's common stock outstanding.

SILICON GRAPHICS INTERNATIONAL CORP.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	2
Item 1.	Financial Statements	2
	Condensed Consolidated Statements of Operations for the Three Months Ended September 28, 2012 and September 30, 2011	2
	Condensed Consolidated Statement of Comprehensive Loss for the Three Months Ended September 28, 2012, and September 30, 2011	3
	Condensed Consolidated Balance Sheets as of September 28, 2012 and June 29, 2012	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 28, 2012 and September 30, 2011	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
PART II	OTHER INFORMATION	35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended
	September 28, 2012			September 30, 2011
Revenue
Product	$	128,353		$	108,568
Service	45,408			48,615
Combined product and service	19,120			21,712
Total revenue	192,881			178,895
Cost of revenue
Product	110,935			86,225
Service	27,077			25,785
Combined product and service	12,659			14,247
Total cost of revenue	150,671			126,257
Gross profit	42,210			52,638
Operating expenses:
Research and development	13,969			16,190
Sales and marketing	19,571			21,798
General and administrative	14,189			16,885
Restructuring	1,474			133
Total operating expenses	49,203			55,006
Loss from operations	(6,993		)	(2,368		)
Total other income (expense), net:
Interest income (expense), net	(155		)	(98		)
Other income (expense), net	(1,107		)	(858		)
Total other income (expense), net	(1,262		)	(956		)
Loss before income taxes	(8,255		)	(3,324		)
Income tax provision (benefit)	425			(667		)
Net loss	$	(8,680	)	$	(2,657	)
Basic and diluted net loss per share	$	(0.27	)	$	(0.08	)
Shares used in computing basic and diluted net loss per share	32,166			31,303

See accompanying notes.

2

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three Months Ended
	September 28, 2012			September 30, 2011
Net loss	$	(8,680	)	$	(2,657	)
Other comprehensive loss:
Unrecognized loss on defined benefit plans, net of zero tax	(42		)	—
Foreign currency translation adjustment, net of zero tax	(212		)	999
Total comprehensive loss	$	(8,934	)	$	(1,658	)

See accompanying notes.

3

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	September 28, 2012			June 29, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	107,214		$	104,851
Current portion of restricted cash and cash equivalents	459			980
Accounts receivable, net of allowance for doubtful accounts of $1,547 and $1,597 as of September 28, 2012 and June 29, 2012, respectively	89,613			98,293
Inventories	145,721			123,391
Deferred cost of revenue	48,393			49,407
Prepaid expenses and other current assets	21,890			18,443
Total current assets	413,290			395,365
Non-current portion of restricted cash and cash equivalents	3,117			3,088
Property and equipment, net	27,892			27,404
Intangible assets, net	7,289			8,675
Non-current portion of deferred cost of revenue	13,442			17,466
Other assets	44,599			44,882
Total assets	$	509,629		$	496,880
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	88,078		$	69,448
Credit facility	10,300			15,200
Accrued compensation	24,384			24,246
Current portion of deferred revenue	135,246			124,924
Other current liabilities	45,922			48,587
Total current liabilities	303,930			282,405
Non-current portion of deferred revenue	58,743			64,717
Long-term income taxes payable	21,904			20,568
Retirement benefit obligations	11,779			11,484
Other non-current liabilities	6,213			6,814
Total liabilities	402,569			385,988
Commitments and contingencies (Note 20)
Stockholders' equity:
Preferred stock, par value $0.001 per share; 12,000 shares authorized; none outstanding	—			—
Common stock, par value $0.001 per share; 120,000 shares authorized; 33,126 shares and 32,723 shares issued at September 28, 2012 and June 29, 2012, respectively	33			33
Additional paid-in capital	489,055			484,461
Treasury stock, at cost (749 shares at September 28, 2012 and June 29, 2012)	(4,912		)	(4,912		)
Accumulated other comprehensive loss	(1,226		)	(1,480		)
Accumulated deficit	(375,890		)	(367,210		)
Total stockholders' equity	107,060			110,892
Total liabilities and stockholders' equity	$	509,629		$	496,880

See accompanying notes.

4

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	September 28, 2012			September 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(8,680	)	$	(2,657	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,498			4,024
Share-based compensation	2,511			2,069
Other	353			410
Changes in operating assets and liabilities:
Accounts receivable	8,500			7,450
Inventories	(24,262		)	(29,874		)
Deferred cost of revenue	5,038			7,758
Prepaid expenses and other assets	(4,350		)	2,010
Accounts payable	18,509			(6,965		)
Deferred revenue	4,755			(7,392		)
Other liabilities	(1,237		)	(5,202		)
Net cash provided by (used in) operating activities	4,635			(28,369		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(1,047		)	(1,531		)
Other	1,479			(1,194		)
Net cash provided by (used in) investing activities	432			(2,725		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of credit facility	(5,000		)	—
Funding of restricted stock units withheld for taxes	(202		)	(420		)
Proceeds from issuance of common stock upon exercise of stock options	549			1,695
Proceeds from issuance of common stock under employee stock purchase plan	1,736			1,554
Net cash (used in) provided by financing activities	(2,917		)	2,829
Effect of exchange rate changes on cash and cash equivalents	213			887
Net increase (decrease) in cash and cash equivalents	2,363			(27,378		)
Cash and cash equivalents-beginning of period	104,851			139,868
Cash and cash equivalents-end of period	$	107,214		$	112,490
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION:
Income taxes paid	$	513		$	145

See accompanying notes.

5

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. DESCRIPTION OF BUSINESS

The principal business of Silicon Graphics International Corp. ("SGI" or the "Company") is the design, manufacture and implementation of highly scalable compute servers, high-capacity storage systems and high-end computing and data management systems. The Company has significant global presence providing products and services either directly or through its distributors and channel partners. In addition to the broad line of mid-range to high-end computing servers, data storage and data center technologies, the Company provides global customer support and professional services related to these products. The Company's products are used by the scientific, technical and business communities to solve challenging data-intensive computing, data management and visualization problems. The vertical markets the Company serves include the federal government, defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive, internet, financial services, media and entertainment, and business intelligence and data analytics. The Company's headquarters is located in Fremont, California and its primary manufacturing facility is located in Chippewa Falls, Wisconsin.

2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. The results for the interim periods are not necessarily indicative of results for the entire year or any future periods. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended June 29, 2012, which are included in the Company's Annual Report on Form 10-K filed with the SEC on September 10, 2012.

The preparation of unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as presented in the accompanying unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Fiscal Year. The Company has a 52 or 53-week fiscal year ending on the last Friday in June. The current fiscal year 2013 will be comprised of 52 weeks and will end on June 28, 2013. Fiscal year 2012 was comprised of 53 weeks and ended on June 29, 2012. The Company's fiscal quarters generally have 13 weeks ending on the last Friday of the respective period. Accordingly, the first quarter of fiscal year 2013 ended September 28, 2012 was comprised of 13 weeks. When a 53-week year occurs, the Company includes the additional week in the first fiscal quarter.

In fiscal year 2012, the Company's fiscal quarters ended on September 30, 2011 (first quarter), December 30, 2011 (second quarter), March 30, 2012 (third quarter) and June 29, 2012 (fourth quarter).

In fiscal year 2013, the Company's fiscal quarters end on September 28, 2012 (first quarter), December 28, 2012 (second quarter), March 29, 2013 (third quarter) and June 28, 2013 (fourth quarter).

Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no changes in the Company's significant accounting policies for the three months ended September 28, 2012 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended June 29, 2012.

Recently Issued Accounting Standards.

Comprehensive income. In June 2011, the FASB issued guidance which requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components

6

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. This requirement should be applied retrospectively and is effective for the Company in its first quarter of fiscal year 2013. The adoption of this standard had no effect on the Company's condensed consolidated statements of operations.

Goodwill and Purchased Intangible Assets.In September 2011, the FASB approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard gives an entity the option to first assess qualitative factors to determine whether performing the current two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that the Company perform a two-step impairment test on goodwill. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit.

The changes were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, earlier adoption is permitted.

4. FINANCIAL INSTRUMENTS AND FAIR VALUE

The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company did not have any assets or liabilities that are measured on a fair value basis at September 28, 2012. The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis as of June 29, 2012 (in thousands):

	Carrying		Fair Value Measured Using						Total
	Value		Level 1		Level 2		Level 3		Balance
Cash equivalents
U.S. treasuries	$	5,530	$	5,530	$	—	$	—	$	5,530
Total cash equivalents	$	5,530	$	5,530	$	—	$	—	$	5,530

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended September 28, 2012. The Company’s cash equivalents, consisting of U.S. treasuries as of June 29, 2012, are classified within Level 1 of the fair value hierarchy as they were valued using quoted market prices of the identical underlying securities in active markets.

The fair values of accounts receivable, accounts payable, accrued liabilities, and credit facility due within one year approximates their carrying values because of their short-term nature.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

As of September 28, 2012 and June 29, 2012, the Company had no assets or liabilities measured at fair value on a non-recurring basis.

7

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

5. INVENTORIES

Inventories consist of the following (in thousands):

	September 28, 2012		June 29, 2012
Finished goods	$	55,196	$	47,728
Work in process	39,843		22,666
Raw materials	50,682		52,997
Total inventories	$	145,721	$	123,391

Finished goods include inventory at customer sites undergoing installation and or testing prior to customer acceptance; such amounts were $35.6 million at September 28, 2012 and $25.7 million at June 29, 2012.

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

	September 28, 2012		June 29, 2012
Value-added tax receivable	$	8,191	$	9,831
Prepaid taxes	1,305		1,555
Deferred income taxes	106		—
Other prepaid and current assets	12,288		7,057
Total prepaid expenses and other current assets	$	21,890	$	18,443

8

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. INTANGIBLE ASSETS, NET

Intangible assets by major asset class consist of the following (in thousands):

Intangible Asset Class	Weighted Average Useful Life (in Years)	At September 28, 2012
		Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	5	$	6,900	$	(4,715	)	$	2,185
Purchased technology	5	7,800		(5,235		)	2,565
Customer backlog	(a)	10,540		(9,130		)	1,410
Trademark/trade name portfolio	5	3,667		(2,538		)	1,129
Patents and other	2	200		(200		)	—
Total		$	29,107	$	(21,818	)	$	7,289

Intangible Asset Class	Weighted Average Useful Life (in Years)	At June 29, 2012
		Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	5	$	7,245	$	(4,407	)	$	2,838
Purchased technology	5	7,800		(4,980		)	2,820
Customer backlog	(a)	10,695		(9,115		)	1,580
Trademark/trade name portfolio	5	3,738		(2,365		)	1,373
Patents and other	2	340		(276		)	64
Total		$	29,818	$	(21,143	)	$	8,675

(a) The customer backlog intangible asset is amortized as revenue recognition criteria is met for a particular customer order, reflecting the use of the asset.

Intangible assets amortization expense was $1.0 million and $1.6 million in the three months ended September 28, 2012 and September 30, 2011, respectively.

As of September 28, 2012, expected amortization expense for all intangible assets was as follows (in thousands):

Fiscal Year	Amortization Expense
2013 (remaining nine months)	$	2,943
2014	2,999
2015	539
2016	427
2017 and thereafter	381
	7,289

9

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. OTHER ASSETS

Other assets consist of the following (in thousands):

	September 28, 2012		June 29, 2012
Long-term service inventory	$	14,528	$	13,494
Restricted pension plan assets	7,528		7,318
Deferred tax assets	15,438		15,438
Long-term refundable deposits	3,996		3,943
Other assets	3,109		4,689
Total other assets	$	44,599	$	44,882

9. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following (in thousands):

	September 28, 2012		June 29, 2012
Accrued sales and use tax payable	$	9,677	$	10,795
Deferred tax liabilities	15,158		15,158
Accrued warranty, current portion	4,134		4,054
Accrued professional services fees	5,699		5,657
Income taxes payable	930		1,740
Accrued restructuring and severance	980		1,849
Other	9,344		9,334
Total other current liabilities	$	45,922	$	48,587

10. OTHER NON-CURRENT LIABILITIES

Other non-current liabilities consist of the following (in thousands):

	September 28, 2012		June 29, 2012
Accrued warranty, non-current portion	$	3,127	$	3,248
Other	3,086		3,566
Total other non-current liabilities	$	6,213	$	6,814

11. WARRANTY RESERVE

Activity in the warranty reserve, which is included in other current and non-current liabilities, was as follows (in thousands):

	Three Months Ended
	September 28, 2012			September 30, 2011
Balance at beginning of period	$	7,302		$	7,578
Current period accrual	1,200			1,579
Warranty expenditures charged to accrual	(1,267		)	(1,236		)
Changes in accrual for pre-existing warranties	26			(34		)
Balance at end of period	$	7,261		$	7,887

10

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

12. RESTRUCTURING ACTIVITY

The Company has implemented a number of restructuring actions to streamline operations and reduce operating expenses. The restructuring expense is included in operating expenses in the accompanying condensed consolidated statements of operations. The total restructuring liability for all restructuring actions was $0.7 million as of September 28, 2012, all of which are classified as current liabilities in the accompanying consolidated balance sheet.

Fiscal 2012 Restructuring Action

On March 16, 2012, the Company's Board of Directors approved a restructuring action to reduce approximately 25% of the Company's European workforce and close certain legal entities and offices in Europe.

In connection with the restructuring action, the Company expects to incur pre-tax cash charges (including charges recorded in fiscal 2012) between $14.0 million and $17.0 million, which consist of pre-tax cash charges between $13.0 million and $16.0 million for employee termination benefits, and up to $1.0 million for the planned office and legal entity closures, which expenses include contract termination costs and other associated costs. The Company expects to recognize the majority of the expense associated with the employee termination benefits prior to the third quarter of fiscal 2013. Total expense incurred in connection with this restructuring plan for the three months ended September 28, 2012 was $1.5 million.

Activity in accrued restructuring for the fiscal 2012 restructuring action was as follows (in thousands):

	Employee Terminations
Balance at June 29, 2012	$	1,621
Costs incurred	1,474
Cash payments	(2,377		)
Balance at September 28, 2012	$	718

Fiscal 2011 Restructuring Action

On February 18, 2011, the Company's Board of Directors approved restructuring actions to reduce the Company's worldwide workforce. As of September 28, 2012, this restructuring program is completed as all final payments have been made and there was no accrual remaining.

Activity in accrued restructuring for the fiscal 2011 restructuring action was as follows (in thousands):

	Employee Terminations
Balance at June 29, 2012	$	210
Costs incurred	—
Cash payments	(210		)
Balance at September 28, 2012	$	—

13. CREDIT FACILITY

On December 5, 2011, the Company entered into a five-year senior secured credit facility in the aggregate principal amount of $35.0 million. The availability under the credit facility is limited to a borrowing base, subject to meeting certain conditions set forth in the credit facility. The credit facility includes a feature that allows the Company to increase the revolver amount in the first 18 months. The Company exercised this feature, and on May 1, 2012, the revolver amount was increased by $5.0 million to an aggregate principal amount of $40.0 million. The credit facility includes a $10.0 million letter of credit subfacility. See Note 20 "Commitments and Contingencies" for more information regarding the letter of credit.

The availability of the aggregate principal amount under the credit facility will fluctuate, generally monthly, based on eligible domestic accounts receivable and inventory due to a variety of factors including the Company's overall mix of sales

11

and resulting accounts receivable with international and domestic customers, United States governmental agencies and a few individual customer accounts which may result in high concentrations of accounts receivable as compared to the overall level of the Company's accounts receivable. The credit facility contains financial covenants including, under certain conditions, maintaining a minimum fixed charge coverage ratio, as well as other non-financial covenants, including restrictions on declaring and paying dividends, and is secured by substantially all of the Company's assets. The credit facility terminates on December 5, 2016. Borrowings under the credit facility bear interest based on a rate of the Company's choice equal to either: 1) the LIBOR plus a margin of 2.50 percent per annum or 2) the base rate plus a margin of 1.75 percent per annum. The base rate is the greater of (a) the Federal Funds rate plus 0.50 percent, (b) the LIBOR rate plus 1.00 percent or (c) the prime rate of the financial institution. The LIBOR rate and the base rate are determined at the specified date preceding or at the time of the borrowing in accordance with the terms of the credit facility. In addition, unused line fees are payable on the credit facility at rates of 0.40 percent per annum.

During the three months ended September 28, 2012, the Company made a $5.0 million payment to pay down the credit facility. As of September 28, 2012, the Company had $10.3 million outstanding borrowings under this credit facility, including $0.4 million of accrued interest. The amount borrowed bears interest at 2.7% based on LIBOR as of September 28, 2012. As of September 28, 2012, the remaining amount available to be borrowed under the credit facility was approximately $27.7 million which takes into account a $2.0 million outstanding letter of credit to back the Company's obligation to pay for goods or services to a supplier. The Company was in compliance with all covenants.

14. SHARE-BASED COMPENSATION

During the three month periods ended September 28, 2012 and September 30, 2011, the Company granted stock options and restricted stock units to employees and non-employee directors under its 2005 Equity Incentive Plan and issued shares of the Company's common stock to participating employees under its 2005 Employee Stock Purchase Plan. Total share-based compensation expense was as follows (in thousands):

	Three Months Ended
	September 28, 2012		September 30, 2011
Cost of revenue	$	500	$	282
Research and development	539		515
Sales and marketing	386		361
General and administrative	1,086		911
Total share-based compensation expense	$	2,511	$	2,069

12

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Determining Fair Value

The fair value of share-based awards was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods:

	Three Months Ended
	September 28, 2012			September 30, 2011
Option Plans Shares
Risk-free interest rate	0.7		%	1.1		%
Volatility	67.6		%	75.6		%
Weighted average expected life (in years)	5.00			4.66
Expected dividend yield	—			—
Weighted average fair value	$	3.67		$	8.66
ESPP Plan shares
Risk-free interest rate	0.2		%	0.1		%
Volatility	83.0		%	80.0		%
Weighted average expected life (in years)	1.25			1.25
Expected dividend yield	—			—
Weighted average fair value	$	4.39		$	6.43

Stock Option Activity

A summary of stock option activity for the three months ended September 28, 2012 was as follows:

	Options Outstanding
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual term in years	Aggregate Intrinsic Value
						(in thousands)
Balance at June 29, 2012	3,703,660		$	10.79
Options granted	64,000		6.62
Options exercised	(105,073	)	5.33
Options cancelled	(109,784	)	11.63
Balance at September 28, 2012	3,552,803		$	10.85	5.44	$	3,657
Vested and expected to vest at September 28, 2012	3,324,688		$	10.90	5.20	$	3,399
Exercisable at September 28, 2012	2,280,623		$	11.41	3.55	$	2,205

The total intrinsic value of options exercised in the three months ended September 28, 2012 and September 30, 2011 was $0.3 million and $0.8 million, respectively. The total fair value of shares vested during the three months ended September 28, 2012 and September 30, 2011 was $0.9 million and $0.7 million, respectively.

As of September 28, 2012, there was $3.0 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.28 years.

13

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Restricted Stock Unit Activity

The following table summarizes the Company's activity with respect to restricted stock units (“RSUs”) for the three months ended September 28, 2012:

	Number of Shares
Balance at June 29, 2012	918,764
Awarded	774,489
Released	(65,035	)
Forfeited	(88,844	)
Balance at September 28, 2012	1,539,374
Vested and expected to vest at September 28, 2012	1,124,163

On August 7, 2012, pursuant to the 2005 Equity Plan and the fiscal 2013 Performance RSU Stock Matrix, the Company's Compensation Committee approved the grant of 185,000 performance-based restricted stock units (the “Performance-Based RSUs” or “PSUs”), pursuant to the 2005 Equity Plan, to various individuals on the Company's executive management team with an effective vest commencement date of August 13, 2012. Of the total PSUs, 25% shall vest on the third business day following the date that the Company publicly announces financial results for fiscal 2013, subject to the attainment of certain performance targets. The remaining 75% of the PSUs will vest in three successive equal annual installments over the three-year period measured from the first anniversary of the vesting commencement date, subject to the continued service of the recipient through each vesting date. The ultimate award will be determined based on the achievement of specific performance targets which will be measured at the end of the fiscal 2013 based on the financial results and can be as low as 50% of the aggregate grant amount or as high as 150% of the aggregate grant amount. In accordance with the 2013 Performance RSU Stock Matrix and based on the information available as of September 28, 2012 and the Company's assessment of 100% achievement of the performance metrics, the award was increased by a factor of 125% to 231,250 PSUs for purposes of reporting and to determine the share-based compensation expense. The Company will assess the achievement of these performance metrics on a quarterly basis through the end of fiscal 2013. If the performance targets are not met at that time, none of the PSUs will vest and will be forfeited.

As of September 28, 2012, there was $9.2 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 3.15 years.

RSUs are converted into common stock upon vesting. Upon the vesting of RSUs, the Company generally withholds a portion of the shares to cover applicable taxes and decreases the shares issued to the employee by a corresponding value. The withholding tax obligations are based upon the fair market value of the Company’s common stock on the vesting date. The number and the value of the shares withheld for tax purposes are summarized in the table below (in thousands except share amounts):

	Three Months Ended
	September 28, 2012		September 30, 2011
RSUs shares withheld for taxes	24,381		29,366
RSUs amounts withheld for taxes	$	188	$	420

14

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Employee Stock Purchase Plan

At September 28, 2012, the total unrecognized compensation cost related to rights to purchase the Company's common stock under the employee stock purchase plan ("ESPP") was approximately $2.2 million. This cost will be amortized on a straight-line basis over approximately 1.9 years. The following table shows the shares issued and their respective weighted-average purchase price per share, pursuant to the ESPP, during the three months ended September 28, 2012 and September 30, 2011.

	Three Months Ended
	September 28, 2012		September 30, 2011
Shares issued	256,972		259,347
Weighted-average purchase price per share	$	6.76	$	5.99

15. EARNINGS PER SHARE

Basic and diluted net loss per common share is computed by dividing unaudited consolidated net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing consolidated net loss by the weighted average number of common shares outstanding and dilutive common shares outstanding during the period. For both of the three months ended September 28, 2012 and September 30, 2011, potentially dilutive shares, which include outstanding common stock options and restricted stock units, were not included in the computation of diluted net loss per common shares as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. As the Company had a net loss in both the three months ended September 28, 2012 and September 30, 2011, basic and diluted net loss per share are the same for these periods.

The following table sets forth the computation of basic and diluted net loss per share for the three months ended September 28, 2012 and September 30, 2011 (in thousands, except per share amount):

	Three Months Ended
	September 28, 2012			September 30, 2011
Numerator:
Net loss	$	(8,680	)	$	(2,657	)
Denominator:
Weighted-average common shares used in computing basic and diluted net loss per share	32,166			31,303
Basic and diluted net loss per share	$	(0.27	)	$	(0.08	)

The following potential common shares have been excluded from the basic net loss per share calculations, as their effect would have been anti-dilutive (in thousands):

	September 28, 2012	September 30, 2011
Options, RSUs, and ESPP	5,106	4,248

15

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

16. RETIREMENT BENEFIT PLAN

Defined Benefit Plans

The Company sponsors defined benefit plans covering certain of its employees in Germany ("German plan") and Japan ("Japan plan").

The net periodic benefit cost of the German and Japan plans were comprised of the following components (in thousands):

	Three Months Ended
	September 28, 2012			September 30, 2011
Net periodic benefit cost
Service cost	$	169		$	333
Interest expense	139			192
Expected return on plan assets	(46		)	(48		)
Net periodic benefit cost	$	262		$	477

17. INCOME TAXES

The Company recorded a tax expense of $0.4 million for the three months ended September 28, 2012. The tax expense primarily consisted of the expected tax liability based on the Company’s projected foreign financial results for the year ending June 28, 2013, offset by a benefit of audit settlements and reversals of liabilities related to the sale of a subsidiary. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three months ended September 28, 2012 primarily due to the tax rate differential of the Company's foreign operations, utilization of net operating losses, audit settlements and reversals of previously accrued taxes in foreign jurisdictions.

The Company recorded a tax benefit of $0.7 million for the three months ended September 30, 2011. The tax benefit primarily comprised of amounts related to the reversal of unrecognized tax benefits and related interest, which was offset by tax liability based on the company's foreign projected financial results for the year ending June 29, 2012. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three months ended September 30, 2011 primarily due to the tax rate differential of the Company's foreign operations, release of unrecognized tax benefits due to lapse of statutes of limitations, domestic operating losses generated from which the Company does not benefit and benefit from utilization of net operating losses not previously recognized.

As of September 28, 2012, the Company has provided a partial valuation allowance against its net deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and related valuation allowance. If management's assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.

The Company had approximately $9.7 million of gross unrecognized tax benefit as of September 28, 2012, of which $7.3 million will impact the effective tax rate when recognized. The Company recognizes interest expense and penalties related to the unrecognized tax benefits within income tax expense. As of September 28, 2012, the Company also had approximately $14.6 million of interest and penalties attributable to the gross unrecognized tax benefits.

The Company is currently under audit by the Canadian tax authorities and expects that the audit will be concluded in the next twelve months.  It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits.  However, it is not possible to estimate either the magnitude or the range of any increase or decrease at this time.

16

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

18. SEGMENT INFORMATION

The Company manages its business primarily on a geographical basis. Accordingly, the Company determined its operating and reporting segments, which are generally based on the location of its sales and service employees generating revenue, to be the Americas, Europe, and Asia-Pacific operations. The Americas segment includes both North and South America. The Europe segment ("EMEA") includes European countries, as well as the Middle East and Africa. The Asia-Pacific segment ("APJ") includes Australia, Japan, and all other Asian countries.

The Company's operating segments are determined based upon several criteria including: the Company's internal organizational structure; the manner in which the Company's operations are managed; the criteria used by the Company's Chief Executive Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the availability of separate financial information. The accounting policies of the various segments are the same as those described in Note 3. Summary of Significant Accounting Policies of this Form 10-Q and in Note 2 of the Consolidated Financial Statements in the Company's fiscal year 2012 Annual Report on Form 10-K.

The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally based on the location of its sales and service employees generating revenues. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A significant portion of the segments’ expenses arise from shared services and infrastructure that the Company has historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, information technology services, treasury and other corporate infrastructure expenses. These corporate charges are allocated to the segments and are reassessed on an annual basis. The allocations have been determined on a basis that the Company considers to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. The Company does not include intercompany transfers between segments for management reporting purposes.

17

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Segment Results

Summary information by operating segment for the three months ended September 28, 2012 and September 30, 2011 is as follows (in thousands):

	Three Months Ended
	September 28, 2012			September 30, 2011
Total revenue
Americas	$	123,385		$	112,392
APJ	44,434			40,106
EMEA	25,062			26,397
Total revenue	$	192,881		$	178,895
Product revenue
Americas	$	101,642		$	89,056
APJ	26,821			21,801
EMEA	17,852			18,095
Total product revenue	$	146,315		$	128,952
Service revenue
Americas	$	21,743		$	23,336
APJ	17,613			18,305
EMEA	7,210			8,302
Total service revenue	$	46,566		$	49,943
Operating income (loss)
Americas	$	1,576		$	(133	)
APJ	(1,411		)	78
EMEA	(7,158		)	(2,313		)
Total operating loss	$	(6,993	)	$	(2,368	)

The Company derives the results of the business segments directly from its internal management reporting system. The presentation of our revenue for segment information purposes differs from the accompanying unaudited condensed consolidated statements of operations. The segment information is presented on the basis which the Company's CODM evaluates the performance of its operating segments. The combined product and service revenue is allocated to product and service revenue on a contractual basis for segment information purposes.

The Company's assets are located primarily in the United States and are not allocated to any specific region. The Company does not measure the performance of its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenue and operating profit (loss).

Customer information

For the three months ended September 28, 2012, one customer from the Americas segment accounted for approximately 18% of the Company's revenue and various agencies of the United States government (collectively, U.S. government) accounted for approximately 14% of the Company's revenue. For the three months ended September 30, 2011, a customer from the Americas segment accounted for approximately 18% of the Company's revenue.

At September 28, 2012, a customer from the Americas segment accounted for approximately 16% of the Company's accounts receivable and another customer from the EMEA segment accounted for approximately 12% of the Company's accounts receivable. At June 29, 2012, one customer from the Americas segment accounted for approximately 28% of the Company's accounts receivable.

18

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Geographic Information

International sales to Japan, the only single foreign country which accounted for 10% or more of revenues, were $36.3 million or 19% and $33.3 million or 19% of revenues for the three months ended September 28, 2012 and September 30, 2011, respectively.

19. FINANCIAL GUARANTEES

The Company has issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for value-added tax and other taxes and to various other parties to support payments in advance of future delivery on goods and services. The majority of the Company's financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at September 28, 2012 was $3.8 million for which the Company has $3.6 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets.

20. COMMITMENTS AND CONTINGENCIES

Letter of Credit

The Company's credit facility includes a $10.0 million letter of credit subfacility. As of September 28, 2012, the Company has $2.0 million of outstanding letter of credit to back the Company's obligation to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods or services to a supplier. See Note 13 "Credit facility" for more information regarding the credit facility.

Indemnification Agreements

The Company enters into standard indemnification agreements with its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that the Company's product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of September 28, 2012. As a result, the Company believes the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to such indemnifications as of September 28, 2012.

Contingencies

The Company may, from time to time, be involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company records a provision for a liability when management believes that it is both probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

On May 1, 2007, Silicon Graphics, Inc., the predecessor company that the Company acquired in May 2009 (“Legacy SGI") received a legal notice from counsel to Bharat Heavy Electricals Ltd. (“BHEL”), located in India, alleging delay in and failure to deliver products and technical problems with its hardware and software in relation to the establishment of a facility in Hyderabad. The Company assumed this claim in connection with its acquisition of Legacy SGI assets, and is currently engaged in arbitration. On January 21, 2008, BHEL filed its statement of claim against Silicon Graphics Systems (India) Pvt. Ltd. for a sum of Indian Rupee (“INR”) 78,478,200 ($1.5 million based on the conversion rate on September 28, 2012) plus interest and costs. On February 29, 2008, the Company filed its reply as well as a counter claim for a sum of INR 27,453,007 ($0.5 million based on the conversion rate on September 28, 2012) plus interest and costs. The proceeding has commenced, witness testimony is now complete and the parties have been instructed to submit final arguments by the next scheduled hearing date (to be determined by the arbitrator).  The Company cannot currently predict the outcome of this dispute nor determine the amount or a reasonable range of potential loss, if any.

19

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Third parties in the past have asserted, and may in the future assert, intellectual property infringement claims against the Company, and such future claims, if proved, could require the Company to pay substantial damages or to redesign its existing products or pay fees to obtain cross-license agreements. Litigation may be necessary in the future to enforce or defend the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of its proprietary rights or the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm the Company's business, operating results and financial condition. Further, many of the Company's current and potential competitors have the ability to dedicate substantially greater resources to enforcing and defending their intellectual property rights than the Company.

Additionally, from time to time, the Company receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any given case that such informal review will not lead to further proceedings involving the Company in the future.

The Company is not aware of any pending disputes, including those disputes and settlements described above, that would be likely to have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages, cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods.

Other Commitments

For a description of significant leases and purchase commitments see Note 24 of the Company's Annual Report on Form 10-K filed with the SEC on September 10, 2012.

20

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included or incorporated by reference in this Form 10-Q other than statements of historical fact, are forward-looking statements. Investors can identify these and other forward-looking statements by the use of words such as “estimate,” “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to such statements.

Our actual results could differ materially from those projected in the forward-looking statements included herein as a result of a number of factors, risks and uncertainties, including, among others, changes in the anticipated amounts and timing of restructuring charges to be incurred and cost savings expected to be realized from our restructuring actions in Europe, our ability to successfully execute our strategies, the sufficiency of our cash, cash equivalents and short-term investments and cash generated from operations, and our future liquidity requirements, the risks discussed in this Part I, Item 2 -"Management's Discussion and Analysis of Financial Condition and Results of Operations,” the risk factors set forth in Part II, Item 1A- "Risk Factors” and elsewhere in this Form 10-Q, the risk factors set forth in our Annual Report on Form 10-K for the year ended June 29, 2012 filed with the Securities and Exchange Commission (the “SEC”) on September 10, 2012 (our “Annual Report”), and the risks detailed from time to time in our future reports filed with the SEC. The information included herein is as of the filing date of this Form 10-Q with the SEC and future events or circumstances could differ materially from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. Unless required by law, we expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written or oral forward-looking statements attributable to SGI or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and other documents we file from time to time with the SEC to advise interested parties of the risks and factors that may affect our business.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Item 1 in this Form 10-Q and with our financial statements and notes thereto for the year ended June 29, 2012 contained in our Annual Report.

“Silicon Graphics,” “SGI,” “Eco-Logical,” “RapidScale,” “Roamer,” “CloudRack,” “ICE Cube,” “MobiRack,” “Rackable,” “Altix,” “CXFS,” “NUMAlink,” “Octane,” “Origin,” “REACT,” “SGI FullCare,” “SGI FullExpress,” “SGI Global Developer Program,” "SGI Tempo," "OpenFOAM," "SGI ArcFiniti," "SGI Accelerate," “COPAN” and the “Silicon Graphics” logo are trademarks or registered trademarks of Silicon Graphics International Corp. or its subsidiaries in the U.S. and/or other countries. Other trademarks or service marks appearing in this report may be trademarks or service marks of other owners.

Overview

We are a global leader in technical computing. We are focused on helping customers solve their most demanding business and technology challenges by delivering large-scale computing and storage, high-performance compute and storage, and data center solutions. We develop, market, and sell a broad line of low cost, mid-range and high-end computing servers and data storage as well as differentiating software. We sell data center infrastructure products purpose-built for large-scale data center deployments. In addition, we provide global customer support and professional services related to our products. We enable enterprises to meet their computing and storage requirements at a lower total cost of ownership and provide them greater flexibility and scalability. We are also a leading developer of enterprise class, high-performance features for the Linux operating system that provide our customers with a standard Linux operating environment combined with our differentiated yet un-intrusive Linux capabilities that are designed to improve performance, simplify system management, and provide a more robust development environment.

Management has implemented a strategic plan which will drive changes in three major areas. First, we are targeting our investments towards the vertical markets where we can provide the highest value to our customers and differentiate our offerings to gain both market share and margin. Second, we are investing and aligning with key partners in order to provide our customers with integrated solutions in Big Data, storage and scale-up computing. Third, management is focusing on initiatives to improve our operational performance and cost structure. We have ongoing efforts to reduce material and other manufacturing costs. We believe that this strategic plan will help create a strong foundation for our business results in the long-term.

Our revenue mix by geography shows that we continue to have strong international presence with 38% of total international revenue in the three months ended September 28, 2012. In addition, our customer base continues to expand in various sectors, including the public, cloud and manufacturing sectors.

21

Results of Operations

Summarized below are the results of our operations for the three months ended September 28, 2012 as compared to the three months ended September 30, 2011.

Financial Highlights

• Our total revenue for the three months ended September 28, 2012 was $192.9 million, up $14.0 million or 8%, from the comparable period in fiscal year 2011. The increase was primarily due to higher revenue from the increase in sales in our product revenue in our Americas and APJ segments offset by decreases in the service revenue for all of our geographic segments.

• Our overall gross margin decreased by 7.5 percentage points from 29.4% in the three months ended September 30, 2011 to 21.9% in the three months ended September 28, 2012. This change in overall gross margin is due to decreases in both product and service gross margin. The decline in our product gross margin was due to product mix as well as a result of a two significant low margin product deals that were recognized during the quarter. The decline in our service gross margins was largely as a result of lower support services revenue as our new products replace our installed base of older generation products which had higher margin support contracts. Typically our service revenue is recognized ratably over the respective service periods. Because the three months ended September 30, 2011 was comprised of 14 weeks compared to only 13 weeks for the three months ended September 28, 2012, we recognized revenue for one less week for our service contracts during the current quarter.

• Our research and development and selling, general and administrative expenses was $47.7 million in the three months ended September 28, 2012, a decrease of $7.1 million compared to $54.9 million for the three months ended September 30, 2011. A primary driver of this decline was the decrease in compensation and related expenses due to reductions in headcount. Headcount as of September 28, 2012 was 1,495, which reflects a reduction of 57 employees from 1,552 as of September 30, 2011 due to the fiscal 2011 and 2012 restructuring actions and attrition. We have also been controlling our costs across all functions in order to streamline our operations and reduce operating expenses and have also benefited from lower charges for the amortization of intangible assets as these assets are nearing full amortization.

• We incurred restructuring expense of $1.5 million in the three months ended September 28, 2012 as part of the fiscal 2012 restructuring action which is primarily focused on cost reductions in Europe.

• Net loss for the three months ended September 28, 2012 was $8.7 million compared to net loss of $2.7 million for the three months ended September 30, 2011. The $6.0 million increase in net loss from the three months ended September 30, 2011 was mainly driven by the lower gross margins reflected during the quarter as we were unfavorably impacted by a few significant low margin deals and unfavorable product mix as well as an unfavorable change in income tax expense which was only partially offset by the decrease in our total operating expenses.

Revenue, cost of revenue, gross profit and gross margin

Our revenue mix by geography shows that we continue to have a strong international presence with 38% of total international revenue in the three months ended September 28, 2012. In addition, our customer base continues to expand in various sectors, including the public, cloud and manufacturing sectors.

22

The following table presents revenue by operating segment for the three months ended September 28, 2012 and September 30, 2011 (in thousands except percentages):

	Three Months Ended				Change
	September 28, 2012		September 30, 2011		$			%
Total revenue
Americas	$	123,385	$	112,392	$	10,993		10%
APJ	44,434		40,106		4,328			11%
EMEA	25,062		26,397		(1,335		)	(5)%
Total revenue	$	192,881	$	178,895	$	13,986		8%
Product revenue
Americas	$	101,642	$	89,056	$	12,586		14%
APJ	26,821		21,801		5,020			23%
EMEA	17,852		18,095		(243		)	(1)%
Total product revenue	$	146,315	$	128,952	$	17,363		13%
Service revenue
Americas	$	21,743	$	23,336	$	(1,593	)	(7)%
APJ	17,613		18,305		(692		)	(4)%
EMEA	7,210		8,302		(1,092		)	(13)%
Total service revenue	$	46,566	$	49,943	$	(3,377	)	(7)%

Revenue. We derive revenue from the sale of products and services directly to end-users as well as through resellers and system integrators. Product revenue is derived from the sale of mid-range to high-end computing servers and data storage systems as well as software. We enter into sales contracts to deliver multiple products and/or services. In accordance with our revenue recognition policy, certain sales contracts are deferred and recognized over the service period. Service revenue is generated from the sale of standard maintenance contracts as well as custom maintenance contracts that are tailored to individual customers' needs. We recognize service revenue ratably over the service periods. Maintenance contracts are typically between one to three years in length and we actively pursue renewals of these contracts. We also generate professional services revenue related to implementation of and training on our products.

Our continuous introduction of new products and improvements of our product's performance and data storage capacity means that we are unable to directly compare our products from period to period, and therefore, we are unable to quantify the changes in pricing of our products from period to period. We believe that our on-going introduction of new products and product features help mitigate competitive pricing pressures by shifting the competitive landscape to differentiated value rather than price.

Segment Operating Performance

Americas

Revenue increased $11.0 million or 10% to $123.4 million in the three months ended September 28, 2012 from $112.4 million in the three months ended September 30, 2011. The increase in Americas revenue was driven by higher product revenue partially offset by a decrease in service revenue. Product revenue increased by $12.6 million due primarily to the strength in sales of our scale-out compute solutions. This increase in product revenue was partially offset by a decrease in sales of our scale-up compute solutions as well as a decrease in service revenue of $1.6 million as our new products replace our installed base of older generation products with higher margin support contracts. The decrease in service revenue is primarily due to timing of when services were performed on consulting and product integration services. Our service revenue is typically recognized ratably over the respective service periods. Because the three months ended September 30, 2011 was comprised of 14 weeks compared to only 13 weeks for the three months ended September 28, 2012, we recognized revenue for one less week for our service contracts during the current quarter. The Americas segment represented 64% and 63% of the total revenue in the three months ended September 28, 2012 and September 30, 2011, respectively.

23

APJ

Revenue increased $4.3 million or 11% to $44.4 million in the three months ended September 28, 2012 from $40.1 million in the three months ended September 30, 2011. Our higher revenue in APJ is primarily driven by higher product revenue for our scale out products which was driven by one significant deal in Japan. Our revenue for the three months ended September 28, 2012 is comprised of $26.8 million from product sales and $17.6 million from services compared to product and service revenue of $21.8 million and $18.3 million, respectively, for the three months ended September 30, 2011. The decrease in service revenue is attributable to the fact that the three months ended September 30, 2011 was comprised of 14 weeks compared to only 13 weeks for the three months ended September 28, 2012, thus we recognized revenue for one less week for our service contracts during the current quarter. The APJ segment represented 23% and 22% of the total revenue in the three months ended September 28, 2012 and September 30, 2011, respectively.

EMEA

Revenue decreased $1.3 million or 5% to $25.1 million in the three months ended September 28, 2012 from $26.4 million in the three months ended September 30, 2011. The decrease in revenue is primarily attributable to a decrease in service revenue of $1.1 million primarily attributable to the fact that the three months ended September 30, 2011 was comprised of 14 weeks compared to only 13 weeks for the three months ended September 28, 2012, thus we recognized revenue for one less week for our service contracts during the current quarter. In addition, we also experienced a decrease in product revenue of $0.2 million. The EMEA segment represented 13% and 15% of the total revenue in the three months ended September 28, 2012 and September 30, 2011, respectively.

Cost of revenue and gross profit

Cost of revenue and gross profit for the three months ended September 28, 2012 and September 30, 2011 were as follows (in thousands except percentages):

	Three Months Ended						Change
	September 28, 2012			September 30, 2011			$			%
Cost of product revenue	$	122,597		$	99,767		$	22,830		23%
Cost of service revenue	28,074			26,489			1,585			6%
Total cost of revenue	$	150,671		$	126,256		$	24,415		19%
Product gross profit	23,718			29,185			(5,467		)	(19)%
Service gross profit	18,492			23,454			(4,962		)	(21)%
Total gross profit	$	42,210		$	52,639		$	(10,429	)	(20)%
Product gross margin	16.2		%	22.6		%
Service gross margin	39.7		%	47.0		%
Total gross margin	21.9		%	29.4		%

Cost of revenue consists of costs associated with direct material, labor, manufacturing overhead, shipment of products, inventory write downs and share-based compensation. Cost of revenue also includes personnel costs for providing maintenance and professional services. Our manufacturing overhead and professional services personnel costs are fixed or semi-variable. Our gross margins are impacted by changes in customer and product mix, pricing actions by our competitors and commodity prices that comprise a significant portion of cost of revenue from period to period. Further when certain sales contracts are deferred in accordance with our revenue recognition policy, the related cost of revenue is deferred and recognized upon recognition of revenue.

Our cost of revenue and gross profit are impacted by price changes, product configuration, revenue mix and product material costs. Our service cost of revenue and gross margin are impacted by timing of support service initiations and renewals, and incremental investments in our customer support infrastructure.

Overall gross profit decreased by $10.4 million to $42.2 million in the three months ended September 28, 2012 from $52.6 million in the three months ended September 30, 2011. Overall gross margin decreased to 21.9% in the three months

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ended September 28, 2012 from 29.4% in the three months ended September 30, 2011. Our gross margin decreased due to unfavorable product mix shifts and competitive product pricing pressures in EMEA, as well as lower service margins.

Product gross profit decreased $5.5 million or 19% to $23.7 million in the three months ended September 28, 2012 from $29.2 million in the three months ended September 30, 2011. Product gross margin decreased to 16.2% in the three months ended September 28, 2012 from 22.6% in the three months ended September 30, 2011 as a result of unfavorable product mix shifts to lower margin products primarily in APJ and EMEA as a result of a few low margin product deals compared to the three month period ended September 30, 2011. Service gross profit decreased $5.0 million or 21% to $18.5 million in the three months ended September 28, 2012 from $23.5 million in the three months ended September 30, 2011. Service gross margin decreased to 39.7% in the three months ended September 28, 2012 from 47% in the three months ended September 30, 2011 as a result of two significant low margin deals as well as higher service costs.

Operating Expenses

Operating expenses for the three months ended September 28, 2012 and September 30, 2011 were as follows (in thousands except percentages):

	Three Months Ended				Change
	September 28, 2012		September 30, 2011		$			%
Research and development	$	13,969	$	16,190	$	(2,221	)	(14)%
Sales and marketing	19,571		21,798		(2,227		)	(10)%
General and administrative	14,189		16,885		(2,696		)	(16)%
Restructuring	1,474		133		1,341			1,008%
Total operating expense	$	49,203	$	55,006	$	(5,803	)	(11)%

Research and development. Research and development expense consists primarily of personnel and related costs, contractor fees, new component testing and evaluation, test equipment, new product design and testing, other product development activities, share-based compensation, and facilities and information technology costs.

Research and development expense decreased $2.2 million or 14% to $14.0 million in the three months ended September 28, 2012 from $16.2 million in the three months ended September 30, 2011. The decrease in research and development expense is primarily due to a reduction in third party provider and non-recurring engineering costs as we were ramping up for new product introductions that were introduced in fiscal 2012 of approximately $1.4 million. As a result of decreased headcount, compensation and related expenses decreased by $0.7 million during the three months ended September 28, 2012.

Sales and marketing. Sales and marketing expense consists primarily of salaries, bonuses and commissions paid to our sales and marketing employees, amortization of intangible assets, share-based compensation, and facilities and information technology costs. We also incur marketing expenses for activities such as trade shows, direct mail and advertising.

Sales and marketing expense decreased $2.2 million or 10% to $19.6 million in the three months ended September 28, 2012 from $21.8 million in the three months ended September 30, 2011. This decrease was primarily due to an decrease in our compensation and related expenses as well as lower commissions and bonus expense reflecting achievement of sales commission targets and performance metrics. We are actively managing our costs and reduced our travel and marketing related expenses by $0.4 million. In addition, we also benefited from a decrease in intangible amortization expense of $0.5 million as some of our intangible assets become fully depreciated, resulting in lower intangible amortization expense.

General and administrative. General and administrative expense consists primarily of personnel costs, legal and professional service costs, depreciation, bad debt expense, share-based compensation, and facilities and information technology costs.

General and administrative expense decreased $2.7 million or 16% to $14.2 million in the three months ended September 28, 2012 from $16.9 million in the three months ended September 30, 2011. We are controlling our costs and have reduced our professional fees, including legal related expenses and recruiting fees by approximately $1.8 million. We have also reduced costs for travel related expenses by $0.2 million, purchases of small equipment by $0.2 million and bad debt expenses by $0.3 million. This is partially offset by an increase in share-based compensation expense of $0.2 million.

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Restructuring. Total restructuring expense related to the Fiscal 2012 Restructuring Action and the restructuring actions we undertook in prior years was $1.5 million for the three months ended September 28, 2012 and was $0.1 million for the three months ended September 30, 2011 for charges related to the Fiscal 2011 Restructuring Action. As a result of the Fiscal 2012 Restructuring Action, we anticipate future cash outflow of between $14.0 million to $17.0 million, of which we expect to recognize a substantial portion in fiscal year 2013.

Total other income (expense), net

Total other income (expense), net for the three months ended September 28, 2012 and September 30, 2011 were as follows (in thousands except percentages):

	Three Months Ended						Change
	September 28, 2012			September 30, 2011			$			%
Interest income (expense), net	$	(155	)	$	(98	)	$	(57	)	58%
Other income (expense), net	(1,107		)	(858		)	(249		)	29%
Total other income (expense), net	$	(1,262	)	$	(956	)	$	(306	)	32%

Interest income (expense), net. Interest income (expense), net primarily consists of interest earned on our interest-bearing investment accounts which include money market funds and U.S. treasury bills, as well as interest expense relating to our credit facility and to certain tax payments.

Other income (expense), net. Other income (expense), net during the three months ended September 28, 2012 consisted primarily of foreign exchange losses of $0.8 million primarily as a result of the strengthening of the Euro, British Pound and Canadian dollar against the U.S. Dollar compared to foreign exchange losses of $1.0 million during the three months ended September 30, 2011 as a result of the exchange rates in effect during that period.

Income tax provision (benefit)

Income tax provision (benefit) for the three months ended September 28, 2012 and September 30, 2011 were as follows (in thousands except percentages):

	Three Months Ended					Change
	September 28, 2012		September 30, 2011			$		%
Income tax provision (benefit)	$	425	$	(667	)	$	1,092	(164)%

We recorded a tax expense of $0.4 million for the three months ended September 28, 2012. The net tax benefit was primarily comprised of tax liability computed based on the Company’s foreign projected financial results for the year ending June 29, 2013 offset by the reversals of unrecognized tax benefits including related interest. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three months ended September 28, 2012 primarily due to tax expense incurred by the Company's foreign subsidiaries with operating income, offset by the release of the unrecognized tax benefits due to lapse of statute of limitations, benefits from reversals of previously accrued taxes in foreign jurisdictions and benefit from utilization of net operating losses not previously recognized.

We recorded a tax benefit of $0.7 million for the three months ended September 30, 2011. Our tax benefit for the three months ended September 30, 2011 included $0.9 million primarily from the reversal of unrecognized tax benefits and related interest. The effective tax rate used to record the tax expense differed from the combined federal and net state statutory income tax rate for fiscal 2012 primarily due to domestic operating losses generated during the period from which the Company does not benefit, tax expense incurred by the Company's foreign subsidiaries with operating income, and tax expense associated with our unrecognized tax benefits and related interest.

As of September 28, 2012, we have provided a partial valuation allowance against our net deferred tax assets. Based on all available evidence, on a jurisdictional basis, including our historical operating results, and the uncertainty of predicting our future income, the valuation allowance reduces the majority of our deferred tax assets to an amount that is more likely than not to be realized. The amount of the valuation allowance is attributable to U.S. federal, state and certain foreign deferred tax assets primarily consisting of net operating loss carryovers, tax credit carryovers, accrued expenses, and other temporary differences.

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We continue to evaluate the realizability of deferred tax assets and related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which management makes the determination.

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Liquidity and Capital Resources

We had $107.2 million of cash and cash equivalents at September 28, 2012 and $104.9 million at June 29, 2012. As of September 28, 2012, we had $49.5 million of cash that is held outside the United States. Historically, we have required capital principally to fund our working capital needs. It is our investment policy to invest in a manner that preserves capital, provides liquidity and maintains appropriate diversification and optimizes after-tax yield and return within our policy's framework and stipulated benchmarks. Adherence with our policy requires the assets to be liquid on and before their maturity dates. This liquidity requirement means that the holder of the assets must be able to pay us, upon our demand, the cash value of the assets invested.

At September 28, 2012, we had short-term and long-term restricted cash and cash equivalents of $3.6 million that are pledged as collateral for various guarantees issued to cover rent on leased facilities and equipment, to government authorities for value-added tax (“VAT”) and other taxes, and certain vendors to support payments in advance of delivery of goods and services.

As described further below under the section titled "Contractual Obligations and Other Commitments", in December 2011, we entered into a five-year senior secured credit facility in the aggregate principal amount of $35.0 million, which was increased to $40.0 million on May 1, 2012. The credit facility is intended to be used primarily to fund working capital requirements, capital expenditures and operations to the extent that cash provided by operating activities is not sufficient to fund our cash needs. As of September 28, 2012, we had an outstanding balance of $10.3 million from our credit facility, which included $0.4 million of accrued interest. We also had $2.0 million of outstanding letters of credit under this credit facility to back the Company's obligation to pay for goods or services to a supplier. As of September 28, 2012, the remaining amount available to be borrowed under the credit facility was approximately $27.7 million.

At September 28, 2012, we believe our current cash and cash equivalents, in conjunction with the funds that may be drawn down under our credit facility, will be sufficient to fund working capital requirements, capital expenditures and operations for at least the next twelve months. We have implemented processes to more effectively monitor our working capital. We have intensified our cash processes related to monitoring, projecting and controlling procedures to operate our business and are more broadly requiring advance and milestone payments for certain large projects that would otherwise involve a significant lag between our payments to vendors for equipment and materials and the installation, acceptance, billing, and collection from the customer. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future. At the present time, we have no material commitments for capital expenditures.

The adequacy of these resources to meet our liquidity needs beyond the next twelve months will depend on our growth, operating results and capital expenditures required to meet our business needs. If we fail to generate cash from our operations on a timely basis, we may not have the cash resources required to run our business and we may need to seek additional sources of funds.

If we require additional capital resources to expand our business internally or to acquire complementary products, technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.

The following is a summary of cash activity (in thousands):

	Three Months Ended
	September 28, 2012			September 30, 2011
Consolidated statements of cash flows data:
Net cash provided by (used in) operating activities	$	4,635		$	(28,369	)
Net cash provided by (used in) investing activities	432			(2,725		)
Net cash (used in) provided by financing activities	(2,917		)	2,829
Effect of exchange rate changes on cash and cash equivalents	213			$	887
Net increase (decrease) in cash and cash equivalents	$	2,363		$	(27,378	)

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Operating Activities

Cash provided in operating activities was $4.6 million for the three months ended September 28, 2012. Our net loss was $8.7 million for the three months ended September 28, 2012. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $3.5 million and share-based compensation expense of $2.5 million. Net change in operating assets and liabilities contributed to the decrease in cash from operating activities of $7.0 million. The primary sources of cash in operating activities were increases in accounts payable and deferred revenue and decreases in accounts receivable and deferred cost of revenue. The primary uses of cash in operating activity were for purchases of inventory and prepaid and other assets as well as decreases in other liabilities.

For the three months ended September 28, 2012, accounts receivable decreased $8.5 million due to the timing of collections of the trade receivables. Accounts payable increased $18.5 million, primarily due to the timing of payments and our progress in effectively monitoring our working capital. Deferred revenue increased by $4.8 million and deferred cost of revenue decreased by $5.0 million, primarily due to the timing of revenue recognition on sales transactions which were required to be deferred in accordance with our revenue recognition policy.

Inventory increased $24.3 million to meet the demands of the large sales contracts that we anticipate shipping over the next few quarters, as well as due to timing of customer shipments and acceptance. A large portion of our inventory balance includes inventory at customer sites undergoing installation testing prior to customer acceptance. Additionally, prepaids and other current assets increased $4.4 million due mainly to timing of value-added tax remittances and an increase in prepayments, and other liabilities decreased $1.2 million primarily due to timing of payments.

Cash used in operating activities was $28.4 million for the three months ended September 30, 2011. Our net loss was $2.7 million for the three months ended September 30, 2011. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $4.0 million and share-based compensation expense of $2.1 million. Net change in operating assets and liabilities contributed to the decrease in cash from operating activities of $32.2 million. The primary use of cash in operating activity was from purchases of inventory accompanied by payments of accounts payable and other liabilities. Our deferred revenue also decreased during the three months ended September 30, 2011. The primary operating activities sources of cash were decreases in accounts receivable due to collection, decrease in deferred cost of revenue, and decrease in prepaid expenses and other assets.

For the three months ended September 30, 2011, deferred revenue and deferred cost of revenue decreased by $7.4 million and $7.8 million, respectively, primarily due to the timing of revenue recognition on sales transactions which were required to be deferred in accordance with our revenue recognition policy. Inventory increased $29.9 million due to timing of inventory purchases and shipments to customers. Additionally, accounts payable decreased $7.0 million, primarily due to the timing of payments. Other liabilities decreased $5.2 million primarily due to timing of compensation and related payments.

Investing Activities

Cash provided by investing activities was $0.4 million in the three months ended September 28, 2012, primarily due to proceeds from other individually immaterial investing activities of $1.5 million offset by purchases of property and equipment of $1.0 million.

Cash used by investing activities was $2.7 million in the three months ended September 30, 2011, primarily due to purchases of property and equipment of $1.5 million and other investing activities of $1.2 million.

Financing Activities

Cash used in financing activities was $2.9 million for the three months ended September 28, 2012, primarily due to the payment of our credit facility of $5.0 million, repurchases of restricted stock units withheld for taxes of $0.2 million, which was offset by the issuance of stock under our employee stock purchase plan and stock option exercises of $2.3 million.

Cash provided by financing activities was $2.8 million for the three months ended September 30, 2011, primarily due to proceeds from the issuance of stock under the employee stock purchase plan and stock options of $3.2 million, which was partially offset by repurchases of restricted stock of $0.4 million for tax withholding purposes.

We expect to continue to invest in the business including working capital, capital expenditures and operating expenses. We intend to fund these activities with our cash reserves, cash generated from operations, if any, and with the remaining principal that is available for withdrawal on the credit facility to the extent that cash provided by operating activities is not sufficient to fund our cash needs. Increases in operating expenses may not result in an increase in our revenue and our anticipated revenue may not be sufficient to support these increased expenditures. We anticipate that operating expenses and working capital will constitute a material use of our cash resources.

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Contractual Obligations and Commitments

Operating Leases

We lease certain real and personal property under non-cancelable operating leases. Certain leases require us to pay property taxes, insurance and routine maintenance and include renewal options and escalation clauses.

As of September 28, 2012, we had total outstanding commitments on non-cancelable operating leases of our real properties of $18.5 million, $6.0 million of which relates to our domestic leases. These leases include our headquarters in Fremont, California and our warehouse facility in Chippewa Falls, Wisconsin. A significant portion of our domestic leases will expire in fiscal year 2014. As of September 28, 2012, we had total outstanding commitments of $12.5 million in non-cancelable international real property operating leases. The total outstanding commitments included $6.0 million relating to our leased facility in Japan, which we assumed as part of the SGI Japan acquisition. Our major facility leases in our international locations are generally for terms of two to nine years, and generally do not provide renewal options, except for our Japan leases, which generally provide for a two-year renewal option.

As of September 28, 2012, personal property under operating lease was comprised primarily of automobiles and office equipment. Total outstanding commitments under such leases totaled approximately $1.0 million at September 28, 2012.

Purchase Commitments

From time to time, we issue blanket purchase orders to our contract manufacturers for the procurement of materials to be used for upcoming orders, particularly for those components that have long lead times. Blanket purchase orders vary in size depending on our projected requirements. If we do not consume these materials on a timely basis or if our relationship with one of our contract manufacturers was to terminate, we could experience an abnormal increase to our inventory carrying amount and related accounts payable.

In connection with supplier agreements, we agreed to purchase certain units of inventory and non-inventory through fiscal year 2014. As of September 28, 2012, there was a remaining commitment of approximately $19.6 million, of which $14.5 million is expected to be paid in the next 12 months.

Other than the contractual obligations and commitments described above, we have no significant unconditional purchase obligations or similar instruments. We are not a guarantor of any other entities' debt or other financial obligations.

Credit Facility

On December 5, 2011, we entered into a five-year senior secured credit facility in the aggregate principal amount of $35.0 million. The availability under the credit facility is limited to a borrowing base, subject to meeting certain conditions set forth in the credit facility. The credit facility includes a feature that allows the Company to increase the revolver amount in the first 18 months. The Company exercised this feature, and on May 1, 2012, the revolver amount was increased by $5.0 million to an aggregate principal amount of $40.0 million. As of September 28, 2012, the outstanding balance under the credit facility was $10.3 million, including $0.4 million of accrued interest. As of September 28, 2012, the remaining amount available to be borrowed under the credit facility was approximately $27.7 million which takes into account a $2.0 million outstanding letter of credit to back the Company's obligation to pay for goods or services to a supplier. This availability will fluctuate over time, and generally monthly, due to a variety of factors including our overall mix of sales and resulting accounts receivable with international and domestic customers, U.S. governmental agencies and a few individual customer accounts which may result in high concentrations of accounts receivable as compared to the overall level of the our accounts receivable. See Note 13 "Credit Facility" to our unaudited condensed consolidated financial statements in this Form 10-Q for further information on the credit facility.

Uncertain Tax Positions

As of September 28, 2012, the net recorded tax liability for uncertain tax positions was $24.3 million, including interest and penalty. We cannot conclude on the range of cash payments that will be made within the next twelve months associated with our uncertain tax positions.

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Guarantees and Indemnifications

We have issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for VAT and other taxes, and to various other parties to support payments in advance of future delivery on goods and services. The majority of our financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at September 28, 2012 was $3.8 million, for which we have $3.6 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash and cash equivalents in the unaudited condensed consolidated balance sheets.

Additionally, we enter into standard indemnification agreements with our customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that our product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. We have not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of September 28, 2012. As a result, we believe the estimated fair value of these indemnification agreements, if any, to be immaterial and, accordingly, no liability has been recorded with respect to such indemnifications as of September 28, 2012.

Off-Balance Sheet Arrangements

Our credit facility includes a $10.0 million letter of credit subfacility. As of September 28, 2012, we have $2.0 million of outstanding letter of credit to back our obligation to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods or services to a supplier.

We had no other off-balance sheet arrangements as of September 28, 2012.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements. We periodically evaluate our material estimates and judgments based on the terms of underlying agreements, the expected course of development, historical experience and other factors that we believe are reasonable under the circumstances. However, actual future results may vary from our estimates.

We believe that the accounting policies discussed under Part I, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended June 29, 2012 are significantly affected by critical accounting estimates and that they are both highly important to the portrayal of our financial condition and results and require difficult management judgments and assumptions about matters that are inherently uncertain. Certain of these significant accounting policies are considered to be critical accounting policies.

Our critical accounting policies and estimates are as follows:

• Revenue recognition;

• Share-based compensation;

• Restructuring reserve;

• Inventory valuation;

• Impairment of intangibles and long-lived assets;

• Warranty reserve;

• Retirement benefit obligations; and

• Accounting for income taxes.

There have been no significant changes in the Company's significant accounting policies for the three months ended September 28, 2012 as compared to those discussed under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended June 29, 2012.

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Recent Accounting Pronouncements

See Note 3 to our unaudited condensed consolidated financial statements in this Form 10-Q for a description of recent accounting pronouncements, including our expected adoption dates and estimated effects on our results of operations, financial condition, and cash flows.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk for investments associated with interest rate movements, liquidity risks, credit risks, and foreign exchange market risk associated with currency rate movements on non-U.S. Dollar denominated assets and liabilities. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.

Investment Risk

The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash, cash equivalents, and investments in high credit quality, readily liquid securities, primarily U.S. treasuries and money market funds. Our portfolio of investments has original maturities of less than three months from date of purchase.

There has been significant deterioration and instability in the financial markets since 2008. The extraordinary disruption and readjustment in the financial markets exposes us to additional investment risk. The value and liquidity of the securities in which we invest could deteriorate rapidly and the issuers of such securities could be subject to credit rating downgrades. In light of the current market conditions and these additional risks, we actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we generally invest in highly-rated securities with relatively short maturities and do not invest in securities we believe involve a higher degree of risk. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated as there are circumstances outside of our control. We currently believe that the current credit market difficulties do not have a material impact on our investment portfolio. However, future degradation in credit market conditions could have a material adverse affect on our financial position.

Interest Rate Risk

Our exposure to market risks for changes in interest rates relates primarily to our investment portfolio and our credit facility. We currently do not hedge our interest rate exposure.

As of September 28, 2012, we did not hold any cash equivalents and we have $107.2 million cash on hand. We believe that the exposure of our principal to interest rate risk is minimal, although our future interest income is subject to reinvestment risk. We believe that the current risk of loss in fair value resulting from interest rate changes is minimal. At September 28, 2012, we had no interest rate forward contracts or option contracts.

The interest expense on outstanding cash borrowings under our credit facility is based on variable interest rates and is therefore affected by changes in market interest rates. If interest rates rise significantly, our results from operations and cash flows may be materially affected. As of September 28, 2012, we had $10.3 million of outstanding borrowings under our credit facility, of which $0.4 million was accrued interest. A 1% increase or decrease in interest rate, with all other variables held constant, would have resulted in a $0.1 million impact in interest expense annually.

Foreign Exchange Risk

As of September 28, 2012, foreign currency cash accounts totaled $37.2 million, primarily in Japanese Yen, Euros, and British Pounds.

Foreign currency risks are associated with our cash and cash equivalents, investments, receivables, and payables denominated in foreign currencies. Fluctuations in exchange rates will result in foreign exchange gains and losses on these foreign currency assets and liabilities, which are included in other income, net in our condensed consolidated statements of operations. Our exposure to foreign currency exchange rate risk relates to sales commitments, anticipated sales, purchases and other expenses, and assets and liabilities denominated in foreign currencies. For most currencies, we are a net receiver of the foreign currency and are adversely affected by a stronger U.S. Dollar relative to the foreign currency. At September 28, 2012, we had no foreign currency forward contracts or option contracts. We have implemented a hedging strategy that is intended to mitigate our currency exposures by entering into foreign currency forward contracts that have maturities generally of one month or more. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated balance sheet accounts or cash flows.

We assessed the risk of loss in fair values from the impact of hypothetical changes in foreign currency exchange rates. For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $3.7 million change in the value of our foreign currency cash accounts.

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ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial officer), we have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The evaluation considered the procedures designed to ensure that the information required to be disclosed in reports we file under the Exchange Act, is recorded, processed, summarized and reported within the appropriate time periods and that information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 28, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarter ended September 28, 2012, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

We are involved in various legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, and other matters. We do not know whether we will prevail in these matters nor can we assure that any remedy could be reached on commercially viable terms, if at all. Based on currently available information, we believe that we have meritorious defenses to these actions and that the resolution of these cases is not likely to have a material adverse effect on our business, financial position or future results of operations. We record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.

On May 1, 2007, Silicon Graphics, Inc., the predecessor company that we acquired in May 2009 ("Legacy SGI") received a legal notice from counsel to Bharat Heavy Electricals Ltd. (“BHEL”), located in India, alleging delay in and failure to deliver products and technical problems with its hardware and software in relation to the establishment of a facility in Hyderabad. We assumed this claim in connection with our acquisition of Legacy SGI assets, and are currently engaged in arbitration. On January 21, 2008, BHEL filed its statement of claim against Silicon Graphics Systems (India) Pvt. Ltd. for a sum of Indian Rupee (“INR”) 78,478,200 ($1.5 million based on the conversion rate on September 28, 2012) plus interest and costs. On February 29, 2008, we filed our reply as well as a counter claim for a sum of INR 27,453,007 ($0.5 million based on the conversion rate on September 28, 2012) plus interest and costs. The proceeding has commenced, witness testimony is now complete and the parties have been instructed to submit final arguments by the next scheduled hearing date (to be determined by the arbitrator). We cannot currently predict the outcome of this dispute nor determine the amount or a reasonable range of potential loss, if any.

ITEM 1A. Risk Factors

The risk factors presented below update the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 29, 2012 (the “Annual Report”). The following factors, along with those in the Annual Report and those described above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be reviewed carefully, in conjunction with the other information contained in this Form 10-Q and our financial statements. These factors, among others, could cause actual results to differ materially from those currently anticipated and contained in forward-looking statements made in this Form 10-Q and presented elsewhere by our management from time to time. See the discussion of forward-looking statements in "Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

If our U.S. government-related sales decrease, or our ability to do business with the U.S. government or entities funded by the U.S. government is disrupted or limited, our operating performance could be adversely affected.

We generally derive a significant portion of our revenue from U.S. government entities, research institutions funded by the U.S. government and third parties that sell directly to the U.S. government through our subsidiary, Silicon Graphics Federal, Inc. For the three months ended September 28, 2012, such sales represented approximately 14.3% of our total revenue. These sales present risks in addition to those involved in sales to commercial customers, including potential disruptions and delays due to changes in appropriation and spending priorities by the U.S. government. In addition, the U.S. government can terminate or modify its contracts with us at any time for its convenience. A significant reduction in such sales could adversely affect our operating performance.

Our U.S. government business is also subject to specific procurement regulations and a variety of other requirements applicable to companies doing business with the U.S government. Sales to the defense sector require us to comply with additional defense-specific regulations, including maintaining a compliant security program, obtaining security clearances for employees, and passing various inspections. Failure to comply with applicable regulations and requirements could lead to our suspension or debarment from U.S. government contracting or subcontracting for a period of time as well as fines against the Company.

Any disruption or limitation in our ability to do business with the U.S. government or entities funded by the U.S. government could materially adversely affect our revenue and operating results.

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A concentrated number of customers that purchase our products in large quantities have historically accounted for a significant portion of our revenues. If we are unable to maintain or replace our relationships with such customers and/or diversify our customer base, our revenue may fluctuate or decline and our growth may be limited.

Historically, a significant portion of our revenue has come from a limited number of customers. There can be no guarantee that we will be able to sustain our revenue levels from these customers. For the three months ended September 28, 2012, our top five customers worldwide accounted for approximately 49.9% of our total revenues, with one customer in the Americas segment accounting for 18.0% and the U.S. government accounting for 14.3%.

This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or reduction of business from one or a combination of our significant customers, for example as a result of a customer's capital expenditure budget reductions or U.S. government spending reductions, could materially adversely affect our revenues, financial condition and results of operations.

The global nature of our operations exposes us to increased risks and compliance obligations, which may adversely affect our business.

During the three months ended September 28, 2012, we derived approximately 38.4% of our revenue from sales outside of the United States. Our international business operations require us to recruit and retain qualified technical and managerial employees, manage multiple, remote locations and ensure intellectual property protection outside of the United States. Our international operations subject us to increased risks, including:

• supporting multiple languages;

• recruiting sales and technical support personnel internationally with the skills to design, manufacture, sell and support our products;

• complying with governmental regulations, including obtaining required import or export approval for our products;

• increased complexity and costs of managing international operations;

• increased exposure to foreign currency exchange rate fluctuations;

• commercial laws and business practices that favor local competition;

• longer sales cycles and manufacturing lead times;

• financial risks such as longer payment cycles and difficulties in collecting accounts receivable;

• difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;

• ineffective legal protection of intellectual property rights;

• more complicated logistics and distribution arrangements;

• additional taxes and penalties;

• inadequate local infrastructure that could result in business disruptions;

• political and economic instability, including the current credit crisis in Europe; and

• other factors beyond our control such as natural disasters, terrorism, civil unrest, war and infectious diseases.

If any of the foreign economies in which we do business deteriorate or if we fail to effectively manage our global operations, our business and results of operations would be harmed.

In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. If we or our employees, contractors or agents violate these laws and regulations, we could be subject to fines, penalties or criminal sanctions, and may be prohibited from conducting business in one or more countries. Any violation individually or in the aggregate could have a material adverse effect on our operations and financial condition.

We may experience foreign currency gains and losses.

We conduct a significant number of transactions in currencies other than the U.S. Dollar. Changes in the value of major foreign currencies, particularly the Euro, Japanese Yen, British Pound and the Canadian Dollar relative to the U.S. Dollar, can significantly affect revenues and our operating results. Our revenues and operating results are adversely affected when the U.S. Dollar strengthens relative to other currencies and are positively affected when the U.S. Dollar weakens. Our revenues and operating results in the three months ended September 28, 2012 have been unfavorably affected by the recent strengthening of the U.S. Dollar relative to other major foreign currencies. Although we have recently initiated foreign currency hedging transactions, we may be unable to hedge all of our foreign currency risk, which could have a negative impact on our results of operations. For the three months ended September 28, 2012, our combined revenue from our EMEA and APJ segments was $69.5 million. As of September 28, 2012, the balance in our foreign currency cash accounts was $37.2 million. As of September 28, 2012, we had no foreign currency forward contracts or option contracts. As a result, an increase in the value of the U.S. Dollar relative to foreign currencies could make our products more expensive and, thus, not competitively priced in

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foreign markets. On the other hand, a decrease in the value of the U.S. Dollar relative to foreign currencies could increase our operating costs in foreign locations. In the future, a larger portion of our international revenue may be denominated in foreign currencies, which will subject us to additional risks associated with fluctuations in those foreign currencies. In addition, we may be unable to successfully hedge against any such fluctuations.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

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EXHIBIT INDEX

Exhibit Number	Exhibit Description	Incorporated by Reference			Filing Date	Filed Herewith
		Form	Ex. No.	File No.
3.1	Amended and Restated Certificate of Incorporation	10-Q	3.1	000-51333	8/12/2005
3.2	Amended and Restated Bylaws	8-K	3.2	000-51333	3/7/2008
3.3	Certificate of Ownership and Merger	8-K	3.3	000-51333	5/21/2009
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2	Form of Specimen Stock Certificate	8-K	4.2	000-51333	5/21/2009
31.1	Certification of Principal Executive Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a).					X
31.2	Certification of Principal Financial Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a).					X
32.1	Certifications of Principal Executive Officer and Principal Financial Officer furnished pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)					X
101.INS**	XBRL Instance Document					X
101.SCH**	XBRL Taxonomy Extension Schema Document					X
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document					X

** XBRL (eXtensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

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

SILICON GRAPHICS INTERNATIONAL CORP.
By:	/s/    ROBERT J. NIKL
	Robert J. Nikl Chief Financial Officer (Principal Financial Officer)

Dated: November 7, 2012