INDUSTRY

SGI has announced financial results for the third quarter of its fiscal 2007, ended March 30, 2007. On a GAAP basis, revenue for the quarter was $111 million and operating loss was $20 million. GAAP gross margin was 33.0% and operating expenses were $57 million. As previously noted and more fully described below, GAAP financial results for the quarter are significantly impacted by non-cash adjustments dictated by the fresh start accounting treatment required as a result of the company's emergence from Chapter 11 bankruptcy protection in October 2006, as well as other accounting changes. The company uses certain pro forma financial measures that are not calculated in accordance with GAAP, or non-GAAP financial measures. Management believes that these non-GAAP financial measures are useful to investors because they facilitate period to period comparisons of SGI's performance and because they help investors view the company's results of operations through the eyes of management and the company's lenders. SGI's credit line covenants and management reporting and incentive plans are measured against certain of these non-GAAP financial measures. Pro forma revenue was $130 million in the third quarter of fiscal 2007, compared with $134 million in the second quarter of fiscal 2007. Pro forma revenue excludes the impact of fresh start accounting and the deferral of the company's recognition of revenues for certain of the company's transactions where software is more than incidental to the overall solution. Pro forma gross margin for the third quarter adjusted for similar items was 43.6% compared with 38.1% in the prior quarter. Excluding restructuring, bankruptcy-related expenses, stock-based compensation expense and amortization of intangibles, pro forma operating expenses were $53 million in both the third quarter and the prior quarter. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the third quarter, as defined in the company's debt agreements, was $10 million, compared with $4 million for the second quarter of fiscal 2007. As of March 30, 2007, SGI had backlog of $109 million, compared with backlog of $139 million at December 29, 2006. Backlog is comprised of product and professional services expected to be delivered within the next nine months, which have not yet been reflected in revenue. Backlog does not include customer support maintenance contracts. SGI ended the third quarter with $70 million in total unrestricted cash, compared with $75 million at the end of the second quarter of fiscal 2007. The company utilized approximately $6 million of cash during the quarter for the settlement of bankruptcy-related obligations. Availability under the company's revolving line of credit was $30 million as of March 30, 2007 and no borrowings were made under the line during the quarter. "Our third quarter results demonstrate continued progress," said Robert (Bo) H. Ewald, SGI's Chief Executive Officer, who joined the company on April 9. "We're pleased with the financial results and the strong support from our customers and employees. We will be focusing more on increasing order volume and improving our traction in the market. Our execution on product and market plans to drive sustainable long-term revenue growth for the company is as critical as near-term performance." "While we are reaching stability, our business is still in the transition phase," said Kathy Lanterman, SGI's Chief Financial Officer. "Over the next year we will be focused on building an operating model for the company that will lead us to revenue growth and that will continue to be cash flow positive." As a policy, the company does not provide specific forward-looking guidance. A reconciliation of the non-GAAP financial measures used to the company's GAAP results of operations, including an illustration of the impact of the company's fresh start accounting and the impact of the implementation of Statement of Accounting Position 97-2, "Software Revenue Recognition" (SOP 97-2) is available at its Web site.