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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended: September 30, 2010

Or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from:  to

Commission File Number: 000-26820





CRAY INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Washington                                                     |  | 93-0962605                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|901 Fifth Avenue, Suite 1000 Seattle, Washington               |  | 98164                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

Registrants Telephone Number, Including Area Code:

(206) 701-2000





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

Indicate by check mark 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | 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   ̈     No  x

As of November 3, 2010, there were 36,005,429 shares of Common Stock issued and outstanding.









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##### Table of Contents



CRAY INC.

TABLE OF CONTENTS



|                                                                                                                             |  |          |    | 
|---------------------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                                                                                                                             |  | Page No. |   
|                                                                                                                             | 
|PART I. FINANCIAL INFORMATION                                                                                                |  |          | 3  | 
|                                                                                                                             | 
|Item 1. Condensed Consolidated Financial Statements:                                                                         |  |          | 3  | 
|                                                                                                                             | 
|Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31,
2009                             |  |          | 3  | 
|                                                                                                                             | 
|Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 
30, 2010 and 2009 (unaudited) |  |          | 4  | 
|                                                                                                                             | 
|Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 
30, 2010 and 2009 (unaudited)           |  |          | 5  | 
|                                                                                                                             | 
|Notes to Condensed Consolidated Financial Statements (unaudited)                                                             |  |          | 6  | 
|                                                                                                                             | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                                |  |          | 16 | 
|                                                                                                                             | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                           |  |          | 29 | 
|                                                                                                                             | 
|Item 4. Controls and Procedures                                                                                              |  |          | 29 | 
|                                                                                                                             | 
|PART II. OTHER INFORMATION                                                                                                   |  |          | 30 | 
|                                                                                                                             | 
|Item 1A. Risk Factors                                                                                                        |  |          | 30 | 
|                                                                                                                             | 
|Item 6. Exhibits                                                                                                             |  |          | 40 | 
|                                                                                                                             | 
|SIGNATURES                                                                                                                   |  |          | 41 | 

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to
those reports and proxy statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge at our website at www.cray.com as soon as reasonably practicable after we electronically file
such reports with the SEC.



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

CRAY INC. AND SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                             |  | September 30,2010 |          |   | December 31,2009 |  
|                                                                                                                                                                             |  | (unaudited)       |          |   |                  |  
|ASSETS                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                    |  | $                 | 68,207   |   |                  | $ | 105,018  |  
|Restricted cash                                                                                                                                                              |  |                   | 5,324    |   |                  |   | 5,161    |  
|Short-term investments, available-for-sale                                                                                                                                   |  |                   |         |   |                  |   | 2,999    |  
|Accounts and other receivables, net                                                                                                                                          |  |                   | 31,442   |   |                  |   | 38,207   |  
|Inventory                                                                                                                                                                    |  |                   | 149,346  |   |                  |   | 29,011   |  
|Prepaid expenses and other current assets                                                                                                                                    |  |                   | 11,165   |   |                  |   | 5,514    |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                         |  |                   | 265,484  |   |                  |   | 185,910  |  
|                                                                                                                                                                             |  |                  
|Property and equipment, net                                                                                                                                                  |  |                   | 19,207   |   |                  |   | 19,809   |  
|Service inventory, net                                                                                                                                                       |  |                   | 1,707    |   |                  |   | 1,719    |  
|Deferred tax assets                                                                                                                                                          |  |                   | 3,069    |   |                  |   | 2,661    |  
|Other non-current assets                                                                                                                                                     |  |                   | 12,923   |   |                  |   | 13,561   |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                                                                                 |  | $                 | 302,390  |   |                  | $ | 223,660  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                             |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                             |  | $                 | 41,821   |   |                  | $ | 18,783   |  
|Accrued payroll and related expenses                                                                                                                                         |  |                   | 11,851   |   |                  |   | 16,219   |  
|Other accrued liabilities                                                                                                                                                    |  |                   | 7,383    |   |                  |   | 9,735    |  
|Deferred revenue                                                                                                                                                             |  |                   | 134,723  |   |                  |   | 42,414   |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                    |  |                   | 195,778  |   |                  |   | 87,151   |  
|                                                                                                                                                                             |  |                  
|Long-term deferred revenue                                                                                                                                                   |  |                   | 10,495   |   |                  |   | 9,627    |  
|Other non-current liabilities                                                                                                                                                |  |                   | 2,700    |   |                  |   | 2,719    |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|TOTAL LIABILITIES                                                                                                                                                            |  |                   | 208,973  |   |                  |   | 99,497   |  
|                                                                                                                                                                             |  |                  
|Commitments and contingencies (Note 12)                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|Preferred stock  Authorized and undesignated, 5,000,000 shares; no shares issued or outstanding                                                                             |  |                   |         |   |                  |   |         |  
|Common stock and additional paid-in capital, par value $.01 per share  Authorized, 75,000,000 shares; issued and
outstanding 35,950,242 and 35,181,407 shares, respectively |  |                   | 557,077  |   |                  |   | 551,220  |  
|Accumulated other comprehensive income                                                                                                                                       |  |                   | 6,556    |   |                  |   | 6,148    |  
|Accumulated deficit                                                                                                                                                          |  |                   | (470,216 | ) |                  |   | (433,205 | )
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                   |  |                   | 93,417   |   |                  |   | 124,163  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                             |  |                  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                   |  | $                 | 302,390  |   |                  | $ | 223,660  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  

See accompanying notes



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CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in
thousands, except per share data)



|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                            |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                            |  | 2010                            |         |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Revenue:                                    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Product                                     |  | $                               | 23,462  |   |                                | $ | 32,374 |      |  | $ | 41,780  |   |  | $ | 133,937 |  
|Service                                     |  |                                 | 19,374  |   |                                |   | 26,201 |      |  |   | 58,177  |   |  |   | 61,863  |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenue                               |  |                                 | 42,836  |   |                                |   | 58,575 |      |  |   | 99,957  |   |  |   | 195,800 |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                            |  |                                 |         |  
|Cost of revenue:                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Cost of product revenue                     |  |                                 | 18,355  |   |                                |   | 24,784 |      |  |   | 30,948  |   |  |   | 93,381  |  
|Cost of service revenue                     |  |                                 | 13,741  |   |                                |   | 10,867 |      |  |   | 40,317  |   |  |   | 33,095  |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total cost of revenue                       |  |                                 | 32,096  |   |                                |   | 35,651 |      |  |   | 71,265  |   |  |   | 126,476 |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                |  |                                 | 10,740  |   |                                |   | 22,924 |      |  |   | 28,692  |   |  |   | 69,324  |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                            |  |                                 |         |  
|Operating expenses:                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development, net               |  |                                 | 18,563  |   |                                |   | 17,321 |      |  |   | 33,301  |   |  |   | 42,246  |  
|Sales and marketing                         |  |                                 | 6,512   |   |                                |   | 6,279  |      |  |   | 19,348  |   |  |   | 18,683  |  
|General and administrative                  |  |                                 | 4,166   |   |                                |   | 3,476  |      |  |   | 12,471  |   |  |   | 11,523  |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                    |  |                                 | 29,241  |   |                                |   | 27,076 |      |  |   | 65,120  |   |  |   | 72,452  |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                        |  |                                 | (18,501 | ) |                                |   | (4,152 | )    |  |   | (36,428 | ) |  |   | (3,128  | )
|                                            |  |                                 |         |  
|Other (expense) income, net                 |  |                                 | (149    | ) |                                |   | 916    |      |  |   | (200    | ) |  |   | (575    | )
|Interest income (expense), net              |  |                                 | 61      |   |                                |   | 35     |      |  |   | 100     |   |  |   | (849    | )
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes                    |  |                                 | (18,589 | ) |                                |   | (3,201 | )    |  |   | (36,528 | ) |  |   | (4,552  | )
|Income tax benefit (expense)                |  |                                 | (187    | ) |                                |   | 1,094  |      |  |   | (483    | ) |  |   | 977     |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net Loss                                    |  | $                               | (18,776 | ) |                                | $ | (2,107 | )    |  | $ | (37,011 | ) |  | $ | (3,575  | )
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                            |  |                                 |         |  
|Basic and diluted net loss per common share |  | $                               | (0.55   | ) |                                | $ | (0.06  | )    |  | $ | (1.08   | ) |  | $ | (0.11   | )
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                            |  |                                 |         |  
|Basic weighted average shares outstanding   |  |                                 | 34,435  |   |                                |   | 33,689 |      |  |   | 34,213  |   |  |   | 33,491  |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted weighted average shares outstanding |  |                                 | 34,435  |   |                                |   | 33,689 |      |  |   | 34,213  |   |  |   | 33,491  |  
|                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes



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CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in
thousands)



|                                                                                          |  |                                |          |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |         
|                                                                                          |  | 2010                           |          |   | 2009 |  
|Operating activities:                                                                     |  |                                |          |   |      |   |         |  
|Net loss                                                                                  |  | $                              | (37,011  | ) |      | $ | (3,575  | )
|                                                                                          |  |                               
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                |          |   |      |   |         |  
|Depreciation and amortization                                                             |  |                                | 6,805    |   |      |   | 6,314   |  
|Loss on disposal of fixed assets                                                          |  |                                | 397      |   |      |   |        |  
|Share-based compensation expense                                                          |  |                                | 3,619    |   |      |   | 4,581   |  
|Inventory write-down                                                                      |  |                                | 833      |   |      |   | 5,481   |  
|Amortization of debt issuance costs                                                       |  |                                |         |   |      |   | 79      |  
|Loss on repurchase of Notes                                                               |  |                                |         |   |      |   | 910     |  
|Amortization of Notes debt discount                                                       |  |                                |         |   |      |   | 832     |  
|Deferred income taxes                                                                     |  |                                | (408     | ) |      |   | (2,693  | )
|Cash provided (used) due to changes in operating assets and liabilities:                  |  |                                |          |   |      |   |         |  
|Accounts and other receivables                                                            |  |                                | 6,792    |   |      |   | 51,413  |  
|Inventory                                                                                 |  |                                | (124,808 | ) |      |   | 21,675  |  
|Prepaid expenses and other assets                                                         |  |                                | (5,185   | ) |      |   | 12,459  |  
|Accounts payable                                                                          |  |                                | 23,145   |   |      |   | 5,766   |  
|Accrued payroll and related expenses and other accrued liabilities                        |  |                                | (2,634   | ) |      |   | (41,717 | )
|Other non-current liabilities                                                             |  |                                | (2,633   | ) |      |   | 207     |  
|Deferred revenue                                                                          |  |                                | 93,610   |   |      |   | (42,541 | )
|                                                                                          |  |                                |          |   |      |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                                | (37,478  | ) |      |   | 19,191  |  
|                                                                                          |  |                               
|Investing activities:                                                                     |  |                                |          |   |      |   |         |  
|Sales/maturities of short-term investments                                                |  |                                | 3,000    |   |      |   | 7,850   |  
|Purchases of short-term investments                                                       |  |                                |         |   |      |   | (5,481  | )
|Increase in restricted cash                                                               |  |                                | (122     | ) |      |   | (809    | )
|Purchases of property and equipment                                                       |  |                                | (2,697   | ) |      |   | (5,217  | )
|                                                                                          |  |                                |          |   |      |   |         |  
|Net cash provided by (used in) investing activities                                       |  |                                | 181      |   |      |   | (3,657  | )
|                                                                                          |  |                               
|Financing activities:                                                                     |  |                                |          |   |      |   |         |  
|Repurchase of Notes                                                                       |  |                                |         |   |      |   | (27,150 | )
|Proceeds from issuance of common stock through employee stock purchase plan               |  |                                | 399      |   |      |   | 391     |  
|Proceeds from exercises of stock options                                                  |  |                                | 116      |   |      |   | 254     |  
|2009 stock option repurchase tender offer, purchase of options                            |  |                                |         |   |      |   | (669    | )
|                                                                                          |  |                                |          |   |      |   |         |  
|Net cash provided by (used in) financing activities                                       |  |                                | 515      |   |      |   | (27,174 | )
|                                                                                          |  |                               
|Effect of foreign exchange rate changes on cash and cash equivalents                      |  |                                | (29      | ) |      |   | 601     |  
|                                                                                          |  |                                |          |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                 |  |                                | (36,811  | ) |      |   | (11,039 | )
|                                                                                          |  |                               
|Cash and cash equivalents:                                                                |  |                                |          |   |      |   |         |  
|Beginning of period                                                                       |  |                                | 105,018  |   |      |   | 72,373  |  
|                                                                                          |  |                                |          |   |      |   |         |  
|End of period                                                                             |  | $                              | 68,207   |   |      | $ | 61,334  |  
|                                                                                          |  |                                |          |   |      |   |         |  
|                                                                                          |  |                               
|Supplemental disclosure of cash flow information:                                         |  |                                |          |   |      |   |         |  
|Cash paid for interest                                                                    |  | $                              | 3        |   |      | $ | 395     |  
|Cash paid for income taxes                                                                |  | $                              | 1,441    |   |      | $ | 1,334   |  
|                                                                                          |  |                               
|Non-cash investing and financing activities:                                              |  |                                |          |   |      |   |         |  
|Inventory transfers to fixed assets and service inventory                                 |  | $                              | 3,640    |   |      | $ | 1,585   |  
|Value of shares issued for 401(k) match                                                   |  | $                              | 1,722    |   |      | $ | 1,537   |  

See accompanying notes



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1  Basis of Presentation

In these notes, Cray Inc. and its wholly-owned subsidiaries are collectively referred to as the Company. In the opinion of management, the accompanying Condensed Consolidated Balance Sheets
and Condensed Consolidated Statements of Operations and Statements of Cash Flows have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Management believes that all adjustments (consisting of normal
recurring adjustments) considered necessary for fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 (the 2009 Form 10-K).

The Companys revenue, results of operations
and cash balances are likely to fluctuate significantly from quarter-to-quarter. These fluctuations are due to such factors as the high average sales prices and limited number of sales of the Companys products, the timing of purchase orders
and product deliveries, the revenue recognition accounting policy of generally not recognizing product revenue until customer acceptance and other contractual provisions have been fulfilled and the timing of payments for product sales, maintenance
services, government research and development funding and purchases of inventory. Given the nature of the Companys business, its revenue, receivables and other related accounts are likely to be concentrated among a few customers.

During the nine months ended September 30, 2010, the Company incurred a net loss of $37 million and used $37.5
million of cash in operating activities. The Company had $69.7 million of working capital as of September 30, 2010. Managements plans project that the Companys current cash resources and cash to be generated from operations will be
adequate to meet the Companys liquidity needs for at least the next twelve months. These plans assume acceptance and subsequent collections from several large customers, as well as cash receipts on future sales opportunities not yet
contracted.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Cray Inc. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and
accompanying notes. These estimates are based on managements best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value or selling price
determinations used in revenue recognition, percentage of completion accounting, estimates of proportional performance on co-funded engineering contracts and prepaid engineering services, realization of accounts receivable, valuation of inventory,
useful lives for depreciation and amortization, determination of future cash flows associated with impairment testing for long-lived assets, determination of the fair value of stock options and assessments of fair value, realization of deferred
income tax assets, potential income tax assessments and other contingencies. The Company bases its estimates on historical experience, current conditions and on other assumptions that it believes to be reasonable under the circumstances. Actual
results could differ materially from those estimates.



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue
realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until the products have been
shipped or services provided to the customer, risk of loss has transferred to the client, and a customer acceptance has been obtained. The sales price is not considered to be fixed or determinable until all material contingencies related to the
sales have been resolved. The Company records revenue in the Condensed Consolidated Statements of Operations net of any sales, use, value added or certain excise taxes imposed by governmental authorities on specific sales transactions. In addition
to the aforementioned general policy, the following are the Companys statements of policy with regard to multiple-element arrangements and specific revenue recognition policies for each major category of revenue.

Multiple-Element Arrangements.The Company commonly enters into revenue arrangements that include multiple
deliverables of its product and service offerings due to the needs of its customers. Product may be delivered in phases over time periods which can be as long as five years. Maintenance services generally begin upon acceptance of the first equipment
delivery and future deliveries of equipment generally have an associated maintenance period. The Company considers the maintenance period to commence upon acceptance of the product, which may include a warranty period and accordingly allocates a
portion of the arrangement consideration as a separate deliverable which is recognized as service revenue over the entire service period. Other services such as training and engineering services can be delivered as a discrete delivery or over the
term of the contract. A multiple-element arrangement is separated into more than one unit of accounting if the following criteria are met:



| |  |  | The delivered item(s) has value to the customer on a standalone basis; and
| | - |  | --------------------------------------------------------------------------



| |  |  | If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s)
is considered probable and substantially in the control of the Company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If these criteria
are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered
element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each
units relative estimated selling price.

The Company follows a selling price hierarchy in determining
the best estimate of the selling price of each deliverable. Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to determine vendor specific objective evidence (VSOE). The
Company determines VSOE based on normal pricing and discounting practices for the product or service when sold separately.

When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company attempts to establish the selling price of each remaining element based on
third-party evidence (TPE). The Companys inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract terms which can be due to infrequently selling each
element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. TPE is determined based on our prices or competitor prices for similar
deliverables when sold separately. On certain transactions the Company is able to obtain competitor prices for comparable bundled arrangements. However, generally, the Companys offerings contain a significant level of customization and
differentiation from those of competitors such that the comparable pricing of products with similar functionality cannot be obtained. The Company is also often unable to reliably determine what similar competitor products selling prices are on
a standalone basis as important details of competitive bids are not available. Therefore, the Company is typically not able to determine TPE.



7



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price
(ESP) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. In determining ESP, the Company
uses either the list price of the deliverable less a discount or the cost to provide the product or service plus a margin. When using list price less a discount the Company uses discounts from list price for previous transactions. This approach
incorporates several factors, including the size of the transaction and any changes to list prices. The data is collected from prior sales, and although the data may not have the sample size or consistency to establish VSOE, it is sufficiently
objective to estimate the selling price. When using cost plus a margin the Company considers the total cost of the product or service, including customer-specific and geographic factors. The Company also considers the historical margins of the
product or service on previous contracts and several factors including any changes to pricing methodologies, competitiveness of products and services and cost drivers that would cause future margins to differ from historical margins

Product.The Company recognizes revenue from sales of products, other than the Cray CX systems, upon customer
acceptance of the system, when the price is fixed or determinable, collection is reasonably assured and no significant unfulfilled obligations exist. Revenue from sales of Cray CX systems is generally recognized upon shipment when title and risk of
loss transfers to the customer and collection is reasonably assured.

Service.Maintenance services are
provided under separate maintenance contracts with customers. These contracts generally provide for maintenance services for one year, although some are for multi-year periods, often with prepayments for the term of the contract. The Company
considers the maintenance period to commence upon acceptance of the product, which may include a warranty period. When service is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to maintenance
service revenue based on estimates of selling price. Maintenance revenue is recognized ratably over the term of the maintenance contract. Maintenance contracts that are paid in advance are recorded as deferred revenue.

Revenue from engineering services is recognized as services are performed.

Project.Revenue from design and build contracts is recognized under the percentage-of-completion
(POC) method. Under the POC method, revenue is recognized based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original estimates of revenues,
costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in income in the period in which the
circumstances that gave rise to the revision become known by management. The Company performs ongoing profitability analyses of its contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and
extent of progress require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.

The Company records revenue from research and development contracts which include milestones using the milestone method
if the milestones are determined to be substantive. A milestone is considered to be substantive if management believes there is substantive uncertainty that it will be achieved and the milestone consideration meets all of the following criteria:



| |  |  | It is commensurate with either of the following:
| | - |  | ------------------------------------------------



| |  |  | The Companys performance to achieve the milestone; or
| | - |  | ------------------------------------------------------



| |  |  | The enhancement of value of the delivered item or items as a result of a specific outcome resulting from the Companys performance to achieve
the milestone.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | It relates solely to past performance.
| | - |  | --------------------------------------



| |  |  | It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

The individual milestones are determined to be substantive or nonsubstantive in their
entirety and milestone consideration is not bifurcated.

Revenue from projects is classified as Product
Revenue or Service Revenue, based on the nature of the work performed.



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Note 2  New Accounting
Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements. The guidance in ASU 2009-13 provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. The
amendments establish a selling price hierarchy for determining the selling price of a deliverable, which replaces fair value in the revenue allocation guidance, as the allocation of revenue can now be based on entity-specific assumptions in addition
to assumptions derived as a marketplace participant. The amendments in ASU 2009-13 are effective for revenue transactions entered into during fiscal years beginning on or after June 15, 2010. The Company adopted this guidance effective
January 1, 2010 and has elected to apply it retrospectively. The adoption of this guidance and its retrospective application did not have a material impact on the Companys financial results. No changes to previously reported amounts in
the historical financial statements were required as a result of retrospective application.

In October 2009,
the FASB issued ASU No. 2009-14, Certain Revenue Arrangements that Include Software Elements. The guidance in ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements.
Tangible products containing software components and non-software components that function together to deliver the tangible products essential functionality are excluded from the guidance applicable to software revenue recognition. The
amendments in ASU 2009-14 are effective for revenue transactions entered into during fiscal years beginning on or after June 15, 2010. The Company adopted this guidance effective January 1, 2010 and has elected to apply it retrospectively.
The adoption of this guidance and its retrospective application did not have a material impact on the Companys financial results. No changes to previously reported amounts in the historical financial statements were required as a result of
retrospective application.

In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition 
Milestone Method (Topic 605): Milestone Method of Revenue Recognition. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or
development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to be substantive by meeting
specific criteria. The amendments in ASU 2010-17 are effective for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. In accordance with the guidance, the Company elected to early
adopt its provisions as of January 1, 2010. The adoption of this guidance did not have a material impact on the Companys financial results nor would it have had a material impact had the guidance been adopted on January 1, 2009.

Note 3  Fair Value Measurement

Under FASB ASC Topic 820, Fair Value Measurements and Disclosures, based on the observability of the inputs used in the valuation techniques used to determine the fair value of certain financial
assets and liabilities, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.



9



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





In
general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair
values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The following table presents information about the
Companys financial assets and liabilities that have been measured at fair value as of September 30, 2010, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):



|                                                         |  |                                |        |   |                                       |   |        |                                           |  |   |        |  
|-------------------------------------------------------- |  | ------------------------------ | ------ | - | ------------------------------------- | - | ------ | ----------------------------------------- |  | - | ------ | -
|Description                                              |  | Fair Value
atSeptember 30,2010 |        |   | QuotedPrices inActiveMarkets(Level 1) |   |        | SignificantOtherObservableInputs(Level 2) | 
|Assets:                                                  |  |                                |        |   |                                       |   |        |                                           |  |   |        |  
|Cash, cash equivalents and restricted cash               |  | $                              | 73,531 |   |                                       | $ | 73,531 |                                           |  | $ |       |  
|Foreign exchange forward contracts                       |  |                                |       |   |                                       |   |       |                                           |  |   |       |  
|                                                         |  |                                |        |   |                                       |   |        |                                           |  |   |        |  
|Assets measured at fair value at September 30, 2010      |  | $                              | 73,531 |   |                                       | $ | 73,531 |                                           |  | $ |       |  
|                                                         |  |                                |        |   |                                       |   |        |                                           |  |   |        |  
|Liabilities:                                             |  |                                |        |   |                                       |   |        |                                           |  |   |        |  
|Foreign exchange forward contracts (1)                   |  | $                              | (2,152 | ) |                                       | $ |        |                                           |  | $ | (2,152 | )
|                                                         |  |                                |        |   |                                       |   |        |                                           |  |   |        |  
|Liabilities measured at fair value at September 30, 2010 |  | $                              | (2,152 | ) |                                       | $ |       |                                           |  | $ | (2,152 | )
|                                                         |  |                                |        |   |                                       |   |        |                                           |  |   |        |  



|(1) | Included in Other accrued liabilities on the Companys Condensed Consolidated Balance Sheets.
|--- | -----------------------------------------------------------------------------------------------

Foreign Currency Derivatives

The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales transactions that are payable in foreign currencies.

As of September 30, 2010, the Company had outstanding forward contracts which were designated as cash flow hedges of
anticipated future cash receipts on sales contracts payable in foreign currencies. The outstanding notional amounts were approximately 17.6 million British pound sterling and 53.3 million Swedish krona and hedged foreign currency exposure
of approximately $32.9 million. Cash receipts associated with the hedged contracts are expected to be received in 2010 and 2011, during which time the revenue on the associated sales contracts are expected to be recognized.

As of December 31, 2009, the Company had outstanding forward contracts designated as cash flow hedges with notional
amounts of approximately 9.8 million British pound sterling, 1.4 million euro and 2.4 million Swiss franc. These contracts hedged foreign currency exposure of $18.5 million. The euro and Swiss franc hedges were settled during the
three months ended March 31, 2010 when payment was received; however, revenue on the associated transactions was recognized in 2009.

Fair Values of Derivative Instruments (in thousands):



|                                                    |  |                                   |  |                                  |        |   |                                 |   |        |  
|--------------------------------------------------- |  | --------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | -
|Hedge Classification                                |  | Balance Sheet Location            |  | Fair Valueas ofSeptember 30,2010 |        |   | Fair Valueas ofDecember 31,2009 |  
|Foreign currency contracts                          |  | Prepaid expenses and other assets |  | $                                |       |   |                                 | $ | 51     |  
|Foreign currency contracts                          |  | Other accrued liabilities         |  | $                                | (2,152 | ) |                                 | $ | (1,659 | )
|                                                    |  |                                   |  |                                  |        |   |                                 |   |        |  
|                                                    |  |                                   | 
|Total derivatives classified as hedging instruments |  |                                   |  | $                                | (2,152 | ) |                                 | $ | (1,608 | )
|                                                    |  |                                   |  |                                  |        |   |                                 |   |        |  

As of September 30, 2010 and December 31, 2009, foreign currency gains of $2.7
million and $2.9 million, respectively, were included in Accumulated other comprehensive income on the Companys Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2009, the Company
recorded approximately $1.2 million and $1.7 million, respectively, in net reclassification adjustments, which increased product revenue, as revenue on the associated sales contracts was recognized. For the three and nine months ended
September 30, 2010, the Company recorded approximately $23,000 in net reclassification adjustments, which increased product revenue, as revenue on the associated sales contracts was recognized.



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##### Table of Contents

CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Note 4  Earnings (Loss)
Per Share (EPS)

Basic EPS is computed by dividing net income available to common shareholders
by the weighted average number of common shares, excluding unvested restricted stock, outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of common and
potential common shares outstanding during the period, which includes the additional dilution related to conversion of stock options, unvested restricted stock and restricted stock units as computed under the treasury stock method and, in 2009, the
common shares issuable upon conversion of the then outstanding 3.0% Convertible Senior Subordinated Notes due 2024 (Notes).

For the three and nine month periods ended September 30, 2010 and 2009, outstanding stock options, unvested restricted stock grants, restricted stock units and shares issuable upon conversion of the
Notes were antidilutive because of net losses and, as such, their effect has not been included in the calculation of basic or diluted net loss per share. For the three and nine month periods ended September 30, 2010, potential gross common
shares of 5.0 million were antidilutive and not included in computing diluted EPS. For the three and nine month periods ended September 30, 2009, potential gross common shares of 4.4 million were antidilutive and not included in
computing diluted EPS.

Note 5  Comprehensive Loss

The components of comprehensive loss were as follows (in thousands):



|                                                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                             |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                             |  | 2010                            |         |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Net loss                                                     |  | $                               | (18,776 | ) |                                | $ | (2,107 | )    |  | $ | (37,011 | ) |  | $ | (3,575 | )
|Unrealized net gain (loss) on available-for-sale investments |  |                                 |        |   |                                |   | 4      |      |  |   | (4      | ) |  |   | 4      |  
|Cash flow hedges:                                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net gain (loss) on cash flow hedges                          |  |                                 | (1,255  | ) |                                |   | 513    |      |  |   | (251    | ) |  |   | (703   | )
|Amounts recognized in revenue (increase)                     |  |                                 | (23     | ) |                                |   | (1,179 | )    |  |   | (23     | ) |  |   | (1,667 | )
|                                                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                             |  |                                 | (1,278  | ) |                                |   | (666   | )    |  |   | (274    | ) |  |   | (2,370 | )
|Foreign currency translation adjustment                      |  |                                 | 864     |   |                                |   | 78     |      |  |   | 686     |   |  |   | (656   | )
|                                                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive loss                                           |  | $                               | (19,190 | ) |                                | $ | (2,691 | )    |  | $ | (36,603 | ) |  | $ | (6,597 | )
|                                                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  

Note 6  Accounts and Other Receivables, Net

Net accounts and other receivables consisted of the following (in thousands):



|                                    |  |                   |        |   |                  |   |        |  
|----------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                    |  | September 30,2010 |        |   | December 31,2009 |  
|Trade accounts receivable           |  | $                 | 21,332 |   |                  | $ | 26,375 |  
|Unbilled receivables                |  |                   | 598    |   |                  |   | 5,791  |  
|Advance billings                    |  |                   | 9,386  |   |                  |   | 2,968  |  
|Other receivables                   |  |                   | 281    |   |                  |   | 3,245  |  
|                                    |  |                   |        |   |                  |   |        |  
|                                    |  |                   | 31,597 |   |                  |   | 38,379 |  
|Allowance for doubtful accounts     |  |                   | (155   | ) |                  |   | (172   | )
|                                    |  |                   |        |   |                  |   |        |  
|Accounts and other receivables, net |  | $                 | 31,442 |   |                  | $ | 38,207 |  
|                                    |  |                   |        |   |                  |   |        |  

Unbilled receivables represent amounts where the Company has recognized revenue in advance
of the contractual billing terms. Advance billings represent billings made based on contractual terms for which revenue has not been recognized.

As of September 30, 2010 and December 31, 2009, accounts and other receivables included $22.7 million and $19.5 million, respectively, due from U.S. government agencies and customers primarily
serving the U.S. government. Of this amount, $0.2 million and $4.1 million were unbilled as of September 30, 2010 and December 31, 2009, respectively, based upon contractual billing arrangements with these customers. As of
September 30, 2010, one non-U.S. government customer accounted for 10% of total accounts and other receivables. As of December 31, 2009, one non-U.S. government customer accounted for 13% of total accounts and other receivables.



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##### Table of Contents

CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Note 7  Inventory

Inventory consisted of the following (in thousands):



|                             |  |                   |         |  |                  |   |        | 
|---------------------------- |  | ----------------- | ------- |  | ---------------- | - | ------ | 
|                             |  | September 30,2010 |         |  | December 31,2009 |  
|Components and subassemblies |  | $                 | 15,567  |  |                  | $ | 10,687 | 
|Work in process              |  |                   | 18,053  |  |                  |   | 14,383 | 
|Finished goods               |  |                   | 115,726 |  |                  |   | 3,941  | 
|                             |  |                   |         |  |                  |   |        | 
|Total                        |  | $                 | 149,346 |  |                  | $ | 29,011 | 
|                             |  |                   |         |  |                  |   |        | 

Finished goods inventory of $108.2 million and $3.6 million was located at customer sites
pending acceptance as of September 30, 2010 and December 31, 2009, respectively. At September 30, 2010, four customers accounted for $87.8 million, and at December 31, 2009, three customers accounted for $3.3 million of finished
goods inventory.

During the three and nine months ended September 30, 2010, the Company wrote off $0.3
million and $0.8 million, respectively, of inventory, primarily related to scrap, excess or obsolete inventory of the Cray XT product line. During the three and nine months ended September 30, 2009, the Company wrote off $4.5 million and $5.5
million, respectively, of inventory, primarily related to scrap, excess or obsolete inventory of the Cray XT product line, which was principally a $4.5 million charge for estimated excess inventory of a Cray custom-made component known as the Cray
SeaStar.

Note 8  Deferred Revenue

Deferred revenue consisted of the following (in thousands):



|                                        |  |                   |         |   |                  |   |        |  
|--------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------ | -
|                                        |  | September 30,2010 |         |   | December 31,2009 |  
|Deferred product revenue                |  | $                 | 109,892 |   |                  | $ | 18,305 |  
|Deferred service revenue                |  |                   | 35,326  |   |                  |   | 33,736 |  
|                                        |  |                   |         |   |                  |   |        |  
|Total deferred revenue                  |  |                   | 145,218 |   |                  |   | 52,041 |  
|Less long-term deferred revenue         |  |                   | (10,495 | ) |                  |   | (9,627 | )
|                                        |  |                   |         |   |                  |   |        |  
|Deferred revenue in current liabilities |  | $                 | 134,723 |   |                  | $ | 42,414 |  
|                                        |  |                   |         |   |                  |   |        |  

As of September 30, 2010, five customers accounted for 76% of total deferred revenue.
At December 31, 2009, two customers accounted for 44% of total deferred revenue.

Note 9  Share-Based Compensation

The Company accounts for its share-based compensation based on an estimate of fair value of the grant on
the date of grant.

The fair value of unvested restricted stock and restricted stock units is based on the
market price of a share of the Companys common stock on the date of grant.

In determining fair value of
stock options, the Company uses the Black-Scholes option pricing model and employed the following key weighted average assumptions:



|                                                        |  |                                 |  |                                |  |           |  |          
|------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | --------- |  | ---------
|                                                        |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                                        |  | 2010                            |  | 2009                           |  | 2010      |  | 2009     
|Risk-free interest rate                                 |  | 1.2%                            |  | 2.0%                           |  | 1.8%      |  | 1.6%     
|Expected dividend yield                                 |  | 0%                              |  | 0%                             |  | 0%        |  | 0%       
|Volatility                                              |  | 75%                             |  | 79%                            |  | 74%       |  | 79%      
|Expected life                                           |  | 4.0 years                       |  | 4.0 years                      |  | 4.0 years |  | 4.0 years
|Weighted average Black-Scholes value of options granted |  | $3.23                           |  | $4.69                          |  | $3.03     |  | $2.21    



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not
anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is based on the assumption that options will be exercised, on average, about two years after vesting occurs. The Company
recognizes compensation expense for only the portion of options or stock units that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected
future employee turnover rates. The estimated forfeiture rate for stock option grants during the three and nine month periods ended September 30, 2010 was 10% and 8%, respectively. The estimated forfeiture rate for stock option grants during
the three and nine month periods ended September 30, 2009 was 10% and 8%, respectively. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future
periods. The Companys stock price volatility, option lives and expected forfeiture rates involve managements best estimates at the time of such determination, which impact the fair value of the option calculated under the Black-Scholes
methodology and, ultimately, the expense that will be recognized over the vesting period or requisite service period of the option. The Company typically issues stock options with a four-year vesting period (the requisite service period) and
amortizes the fair value of stock options (stock compensation cost) ratably over the requisite service period. The fair value of unvested restricted stock and restricted stock units is based on the market price of a share of the Companys
common stock on the date of grant and is amortized over the vesting period.

The Company also has an employee
stock purchase plan (ESPP) which allows employees to purchase shares of the Companys common stock at 95% of fair market value on the fourth business day after the end of each offering period. The ESPP is deemed non-compensatory and
therefore is not subject to the fair value provisions.

The following table sets forth the gross share-based
compensation cost resulting from stock options and unvested restricted stock grants and restricted stock units (before consideration of any offsets for research and development co-funding) that was recorded in the Companys Condensed
Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (in thousands):



|                              |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 
|----------------------------- |  | ------------------------------- | ----- |  | ------------------------------ | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                              |  | Three Months EndedSeptember 30, |       |  | Nine Months EndedSeptember 30, |  
|                              |  | 2010                            |       |  | 2009                           |   |       | 2010 |  |   | 2009  | 
|Cost of product revenue       |  | $                               | 58    |  |                                | $ | 51    |      |  | $ | 159   |  |  | $ | 175   | 
|Cost of service revenue       |  |                                 | 118   |  |                                |   | 95    |      |  |   | 321   |  |  |   | 393   | 
|Research and development, net |  |                                 | 431   |  |                                |   | 390   |      |  |   | 1,216 |  |  |   | 1,629 | 
|Sales and marketing           |  |                                 | 10    |  |                                |   | 182   |      |  |   | 420   |  |  |   | 694   | 
|General and administrative    |  |                                 | 513   |  |                                |   | 460   |      |  |   | 1,503 |  |  |   | 1,690 | 
|                              |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 
|Total                         |  | $                               | 1,130 |  |                                | $ | 1,178 |      |  | $ | 3,619 |  |  | $ | 4,581 | 
|                              |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 

A summary of the Companys year-to-date stock option activity and related information
follows:



|                                          |  |         |           |   |                              |   |      |                                         |  |  |           | 
|----------------------------------------- |  | ------- | --------- | - | ---------------------------- | - | ---- | --------------------------------------- |  |  | --------- | 
|                                          |  | Options |           |   | WeightedAverageExercisePrice |   |      | WeightedAverageRemainingContractualTerm | 
|Outstanding at December 31, 2009          |  |         | 3,116,522 |   |                              | $ | 6.43 |                                         |  |  |           | 
|Grants                                    |  |         | 710,950   |   |                              | $ | 5.49 |                                         |  |  |           | 
|Exercises                                 |  |         | (23,419   | ) |                              | $ | 4.96 |                                         |  |  |           | 
|Cancellations                             |  |         | (289,530  | ) |                              | $ | 7.30 |                                         |  |  |           | 
|                                          |  |         |           |   |                              |   |      |                                         |  |  |           | 
|Outstanding at September 30, 2010         |  |         | 3,514,523 |   |                              | $ | 6.17 |                                         |  |  | 7.5 years | 
|                                          |  |         |           |   |                              |   |      |                                         |  |  |           | 
|Exercisable at September 30, 2010         |  |         | 1,641,519 |   |                              | $ | 7.32 |                                         |  |  | 6.0 years | 
|                                          |  |         |           |   |                              |   |      |                                         |  |  |           | 
|Available for grant at September 30, 2010 |  |         | 3,382,633 |   |                              |   |      |                                         |  |  |           | 
|                                          |  |         |           |   |                              |   |      |                                         |  |  |           | 



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





As
of September 30, 2010, there was $4.5 million of aggregate intrinsic value of outstanding stock options, including $1.6 million of aggregate intrinsic value of exercisable stock options. Intrinsic value represents the total pretax intrinsic
value for all in-the-money options (i.e., the difference between the Companys closing stock price on the last trading day of its third quarter of 2010 and the exercise price, multiplied by the number of shares of common stock
underlying the stock options) that would have been received by the option holders had all option holders exercised their options on September 30, 2010. During the three and nine months ended September 30, 2010, stock options covering
15,808 and 23,419 shares of common stock, respectively, with a total intrinsic value of $26,130 and $34,264 respectively, were exercised. During the three and nine months ended September 30, 2009, stock options covering 37,170 and 41,945 shares
of common stock, respectively, with a total intrinsic value of $87,000 and $94,000 respectively, were exercised.

A summary of the Companys unvested restricted stock grants and restricted stock units and changes during the period ended September 30, 2010 is as follows:



|                                  |  |        |           |   |                                     |   |      | 
|--------------------------------- |  | ------ | --------- | - | ----------------------------------- | - | ---- | 
|                                  |  | Shares |           |   | WeightedAverageGrant DateFair Value |  
|Outstanding at December 31, 2009  |  |        | 1,431,885 |   |                                     | $ | 5.22 | 
|Granted                           |  |        | 501,157   |   |                                     |   | 5.54 | 
|Forfeited                         |  |        | (142,912  | ) |                                     |   | 4.45 | 
|Vested                            |  |        | (285,314  | ) |                                     |   | 6.04 | 
|                                  |  |        |           |   |                                     |   |      | 
|Outstanding at September 30, 2010 |  |        | 1,504,816 |   |                                     | $ | 5.24 | 
|                                  |  |        |           |   |                                     |   |      | 

The aggregate fair value of restricted stock vested during the nine months ended
September 30, 2010 was $1.4 million.

As of September 30, 2010, the Company had $9.3 million of
total unrecognized compensation cost related to unvested stock options and unvested restricted stock and restricted stock units, which is expected to be recognized over a weighted average period of 2.37 years.

In March 2009, the Company completed a tender offer to purchase 1.8 million of eligible vested and unvested employee
and director stock options outstanding for $669,000. The tender offer was for options with a grant price of $8.00 or more, which were granted prior to May 2007. The amount charged to shareholders equity for stock options purchased at or below
the estimated fair value of the options on the date of repurchase was $587,000, with the balance of $82,000 charged to compensation expense as amounts paid were in excess of estimated fair value. The Company recorded $1.4 million of stock-based
compensation expense in the nine months ended September 30, 2009 related to previously unrecognized compensation cost of unvested stock options that were purchased.

Note 10  Taxes

The Company recorded income tax
expense of $187,000 and $483,000, respectively, for the three and nine months ended September 30, 2010. The expense recorded was primarily related to foreign income taxes payable. The Company recorded an income tax benefit of $1.1 million and
$1.0 million, respectively, for the three and nine months ended September 30, 2009. The income tax benefit realized during the three and nine months ended September 30, 2009 was primarily the result of the reversal of approximately $1.1
million of valuation allowance held against certain deferred income tax assets of our Japanese subsidiary.

The Company continues to provide a full valuation allowance against net operating losses and other net deferred tax
assets arising in certain jurisdictions, primarily in the United States and Canada, as the realization of such assets is not considered to be more likely than not.

Note 11  Geographic Segment Information

Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding allocation of
resources and assessing performance. The Companys chief decision-maker is the Chief Executive Officer. The Company continues to operate in a single operating segment.



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CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





The Companys geographic operations outside the United States include sales and service offices in Canada, Brazil,
Europe, the Middle East, Japan, Australia, India, Korea and Taiwan. The following data presents the Companys revenue for the United States and all other countries, which is determined based upon a customers geographic location (in
thousands):



|                                 |  |               |        |  |                 |   |         |       |  |   |        |  |  |      |        |  |      |   |        |  |  |   |         | 
|-------------------------------- |  | ------------- | ------ |  | --------------- | - | ------- | ----- |  | - | ------ |  |  | ---- | ------ |  | ---- | - | ------ |  |  | - | ------- | 
|                                 |  | United States |        |  | Other Countries |   |         | Total | 
|                                 |  | 2010          |        |  | 2009            |   |         | 2010  |  |   | 2009   |  |  | 2010 |        |  | 2009 |  
|Three months ended September 30, |  |               |        |  |                 |   |         |       |  |   |        |  |  |      |        |  |      |   |        |  |  |   |         | 
|Product revenue                  |  | $             | 19,855 |  |                 | $ | 15,255  |       |  | $ | 3,607  |  |  | $    | 17,119 |  |      | $ | 23,462 |  |  | $ | 32,374  | 
|Service revenue                  |  |               | 14,214 |  |                 |   | 22,676  |       |  |   | 5,160  |  |  |      | 3,525  |  |      |   | 19,374 |  |  |   | 26,201  | 
|                                 |  |               |        |  |                 |   |         |       |  |   |        |  |  |      |        |  |      |   |        |  |  |   |         | 
|Total revenue                    |  | $             | 34,069 |  |                 | $ | 37,931  |       |  | $ | 8,767  |  |  | $    | 20,644 |  |      | $ | 42,836 |  |  | $ | 58,575  | 
|                                 |  |               |        |  |                 |   |         |       |  |   |        |  |  |      |        |  |      |   |        |  |  |   |         | 
|                                 |  |               |       
|                                 |  | United States |        |  | Other Countries |   |         | Total | 
|                                 |  | 2010          |        |  | 2009            |   |         | 2010  |  |   | 2009   |  |  | 2010 |        |  | 2009 |  
|Nine months ended September 30,  |  |               |        |  |                 |   |         |       |  |   |        |  |  |      |        |  |      |   |        |  |  |   |         | 
|Product revenue                  |  | $             | 31,032 |  |                 | $ | 95,021  |       |  | $ | 10,748 |  |  | $    | 38,916 |  |      | $ | 41,780 |  |  | $ | 133,937 | 
|Service revenue                  |  |               | 43,375 |  |                 |   | 47,326  |       |  |   | 14,802 |  |  |      | 14,537 |  |      |   | 58,177 |  |  |   | 61,863  | 
|                                 |  |               |        |  |                 |   |         |       |  |   |        |  |  |      |        |  |      |   |        |  |  |   |         | 
|Total revenue                    |  | $             | 74,407 |  |                 | $ | 142,347 |       |  | $ | 25,550 |  |  | $    | 53,453 |  |      | $ | 99,957 |  |  | $ | 195,800 | 
|                                 |  |               |        |  |                 |   |         |       |  |   |        |  |  |      |        |  |      |   |        |  |  |   |         | 

Product and service revenue from U.S. government agencies and customers primarily serving
the U.S. government totaled approximately $32.0 million and $68.6 million, respectively, for the three and nine months ended September 30, 2010, compared to approximately $34.3 million and $133.4 million, respectively, for the three and nine
months ended September 30, 2009.

Note 12  Commitments and Contingencies

In 2009 a complaint was filed against the Company and Mellon Investor Services, LLC (the Companys stock transfer
agent) claiming damages relating to the participation of an individual in a 1999 financing of the Company. The plaintiff is the receiver that has been appointed for certain entities related to the individual and the claims brought by the plaintiff
arise from, among other things, plaintiffs assertion that there has been an inappropriate delay in receiving a replacement for a lost stock certificate allegedly due to the receiver. The Company will continue to evaluate the claim but does not
expect the outcome to have a material impact on its financial position.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Preliminary Note Regarding Forward-Looking Statements

This
quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our actual results to differ materially from those
expressed or implied by such forward-looking statements. Forward-looking statements are based on our managements beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements
by terms such as may, will, should, could, would, expect, plans, anticipates, believes, estimates, projects,
predicts, and potential, and similar expressions intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements, and examples of forward-looking statements include any projections of earnings, revenue or other results of operations or financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements concerning proposed new products, technologies or services; any statements regarding future research and development or co-funding for such efforts; any statements
regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing.

These forward-looking statements are subject to the safe harbor created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Item 1A. Risk Factors in Part II and other sections of this
report and our other filings with the Securities and Exchange Commission (SEC). You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. You should read this report
completely and with the understanding that our actual future results may be materially different from what we expect. We assume no obligation to update these forward-looking statements, whether as a result of new information, future events, or
otherwise.

Overview and Executive Summary

We design, develop, manufacture, market and service high-performance computing (HPC) systems, commonly known as supercomputers, and provide engineering services related to HPC systems and
solutions. Our supercomputer systems provide capability and sustained performance far beyond typical server-based computer systems and address challenging scientific, economic, engineering and national security computing problems.

We believe we are well-positioned to meet the HPC markets demanding needs by providing superior supercomputer
systems with performance and cost advantages when sustained performance on challenging applications and total cost of ownership are taken into account. We differentiate ourselves from our competitors primarily by concentrating our research and
development efforts on the interconnect, packaging and system software capabilities that enable our systems to provide efficient and high sustained performance at scale  that is, to continue to increase performance as our systems grow in size.
Purpose-built for the supercomputer market, our higher-end systems balance highly capable processors, highly scalable system software and very high speed interconnect and communications capabilities. Our current plans are based on gaining market
share in the high-end supercomputer market segment (which is expected to grow), extending our technology leadership, maintaining our focus on execution and profitability and expanding our addressable market through broadening of our engineering
services offerings, specifically our Custom Engineering practices, and selling our newer Cray XTm systems.

The Companys revenue, results of operations and cash balances are likely to fluctuate significantly from
quarter-to-quarter. These fluctuations are due to such factors as the high average sales prices and limited number of sales of the Companys products, the timing of purchase orders and product deliveries, the revenue recognition accounting
policy of generally not recognizing product revenue until customer acceptance and other contractual provisions have been fulfilled, the timing of payments for product sales, maintenance services, government research and development funding, the
impact of the timing of new products on customer orders (including the ongoing rollout of the new Cray XT6 and Cray XE6 systems), and purchases of inventory during periods of inventory build-up. As a result of these factors, revenue, gross margin,
expenses, and certain balance sheet accounts are expected to vary significantly quarter to quarter and year to year. Also, given the nature of the Companys business, its revenue, receivables and other related accounts are likely to be
concentrated among a few customers.



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Cray
released the Cray XT6 system in the second quarter of 2010 and began shipping the Cray XE6 system in the third quarter of 2010. Product revenues for the three and nine months ended September 30, 2010 were significantly lower than the prior
period primarily due to customers deferring purchases pending the release of these new products. Additionally, a portion of the revenue recognized in the first nine months of 2009 was from products delivered at the end of 2008. A significant level
of Cray XT6 and Cray XE6 systems are expected to be accepted, and the associated revenue recorded, during the fourth quarter of 2010 and potentially the first quarter of 2011 to the extent any of these customer acceptances are not completed in 2010.

Summary of First Nine Months of 2010 Results

Total revenue decreased $95.8 million for the first nine months of 2010, from $195.8 million to $100.0 million, compared
to the first nine months of 2009, due to decreased product revenue of $92.2 million.

Net loss for the first
nine months of 2010 was $37.0 million compared to a net loss of $3.6 million for the same period in 2009, due to decreased gross profit of $40.6 million primarily driven by lower product revenue that was partially offset by a $7.3 million decrease
in operating expenses. Operating expenses decreased primarily due to a reduction in net research and development expenses resulting from lower outside engineering costs caused by a reduction in scope of the DARPA agreement.

Net cash used in operations was $37.5 million for the first nine months of 2010 compared to net cash provided by
operations of $19.2 million for the first nine months of 2009. The cash usage was primarily a result of large increase in inventory to support Cray XT6 and Cray XE6 system deliveries in the second half of 2010 and to fund the net loss year-to-date.
Cash and short-term investment balances, including restricted cash balances, were $73.5 million as of September 30, 2010 compared to $113.2 million as of December 31, 2009.

Market Overview and Challenges

Significant trends
in the HPC industry include:



| |  |  | The commoditization of HPC hardware, particularly processors and interconnect systems;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | The growing commoditization of software, including plentiful building blocks and more capable open source software;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Supercomputing with many-core commodity processors driving increasing scalability requirements;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Electrical power requirements becoming a design constraint and driver in total cost of ownership determinations;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Increased micro-architectural diversity, including many-core processors with vector extensions and growing experimentation with accelerators, as the
rate of per-core performance increases slows; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data needs growing faster than computational needs.
| | - |  | ---------------------------------------------------

Several of these trends have resulted in the expansion and acceptance of lower-bandwidth cluster systems using processors
manufactured by Intel, AMD and others combined with commercially available commodity networking and other components, particularly in the middle and lower segments of the HPC market. These systems may offer higher theoretical peak performance for
equivalent cost, and price/peak performance is often the dominant factor in HPC procurements outside of the high-end supercomputer market segment. Vendors of such systems often put pricing pressure on us in competitive procurements, even
at times in larger procurements where time to solution is of significant importance.



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In the
markets for the largest systems, those costing significantly in excess of $1 million, the use of commodity processors and networking components can result in increasing data transfer bottlenecks as these components do not balance processor power
with network communication capability. With the arrival of increasing processor core counts due to new many-core processors, these unbalanced systems will typically have even lower productivity, especially in larger systems running more complex
applications. We and other vendors have also begun to augment standard microprocessors with other processor types, such as field programmable gate arrays and graphics processing units, in order to increase computational power, further complicating
programming models. In addition, with increasing scale, bandwidth and processor core counts, large computer systems use progressively higher amounts of power to operate and require special cooling capabilities.

To position ourselves to meet the markets demanding needs, we concentrate our research and development efforts on
the interconnect, system and programming environment software and packaging capabilities that enable our supercomputers to perform at scale  that is, to continue to increase actual performance as systems grow ever larger in size. We also have
demonstrated expertise in several processor technologies. Further, we offer unique capabilities in high-speed, high bandwidth system interconnect design, compiler technology, system software and packaging capabilities. We believe our experience and
capabilities across each of these fronts are becoming ever more important, especially in larger procurements. We expect to be in a comparatively advantageous position as larger many-core processors become available and as multiple processing
technologies become integrated into single systems. In addition, we intend to expand our addressable market by leveraging our technologies and customer base, the Cray brand and industry trends by introducing complementary products and services to
new and existing customers, as demonstrated by our emphasis on Custom Engineering projects and the introduction of our Cray CX family, Cray XT5m and Cray XT6m systems.

Key Performance Indicators

Our management monitors and
analyzes several key performance indicators in order to manage our business and evaluate our financial and operating performance, including:

Revenue.Product revenue generally constitutes the major portion of our revenue in most reporting periods and, for the reasons discussed elsewhere in this quarterly report on Form 10-Q, is subject
to significant variability from period to period. In the short term, we closely review the status of product shipments, installations and acceptances in order to forecast revenue and cash receipts; longer-term, we monitor the status of the pipeline
of product sales opportunities, fiscal funding and product development cycles. Revenue growth is the best indicator of whether we are achieving our objective of increased market share in the markets we address. The introduction of the Cray XT family
and our longer-term product roadmap, including our initiative to integrate Intel processors and our new Cray XE6, are efforts to increase product revenue. We have also been increasing our product and service offerings to grow revenue. This includes
additional engineering services and external high performance data storage through our Custom Engineering initiative and products such as the Cray CX and Cray XT6m and successor systems. Maintenance service revenue is more constant in the short term
and assists, in part, to offset the impact that the variability in product revenue has on total revenue in any particular period.

Gross profit.Our total gross profit margin and our product gross profit margin for the first nine months of 2010 were 29% and 26%, respectively, which reflect decreases from the respective 2009
levels of 35% and 30%, respectively. Product gross profit margin for the first nine months of 2010 was negatively impacted by certain low margin transactions. Service gross profit margin of 31% for the nine month period ended September 30, 2010
was down from 47% during the same period in 2009. This was primarily due to the increase in personnel and third-party costs associated with our increased Custom Engineering activities without sufficient revenue to maintain the gross margin.
Additionally, service revenue in the nine month period ended September 30, 2010 was reduced by $1 million in 2010 due to an increase in the estimated costs to complete a Custom Engineering contract that resulted in an adjustment of revenue that
had been recognized in prior periods. Gross profit in the first nine months of 2009 was negatively impacted by a large, low gross profit contract (on which $36 million was recognized in the first quarter of 2009) and a delay in signing of a contract
and related revenue recognition issues relating to an anticipated Custom Engineering project on which costs were incurred. We continue to focus on maintaining and improving our product gross profit over the long term, which we believe is best
achieved through product differentiation as compared to our competitors.



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Operating expenses.Our operating expenses are driven largely by headcount, the level of recognized co-funding for
research and development and contracted third-party research and development services. As part of our ongoing efforts to control operating expenses, we monitor headcount levels in specific geographic and operational areas. Operating expenses for the
first nine months of 2010 were approximately $7.3 million less than the first nine months of 2009 resulting from a reduction in net research and development expenses due to a reduction in outside engineering services costs. Operating expenses can
increase significantly in profitable quarters where incentive compensation can be high.

Liquidity and cash
flows.Due to the variability in product revenue and new contracts, our cash position also varies from quarter-to-quarter and within a quarter. We closely monitor our expected cash levels, particularly in light of increased inventory purchases
for large system installations and the risk of delays in product shipments and acceptances and, longer-term, in product development. Sustained profitability over annual periods is our primary objective and should improve our cash position.

Critical Accounting Policies and Estimates

This discussion, as well as disclosures included elsewhere in this quarterly report on Form 10-Q, are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance
with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingencies. In preparing our financial
statements in accordance with GAAP, there are certain accounting policies that are particularly important. These include revenue recognition, inventory valuation, accounting for income taxes, research and development expenses and share-based
compensation. Our significant accounting policies are set forth in Note 2 to the Condensed Consolidated Financial Statements included in our 2009 Form 10-K and should be reviewed in conjunction with the accompanying Condensed Consolidated Financial
Statements and notes thereto as of September 30, 2010, as they are integral to understanding our results of operations and financial condition in this interim period. In some cases, these policies represent required accounting. In other cases,
they may represent a choice between acceptable accounting methods or may require substantial judgment or estimation.

Additionally, we consider certain judgments and estimates to be significant, including those relating to the fair value and selling price determination used in revenue recognition, percentage of
completion accounting, estimates of proportional performance on co-funded engineering contracts and prepaid engineering services, realization of accounts receivable, determination of inventory at the lower of cost or market, useful lives for
depreciation and amortization, determination of future cash flows associated with impairment testing of long-lived assets, determination of the fair value of stock options and other assessments of fair value, realization of deferred income tax
assets, including our ability to utilize such assets, potential income tax assessments and other contingencies. We base our estimates on historical experience, current conditions and on other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ materially from these estimates and assumptions.

Our management has
discussed the selection of significant accounting policies and the effect of judgments and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition

The Company recognizes revenue
when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is
reasonably assured. Delivery does not occur until the products have been shipped or services provided to the customer, risk of loss has transferred to the client, and a customer acceptance has been obtained. The sales price is not considered to be
fixed or determinable until all contingencies related to the sales have been resolved. The Company records revenue in the Condensed Consolidated Statements of Operations net of any sales, use, value added or certain excise taxes imposed by
governmental authorities on specific sales transactions. In addition to the aforementioned general policy, the following are our statements of policy with regard to multiple-element arrangements and specific revenue recognition policies for each
major category of revenue.



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Multiple-Element Arrangements.The Company commonly enters into revenue arrangements that include multiple
deliverables of its product and service offerings due to the needs of its customers. Product may be delivered in phases over time periods which can be as long as five years. Maintenance services generally begin upon acceptance of the first equipment
delivery and future deliveries of equipment generally have an associated maintenance period. The Company considers the maintenance period to commence upon acceptance of the product, which may include a warranty period and accordingly allocates a
portion of the arrangement consideration as a separate deliverable which is recognized as service revenue over the entire service period. Other services such as training and engineering services can be delivered as a discrete delivery or over the
term of the contract. A multiple-element arrangement is separated into more than one unit of accounting if the following criteria are met:



| |  |  | The delivered item(s) has value to the customer on a standalone basis; and
| | - |  | --------------------------------------------------------------------------



| |  |  | If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the Company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If these criteria are
not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element
is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each units
relative estimated selling price.

The Company follows a selling price hierarchy in determining the best
estimate of the selling price of each deliverable. Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to determine vendor specific objective evidence (VSOE). The Company
determines VSOE based on normal pricing and discounting practices for the product or service when sold separately.

When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company attempts to establish the selling price of each remaining element based on
third-party evidence (TPE). The Companys inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract terms which can be due to infrequently selling each
element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. TPE is determined based on our prices or competitor prices for similar
deliverables when sold separately. On certain transactions the Company is able to obtain competitor prices for comparable bundled arrangements. However, generally, the Companys offerings contain a significant level of customization and
differentiation from those of competitors such that the comparable pricing of products with similar functionality cannot be obtained. The Company is also often unable to reliably determine what similar competitor products selling prices are on
a standalone basis as important details of competitive bids are not available. Therefore, the Company is typically not able to determine TPE.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price (ESP) in its allocation of arrangement consideration. The objective of ESP is
to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. In determining ESP, the Company uses either the list price of the deliverable less a discount or the cost to provide the
product or service plus a margin. When using list price less a discount the Company uses an average of the discount from list price for previous transactions and consider several factors including, the transaction, the product lifecycle, and
considering any changes to list prices. The data is collected from prior sales, but may not have the sample size or consistency to establish VSOE but is sufficiently objective to estimate the selling price. When using cost plus a margin, the Company
considers several factors including the total cost of the product or service, customer-specific and geographic factors. The Company also considers the historical margins of the product or service on similar contracts and any changes to pricing
methodologies or cost drivers that would cause margins on current contracts to differ from historical margins.

Product.The Company recognizes revenue from sales of products, other than the Cray CX systems, upon customer
acceptance of the system, when the price is fixed or determinable, collection is reasonably assured and no significant unfulfilled obligations exist. Revenue from sales of Cray CX systems is generally recognized upon shipment when title and risk of
loss transfers to the customer and collection is reasonably assured.



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Service.Maintenance services are provided under separate maintenance contracts with customers. These contracts
generally provide for maintenance services for one year, although some are for multi-year periods, often with prepayments for the term of the contract. The Company considers the maintenance period to commence upon acceptance of the product, which
may include a warranty period. When service is part of a multiple-element arrangement, the Company allocates a portion of the arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance revenue is
recognized ratably over the term of the maintenance contract. Maintenance contracts that are paid in advance are recorded as deferred revenue.

Revenue from engineering services is recognized as services are performed.

Project.Revenue from design and build contracts is recognized under the percentage-of-completion (POC) method. Under the POC method, revenue is recognized based on the costs incurred
to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions
may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in income in the period in which the circumstances that gave rise to the revision become known by management. The Company performs ongoing
profitability analyses of its contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any time these estimates indicate that the contract will
be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.

The
Company records revenue from research and development contracts which include milestones using the milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive if management believes there is
substantive uncertainty that it will be achieved and the milestone consideration meets all of the following criteria:



| |  |  | It is commensurate with either of the following:
| | - |  | ------------------------------------------------



| |  |  | The Companys performance to achieve the milestone; or
| | - |  | ------------------------------------------------------



| |  |  | The enhancement of value of the delivered item or items as a result of a specific outcome resulting from the Companys performance to achieve
the milestone.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | It relates solely to past performance.
| | - |  | --------------------------------------



| |  |  | It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

The individual milestones are determined to be substantive or nonsubstantive in their
entirety and milestone consideration is not bifurcated.

Revenue from projects is classified as Product
Revenue or Service Revenue, based on the nature of the work performed.

Inventory Valuation

We record our inventory at the lower of cost or market. We regularly evaluate the technological usefulness and anticipated
future demand for our inventory components. Due to rapid changes in technology and the increasing demands of our customers, we are continually developing new products. Additionally, during periods of product or inventory component upgrades or
transitions, we may acquire significant quantities of inventory to support estimated current and future production and service requirements. As a result, it is possible that older inventory items we have purchased may become obsolete, be sold below
cost or be deemed in excess of quantities required for production or service requirements. When we determine it is not likely we will recover the cost of inventory items through future sales, we write-down the related inventory to our estimate of
its market value.



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Because the products we sell have high average sales prices and because a high number of our prospective customers receive
funding from U.S. or foreign governments, it is difficult to estimate future sales of our products and the timing of such sales. It also is difficult to determine whether the cost of our inventories will ultimately be recovered through future sales.
While we believe our inventory is stated at the lower of cost or market and that our estimates and assumptions to determine any adjustments to the cost of our inventories are reasonable, our estimates may prove to be inaccurate. We have sold
inventory previously reduced in part or in whole to zero, and we may have future sales of previously written-down inventory. We also may have additional expense to write-down inventory to its estimated market value. Adjustments to these estimates in
the future may materially impact our operating results. During the nine month period ended September 30, 2010, we recorded a charge of $833,000 related to inventory in excess of estimated future demand. The largest portion of this write-down
related to a Cray custom-made component used on the Cray XT products known as the Cray SeaStar interconnect purchased in 2008 under a last-time buy procurement.

Accounting for Income Taxes

Deferred tax assets and
liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the
differences and carryforwards are expected to be recovered or settled. A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not that all or a portion of the deferred tax assets may not be realized
through future operations. This assessment is based upon consideration of available positive and negative evidence, which includes, among other things, our recent results of operations and expected future profitability. We consider our actual
historical results over several years to have stronger weight than other more subjective indicators, including forecasts, when considering whether to establish or reduce a valuation allowance on deferred tax assets. Estimated interest and penalties
are recorded as a component of interest expense and other expense, respectively.

As of September 30,
2010, we had approximately $149.1 million of net deferred tax assets, against which we provided a $146.0 million valuation allowance, resulting in a net deferred tax asset of $3.1 million. Our net deferred tax assets relate primarily to certain
foreign jurisdictions where we believe it is more likely than not that such assets will be realized. We continue to provide a full valuation allowance against net operating losses and other net deferred tax assets arising in certain jurisdictions,
primarily in the United States and Canada, as the realization of such assets is not considered to be more likely than not.

Research and
Development Expenses

Research and development expenses include costs incurred in the development and
production of our hardware and software, costs incurred to enhance and support existing product features and costs related to future product development. Research and development costs are expensed as incurred, and may be offset by co-funding from
third parties. We may also enter into arrangements whereby we make advance, non-refundable payments to a vendor to perform certain research and development services. These payments are deferred and recognized over the vendors estimated
performance period. During the third quarter of 2009, we amended a vendor agreement to settle outstanding performance issues. We had made advance payments of $16.2 million to the vendor. The amendment called for us to receive a refund of $10.0
million of amounts previously paid to the vendor and the right to receive rebates on future purchases. As of September 30, 2010, the full balance of the refund had been received. The rebate right of $6.2 million is classified in Other
non-current assets in the Condensed Consolidated Balance Sheets. No gain or loss was recorded as a result of this amendment.

Amounts to be received under co-funding arrangements with the U.S. government are based on either contractual milestones or costs incurred. These co-funding milestone payments are recognized in operations
as performance is estimated to be completed and are measured as milestone achievements occur or as costs are incurred. These estimates are reviewed on a periodic basis and are subject to change, including in the near term. If an estimate is changed,
net research and development expense could be impacted significantly.

We do not record a receivable from the
U.S. government prior to completing the requirements necessary to bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget restrictions and milestones may be subject to completion risk, and as such,
there may be periods in which research and development costs are expensed as incurred for which no reimbursement is recorded, as milestones have not been completed or the U.S. government has not funded an agreement.



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We
classify amounts to be received from funded research and development projects as either revenue or a reduction to research and development expense, based on the specific facts and circumstances of the contractual arrangement, considering total costs
expected to be incurred compared to total expected funding and the nature of the research and development contractual arrangement. In the event that a particular arrangement is determined to represent revenue, the corresponding research and
development costs are classified as cost of revenue.

Share-based Compensation

We account for share-based compensation by estimating the fair value of share-based compensation using the Black-Scholes
option pricing model. We utilize assumptions related to stock price volatility, stock option term and forfeiture rates that are based upon both historical factors as well as managements judgment.

New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements. The
guidance in ASU 2009-13 provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable, which replaces fair
value in the revenue allocation guidance, as the allocation of revenue can now be based on entity-specific assumptions in addition to assumptions derived as a marketplace participant. The amendments in ASU 2009-13 are effective for revenue
transactions entered into during fiscal years beginning on or after June 15, 2010. The Company adopted this guidance effective January 1, 2010 and has elected to apply it retrospectively. The adoption of this guidance and its retrospective
application did not have a material impact on the Companys financial results. No changes to previously reported amounts in the historical financial statements were required as a result of retrospective application.

In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements that Include Software
Elements. The guidance in ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function
together to deliver the tangible products essential functionality are excluded from the guidance applicable to software revenue recognition. The amendments in ASU 2009-14 are effective for revenue transactions entered into during fiscal years
beginning on or after June 15, 2010. The Company adopted this guidance effective January 1, 2010 and has elected to apply it retrospectively. The adoption of this guidance and its retrospective application did not have a material impact on
the Companys financial results. No changes to previously reported amounts in the historical financial statements were required as a result of retrospective application.

In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition  Milestone Method (Topic 605):
Milestone Method of Revenue Recognition. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.
Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to be substantive by meeting specific criteria. The
amendments in ASU 2010-17 are effective for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. In accordance with the guidance, the Company elected to early adopt its provisions as
of January 1, 2010. The adoption of this guidance did not have a material impact on the Companys financial results nor would it have had a material impact had the guidance been adopted on January 1, 2009.

Results of Operations

The Companys revenue, results of operations and cash balances are likely to fluctuate significantly from quarter-to-quarter. These fluctuations are due to such factors as the high average sales
prices and limited number of sales of the Companys products, the timing of purchase orders and product deliveries, the revenue recognition accounting policy of generally not recognizing product revenue until customer acceptance and other
contractual provisions have been fulfilled, the timing of payments for product sales, maintenance services, government research and development funding, the impact of the timing of new products on customer orders, and purchases of inventory during
periods of inventory build-up. As a result of these factors, revenue, gross margin, expenses, cash, and inventory are expected to vary significantly quarter to quarter and year to year.



23



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Revenue and Gross Profit Margins

Our revenue, cost of revenue and gross profit margin for the three and nine months ended
September 30, 2010 and 2009, respectively, were (in thousands, except for percentages):



|                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|----------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                              |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                              |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Product revenue               |  | $                               | 23,462 |   |                                | $ | 32,374 |      |  | $ | 41,780 |   |  | $ | 133,937 |  
|Less: Cost of product revenue |  |                                 | 18,355 |   |                                |   | 24,784 |      |  |   | 30,948 |   |  |   | 93,381  |  
|                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Product gross profit          |  | $                               | 5,107  |   |                                | $ | 7,590  |      |  | $ | 10,832 |   |  | $ | 40,556  |  
|                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Product gross profit margin   |  |                                 | 22     | % |                                |   | 23     | %    |  |   | 26     | % |  |   | 30      | %
|                              |  |                                 |        |  
|Service revenue               |  | $                               | 19,374 |   |                                | $ | 26,201 |      |  | $ | 58,177 |   |  | $ | 61,863  |  
|Less: Cost of service revenue |  |                                 | 13,741 |   |                                |   | 10,867 |      |  |   | 40,317 |   |  |   | 33,095  |  
|                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Service gross profit          |  | $                               | 5,633  |   |                                | $ | 15,334 |      |  | $ | 17,860 |   |  | $ | 28,768  |  
|                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Service gross profit margin   |  |                                 | 29     | % |                                |   | 59     | %    |  |   | 31     | % |  |   | 47      | %
|                              |  |                                 |        |  
|Total revenue                 |  | $                               | 42,836 |   |                                | $ | 58,575 |      |  | $ | 99,957 |   |  | $ | 195,800 |  
|Less: Total cost of revenue   |  |                                 | 32,096 |   |                                |   | 35,651 |      |  |   | 71,265 |   |  |   | 126,476 |  
|                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total gross profit            |  | $                               | 10,740 |   |                                | $ | 22,924 |      |  | $ | 28,692 |   |  | $ | 69,324  |  
|                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total gross profit margin     |  |                                 | 25     | % |                                |   | 39     | %    |  |   | 29     | % |  |   | 35      | %

Product Revenue

Product revenue for the three and nine months ended September 30, 2010 was $23.5 million and $41.8 million,
respectively, primarily from sales of Cray XT5 systems and third-party equipment. Product revenue for the three and nine months ended September 30, 2009 was $32.4 million and $133.9 million, respectively, primarily from sales of and upgrades to
Cray XT systems and third-party equipment. Product revenue for the three and nine months ended September 30, 2010 were significantly lower than the prior periods primarily due to the anticipated release of the Cray XT6 and Cray XE6 systems in
the second half of 2010 and the recognition of revenue in the first half of 2009 from product deliveries at the end of 2008. Several customers deferred purchases pending the release of Cray XE6 systems, the successor product to the Cray XT5 and Cray
XT6 systems, with the majority of those product deliveries expected to be accepted and recognized as revenue in the fourth quarter of 2010 or early 2011.

Service Revenue

Service revenue for the three months ended
September 30, 2010 was $19.4 million compared to $26.2 million for the same period in 2009. Service revenue for the nine months ended September 30, 2010 was $58.2 million compared to $61.9 million for the same period in 2009, a decrease of
$3.7 million. The decreases were primarily caused by delays on certain Custom Engineering contracts.

Cost of Product Revenue and Product
Gross Profit

For the three and nine months ended September 30, 2010, cost of product revenue
decreased $6.4 million and $62.4 million, respectively, based on lower product revenues. For the three months ended September 30, 2010, product gross profit margin decreased by 1 percentage point to 22 percent, compared to the same period in
2009. Product gross margins for the quarters ended September 30, 2010 and 2009 are not indicative of expected full year results. For the nine months ended September 30, 2010, product gross profit margin dropped 4 percentage points from the
same period in 2009 partially due to two low margin transactions. Cost of product revenue for the first nine months of 2009 was negatively impacted by higher excess and obsolete charges.



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Cost of Service Revenue and Service
Gross Profit

Cost of service revenue increased $2.9 million and service gross profit margin decreased by
30 percentage points to 29% during the three months ended September 30, 2010 compared to the same period in 2009. These changes were principally due to the increase in personnel and third-party costs associated with our increased Custom
Engineering activities ahead of revenue. For the nine months ended September 30, 2010, cost of service revenue increased $7.2 million and service gross profit margin decreased by 16 percentage points to 31% compared to the same period in 2009.
These changes were primarily due to the increase in personnel and third-party costs associated with our increased Custom Engineering activities and a revision in estimated progress toward completion on a contract accounted for under the percentage
of completion method during the nine months ended September 30, 2010.

Research and Development Expenses

Research and development expenses for the three and nine months ended September 30, 2010 and 2009, respectively, were
(in thousands, except for percentages):



|                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                        |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                        |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Gross research and development expenses                                 |  | $                               | 20,583 |   |                                | $ | 19,197 |      |  | $ | 59,828  |   |  | $ | 70,089  |  
|Less: Amounts included in cost of revenue                               |  |                                 | (27    | ) |                                |   | (410   | )    |  |   | (34     | ) |  |   | (1,705  | )
|Less: Reimbursed research and development (excludes amounts in revenue) |  |                                 | (1,993 | ) |                                |   | (1,466 | )    |  |   | (26,493 | ) |  |   | (26,138 | )
|                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net research and development expenses                                   |  | $                               | 18,563 |   |                                | $ | 17,321 |      |  | $ | 33,301  |   |  | $ | 42,246  |  
|                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Percentage of total revenue                                             |  |                                 | 43     | % |                                |   | 30     | %    |  |   | 33      | % |  |   | 22      | %

Gross
research and development expenses in the table above reflect all research and development expenditures. Research and development expenses include personnel expenses, depreciation, allocations for certain overhead expenses, software, prototype
materials and outside contracted engineering expenses.

For the three months ended September 30, 2010,
gross research and development expenses increased $1.4 million from the same period in 2009. For the nine months ended September 30, 2010, gross research and development expenses decreased $10.3 million from the same period in 2009, due
principally to lower outside services from the completion of the process improvement consulting costs in 2009 and reduced salary and related expenses.

In February 2010, the Company and the Defense Advanced Research Projects Agency High Productivity Computing Systems program (DARPA) amended the Phase III agreement. As with the previous
contract, we expect to receive reimbursement after the achievement of a series of pre-defined milestones culminating in the delivery of a prototype system in 2012. Consistent with this change, certain deliverables have been eliminated from the
contract, reducing the overall scope and cost of the project. The remaining amount of the milestones under the contract was reduced by $60 million. Pursuant to the recently-amended contract, we are required to spend $285 million on our DARPA Phase
III project in order to receive the full $190 million of co-funding. We currently do not expect that spending will be a limiting issue. We received acceptance of the final DARPA milestone planned for 2010 in October 2010 for $12 million. The
significant majority, if not all, of the $12 million milestone is expected to be credited against gross research and development expense for the fourth quarter of 2010. The Company will assess how much of the $12 million milestone will be credited
against research and development expenses during the fourth quarter of 2010.



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Sales and Marketing and General
and Administrative Expenses

Our sales and marketing and general and administrative expenses for the
three and nine months ended September 30, 2010 and 2009, respectively, were (in thousands, except for percentages):



|                            |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|--------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                            |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                            |  | 2010                            |       |   | 2009                           |   |       | 2010 |  |   | 2009   |  
|Sales and marketing         |  | $                               | 6,512 |   |                                | $ | 6,279 |      |  | $ | 19,348 |   |  | $ | 18,683 |  
|Percentage of total revenue |  |                                 | 15    | % |                                |   | 11    | %    |  |   | 19     | % |  |   | 10     | %
|General and administrative  |  | $                               | 4,166 |   |                                | $ | 3,476 |      |  | $ | 12,471 |   |  | $ | 11,523 |  
|Percentage of total revenue |  |                                 | 10    | % |                                |   | 6     | %    |  |   | 12     | % |  |   | 6      | %

Sales and Marketing.Sales and marketing expense for the three and nine months ended
September 30, 2010 increased $233,000 and $665,000, respectively, from the same periods in 2009, primarily due to higher salaries and benefits related to our strategic initiatives as well as increased expenses in our foreign locations offset by
lower commissions and bonus expense.

General and Administrative. General and administrative
expense for the three and nine months ended September 30, 2010 increased $690,000 and $948,000, respectively, from the same periods in 2009, primarily due to higher salaries and benefits.

Research and Development, Sales and Marketing, and General and Administrative expenses can vary significantly from
quarter to quarter depending on the level of incentive compensation earned, which is based largely on year-to-date operating results and milestones completed under externally funded research and development contracts.

Other Income (Expense), net

For the three months ended September 30, 2010, we recognized net other expense of $149,000 compared to net other income of $916,000 for the same period in 2009. Net other income (expense) for the
three months ended September 30, 2010 and 2009 was principally the result of foreign currency transaction gains (losses). For the nine months ended September 30, 2010, we recognized net other expense of $200,000 compared to net other
expense of $575,000 for the same period in 2009. Net other expense for the nine months ended September 30, 2010 was principally the result of foreign currency transaction losses. Net other expense for the nine months ended September 30,
2009 was principally the result of a loss on the repurchase of Notes and foreign currency transaction losses.

Interest Income
(Expense), net

Our interest income and interest expense for the three and nine months ended
September 30, 2010 and 2009, respectively, were (in thousands):



|                               |  |                                 |    |  |                                |   |     |      |  |   |      |   |  |   |        |  
|------------------------------ |  | ------------------------------- | -- |  | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ------ | -
|                               |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |  
|                               |  | 2010                            |    |  | 2009                           |   |     | 2010 |  |   | 2009 |  
|Interest income                |  | $                               | 30 |  |                                | $ | 58  |      |  | $ | 119  |   |  | $ | 438    |  
|Interest expense               |  |                                 | 31 |  |                                |   | (23 | )    |  |   | (19  | ) |  |   | (1,287 | )
|                               |  |                                 |    |  |                                |   |     |      |  |   |      |   |  |   |        |  
|Interest income (expense), net |  | $                               | 61 |  |                                | $ | 35  |      |  | $ | 100  |   |  | $ | (849   | )
|                               |  |                                 |    |  |                                |   |     |      |  |   |      |   |  |   |        |  

Interest income decreased during the three and nine months ended September 30, 2010
compared to the same periods in 2009 as a result of lower invested balances and short-term interest rates. Interest expense in the three and nine month periods ended September 30, 2010 included the $47,000 reversal of estimated interest on a
tax liability. The actual interest charged was less than the accrued amount and the reversal of the excess was larger than actual interest expense for the quarter. Interest expense for the nine months ended September 30, 2010 decreased
significantly compared to the same period in 2009 due to the retirement of our Notes in 2009. Interest expense for the three months ended September 30, 2009 included $1,000 of contractual interest on our Notes and non-cash amortization of our
Notes debt discount of $4,000. Interest expense for the nine months ended September 30, 2009 included $0.3 million of contractual interest on our Notes, non-cash amortization of our Notes debt discount of $0.8 million and non-cash
amortization of capitalized issuance costs of $0.1 million.



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Taxes

We recorded income tax expense of $187,000 and $483,000, respectively, for the three and nine months ended
September 30, 2010. The expense recorded was primarily related to foreign income taxes payable. We recorded an income tax benefit of $1.1 million and $1.0 million, respectively, for the three and nine months ended September 30, 2009. The
income tax benefit realized during the three and nine months ended September 30, 2009 was primarily the result of the reversal of approximately $1.1 million of valuation allowance held against certain deferred income tax assets of our Japanese
subsidiary.

Liquidity and Capital Resources

The Company generates cash from operations predominantly from the sale of high performance computer systems and related services. The Company typically has a small number of significant contracts that
make up the majority of total revenue. The material changes in certain of the Companys balance sheet accounts are due to the timing of product deliveries, customer acceptances, contractually determined billings and cash collections. Working
capital requirements, including inventory purchases and normal capital expenditures, are generally funded with cash from operations.

At September 30, 2010 the Company was completing a very large production ramp to deliver new Cray XE6 supercomputers to several customers. This production ramp has resulted in a significant increase
in inventory to $149.3 million as of September 30, 2010 compared to $29.0 million at December 31, 2009. Associated with this increase is a large increase in accounts payable to $41.8 million as of September 30, 2010 compared to $18.8
million at year-end. Partially offsetting these impacts on our liquidity position has been an increase in the current portion of deferred revenues to $134.7 million as of September 30, 2010 from $42.4 million at December 31, 2009 resulting
principally from contractual rights to bill certain of these customers for part of the contract before full customer acceptance and related revenue recognition.

In the fourth quarter of 2010 or in early 2011 we anticipate that the impacts of this large production ramp on our
liquidity will reverse at least in part as we collect payment for these systems based on receiving customer acceptance, however, any significant delays in deliveries or acceptances of our systems could also delay such reversal and significantly
reduce the Companys liquidity and cash position.

Cash and cash equivalents, restricted cash and
short-term investments totaled $73.5 million at September 30, 2010 compared to $113.2 million at December 31, 2009.

Cash flow information includes the following (in thousands):



|                            |  |                                |         |   |      |   |         |  
|--------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                            |  | Nine Months EndedSeptember 30, |        
|                            |  | 2010                           |         |   | 2009 |  
|Cash provided by (used in): |  |                                |         |   |      |   |         |  
|Operating Activities        |  | $                              | (37,478 | ) |      | $ | 19,191  |  
|Investing Activities        |  | $                              | 181     |   |      | $ | (3,657  | )
|Financing Activities        |  | $                              | 515     |   |      | $ | (27,174 | )

Operating Activities.Net cash used in operating activities for the nine months ended September 30, 2010 was
$37.5 million compared to net cash provided by operating activities of $19.2 million for the same period in 2009. For the nine months ended September 30, 2010, net cash used in operating activities was principally the result of a buildup of
inventory related to certain large-scale system contracts, much of which management expects to be converted to cash in the fourth quarter of 2010 or early 2011. For the nine months ended September 30, 2009, net cash provided by operating
activities was principally the result of decreases in accounts receivable and inventory as acceptance and payment were received for certain large-scale systems.

Investing Activities.Net cash provided by investing activities was $0.2 million for the nine months ended
September 30, 2010, compared to net cash used in investing activities of $3.7 million for the same 2009 period. Net cash provided by investing activities for the nine months ended September 30, 2010 was due principally to the sale of
short-term investments partially offset by the purchase of property and equipment. Net cash used in investing activities for the nine months ended September 30, 2009 was principally due to purchases of property and equipment and an increase in
restricted cash.



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Financing Activities.Net cash provided by financing activities for the nine months ended September 30, 2010
was $0.5 million, compared to net cash used in financing activities of $27.2 million for the same period in 2009. Net cash provided by financing activities for the nine months ended September 30, 2010 resulted primarily from cash received from
the issuance of common stock through our employee stock purchase plan. Net cash used in financing activities for the nine months ended September 30, 2009 resulted primarily from the repurchase of our Notes and our stock options from our 2009
stock option repurchase tender offer, partially offset by the issuance of common stock through our employee stock purchase plan and exercises of stock options.

In addition, we lease certain equipment and facilities used in our operations under operating leases in the normal course of business and have contractual commitments under certain development
arrangements. The following table summarizes our contractual obligations at September 30, 2010 (in thousands):



|                                   |  |                           |        |  |                       |   |       |           |  |   |           |  |  |            |       |  |  |   |        | 
|---------------------------------- |  | ------------------------- | ------ |  | --------------------- | - | ----- | --------- |  | - | --------- |  |  | ---------- | ----- |  |  | - | ------ | 
|                                   |  | Amounts Committed by Year |       
|Contractual Obligations            |  | Total                     |        |  | 2010(Less than1 Year) |   |       | 2011-2012 |  |   | 2013-2014 |  |  | Thereafter |      
|Development agreements             |  | $                         | 16,369 |  |                       | $ | 6,260 |           |  | $ | 9,984     |  |  | $          | 125   |  |  | $ |       | 
|Operating leases                   |  |                           | 28,859 |  |                       |   | 1,038 |           |  |   | 7,765     |  |  |            | 7,144 |  |  |   | 12,912 | 
|Unrecognized income tax benefits   |  |                           | 452    |  |                       |   | 433   |           |  |   | 19        |  |  |            |      |  |  |   |       | 
|                                   |  |                           |        |  |                       |   |       |           |  |   |           |  |  |            |       |  |  |   |        | 
|Total contractual cash obligations |  | $                         | 45,680 |  |                       | $ | 7,731 |           |  | $ | 17,768    |  |  | $          | 7,269 |  |  | $ | 12,912 | 
|                                   |  |                           |        |  |                       |   |       |           |  |   |           |  |  |            |       |  |  |   |        | 

We believe that current cash and cash equivalents balances will be sufficient to meet our
anticipated operating cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. For example, if we are unable to obtain customer acceptances of and customer
payment for our Cray XT6 and Cray XE6 systems delivered in the second half of 2010, our 2010 revenue and cash will be substantially reduced and our financial results will be significantly adversely affected. We have discussed and been granted
extended payment terms with certain key suppliers to help us mitigate the impact of our new product manufacturing ramp.

During the third quarter of 2010, we entered into a secured line of credit with a bank in the amount of $25 million. The first $15 million is available to us at any time and the additional $10 million is
available if we exceed certain minimum financial ratios.

The Company had $28.5 million of unused borrowings
on two lines of credit of $25 million and $3.5 million at September 30, 2010. The Company had $3.5 million of unused borrowings on one line of credit of $3.5 million at December 31, 2009.

We continually evaluate opportunities to sell equity or debt securities, access existing credit facilities or obtain new
credit facilities to further strengthen our financial position. The sale of additional equity or convertible debt securities would likely be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or
investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that these financing instruments will
be available in amounts or on terms needed or acceptable to us, if at all.

Should there be significant delays
in product acceptances of or payments for the Cray XT6 and the new Cray XE6 systems, the Company may need to assess these and potentially other sources of financing. There can be no assurance that extended supplier credit terms, additional lines of
credit or other financing will be available in amounts or on terms needed or acceptable to us, if at all.

Contractual Obligations

There have been no significant changes in our contractual obligations during the nine months ended
September 30, 2010, as compared to the contractual obligations disclosed in Managements Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We are exposed to financial market risks, including changes in interest rates and foreign currency fluctuations.

Interest Rate Risk: We invest our available cash principally in highly liquid investment-grade debt instruments of corporate issuers and in debt instruments of the U.S. government and its agencies.
We do not have any derivative instruments in our investment portfolio. We protect and preserve invested funds by limiting default, market and reinvestment risk.

Foreign Currency Risk: We sell our products primarily in North America, Asia and Europe. As a result, our
financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Our products are generally priced in U.S. dollars, and a strengthening of the dollar could make our
products less competitive in foreign markets. While we commonly sell products with payments in U.S. dollars, our product sales contracts may call for payment in foreign currencies and to the extent we do so, or engage with our foreign subsidiaries
in transactions deemed to be short-term in nature, we are subject to foreign currency exchange risks. As of September 30, 2010, we were a party to forward exchange contracts that hedged approximately $32.9 million of anticipated cash receipts
on specific foreign currency denominated sales contracts. These forward contracts hedge the risk of foreign exchange rate changes between the time that the related contract was signed and when the cash receipts are expected to be received. Our
foreign maintenance contracts are typically paid in local currencies and provide a natural hedge against foreign exchange exposure. To the extent that we wish to repatriate any of these funds to the United States, however, we are subject to foreign
exchange risks. As of September 30, 2010, a 10% change in foreign exchange rates could impact our annual earnings and cash flows by approximately $0.8 million.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of disclosure controls and procedures.Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we
conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this
quarterly report. Based on this evaluation, our chief executive officer and chief financial officer concluded as of September 30, 2010, that our disclosure controls and procedures were effective such that the information required to be
disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer
and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.There have been no changes in our internal control over
financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Limitations on effectiveness of control.Our management, including our chief executive officer and chief financial
officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.



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Part II. OTHER INFORMATION



|Item 1A. | Risk Factors
|-------- | ------------

You should carefully consider the risks described below together with all of the other information included in this quarterly report on Form 10-Q and in our 2009 annual report on Form 10-K. If any of
these risks actually occur, our business, financial condition or operating results could be materially adversely affected and the trading price of our common stock could decline.

Our operating results may fluctuate significantly and we may not achieve profitability in any given period.Our
operating results are subject to significant fluctuations which make estimating revenue and operating results for any specific period very difficult, particularly as a material portion of product revenue recognized in any given quarter and year
typically depends on a very limited number of system sales expected for that quarter and year and the product revenue may depend on the timing of product acceptances by customers and contractual provisions affecting revenue recognition. Delays in
recognizing revenue from a product transaction or transactions due to development or product delivery delays, not receiving needed components timely or with anticipated quality and performance, not achieving customer acceptances of installed
systems, contractual provisions or for other reasons, could have a material adverse effect on our operating results in any specific quarter, and could shift associated revenue, gross profit and cash receipts from one quarter into another, including
from one year to another in the case of revenue expected to be realized in the fourth quarter of any year. In addition, because our revenue is often concentrated in particular quarters rather than evenly spread throughout a year, as it is expected
to be in the fourth quarter this year, we may not be able to sustain profitability over successive quarters even if we are profitable for the year.

We have experienced net losses in recent periods and last recorded positive annual net income in 2003. For example, we recorded a net loss of $10.6 million in 2007, a net loss of $40.7 million in 2008,
including a non-cash goodwill impairment charge of approximately $54.5 million, a net loss of $0.6 million in 2009 and a net loss of $37 million for the nine months ended September 30, 2010.

Whether we will be able to increase our revenue and achieve and sustain profitability on a quarterly and annual basis
depends on a number of factors, including:



| |  |  | achieving acceptances of Cray XT6 and Cray XE6 systems delivered, specifically those delivered in 2010 in the case of 2010 revenue and earnings;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of revenue recognized in any given period, which is affected by the very high average sales prices and limited number of system sales in
any quarter, the timing of product acceptances by customers and contractual provisions affecting the timing and amount of revenue recognition;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | successfully selling, delivering and obtaining customer acceptances of our Cray XT6, Cray XE6, and Cray XT6m systems and upgrade and successor
systems;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the successful continued expansion of our Custom Engineering strategic initiative;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our expense levels, including research and development expense net of government funding, which are affected by the amount and timing of such
funding and the meeting of contractual development milestones, including the milestones under our DARPA HPCS program;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of product gross profit contribution in any given period due to volume or product mix, strategic transactions, product life cycle,
currency fluctuations and component costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully and timely design, integrate and secure competitive processors into our systems, including for successors to our Cray
XT6 and Cray XE6 systems;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the competitiveness of our products;
| | - |  | ------------------------------------



| |  |  | our ability to secure additional government funding for future development projects;
| | - |  | ------------------------------------------------------------------------------------



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| |  |  | maintaining our product development projects on schedule and within budgetary limitations;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the level and timing of maintenance contract renewals with existing customers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the level and timing of our engineering services contract closures, including the amount of non-billable time incurred;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | revenue delays or losses due to customers postponing purchases to wait for future upgraded or new systems, delays in delivery of upgraded or new
systems, longer than expected customer acceptance cycles or penalties resulting from system acceptance issues; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the terms and conditions of sale or lease for our products and services.
| | - |  | ------------------------------------------------------------------------

The receipt of orders and the timing of shipments and acceptances impact our quarterly and annual results, including cash
flows, and are affected by events outside our control, such as:



| |  |  | the timely availability of acceptable components in sufficient quantities to meet customer delivery schedules;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | the timing and level of government funding for research and development contracts and product acquisitions, which may be adversely affected by the
current economic and fiscal situation and governmental budgetary limitations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the availability of adequate customer facilities to install and operate new Cray systems;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | price fluctuations in the commodity electronics, processor and memory markets;
| | - |  | ------------------------------------------------------------------------------



| |  |  | general economic trends, including changes in levels of customer capital spending;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the introduction or announcement of competitive products;
| | - |  | ---------------------------------------------------------



| |  |  | currency fluctuations, international conflicts or economic crises; and
| | - |  | ----------------------------------------------------------------------



| |  |  | the receipt and timing of necessary export licenses.
| | - |  | ----------------------------------------------------

Because of the numerous factors affecting our revenue and results of operations, we may not have net income on a
quarterly or annual basis in the future. We anticipate that our quarterly results will fluctuate significantly, and include losses. Delays in component availability, product development, receipt of orders, product acceptances, reductions in outside
funding for our research and development efforts and achieving contractual development milestones have had a substantial adverse effect on our past results and could continue to have such an effect on our results in 2010 and in future years.

If we are unable to obtain customer acceptances of our Cray XT6 and Cray XE6 systems delivered in 2010,
our 2010 revenue and cash will be substantially reduced and our financial results will be significantly adversely affected.Our 2010 expected financial results are dependent upon our customer acceptances of the Cray XT6 and Cray XE6 systems that
we have recently shipped as a substantial portion of our 2010 revenue and cash flow are expected to be derived from these system sales. To obtain revenue and cash from sales of these systems that have been delivered, we must obtain customer
acceptances of the systems, including the storage subsystems, typically based on performance, functionality and reliability testing. If the systems do not perform as required, we may not be able to obtain customer acceptances in 2010. To accomplish
this, we must complete customer acceptance testing and meet our contractual requirements to obtain the customer acceptance of the system and realize the revenue and receive payment for the system. Because of the complexity of our systems, there are
often additional updates or development work that must be completed even after delivery of a system to a customer to meet the system acceptance requirements, as has been the case with these system deliveries, and we expect that such additional work
will continue to be required to achieve acceptances of these systems.



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If we
are unable to obtain customer acceptances in 2010 for Cray XT6 and Cray XE6 systems delivered in 2010, our 2010 revenue and cash will be substantially reduced. We have already incurred expenses and used a significant amount of cash in 2010 to
develop and deliver these systems and must continue to do so regardless of whether customer acceptances are obtained in 2010, and therefore our overall financial results and our cash will be significantly adversely affected if we are not able to
obtain revenue and cash from these system sales in 2010. We have obtained extended payment terms with certain key suppliers to help us mitigate the impact of the requirement that we spend considerable cash in advance of delivery and acceptance of
these systems and have added an additional credit line to provide an additional source of working capital if necessary. Should there be significant delays in product acceptances for the new Cray systems the Company may need to assess these and
potentially other sources of financing. There can be no assurance that extended supplier credit terms or other financing will be available in amounts or on terms needed or acceptable to us, if at all.

If the Defense Advanced Research Projects Agency (DARPA) terminates our DARPA High Productivity Computing
Systems (HPCS) program in whole or in part or if we are unable to achieve and obtain acceptance of key DARPA milestones when or as expected or at all, our desired strategy would be adversely affected, our net research and development
expenditures and capital requirements would increase significantly and our ability to conduct research and development would decrease.The DARPA HPCS program calls for the delivery of prototype systems in 2012, and currently provides for a
contribution by DARPA to us of up to $190 million assuming we meet certain milestones, $122 million of which we had already earned as of September 30, 2010. We received acceptance of the final DARPA milestone planned for 2010 in October 2010
for $12 million. In February of 2010, we completed negotiations with DARPA to change the scope and schedule of this program, including changes to milestones and payments allocated to individual milestones, and that resulted in a reduction in the
total possible contribution from DARPA over the term of the HPCS program from $250 million to $190 million. If the completion of any development milestone is delayed, our reported net research and development expenses, and our operating results,
would be adversely affected. If we are unable to complete the remaining milestones, or one or more milestone payments are delayed, reduced and/or eliminated or the program is terminated, our cash flows and expenses would be adversely impacted and
our product development programs would be put at risk. If we do not achieve and have accepted a milestone in the period we had originally estimated, we may incur research and development expense without offsetting co-funding, resulting in increased
net research and development expense during the period. We incurred some delays in payments for program milestones by DARPA in 2007 and 2008; in addition, as a result of our recent discussions with DARPA on the changes in scope and program schedule,
third and fourth quarters of 2009 and full-year 2009 results were adversely impacted by delays in completing development milestones. The amount of DARPA funds we can recognize as an offset to our periodic research and development expenses depends on
our estimates of the total costs and the time to complete the program; changes in our estimates may decrease the amount of funding recognized in any period, which may increase the amount of net research and development expense recognized in that
quarter. By the projects completion, we must spend at least $285 million on the project for us to receive all of the DARPA $190 million reimbursements; failure to do so would result in a lower level of DARPA contribution and could result in a
termination of the funding contract. DARPAs future financial commitments are subject to subsequent Congressional and federal inter-agency action, and our development efforts and the level of reported research and development expenses would be
adversely impacted if DARPA does not receive expected funding, which could result in a delay in payment for completed milestones, a delay in the timing of milestones or a decision to terminate all or part of the program before completion.



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If
our current and future strategic initiatives targeting markets outside of the high-end of the HPC market, particularly our Custom Engineering initiative, are not successful, our ability to grow our revenues and achieve and sustain profitability will
be adversely affected.Our ability to materially grow our revenues and achieve and sustain profitability will be adversely affected if we are unable to generate sufficient revenue from strategic initiatives targeting markets outside of the
high-end of the HPC market, particularly if that segment of the market does not grow significantly. We currently have two such new strategic initiatives: Custom Engineering and selling our Cray XT6m and successor systems. Our Custom Engineering
initiative has demonstrated the most growth to date, and we believe it represents the best opportunity for us to diversify our revenue. To grow our revenue from Custom Engineering, we must continue to win awards for new contracts, timely perform on
existing contracts and develop our capability for business development, notwithstanding that this is a relatively new initiative and we do not have significant experience targeting the markets relevant to our Custom Engineering practices. In
addition, many of the new Custom Engineering projects will be for the U.S. government and likely will require us to enter into agreements that are subject to new or additional Federal Acquisition Regulations, including costing and pricing
requirements to which we have not previously been subject. These regulations are complex and subject to audit to ensure compliance. We may need to enhance existing financial and costing systems to accommodate these new requirements. Errors made in
interpreting and complying with these regulations could result in significant penalties. The Cray XT6m and successor systems require successful sales in a lower priced segment of the supercomputer market. These efforts require monetary investments
ahead of revenue, including adding experienced personnel and initiating new marketing efforts.

Our
reliance on third-party suppliers poses significant risks to our operating results, business and prospects.We rely upon third-party vendors to supply processors for our systems and storage subsystems and use service providers to co-develop key
technologies, including integrated circuit design and verification. We subcontract the manufacture of a majority of the hardware components for our high-end products, including integrated circuits, printed circuit boards, connectors, cables, power
supplies and memory parts, on a sole or limited source basis to third-party suppliers. We use contract manufacturers to assemble certain important components for all of our systems. We also rely on third parties to supply key software and hardware
capabilities, such as file systems and storage subsystems. In addition, we use original equipment manufacturers to deliver complete Cray CX systems. Because specific processors must be designed into our systems well in advance of initial deliveries
of those systems, we are particularly reliant on our processor vendors to deliver on the capabilities and pricing expected at the time we design the processor into the system. We are subject to substantial risks because of our reliance on these and
other limited or sole source suppliers, including the following risks:



| |  |  | If a supplier does not provide components that meet our specifications in sufficient quantities on time, then production and sales of our systems
could be delayed.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If an interruption of supply of our components, services or capabilities occurs because a supplier changes its technology roadmap, decides to no
longer provide those products or services, increases the price of those products or services significantly or imposes reduced delivery allocations on its customers, it could take us a considerable period of time to identify and qualify alternative
suppliers, to redesign our products as necessary and to begin to manufacture the redesigned components or otherwise obtain those services or capabilities. In some cases, such as with key integrated circuits and memory parts or processors, we may not
be able to redesign such components or find alternate sources that we could use in any realistic timeframe.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If a supplier providing us with key research and development and design services or core technology components with respect to integrated circuit
design, network communication capabilities or software is late, fails to provide us with effective functionality or loses key internal talent, our development programs may be delayed or prove to be impossible to complete.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If a supplier cannot provide a competitive key component (for example, due to inadequate performance or a prohibitive price) or eliminates key
features from components, such as with the processors we design into our systems, our systems may be less competitive than systems using components with greater capabilities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If a supplier provides us with hardware or software that contains bugs or other errors or is different from what we expected, our development
projects and production systems may be adversely affected through reduced performance or capabilities, additional design testing and verification efforts, re-spins of integrated circuits and/or development of replacement components, and the
production and sales of our systems could be delayed and systems installed at customer sites could require significant, expensive field component replacements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Some of our key component and service suppliers are small companies with limited financial and other resources, and consequently may be more likely
to experience financial and operational difficulties than larger, well-established companies, which increases the risk that they will be unable to deliver products as needed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If a key supplier is acquired or has a significant business change, such as the acquisition of our file system software provider by our competitor
Sun Microsystems and the subsequent acquisition of Sun by Oracle, the production and sales of our systems and services may be delayed or adversely affected, or our development programs may be delayed or may be impossible to complete.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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For example, our DARPA HPCS project was adversely affected by changes by
Intel in its high performance technology roadmap that affected our ability to complete that program successfully and resulted in a reduction in the amount of funding we could receive from DARPA by $60 million. In addition, our Cray XT5, Cray XT6,
Cray XE6, Cray XT5m and Cray XT6m systems are based on certain AMD Opteron processors. Delays in the availability of certain acceptable reliable components, including processors and memory parts, and increases in order lead times for certain
components, adversely affected our revenue and operating results in prior periods, and could continue to adversely affect results for 2010 and in subsequent periods. The failure by the original equipment manufacturer of our Cray CX1 systems to
timely obtain necessary certifications also adversely affected our ability to introduce and ramp up sales of this product in 2009.

If we are unable to compete successfully in the highly competitive HPC market, our business will not be successful.The market for HPC systems is very competitive. An increase in competitive
pressures in our market or our failure to compete effectively may result in pricing reductions, reduced gross margins and loss of market share and revenue. Many of our competitors are established companies well known in the HPC market, including
IBM, NEC, Hewlett-Packard, Fujitsu, Hitachi, Silicon Graphics International, Bull S.A. and Sun Microsystems. Most of these competitors have substantially greater research, engineering, manufacturing, marketing and financial resources than we do. We
also compete with systems builders and resellers of systems that are constructed from commodity components using processors manufactured by Intel, AMD and others. These competitors include the previously named companies and Dell, with IBM using both
third-party processors and its own proprietary processors, as well as smaller firms that benefit from the low research and development costs needed to assemble systems from commercially available commodity products. Such companies, because they can
offer high peak performance per dollar, can put pricing pressure on us in certain competitive procurements. In addition, to the extent that Intel, IBM and other processor suppliers develop processors with greater capabilities or at a lower cost than
the processors we currently use from AMD or design in over time, our Cray XT6, Cray XT6m, Cray XE6 and successor systems may be at a competitive disadvantage to systems utilizing such other processors until we can design in, integrate and secure
competitive processors, if at all. Although our April 2008 collaboration with Intel is intended to help mitigate this risk, Intel processors are not expected to be delivered in our Cray XT/XE line of supercomputers until late 2012 or 2013.

Periodic announcements by our competitors of new HPC systems or plans for future systems and price
adjustments may reduce customer demand for our products. Many of our potential customers already own or lease high performance computer systems. Some of our competitors may offer substantial discounts to potential customers. We have in the past and
may again be required to provide substantial discounts to make strategic sales, which may reduce or eliminate any gross profit on such transactions, or to provide lease financing for our products, which could result in a deferral of our receipt of
cash and revenue for these systems. These developments limit our revenue and resources and reduce our ability to be profitable.

If the U.S. government purchases fewer supercomputers, our revenue would be reduced and our operating results would be adversely affected.Historically, sales to the U.S. government and customers
primarily serving the U.S. government have represented the largest single market segment for supercomputer sales worldwide, including our products and services. In 2007, 2008 and 2009 and the first nine months of 2010, approximately 60%, 81%, 72%
and 69%, respectively, of our revenue was derived from such sales. Our plans for 2010 and the foreseeable future contemplate significant sales to U.S. government agencies. Sales to government agencies, including further sales pursuant to existing
contracts, may be adversely affected by factors outside our control, such as the current economic uncertainty and its effect on government budgets, changes in procurement policies, budgetary considerations including Congressional delays in
completing appropriation bills, domestic crises, and international political developments. If agencies and departments of the United States or other governments were to stop, reduce or delay their use and purchases of supercomputers, our revenue and
operating results would be adversely affected.

If we are unable to successfully sell and deliver our Cray
XE6 systems and develop, sell and deliver successor systems, our operating results will be adversely affected.We expect that a significant portion of our revenue in the foreseeable future will come from sales and deliveries of Cray XE6 and
successor systems, and upgrades. Because of the long technology development cycles required to compete effectively in this market, we must begin development of products years ahead of our ability to sell such systems. With procurements for large
systems that require that we link together multiple cabinets containing powerful processors and other components into an integrated system, our Cray XE6 and successor systems must also scale to unprecedented levels of performance. During our
internal testing and the customer acceptance processes, we may discover that we cannot achieve acceptable system stability or scalability across these large systems without incurring significant additional delays and expense. Any additional delays
in receiving acceptable components or in product development, assembly, final testing and obtaining large system stability would delay delivery, installation and acceptance of Cray XE6 and successor systems.

Many factors affect our ability to successfully develop and sell these systems, including the following:



| |  |  | The level of product differentiation in our Cray XE6 and successor systems. We need to compete successfully against HPC systems from large
established companies and lower bandwidth, commodity cluster systems from both large, established companies and smaller firms and demonstrate the value of our balanced high bandwidth systems.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Our ability to meet all customer requirements for acceptance. Even once a system has been delivered, we sometimes do not meet all of the contract
requirements for customer acceptance and ongoing reliability of our systems within the provided-for acceptance period, which has resulted in contract penalties and delays in our ability to recognize revenue from system deliveries. Most often these
penalties adversely affect gross profit through the provision of additional equipment and services and/or service credits to satisfy delivery delays and performance shortfalls. The risk of contract penalties is increased when we bid for new business
prior to completing development of new products when we must estimate future system performance, such as was required with our new Cray XE6 systems.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to source competitive, key components in appropriate quantities, in a timely fashion and on acceptable terms and conditions. For
example, in March 2008, we placed a last-time buy for a key component for our Cray XT4, Cray XT5, Cray XT6 and Cray XMT systems prior to it becoming unavailable, which had to be placed before we could know all the possible sales prospects for these
products or when the key component could be made obsolete by a successor component. If we underestimated our needs, we could limit the number of possible sales of these products and reduce potential revenue, or if we overestimated, we could incur
inventory obsolescence charges and reduce our gross profit. Through the third quarter of 2010, we have written off approximately $5.0 million of estimated excess inventory primarily related to this key component, and we may be required to write off
some of the $0.7 million remaining inventory in the future.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Failure to successfully sell
our Cray XE6 systems and develop and sell successor systems into the high-end of the HPC market will adversely affect our operating results.

The continuing commoditization of HPC hardware and software has resulted in pricing pressure and may adversely affect our operating results.The continuing commoditization of HPC hardware,
particularly processors and interconnect systems, and the growing commoditization of software, including plentiful building blocks and more capable open source software, has resulted in the expansion and acceptance of lower-bandwidth cluster systems
using processors manufactured by Intel, AMD and others combined with commercially available commodity networking and other components, particularly in the middle and lower segments of the HPC market. These systems may offer higher theoretical peak
performance for equivalent cost than equivalent Cray systems, and price/peak performance is often the dominant factor in HPC procurements outside of the high-end HPC or supercomputer market segment. Vendors of such systems often put
pricing pressure on us in competitive procurements, even at times in larger procurements, and this pricing pressure may cause us to reduce our pricing in order to remain competitive which can negatively impact our gross margins and adversely affect
our operating results.

Failure to overcome the technical challenges of developing competitive
supercomputer systems well in advance of when they can be sold would adversely affect our revenue and operating results in subsequent years.We continue to develop successor systems to the Cray XE6 systems and incorporate Intel technologies into
our products as part of our DARPA HPCS program. We are also planning to incorporate graphic processing unit accelerators into our Cray XE6 products. The incorporation of graphic processing units into our systems designed for the
supercomputing segment of the market poses unique challenges in both hardware and software integration.



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These
development efforts are lengthy and technically challenging processes, and require a significant investment of capital, engineering and other resources often years ahead of the time when we can be assured they will result in competitive products. We
may invest significant resources in alternatives that prove ultimately unfruitful. Unanticipated performance and/or development issues may require more engineers, time or testing resources than are currently available. In the past several years,
directing engineering resources to solving current issues has adversely affected the timely development of successor products required for our longer-term product roadmap. Given the breadth of our engineering challenges and our limited engineering
and technical personnel resources, we periodically review the anticipated contributions and expense of our product programs to determine their long-term viability, and we may substantially modify or terminate one or more development programs. We may
not be successful in meeting our development schedules for technical reasons and/or because of insufficient engineering resources, which could cause a lack of confidence in our capabilities among our key customers. To the extent we incur delays in
completing the design, development and production of hardware components, delays in development of requisite system software, cancellation of programs due to technical or economic infeasibility or invest in unproductive development efforts, our
revenue, results of operations and cash flows, and the reputation of such systems in the market, could be adversely affected.

If we are unable to secure additional government research and development funding, our desired strategy would be adversely affected and our ability to conduct research and development would
decrease. The significant government research and development funding we receive from the DARPA HPCS program is scheduled to end in 2012. If we are unable to secure sufficient additional government research and development funding beyond 2012,
our desired strategy would be adversely affected and our ability to continue research and development efforts on next-generation systems would decrease.

We may fail in our efforts to keep up with rapid technological changes in the HPC industry.Our market is characterized by rapidly changing technology, accelerated product obsolescence and
continuously evolving industry standards. Our success depends upon our ability to sell our current products, and to develop successor systems and enhancements in a timely manner to meet evolving customer requirements, which may be influenced by
competitive offerings. We may not succeed in these efforts. Even if we succeed, products or technologies developed by others may render our products or technologies noncompetitive or obsolete. The development process is lengthy and costly and
requires us to commit a significant amount of resources well in advance of sales. A breakthrough in technology could make lower bandwidth cluster systems even more attractive to our existing and potential customers. Such a breakthrough would impair
our ability to sell our products and would reduce our revenue and operating results.

We are subject to
increasing government regulations and other requirements due to the nature of our business, which may adversely affect our business operations.In 2008 and 2009 and the first nine months of 2010, 81%, 72% and 69%, respectively, of our revenue
were derived from the U.S. government or customers primarily serving the U.S. government. Our growth in Custom Engineering is also primarily directed at the government market. In addition to normal business risks, our contracts with the U.S.
government are subject to unique risks, some of which are beyond our control. In addition, other government regulations affect our business operations.

The funding of U.S. government programs is subject to congressional appropriations.Many of the U.S. government programs in which we participate may extend for several years; however, these
programs are normally funded annually. Changes in U.S. strategy and priorities may affect our future procurement opportunities and existing programs. Long-term government contracts and related orders are subject to cancellation, or delay, if
appropriations for subsequent performance periods are not made. The termination of funding for existing or new U.S. government programs could result in a material adverse effect on our results of operations and financial condition.

The U.S. government may modify, curtail or terminate its contracts with us. The U.S. government may modify, curtail
or terminate its contracts and subcontracts with us, without prior notice at its convenience upon payment for work done and commitments made at the time of termination. Modification, curtailment or termination of our major programs or contracts
could have a material adverse effect on our results of operations and financial condition.

Our U.S.
government contract costs are subject to audits by U.S. government agencies.U.S. government representatives may audit the costs we incur on our U.S. government contracts, including allocated indirect costs. Such audits could result in
adjustments to our contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed must be refunded. If any audit uncovers improper or illegal activities, we may be subject
to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government.



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Our
business is subject to potential U.S. government inquiries and investigations.We may be subject to U.S. government inquiries and investigations of our business practices due to our participation in government contracts. Any such inquiry or
investigation could potentially result in a material adverse effect on our results of operations and financial condition.

Our U.S. government business is also subject to specific procurement regulations and other requirements.These requirements, although customary in U.S. government contracts, increase our
performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or
debarment, for cause, from U.S. government contracting or subcontracting for a period of time and could have a negative effect on our reputation and ability to secure future U.S. government contracts.

U.S. export controls could hinder our ability to make sales to foreign customers and our future prospects.The U.S.
government regulates the export of HPC systems such as our products. Occasionally we have experienced delays for up to several months in receiving appropriate approvals necessary for certain sales, which have delayed the shipment of our products.
Delay or denial in the granting of any required licenses could make it more difficult to make sales to foreign customers, eliminating an important source of potential revenue. Our ability to have certain components manufactured in foreign countries
for a lower cost has also been adversely affected by export restrictions covering information necessary to allow such foreign manufacturers to manufacture components for us.

If we cannot retain, attract and motivate key personnel, we may be unable to effectively implement our business plan.Our success depends in large part upon our ability to retain, attract and motivate highly skilled management, development, marketing, sales and service personnel. The loss of and failure to replace key engineering management and personnel could
adversely affect multiple development efforts. Recruitment and retention of senior management and skilled technical, sales and other personnel is very competitive, and we may not be successful in either attracting or retaining such personnel. From
time to time, we have lost key personnel to other high technology companies. As part of our strategy to attract and retain key personnel, we may offer equity compensation through stock options and restricted stock grants. Potential employees,
however, may not perceive our equity incentives as attractive, and current employees who have significant options with exercise prices significantly above current market values for our common stock may seek other employment. In addition, due to the
intense competition for qualified employees, we may be required to increase the level of compensation paid to existing and new employees, which could materially increase our operating expenses.

Our stock price is volatile.The trading price of our common stock is subject to significant fluctuations in
response to many factors, including our quarterly operating results, changes in analysts estimates or our outlook, our capital raising activities, announcements of technological innovations and customer contracts by us or our competitors,
general economic conditions and conditions in our industry.

We may infringe or be subject to claims that
we infringe the intellectual property rights of others.Third parties in the past have asserted, and may in the future assert intellectual property infringement claims against us; and such future claims, if proven, could require us to pay
substantial damages, redesign our existing products or pay fees to obtain cross-license agreements. Regardless of the merits, any claim of infringement would require management attention and could be expensive to defend.



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We
incorporate software licensed from third parties into the operating systems for our products as well as in our tools to design products and any significant interruption in the availability of these third-party software products or defects in these
products could reduce the demand for our products or cause delay in development.The operating system software we develop for our HPC systems contains components that are licensed to us under open source software licenses. Our business could be
disrupted if this software, or functional equivalents of this software, were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case we would be required to redesign our operating system software
to function with alternative third-party software, or develop these components ourselves, which would result in increased costs and could result in delays in product shipments. Our Cray CX, Cray XT, Cray XE and successor systems utilize software
system variants that incorporate Linux technology. The open source licenses under which we have obtained certain components of our operating system software may not be enforceable. Any ruling by a court that these licenses are not enforceable, or
that Linux-based operating systems, or significant portions of them, may not be copied, modified or distributed as provided in those licenses, would adversely affect our ability to sell our systems. In addition, as a result of concerns about the
risks of litigation and open source software generally, we may be forced to protect our customers from potential claims of infringement. In any such event, our financial condition and results of operations may be adversely affected.

We also incorporate proprietary incidental software from third parties, such as for file systems, job scheduling and
storage subsystems. We have experienced some functional issues in the past with implementing such software with our supercomputer systems. In addition, we may not be able to secure needed software systems on acceptable terms, which may make our
systems less attractive to potential customers. These issues may result in lost revenue, additional expense by us and/or loss of customer confidence.

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 at the end of each fiscal year, and any adverse results from such
future evaluations could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our
management and a report by our independent registered public accounting firm on our internal control over financial reporting in our annual reports on Form 10-K as to whether we have any material weaknesses in our internal controls over financial
reporting. Depending on their nature and severity, any future material weaknesses could result in our having to restate financial statements, could make it difficult or impossible for us to obtain an audit of our annual financial statements or could
result in a qualification of any such audit. In such events, we could experience a number of adverse consequences, including our inability to comply with applicable reporting and listing requirements, a loss of market confidence in our publicly
available information, delisting from the NASDAQ Global Market, an inability to complete a financing, loss of other financing sources such as our line of credit, and litigation based on the events themselves or their consequences.

We may not be able to protect our proprietary information and rights adequately.We rely on a combination of
patent, copyright and trade secret protection, nondisclosure agreements and licensing arrangements to establish, protect and enforce our proprietary information and rights. We have a number of patents and have additional applications pending. There
can be no assurance, however, that patents will be issued from the pending applications or that any issued patents will protect adequately those aspects of our technology to which such patents will relate. Despite our efforts to safeguard and
maintain our proprietary rights, we cannot be certain that we will succeed in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technologies. The laws of some
countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the United States. Additionally, under certain conditions, the U.S. government might obtain non-exclusive rights to certain of our
intellectual property. Although we continue to implement protective measures and intend to defend our proprietary rights vigorously, these efforts may not be successful.

Provisions of our Restated Articles of Incorporation and Bylaws could make a proposed acquisition of Cray that is not
approved by our Board of Directors more difficult.Provisions of our Restated Articles of Incorporation and Bylaws could make it more difficult for a third party to acquire us. These provisions could limit the price that investors might be
willing to pay in the future for our common stock. For example, our Restated Articles of Incorporation and Bylaws provide for:



| |  |  | removal of a director only in limited circumstances and only upon the affirmative vote of not less than two-thirds of the shares entitled to vote to
elect directors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our Board of Directors to issue up to 5,000,000 shares of preferred stock, without shareholder approval, with rights senior to those
of the common stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | no cumulative voting of shares;
| | - |  | -------------------------------



| |  |  | the right of shareholders to call a special meeting of the shareholders only upon demand by the holders of not less than 30% of the shares entitled
to vote at such a meeting;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the affirmative vote of not less than two-thirds of the outstanding shares entitled to vote on an amendment, unless the amendment was approved by a
majority of our continuing directors, who are defined as directors who have either served as a director since August 31, 1995, or were nominated to be a director by the continuing directors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | special voting requirements for mergers and other business combinations, unless the proposed transaction was approved by a majority of continuing
directors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | special procedures to bring matters before our shareholders at our annual shareholders meeting; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | special procedures to nominate members for election to our Board of Directors.
| | - |  | ------------------------------------------------------------------------------

These provisions could delay, defer or prevent a merger, consolidation, takeover or other business transaction between us
and a third-party that is not approved by our Board of Directors.



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|Item 6. | Exhibits
|------- | --------



|      |  |                                                                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.01 |  | Loan and Security Agreement by and between Cray Inc. and Silicon Valley Bank, dated September 13, 2010 (1)                                                                      
|      | 
|31.1  |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|      | 
|31.2  |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|      | 
|32.1  |  | Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                            



|(1) | Incorporated by reference to the Companys Current Report on Form 8-K, as filed with the Commission on September 17, 2010.
|--- | --------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements 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.



|                       |  |                                                                  
|---------------------- |  | -----------------------------------------------------------------
|                       |  | CRAY INC.                                                        
|                       | 
|Date: November 8, 2010 |  | /S/    PETER J.
UNGARO                                           
|                       |  | Peter J. Ungaro                                                  
|                       |  | President and Chief Executive Officer                            
|                       | 
|                       |  | /S/    BRIAN C.
HENRY                                            
|                       |  | Brian C. Henry                                                   
|                       |  | Executive Vice President and Chief Financial Officer             
|                       | 
|                       |  | /S/    CHARLES D.
FAIRCHILD                                      
|                       |  | Charles D. Fairchild                                             
|                       |  | Vice President, Corporate Controller and Chief Accounting Officer



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