##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    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 0-26820
 
 CRAY INC.
 (Exact name of registrant as specified in its charter)
 Washington
(State or other jurisdiction of 
incorporation or organization)
    
    93-0962605
(I.R.S. Employer
Identification No.)
 
 
 
 þ o
  o þ o
 o þ




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##### 



CRAY INC.
 TABLE OF CONTENTS
 Page No.PART I FINANCIAL INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements:Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    1Statements of Operations for the Three Months Ended March 31, 2007 and 2006
    
    
    2Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
    
    
    3Notes
to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22Item 4T. Controls and Procedures
    
    
    22PART II OTHER INFORMATIONItem 1A. Risk Factors
    
    
    22Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  
  Available Information




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PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
  
 
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    91,089
    
    
    $
    115,328Restricted cash
    
    
    25,000
    
    
    
    25,000Short-term investments, available-for-sale
    
    
    31,488
    
    
    
    Accounts receivable, net
    
    
    25,733
    
    
    
    44,790Inventory
    
    
    53,960
    
    
    
    58,798Prepaid expenses and other current assets
    
    
    3,368
    
    
    
    2,156Total current assets
    
    
    230,638
    
    
    
    246,072Property and equipment, net
    
    
    19,209
    
    
    
    21,564Service inventory, net
    
    
    4,119
    
    
    
    4,292Goodwill
    
    
    57,521
    
    
    
    57,138Deferred tax asset
    
    
    746
    
    
    
    722Intangible assets, net
    
    
    1,380
    
    
    
    1,404Other non-current assets
    
    
    6,069
    
    
    
    6,311TOTAL ASSETS
    
    $
    319,682
    
    
    $
    337,503LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    15,634
    
    
    $
    22,450Accrued payroll and related expenses
    
    
    10,464
    
    
    
    17,411Advance research and development payments
    
    
    15,474
    
    
    
    21,518Other accrued liabilities
    
    
    9,521
    
    
    
    5,121Deferred revenue
    
    
    39,912
    
    
    
    43,248Total current liabilities
    
    
    91,005
    
    
    
    109,748Long-term deferred revenue
    
    
    2,069
    
    
    
    2,475Other non-current liabilities
    
    
    3,474
    
    
    
    3,906Convertible notes payable
    
    
    80,000
    
    
    
    80,000TOTAL LIABILITIES
    
    
    176,548
    
    
    
    196,129Commitments and ContingenciesShareholders 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, 32,432,737 and 32,236,888 shares, respectively
    
    
    509,900
    
    
    
    507,356Accumulated other comprehensive income
    
    
    6,912
    
    
    
    6,855Accumulated deficit
    
    
    (373,678
    )
    
    
    (372,837
    )TOTAL SHAREHOLDERS EQUITY
    
    
    143,134
    
    
    
    141,374TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    319,682
    
    
    $
    337,503
 See accompanying notes
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Three Months EndedMarch 31,2007
    
    
    2006Revenue:Product
    
    $
    33,660
    
    
    $
    34,269Service
    
    
    13,449
    
    
    
    14,246Total revenue
    
    
    47,109
    
    
    
    48,515Cost of revenue:Cost of product revenue
    
    
    23,577
    
    
    
    26,677Cost of service revenue
    
    
    7,998
    
    
    
    7,693Total cost of revenue
    
    
    31,575
    
    
    
    34,370Gross margin
    
    
    15,534
    
    
    
    14,145Operating expenses:Research and development, net
    
    
    7,880
    
    
    
    7,215Sales and marketing
    
    
    5,268
    
    
    
    4,985General and administrative
    
    
    4,280
    
    
    
    5,594Restructuring and severance
    
    
    10
    
    
    
    738Total operating expenses
    
    
    17,438
    
    
    
    18,532Loss from operations
    
    
    (1,904
    )
    
    
    (4,387
    )Other income (expense), net
    
    
    395
    
    
    
    (41
    )Interest income (expense), net
    
    
    1,033
    
    
    
    (608
    )Loss before income taxes
    
    
    (476
    )
    
    
    (5,036
    )Provision for income taxes
    
    
    (365
    )
    
    
    (269
    )Net loss
    
    $
    (841
    )
    
    $
    (5,305
    )Basic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.24
    )Basic and diluted weighted average shares outstanding
    
    
    31,484
    
    
    
    22,338
 See accompanying notes
 2




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Three Months EndedMarch 31,2007
    
    
    2006Operating activities:Net loss
    
    $
    (841
    )
    
    $
    (5,305
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    3,317
    
    
    
    4,630Share-based compensation cost
    
    
    1,022
    
    
    
    481Inventory write-down
    
    
    148
    
    
    
    117Amortization of issuance costs, convertible notes payable and line of credit
    
    
    172
    
    
    
    338Deferred income taxes
    
    
    (24
    )
    
    
    (56
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    18,857
    
    
    
    24,846Inventory
    
    
    4,228
    
    
    
    7,179Prepaid expenses and other current assets
    
    
    (1,218
    )
    
    
    (725
    )Other non-current assets
    
    
    (38
    )
    
    
    33Accounts payable
    
    
    (6,849
    )
    
    
    4,519Accrued payroll and related expenses, other accrued liabilities and advance
research and development payments
    
    
    (8,262
    )
    
    
    (1,957
    )Other non-current liabilities
    
    
    (434
    )
    
    
    559Deferred revenue
    
    
    (3,760
    )
    
    
    (10,771
    )Net cash provided by operating activities
    
    
    6,318
    
    
    
    23,888Investing activities:Purchases of short-term investments
    
    
    (31,362
    )
    
    
    Proceeds from sale of investment
    
    
    
    
    
    
    239Purchases of property and equipment
    
    
    (359
    )
    
    
    (996
    )Net cash used in investing activities
    
    
    (31,721
    )
    
    
    (757
    )Financing activities:Proceeds from issuance of common stock through employee stock purchase plan
    
    
    119
    
    
    
    130Proceeds from exercise of options
    
    
    1,066
    
    
    
    602Principal payments on capital leases
    
    
    (31
    )
    
    
    (30
    )Net cash provided by financing activities
    
    
    1,154
    
    
    
    702Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    10
    
    
    
    34Net increase (decrease) in cash and cash equivalents
    
    
    (24,239
    )
    
    
    23,867Cash and cash equivalentsBeginning of period
    
    
    115,328
    
    
    
    46,026End of period
    
    $
    91,089
    
    
    $
    69,893Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    5
    
    
    $
    212Non-cash investing and financing activities:Inventory transfers to fixed assets and service inventory
    
    $
    462
    
    
    $
    299Stock issued
for 401(k) match
    
    $
    337
    
    
    $
    286
 See accompanying notes
 3




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Note 1  Basis of Presentation
     Principles of Consolidation
  Use of Estimates
  4




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Reverse Stock Split
  Note 2
 Summary of New Accounting Policies
 Short-term investments
 Accounting
for Certain Investments in Debt and Equity Securities
 Note 3  Earnings Per Share (EPS)
   Note 4
 Comprehensive Loss
  Three Months EndedMarch 31,2007
    
    
    2006Net loss
    
    $
    (841
    )
    
    $
    (5,305
    )Unrealized gains on available-for-sale investments
    
    
    17
    
    
    
    Unrealized losses on hedged transactions
    
    
    (288
    )
    
    
    Foreign currency translation adjustment
    
    
    328
    
    
    
    72Comprehensive loss
    
    $
    (784
    )
    
    $
    (5,233
    )
 5




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Note 5  Accounts Receivable
  March 31,
    
    
    December 31,2007
    
    
    2006Trade accounts receivable
    
    $
    21,496
    
    
    $
    39,766Unbilled receivables
    
    
    4,065
    
    
    
    4,045Advance billings
    
    
    271
    
    
    
    1,07825,832
    
    
    
    44,889Allowance for doubtful accounts
    
    
    (99
    )
    
    
    (99
    )Accounts receivable, net
    
    $
    25,733
    
    
    $
    44,790
   Note 6  Inventory
  March 31,
    
    
    December 31,2007
    
    
    2006Components and subassemblies
    
    $
    11,873
    
    
    $
    22,536Work in process
    
    
    11,107
    
    
    
    15,310Finished goods
    
    
    30,980
    
    
    
    20,952Total
    
    $
    53,960
    
    
    $
    58,798
   Note 7  Deferred Revenue
  March 31,
    
    
    December 31,2007
    
    
    2006Deferred product revenue
    
    $
    22,986
    
    
    $
    26,993Deferred service revenue
    
    
    18,995
    
    
    
    18,730Total deferred revenue
    
    
    41,981
    
    
    
    45,723Less long-term deferred revenue
    
    
    (2,069
    )
    
    
    (2,475
    )Deferred revenue in current liabilities
    
    $
    39,912
    
    
    $
    43,248
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Note 8  Restructuring and Severance Charges
   2007
    
    
    2006Balance, January 1
    
    $
    1,063
    
    
    $
    3,582Payments
    
    
    (285
    )
    
    
    (1,429
    )Adjustments to previously accrued amounts
    
    
    10
    
    
    
    107Current period charges
    
    
    
    
    
    
    631Foreign currency translation adjustment
    
    
    2
    
    
    
    36Total liability balance, March 31
    
    
    790
    
    
    
    2,927Less long-term restructuring and severance liability
    
    
    
    
    
    
    (272
    )Current restructuring and severance liability
    
    $
    790
    
    
    $
    2,655
 Note 9  Share-Based Compensation
 Share-Based Payment
  Three Months EndedMarch 31,2007
    
    2006Risk-free interest rate
    
    4.6%
    
    4.5%Expected dividend yield
    
    0%
    
    0%Volatility
    
    73%
    
    60%Expected life
    
    4.0 years
    
    4.5 yearsWeighted average Black-Scholes value of options granted
    
    $6.78
    
    $4.45
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Three Months Ended March 31,2007
    
    
    2006Cost of product revenue
    
    $
    27
    
    
    $
    15Cost of service revenue
    
    
    41
    
    
    
    Research and development, net
    
    
    342
    
    
    
    93Sales and marketing
    
    
    137
    
    
    
    105General and administrative
    
    
    475
    
    
    
    268Total
    
    $
    1,022
    
    
    $
    481
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2006
    
    
    3,867,415
    
    
    $
    14.68Grants
    
    
    17,000
    
    
    
    11.75Exercises
    
    
    (133,457
    )
    
    
    7.99Cancellations
    
    
    (100,500
    )
    
    
    20.53Outstanding at March 31, 2007
    
    
    3,650,458
    
    
    $
    14.75
    
    
    6.5 years
    
    $10.8 millionExercisable at March 31, 2007
    
    
    2,924,819
    
    
    $
    15.81
    
    
    5.7 years
    
    $ 8.4 millionAvailable for grant at March 31, 2007
    
    
    2,402,523
   Note 10  Taxes
  Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement 109
 8




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Note 11  Geographic Segment Information
 Disclosure about Segments of an Enterprise and Related Information
  United States
    
    
    Other Countries
    
    
    TotalThree months ended March 31,
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Product revenue
    
    $
    27,235
    
    
    $
    31,428
    
    
    $
    6,425
    
    
    $
    2,841
    
    
    $
    33,660
    
    
    $
    34,269Service revenue
    
    
    8,603
    
    
    
    10,464
    
    
    
    4,846
    
    
    
    3,782
    
    
    
    13,449
    
    
    
    14,246Total revenue
    
    $
    35,838
    
    
    $
    41,892
    
    
    $
    11,271
    
    
    $
    6,623
    
    
    $
    47,109
    
    
    $
    48,515
   Note 12  Foreign Currency Derivatives
 
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
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Preliminary Note Regarding Forward-Looking Statements
  Overview and Executive Summary
    Summary of 1 st Quarter 2007 Results
   11




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Market Overview and Challenges
   Our Strategy
  Gain Share in Our Core HPC Market.
 Maintain Focus on Execution and Profitability.
 Extend Technology Leadership.
 Expand Total Addressable Market.
 12




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Key Performance Indicators
  Revenue.
 Gross margins.
 Operating expenses.
 Liquidity and cash flows.
 Critical Accounting Policies and Estimates
  13




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Revenue Recognition
 Revenue
Recognition in Financial Statements
 Multiple-Element Arrangements. Revenue
Arrangements with Multiple Deliverables
 
    
    The element could be sold separately;
    
    The fair value of the undelivered element is established; and
    
    In cases with any general right of return, our performance with respect
to any undelivered element is within our control and probable.
  Products.
 DARPA Phase II and Red Storm Project Revenue Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.
 14




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Services.
 Inventory Valuation
   Goodwill
   15




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Accounting for Income Taxes
 Accounting for
Income Taxes,
 Accounting for Uncertainty in Income Taxes
 Accounting for Loss Contracts
  Research and Development Expenses
    16




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Share-based Compensation
  Results of Operations
 Revenue and Gross Margins
  Three Months EndedMarch 31,2007
    
    
    2006Product revenue
    
    $
    33,660
    
    
    $
    34,269Less: Cost of product revenue
    
    
    23,577
    
    
    
    26,677Product gross margin
    
    $
    10,083
    
    
    $
    7,592Product gross margin percentage
    
    
    30%
    
    
    
    22%Service revenue
    
    $
    13,449
    
    
    $
    14,246Less: Cost of service revenue
    
    
    7,998
    
    
    
    7,693Service gross margin
    
    $
    5,451
    
    
    $
    6,553Service gross margin percentage
    
    
    41%
    
    
    
    46%Total revenue
    
    $
    47,109
    
    
    $
    48,515Less: Total cost of revenue
    
    
    31,575
    
    
    
    34,370Total gross margin
    
    $
    15,534
    
    
    $
    14,145Total gross margin percentage
    
    
    33%
    
    
    
    29%
 Product Revenue
   17




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Service Revenue
   Product Gross Margin
   Service Gross Margin
  Operating Expenses
 Research and Development
  Three MonthsEnded March 31,2007
    
    
    2006Gross research and development expenses
    
    $
    22,531
    
    
    $
    26,073Less: Amounts included in cost of product revenue
    
    
    (270
    )
    
    
    (6,378
    )Less: Reimbursed research and development
(excludes amounts in revenue)
    
    
    (14,381
    )
    
    
    (12,480
    )Net research and development expenses
    
    $
    7,880
    
    
    $
    7,215Percentage of total revenue
    
    
    17%
    
    
    
    15%
  18




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Other Operating Expenses
  Three MonthsEnded March 31,2007
    
    2006Sales and marketing
    
    $
    5,268
    
    
    $
    4,985Percentage of total revenue
    
    
    11%
    
    
    
    10%General and administrative
    
    $
    4,280
    
    
    $
    5,594Percentage of total revenue
    
    
    9%
    
    
    
    12%Restructuring and severance
    
    $
    10
    
    
    $
    738Percentage of total revenue
    
    
    <1%
    
    
    
    2%
 Sales and Marketing.
 General and Administrative
 Restructuring
and Severance.
 Other Income (Expense), net
  Interest Income (Expense), net
  19




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Three MonthsEnded March 31,2007
    
    
    2006Interest income
    
    $
    1,835
    
    
    $
    485Interest expense
    
    
    (802
    )
    
    
    (1,093
    )Net interest income (expense)
    
    $
    1,033
    
    
    $
    (608
    )
   Taxes
  Liquidity and Capital Resources
      20




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Amounts Committed by YearLess than
    
    
    1-3
    
    
    3-5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    ThereafterDevelopment agreements
    
    $
    18,536
    
    
    $
    16,349
    
    
    $
    2,187
    
    
    $
    
    
    
    $
    Operating leases
    
    
    6,206
    
    
    
    2,405
    
    
    
    3,369
    
    
    
    409
    
    
    
    23Total contractual cash obligations
    
    $
    24,742
    
    
    $
    18,754
    
    
    $
    5,556
    
    
    $
    409
    
    
    $
    23
     
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
 21




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Foreign Currency Risk 
 
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 
 Item 4T. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 Item 1A. Risk Factors
  Our operating results may fluctuate significantly and we may not achieve profitability
in any given period.
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
    
    successfully selling the Cray XT4 system, including upgrades and
successor systems, and new products based on our BlackWidow project and Cray
XMT system, and the timing and funding of government purchases, especially
in the United States;
    
    the level of revenue recognized in any given period, particularly with
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 of revenue recognition;
    
    the level of product margin contribution in any given period due to
product mix, strategic transactions, product life cycle and component costs;
    
    the level and timing of maintenance contract renewals with existing customers;
    
    maintaining our product development projects on schedule and within budgetary limitations;
    
    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 and longer than expected customer acceptance cycles;
    
    our expense levels, including research and development net of government
funding, which may be affected by the level and timing of such funding;
    
    the terms and conditions of sale or lease for our products; and
    
    the impact of expensing our share-based compensation under FAS 123R.
  
    
    the timely availability of acceptable components in sufficient quantities
to meet customer delivery schedules;
    
    the timing and level of government funding for product acquisitions and
research and development contracts;
    
    the availability of adequate customer facilities to install and operate new Cray systems;
    
    general economic trends, including changes in levels of customer capital spending;
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
    
    the introduction or announcement of competitive products;
    
    currency fluctuations, international conflicts or economic crises; and
    
    the receipt and timing of necessary export licenses.
  Failure to sell Cray XT4 systems in planned quantities and at expected gross margins
could adversely affect revenue and operating results in 2007 and future periods.
  Our inability to complete the development of our BlackWidow and Cray XMT supercomputer systems
would adversely affect our revenue and operating results in 2007 and future periods.
 If we lose government support for development of our supercomputer systems, our net
research and development expenditures and capital requirements would increase and our
ability to conduct research and development would decrease.
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Our reliance on third-party suppliers poses significant risks to our business and
prospects.
 
    
    if a supplier does not provide components that meet our specifications in
sufficient quantities on time, then production and sales of our systems
would be delayed, adversely affecting revenue and cash flow  these risks
are accentuated during steep production ramp periods as we introduce new or
successor products;
    
    if an interruption of supply of our components occurs, because of a
significant problem with a supplier providing parts that later prove to be
defective or because a single-source supplier imposes allocations on its
customers, decides to no longer provide those components to us or increases
the price of those parts significantly, it could take us a considerable
period of time to identify and qualify alternative suppliers, to redesign
our products as necessary and to begin manufacture of the redesigned
components. In some cases, we may not be able to redesign such components.
Defective components may need to be replaced, which may result in increased
costs and obsolete inventory. See also the Risk Factor captioned, We have
placed last-time buy decisions affecting our current products, which
may adversely affect our revenue and operating results, below;
    
    if a supplier cannot provide a competitive key component, our systems may
be less competitive than systems using components with greater capability;
and
    
    some of our key 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.
   Failure to overcome the technical challenges of completing the development of our
supercomputer systems on our product roadmap would adversely affect our revenue and
operating results in subsequent years.
 If the U.S. government purchases fewer supercomputers, our revenue would be reduced and
our operating results would be adversely affected.
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Phase III of the DARPA HPCS program will affect our operations.
 The achievement of our business plan is highly dependent on increased product revenue
and margins.
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We have placed last-time buy decisions affecting our current products, which may
adversely affect our revenue and operating results.
 If we are unable to compete successfully in the HPC market, our revenue will decline.
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Our stock price is volatile.
 If we cannot retain, attract and motivate key personnel, we may be unable to
effectively implement our business plan.
 Lower than anticipated sales of new supercomputers and the termination of maintenance
contracts on older and/or decommissioned systems may reduce our service revenue and margins
from maintenance service contracts.
 Expansion of our Technical Services efforts could reduce our service margins.
 The adoption of FAS 123R has and will continue to adversely affect our operating
results and may adversely affect the market price of our common stock.
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We may infringe or be subject to claims that we infringe the intellectual property
rights of others.
 U.S. export controls could hinder our ability to make sales to foreign customers and
our future prospects.
 We incorporate software licensed from third parties into the operating systems for our
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.
  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.
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Our indebtedness may adversely affect our financial strength.
 
    
    increase our vulnerability to general economic and industry conditions,
including recessions;
    
    require us to use cash from operations to service our indebtedness,
thereby reducing our ability to fund working capital, capital expenditures,
research and development efforts and other expenses;
    
    limit our flexibility in planning for, or reacting to, changes in our
business, including merger and acquisition opportunities;
    
    place us at a competitive disadvantage compared to competitors that have
less indebtedness; and
    
    limit our ability to borrow additional funds that may be needed to
operate and expand our business.
 We may not have the funds necessary to purchase the Notes upon a fundamental change or
other purchase date and our ability to purchase the Notes in such events may be limited.
 We will require a significant amount of cash to repay our indebtedness and to fund
planned capital expenditures, research and development efforts and other corporate expenses.
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New environmental rules in Europe and other jurisdictions may adversely affect our
operations.
   We may not be able to protect our proprietary information and rights adequately.
 A substantial number of our shares are eligible for future sale and may depress the
market price of our common stock and may hinder our ability to obtain additional financing.
 
    
    32,432,747 shares of common stock;
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
    
    1,284,852 shares of common stock issuable upon exercise of warrants;
    
    3,650,458 shares of common stock issuable upon exercise of options, of
which options to 2,924,819 shares of common stock were then exercisable; and
    
    Notes convertible into an aggregate of 4,144,008 shares of common stock
or, under certain circumstances specified in the indenture governing the
Notes, a maximum of 5,698,006 shares of common stock.
   Provisions of our Restated Articles of Incorporation and Bylaws could make a proposed
acquisition that is not approved by our Board of Directors more difficult.
 
    
    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 preferred stock, without
shareholder approval, with rights senior to those of the common stock;
    
    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.
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Item 6. Exhibits
 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 200231.2
    
    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 200232.1
    
    Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
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SIGNATURES
  CRAY INC.May 7, 2007
    /s/ PETER J. UNGAROPeter J. UngaroChief Executive Officer and President/s/ BRIAN C. HENRYBrian C. HenryChief Financial Officer/s/ KENNETH D. ROSELLIKenneth D. RoselliChief Accounting Officer 34