##### 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: June 30, 2009
 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.)901 Fifth Avenue, Suite 1000Seattle, Washington
(Address of Principal Executive Office)
    
    98164
(Zip Code)
 Registrants Telephone Number, Including Area Code:
(206) 701-2000
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



CRAY INC.
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements:
    
    
    3Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    3Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008
    
    
    4Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26Item 4T. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem1A. Risk Factors
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34EX-31.1EX-31.2EX-32.1
  Available Information
  ®
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
  
   December 31,June 30,
    
    
    20082009
    
    
    (As Adjusted)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    61,487
    
    
    $
    72,373Restricted cash
    
    
    1,906
    
    
    
    2,691Short-term investments, available-for-sale
    
    
    5,488
    
    
    
    5,350Accounts receivable, net
    
    
    47,727
    
    
    
    95,667Inventory
    
    
    50,432
    
    
    
    80,437Prepaid expenses and other current assets
    
    
    22,494
    
    
    
    29,993Total current assets
    
    
    189,534
    
    
    
    286,511Property and equipment, net
    
    
    17,735
    
    
    
    18,396Service inventory, net
    
    
    1,702
    
    
    
    1,917Deferred tax asset
    
    
    1,322
    
    
    
    1,200Other non-current assets
    
    
    7,124
    
    
    
    5,837TOTAL ASSETS
    
    $
    217,417
    
    
    $
    313,861LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,815
    
    
    $
    16,730Accrued payroll and related expenses
    
    
    13,232
    
    
    
    23,672Advance research and development payments
    
    
    1,467
    
    
    
    13,887Convertible notes, net of discount
    
    
    158
    
    
    
    25,681Other accrued liabilities
    
    
    8,369
    
    
    
    24,670Deferred revenue
    
    
    34,711
    
    
    
    67,692Total current liabilities
    
    
    76,752
    
    
    
    172,332Long-term deferred revenue
    
    
    16,690
    
    
    
    18,154Other non-current liabilities
    
    
    3,266
    
    
    
    3,170TOTAL LIABILITIES
    
    
    96,708
    
    
    
    193,656Commitments 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 35,021,880 and 33,506,573 shares, respectively
    
    
    547,852
    
    
    
    543,442Accumulated other comprehensive income
    
    
    6,926
    
    
    
    9,364Accumulated deficit
    
    
    (434,069
    )
    
    
    (432,601
    )TOTAL SHAREHOLDERS EQUITY
    
    
    120,709
    
    
    
    120,205TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    217,417
    
    
    $
    313,861
 See accompanying notes
 3




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    
    
    
    
    20082009
    
    
    (As Adjusted)
    
    
    2009
    
    
    (As Adjusted)Revenue:Product
    
    $
    42,101
    
    
    $
    32,851
    
    
    $
    101,563
    
    
    $
    43,541Service
    
    
    20,643
    
    
    
    13,882
    
    
    
    35,662
    
    
    
    29,320Total revenue
    
    
    62,744
    
    
    
    46,733
    
    
    
    137,225
    
    
    
    72,861Cost of revenue:Cost of product revenue
    
    
    22,263
    
    
    
    22,003
    
    
    
    68,597
    
    
    
    28,415Cost of service revenue
    
    
    11,952
    
    
    
    9,241
    
    
    
    22,228
    
    
    
    17,600Total cost of revenue
    
    
    34,215
    
    
    
    31,244
    
    
    
    90,825
    
    
    
    46,015Gross profit
    
    
    28,529
    
    
    
    15,489
    
    
    
    46,400
    
    
    
    26,846Operating expenses:Research and development, net
    
    
    13,710
    
    
    
    11,890
    
    
    
    24,925
    
    
    
    25,609Sales and marketing
    
    
    6,341
    
    
    
    5,848
    
    
    
    12,404
    
    
    
    11,230General and administrative
    
    
    3,901
    
    
    
    3,465
    
    
    
    8,047
    
    
    
    7,161Total operating expenses
    
    
    23,952
    
    
    
    21,203
    
    
    
    45,376
    
    
    
    44,000Income (loss) from operations
    
    
    4,577
    
    
    
    (5,714
    )
    
    
    1,024
    
    
    
    (17,154
    )Other income (expense), net
    
    
    (737
    )
    
    
    540
    
    
    
    (1,491
    )
    
    
    793Interest expense, net
    
    
    (351
    )
    
    
    (1,123
    )
    
    
    (884
    )
    
    
    (1,619
    )Income (loss) before income taxes
    
    
    3,489
    
    
    
    (6,297
    )
    
    
    (1,351
    )
    
    
    (17,980
    )Income tax expense
    
    
    (69
    )
    
    
    (107
    )
    
    
    (117
    )
    
    
    (389
    )Net income (loss)
    
    $
    3,420
    
    
    $
    (6,404
    )
    
    $
    (1,468
    )
    
    $
    (18,369
    )Basic and diluted net income (loss) per common share
    
    $
    0.10
    
    
    $
    (0.20
    )
    
    $
    (0.04
    )
    
    $
    (0.57
    )Basic weighted average shares outstanding
    
    
    33,580
    
    
    
    32,521
    
    
    
    33,390
    
    
    
    32,446Diluted weighted average shares outstanding
    
    
    33,965
    
    
    
    32,521
    
    
    
    33,390
    
    
    
    32,446
 See accompanying notes
 4




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##### Table of Contents



Six Months EndedJune 30,20082009
    
    
    (As Adjusted)Operating activities:Net loss
    
    $
    (1,468
    )
    
    $
    (18,369
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    4,490
    
    
    
    5,421Share-based compensation expense
    
    
    3,403
    
    
    
    1,378Inventory write-down
    
    
    956
    
    
    
    420Amortization of debt issuance costs
    
    
    79
    
    
    
    254Loss on repurchase of Notes
    
    
    910
    
    
    
    Amortization of convertible notes debt discount
    
    
    828
    
    
    
    2,802Deferred income taxes
    
    
    94
    
    
    
    (89
    )Cash provided by (used in) due to changes in operating assets and liabilities:Accounts receivable
    
    
    47,580
    
    
    
    (8,893
    )Inventory
    
    
    27,776
    
    
    
    (61,531
    )Prepaid expenses and other assets
    
    
    5,871
    
    
    
    (10,723
    )Accounts payable
    
    
    2,070
    
    
    
    50,642Accrued payroll and related expenses, other accrued liabilities and advance research
and development payments
    
    
    (39,433
    )
    
    
    (16,033
    )Other non-current liabilities
    
    
    95
    
    
    
    234Deferred revenue
    
    
    (34,699
    )
    
    
    (8,395
    )Net cash provided by (used in) operating activities
    
    
    18,552
    
    
    
    (62,882
    )Investing activities:Sales/maturities of short-term investments
    
    
    5,350
    
    
    
    35,549Purchases of short-term investments
    
    
    (5,481
    )
    
    
    (1,673
    )Decrease in restricted cash
    
    
    785
    
    
    
    Purchases of property and equipment
    
    
    (2,225
    )
    
    
    (1,871
    )Net cash provided by (used in) investing activities
    
    
    (1,571
    )
    
    
    32,005Financing activities:Repurchase of Notes
    
    
    (27,150
    )
    
    
    Proceeds from issuance of common stock through employee stock purchase plan
    
    
    255
    
    
    
    234Proceeds from exercises of stock options
    
    
    28
    
    
    
    482009 stock option repurchase tender offer, purchase of options
    
    
    (669
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (27,536
    )
    
    
    282Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (331
    )
    
    
    166Net decrease in cash and cash equivalents
    
    
    (10,886
    )
    
    
    (30,429
    )Cash and cash equivalents:Beginning of period
    
    
    72,373
    
    
    
    120,539End of period
    
    $
    61,487
    
    
    $
    90,110Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    393
    
    
    $
    1,202Non-cash investing and financing activities:Inventory transfers to fixed assets and service inventory
    
    $
    1,273
    
    
    $
    1,727Shares issued for 401(k) match
    
    $
    1,311
    
    
    $
    1,223
 See accompanying notes
 5




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##### Table of Contents



Note 1  Basis of Presentation
    Principles of Consolidation
  Adjustments and Reclassifications
 Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)
 Note 12  Convertible Notes
  6




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##### Table of Contents



Use of Estimates
  Note 2  New Accounting Pronouncements
 Disclosures about Derivative Instruments and Hedging Activities Accounting for Derivative Instruments and Hedging
Activities Note 3  Fair Value Measurement
 Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments,
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly
 Subsequent Events
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
 7




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##### Table of Contents



Note 3  Fair Value Measurement
 Effective Date of FASB Statement No.
157
  Quoted
    
    
    SignificantPrices in
    
    
    OtherFair Value
    
    
    Active
    
    
    Observableat June 30,
    
    
    Markets
    
    
    InputsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)Assets:Cash, cash equivalents and restricted cash
    
    $
    63,393
    
    
    $
    63,393
    
    
    $
    Short-term investments, available-for-sale
    
    
    5,488
    
    
    
    5,488
    
    
    
    Assets measured at fair value at June 30, 2009
    
    $
    68,881
    
    
    $
    68,881
    
    
    $
    Foreign exchange forward contracts (1)
    
    
    (2,693
    )
    
    
    
    
    
    
    (2,693
    )Liabilities measured at fair value at June 30, 2009
    
    $
    (2,693
    )
    
    $
    
    
    
    $
    (2,693
    )
 
 (1)
    
    Included in Other accrued liabilities on the Companys Condensed Consolidated Balance
Sheets.  Short-term Investments
  Amortized
    
    
    Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    UnrealizedBasis
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueJune 30, 2009Corporate notes and bonds
    
    $
    2,499
    
    
    $
    
    
    
    $
    
    
    
    $
    2,499Treasury bills
    
    
    2,990
    
    
    
    
    
    
    
    (1
    )
    
    
    2,989Total short-term investments
    
    $
    5,489
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    5,488December 31, 2008Corporate notes and bonds
    
    $
    5,351
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    5,350Total short-term investments
    
    $
    5,351
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    5,350
   8




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##### Table of Contents



Foreign Currency Derivatives
     Fair Value
    
    
    Fair Valueas of
    
    
    as ofJune 30,
    
    
    December 31,Hedge Classification
    
    Balance Sheet Location
    
    2009
    
    
    2008Cash flow hedges
    

Other
accrued liabilities/Prepaid expenses and other current assets
    
    $
    (2,693
    )
    
    $
    5,478Total derivatives classified as hedging instruments
    
    
    
    $
    (2,693
    )
    
    $
    5,478
  Note 4  Earnings (Loss) Per Share (EPS)
   Note 5  Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008 (1)
    
    
    2009
    
    
    2008 (1)Net income (loss)
    
    $
    3,420
    
    
    $
    (6,404
    )
    
    $
    (1,468
    )
    
    $
    (18,369
    )Unrealized net gain (loss) on
available-for-sale investments
    
    
    4
    
    
    
    (83
    )
    
    
    
    
    
    
    (7
    )Cash flow hedges:Net loss on cash flow hedges
    
    
    (1,515
    )
    
    
    (320
    )
    
    
    (979
    )
    
    
    (123
    )Reclassification adjustment to revenue
    
    
    (512
    )
    
    
    500
    
    
    
    (488
    )
    
    
    500(2,027
    )
    
    
    180
    
    
    
    (1,467
    )
    
    
    377Foreign currency translation adjustment
    
    
    (1,409
    )
    
    
    485
    
    
    
    (971
    )
    
    
    (2,840
    )Comprehensive loss
    
    $
    (12
    )
    
    $
    (5,822
    )
    
    $
    (3,906
    )
    
    $
    (20,839
    )
 
 (1)
    
    Net loss adjusted for retrospective application of FSP APB 14-1 (see Note 12  Convertible
Notes) 9




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##### Table of Contents



Note 6  Accounts Receivable
  June 30,
    
    
    December 31,2009
    
    
    2008Trade accounts receivable
    
    $
    45,165
    
    
    $
    75,624Unbilled receivables
    
    
    1,023
    
    
    
    6,703Advance billings
    
    
    1,770
    
    
    
    13,43947,958
    
    
    
    95,766Allowance for doubtful accounts
    
    
    (231
    )
    
    
    (99
    )Accounts receivable, net
    
    $
    47,727
    
    
    $
    95,667
   Note 7  Inventory
  June 30,
    
    
    December 31,2009
    
    
    2008Components and subassemblies
    
    $
    23,967
    
    
    $
    16,805Work in process
    
    
    12,097
    
    
    
    6,284Finished goods
    
    
    14,368
    
    
    
    57,348Total
    
    $
    50,432
    
    
    $
    80,437
   Note 8  Deferred Revenue
  June 30,
    
    
    December 31,2009
    
    
    2008Deferred product revenue
    
    $
    24,937
    
    
    $
    49,326Deferred service revenue
    
    
    26,464
    
    
    
    36,520Total deferred revenue
    
    
    51,401
    
    
    
    85,846Less long-term deferred revenue
    
    
    (16,690
    )
    
    
    (18,154
    )Deferred revenue in current liabilities
    
    $
    34,711
    
    
    $
    67,692
  10




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##### Table of Contents



Note 9  Share-Based Compensation
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Risk-free interest rate
    
    
    1.6
    %
    
    
    2.9
    %
    
    
    1.6
    %
    
    
    2.8
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    79
    %
    
    
    69
    %
    
    
    79
    %
    
    
    69
    %Expected life
    

    4.0 years
    
    
    4.0 years
    
    
    4.0 years
    
    
    4.0 yearsWeighted average Black-Scholes value of options granted
    
    $
    2.20
    
    
    $
    3.57
    
    
    $
    2.19
    
    
    $
    3.52
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of product revenue
    
    $
    33
    
    
    $
    23
    
    
    $
    124
    
    
    $
    37Cost of service revenue
    
    
    81
    
    
    
    43
    
    
    
    298
    
    
    
    69Research and development, net
    
    
    347
    
    
    
    296
    
    
    
    1,239
    
    
    
    517Sales and marketing
    
    
    148
    
    
    
    128
    
    
    
    512
    
    
    
    209General and administrative
    
    
    424
    
    
    
    315
    
    
    
    1,230
    
    
    
    546Total
    
    $
    1,033
    
    
    $
    805
    
    
    $
    3,403
    
    
    $
    1,378
 11




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##### Table of Contents



WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Term
    
    ValueOutstanding at December 31, 2008
    
    
    3,755,894
    
    
    $
    12.30Grants
    
    
    1,210,200
    
    
    $
    3.74Exercises
    
    
    (4,775
    )
    
    $
    5.96Cancellations
    
    
    (1,896,657
    )
    
    $
    16.35Outstanding at June 30, 2009
    
    
    3,064,662
    
    
    $
    6.42
    
    
    7.9 years
    
    $7.5 millionExercisable at June 30, 2009
    
    
    1,170,103
    
    
    $
    9.00
    
    
    5.4 years
    
    $1.7 millionAvailable for grant at June 30, 2009
    
    
    4,290,485
   WeightedAverageGrant dateShares
    
    
    Fair ValueOutstanding at December 31, 2008
    
    
    623,874
    
    
    $
    7.36Granted
    
    
    852,170
    
    
    
    3.77Vested
    
    
    (56,659
    )
    
    
    7.07Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2009
    
    
    1,419,385
    
    
    $
    5.21
    Note 10  Taxes
  12




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Note 11  Geographic Segment Information
   United States
    
    
    Other Countries
    
    
    Total2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Three months ended June 30,Product revenue
    
    $
    29,057
    
    
    $
    21,760
    
    
    $
    13,044
    
    
    $
    11,091
    
    
    $
    42,101
    
    
    $
    32,851Service revenue
    
    
    15,023
    
    
    
    7,994
    
    
    
    5,620
    
    
    
    5,888
    
    
    
    20,643
    
    
    
    13,882Total revenue
    
    $
    44,080
    
    
    $
    29,754
    
    
    $
    18,664
    
    
    $
    16,979
    
    
    $
    62,744
    
    
    $
    46,733
 United States
    
    
    Other Countries
    
    
    Total2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Six months ended June 30,Product revenue
    
    $
    79,766
    
    
    $
    31,544
    
    
    $
    21,797
    
    
    $
    11,997
    
    
    $
    101,563
    
    
    $
    43,541Service revenue
    
    
    24,650
    
    
    
    17,524
    
    
    
    11,012
    
    
    
    11,796
    
    
    
    35,662
    
    
    
    29,320Total revenue
    
    $
    104,416
    
    
    $
    49,068
    
    
    $
    32,809
    
    
    $
    23,793
    
    
    $
    137,225
    
    
    $
    72,861
   Note 12  Convertible Notes
   13




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##### Table of Contents



As Originally
    
    
    Effect of
    
    
    AsReported
    
    
    Change
    
    
    AdjustedIncome Statement for the three-month period ended June 30, 2008:Interest income (expense), net
    
    $
    254
    
    
    $
    (1,377
    )
    
    $
    (1,123
    )Loss before income taxes
    
    
    (4,920
    )
    
    
    (1,377
    )
    
    
    (6,297
    )Net loss
    
    
    (5,027
    )
    
    
    (1,377
    )
    
    
    (6,404
    )Basic and diluted net loss per common share
    
    $
    (0.15
    )
    
    $
    (0.04
    )
    
    $
    (0.20
    )Income Statement for the six-month period ended June 30, 2008:Interest income (expense), net
    
    $
    1,091
    
    
    $
    (2,710
    )
    
    $
    (1,619
    )Loss before income taxes
    
    
    (15,270
    )
    
    
    (2,710
    )
    
    
    (17,980
    )Net loss
    
    
    (15,659
    )
    
    
    (2,710
    )
    
    
    (18,369
    )Basic and diluted net loss per common share
    
    $
    (0.48
    )
    
    $
    (0.08
    )
    
    $
    (0.57
    )Cash Flow Statement for the six-month period ended June 30, 2008:Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Net loss
    
    $
    (15,659
    )
    
    $
    (2,710
    )
    
    $
    (18,369
    )Amortization of debt issuance costs
    
    
    346
    
    
    
    (92
    )
    
    
    254Amortization of convertible notes debt discount
    
    $
    
    
    
    $
    2,802
    
    
    $
    2,802Balance Sheet as of December 31, 2008:Prepaid expenses and other current assets
    
    $
    30,023
    
    
    $
    (30
    )
    
    $
    29,993Total Assets
    
    $
    313,891
    
    
    $
    (30
    )
    
    $
    313,861Convertible notes, net of discount
    
    $
    27,727
    
    
    
    (2,046
    )
    
    
    25,681Total Liabilities
    
    
    195,702
    
    
    
    (2,046
    )
    
    
    193,656Common stock and additional paid-in capital
    
    
    518,727
    
    
    
    24,715
    
    
    
    543,442Accumulated deficit
    
    
    (409,902
    )
    
    
    (22,699
    )
    
    
    (432,601
    )Total Shareholders Equity
    
    
    118,189
    
    
    
    2,016
    
    
    
    120,205Total Liabilities and Shareholders Equity
    
    $
    313,891
    
    
    $
    (30
    )
    
    $
    313,861
 Note 13  Subsequent Events
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Preliminary Note Regarding Forward-Looking Statements
  14




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##### Table of Contents



Overview and Executive Summary
   Summary of First Six Months of 2009 Results
    15




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##### Table of Contents



Market Overview and Challenges
  
    
    The commoditization of HPC hardware, particularly processors and also interconnect
systems,
    
    The growing commoditization of software, including plentiful building blocks and more
capable open source software,
    
    Supercomputing with multi-core commodity processors causing 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 has decreased, and
    
    Data needs growing faster than computational needs.
    Our Goals and Strategy
  Gain Share in Our Core Supercomputing Market.
 Extend Technology Leadership.
 16




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##### Table of Contents



Expand Our Total Addressable Market.
 Maintain Our Focus on Execution and Profitability.
  Key Performance Indicators
  Revenue.
 Gross profit margin.
 Operating expenses.
 Liquidity and cash flows.
 17




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##### Table of Contents



Critical Accounting Policies and Estimates
    Revenue Recognition
  Multiple-Element Arrangements.
 
    
    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.
 18




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##### Table of Contents



Project Revenue. .
 Services.
 Inventory Valuation
   Accounting for Income Taxes
   19




---



##### Table of Contents



Research and Development Expenses
     Share-based Compensation
  New Accounting Pronouncements
 Accounting for Derivative Instruments and Hedging Activities Note 3  Fair
Value Measurement
 Disclosures about Fair
Value of Financial Instruments,
  20




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##### Table of Contents



Fair Value Measurements
   Results of Operations
 Revenue and Gross Profit Margins
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Product revenue
    
    $
    42,101
    
    
    $
    32,851
    
    
    $
    101,563
    
    
    $
    43,541Less: Cost of product revenue
    
    
    22,263
    
    
    
    22,003
    
    
    
    68,597
    
    
    
    28,415Product gross profit
    
    $
    19,838
    
    
    $
    10,848
    
    
    $
    32,966
    
    
    $
    15,126Product gross profit margin
    
    
    47
    %
    
    
    33
    %
    
    
    32
    %
    
    
    35
    %Service revenue
    
    $
    20,643
    
    
    $
    13,882
    
    
    $
    35,662
    
    
    $
    29,320Less: Cost of service revenue
    
    
    11,952
    
    
    
    9,241
    
    
    
    22,228
    
    
    
    17,600Service gross profit
    
    $
    8,691
    
    
    $
    4,641
    
    
    $
    13,434
    
    
    $
    11,720Service gross profit margin
    
    
    42
    %
    
    
    33
    %
    
    
    38
    %
    
    
    40
    %Total revenue
    
    $
    62,744
    
    
    $
    46,733
    
    
    $
    137,225
    
    
    $
    72,861Less: Total cost of revenue
    
    
    34,215
    
    
    
    31,244
    
    
    
    90,825
    
    
    
    46,015Total gross profit
    
    $
    28,529
    
    
    $
    15,489
    
    
    $
    46,400
    
    
    $
    26,846Total gross profit margin
    
    
    45
    %
    
    
    33
    %
    
    
    34
    %
    
    
    37
    %
 Product Revenue
   21




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##### Table of Contents



Service Revenue
   Cost of Product Revenue and Product Gross Profit
   Cost of Service Revenue and Service Gross Profit
   Research and Development Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Gross research and development expenses
    
    $
    24,874
    
    
    $
    22,215
    
    
    $
    50,892
    
    
    $
    44,307Less: Amounts included in cost of revenue
    
    
    (713
    )
    
    
    
    
    
    
    (1,295
    )
    
    
    Less: Reimbursed research and development (excludes amounts
in revenue)
    
    
    (10,451
    )
    
    
    (10,325
    )
    
    
    (24,672
    )
    
    
    (18,698
    )Net research and development expenses
    
    $
    13,710
    
    
    $
    11,890
    
    
    $
    24,925
    
    
    $
    25,609Percentage of total revenue
    
    
    22
    %
    
    
    25
    %
    
    
    18
    %
    
    
    35
    %
   22




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##### Table of Contents



Sales and Marketing and General and Administrative Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Sales and marketing
    
    $
    6,341
    
    
    $
    5,848
    
    
    $
    12,404
    
    
    $
    11,230Percentage of total revenue
    
    
    10
    %
    
    
    13
    %
    
    
    9
    %
    
    
    15
    %General and administrative
    
    $
    3,901
    
    
    $
    3,465
    
    
    $
    8,047
    
    
    $
    7,161Percentage of total revenue
    
    
    6
    %
    
    
    7
    %
    
    
    6
    %
    
    
    10
    %
 Sales
and Marketing .
 General and Administrative
 Other Income (Expense), net
  Interest Income (Expense)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(As Adjusted)
    
    
    
    
    
    
    (As Adjusted)Interest income
    
    $
    110
    
    
    $
    1,031
    
    
    $
    380
    
    
    $
    2,666Interest expense
    
    
    (461
    )
    
    
    (2,154
    )
    
    
    (1,264
    )
    
    
    (4,285
    )Net interest expense
    
    $
    (351
    )
    
    $
    (1,123
    )
    
    $
    (884
    )
    
    $
    (1,619
    )
 23




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##### Table of Contents



Taxes
  Liquidity and Capital Resources
      Amounts Committed by Year2009(Less thanContractual Obligations
    
    Total
    
    
    1 Year)
    
    
    2010-2011
    
    
    2012-2013
    
    
    ThereafterDevelopment agreements
    
    $
    14,511
    
    
    $
    6,240
    
    
    $
    8,271
    
    
    $
    
    
    
    $
    Operating leases
    
    
    17,502
    
    
    
    980
    
    
    
    4,425
    
    
    
    4,216
    
    
    
    7,881Unrecognized income tax benefits
    
    
    646
    
    
    
    292
    
    
    
    354
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    32,659
    
    
    $
    7,512
    
    
    $
    13,050
    
    
    $
    4,216
    
    
    $
    7,881
  24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  WeightedAveragedInterestFair Value
    
    
    Maturities
    
    RateCorporate notes and bonds
    
    $
    2,499
    
    
    2009
    
    0.6%Treasury bills
    
    $
    2,989
    
    
    2010
    
    0.5%Total short-term investments
    
    $
    5,488
 Foreign Currency Risk
 25




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##### Table of Contents



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.
   
    
    successfully completing development and selling of our Cray XT5 and Cray XT5m systems,
including upgrades and successor systems;
    
    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;
    
    the successful expansion of our Custom Engineering program, including winning new
contracts in time for performance in 2009 and subsequent years;
    
    our expense levels, including research and development 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;
 26




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##### Table of Contents




    
    maintaining our product development projects on schedule and within budgetary
limitations;
    
    the level of product gross profit contribution in any given period due to product mix,
strategic transactions, product life cycle and component costs;
    
    the competitiveness of our products, which may be affected by the competitiveness of key
components from suppliers;
    
    the level and timing of maintenance contract renewals with existing customers;
    
    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;
    
    the building of a reseller network for
our Cray CX products and achieving significant
sales of Cray CX systems; and
    
    the terms and conditions of sale or lease for our products.
  
    
    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;
    
    price fluctuations in the commodity electronics and memory markets;
    
    the availability of adequate customer facilities to install and operate new Cray systems;
    
    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.
  Our reliance on third-party suppliers poses significant risks to our operating results,
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 could be delayed, which would
result in decreased revenue and gross profit and adversely affect 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 a supplier changes its
technology roadmap, decides to no longer provide those components, increases the price of
those components significantly or imposes 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. In some cases, such as with key integrated
circuits and memory parts, we may not be able to redesign such components or find alternate
sources that we could use in any realistic time frame. Defective components may need to be
replaced, which may result in increased costs and obsolete inventory;
 27




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##### Table of Contents




    
    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 not possible to
complete;
    
    if a supplier cannot provide a competitive key component or eliminates key features from
components, such as processors, our systems may be less competitive than systems using
components with greater capabilities;
    
    if a supplier provides us with hardware, software or other intellectual property that
contains bugs or other errors or is different from what we expected, our development
projects and production systems may be adversely affected through additional design testing
and verification efforts, respins of integrated circuits and/or development of replacement
components, the production and sales of our systems could be delayed and systems installed
at customer sites could require significant field component replacements, resulting in
decreased revenue and gross profit and adversely affecting cash flow;
    
    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; and
    
    if a key supplier is acquired or has a significant business change, production and sales
of our systems may be delayed or our development programs may be delayed or may not be
possible to complete.
 tm
 The achievement of our business plan in 2009 and future periods is highly dependent on
increased product revenue and gross profit from our Cray XT5 and successor systems.
  
    
    the level of product differentiation in our Cray XT5 and successor systems. We need to
compete successfully against HPC systems from large established companies and lower
bandwidth cluster systems. Our long-term success may be adversely affected if we are not
successful in demonstrating the value of our balanced high bandwidth systems with the
capability of solving challenging problems quickly to a market beyond our current core of
customers, largely certain agencies of the U.S. and other governments, that require systems
with the performance and features we offer;
    
    we sometimes do not meet all of the contract requirements for customer acceptance and
ongoing reliability of our systems, which has resulted in contract penalties. Most often
these penalties adversely affect the gross profit through the provision of additional
equipment and services and/or service credits to satisfy delivery delays and performance
shortfalls. Such penalties adversely impacted gross profits in 2008 and 2007, and we will incur additional penalties in 2009. 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;
 28




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##### Table of Contents




    
    in March 2008, we placed a last-time buy for a key component for our Cray XT4, Cray XT5
and Cray XMT systems, which had to be placed before we could know all the possible sales
prospects for these products. If we estimated our needs too low, we could limit the number
of possible sales of these products and reduce potential revenue, or if we estimated too
high, we could incur inventory obsolescence charges and reduce our gross profit. Either way,
our operating results could be adversely affected; and
    
    from time to time, including in the 2009
second quarter, product gross profit has been adversely impacted by lower volumes than
planned and higher than anticipated manufacturing variances, including scrap, rework and
excess and obsolete inventory.
  If DARPA terminated our DARPA HPCS program, 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.
 If we do not meet our revenue goals for our new strategic initiatives, our revenue and
operating results will be adversely affected.
 29




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##### Table of Contents



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.
 If we are unable to compete successfully in the HPC market, our revenue will decline.
   30




---



##### Table of Contents



If we cannot retain, attract and motivate key personnel, we may be unable to effectively
implement our business plan.
 Our stock price is volatile.
 U.S. export controls could hinder our ability to make sales to foreign customers and our
future prospects.
 We may infringe or be subject to claims that we infringe the intellectual property rights of
others.
 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.
 31




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##### Table of Contents



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.
 
    
    35,021,880 shares of common stock;
    
    3,064,662 shares of common stock issuable upon exercise of options, of which options to
purchase 1,170,103 shares of common stock were then exercisable; and
    
    Notes convertible into an aggregate of 8,495 shares of common stock at a current
conversion price of approximately $19.31 per share, subject to adjustment, or, under certain
circumstances specified in the indenture governing the Notes, a maximum of 11,680 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 up to 5,000,000 shares of preferred stock,
without shareholder approval, with rights senior to those of the common stock;
    
    no cumulative voting of shares;
 32




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##### Table of Contents




    
    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.
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Name
    
    Votes For
    
    % For
    
    Withheld
    
    % WithheldWilliam C. Blake
    
    
    20,673,671
    
    
    
    66.3
    %
    
    
    10,524,499
    
    
    
    33.7
    %John B. Jones, Jr.
    
    
    18,454,968
    
    
    
    59.2
    %
    
    
    12,743,202
    
    
    
    40.8
    %Stephen C. Kiely
    
    
    18,402,245
    
    
    
    59.0
    %
    
    
    12,795,925
    
    
    
    41.0
    %Frank L. Lederman
    
    
    18,414,961
    
    
    
    59.0
    %
    
    
    12,783,209
    
    
    
    41.0
    %Sally G. Narodick
    
    
    20,642,410
    
    
    
    66.2
    %
    
    
    10,555,760
    
    
    
    33.8
    %Daniel C. Regis
    
    
    20,665,626
    
    
    
    66.2
    %
    
    
    10,532,544
    
    
    
    33.8
    %Stephen C. Richards
    
    
    18,756,010
    
    
    
    60.1
    %
    
    
    12,442,160
    
    
    
    39.9
    %Peter J. Ungaro
    
    
    20,584,529
    
    
    
    66.0
    %
    
    
    10,613,641
    
    
    
    34.0
    %
   
 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 and 5 of Part II are not applicable and have been omitted. 33




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##### Table of Contents



SIGNATURES
  Date: August 5, 2009
    CRAY INC./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