##### 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: September 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
    
    93-0962605(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)901 Fifth Avenue, Suite 1000Seattle, Washington
    
    98164(Address of Principal Executive Office)
    
    (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(Do not check if a smaller reporting company)
Smaller reporting company o o þ




---



##### 



CRAY INC.
TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Unaudited Condensed Consolidated Financial Statements:
    
    
    3Balance Sheets as of September 30, 2009 and December 31, 2008
    
    
    3Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008
    
    
    4Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27Item 4T. Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    27Item 1A. Risk Factors
    
    
    27Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    37EX-31.1EX-31.2EX-32.1
  Available Information
  ®
 2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
  
 
 December 31,September 30,
    
    
    20082009
    
    
    (As Adjusted)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    61,334
    
    
    $
    72,373Restricted cash
    
    
    3,500
    
    
    
    2,691Short-term investments, available-for-sale
    
    
    2,997
    
    
    
    5,350Accounts and other receivables, net
    
    
    43,792
    
    
    
    95,667Inventory
    
    
    51,696
    
    
    
    80,437Prepaid expenses and other current assets
    
    
    8,105
    
    
    
    29,993Total current assets
    
    
    171,424
    
    
    
    286,511Property and equipment, net
    
    
    19,403
    
    
    
    18,396Service inventory, net
    
    
    1,646
    
    
    
    1,917Deferred tax asset
    
    
    3,647
    
    
    
    1,200Other non-current assets
    
    
    14,688
    
    
    
    5,837TOTAL ASSETS
    
    $
    210,808
    
    
    $
    313,861LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    22,546
    
    
    $
    16,730Accrued payroll and related expenses
    
    
    10,640
    
    
    
    23,672Advance research and development payments
    
    
    
    
    
    
    13,887Convertible notes, net of discount
    
    
    162
    
    
    
    25,681Other accrued liabilities
    
    
    10,625
    
    
    
    24,670Deferred revenue
    
    
    34,056
    
    
    
    67,692Total current liabilities
    
    
    78,029
    
    
    
    172,332Long-term deferred revenue
    
    
    9,616
    
    
    
    18,154Other non-current liabilities
    
    
    3,379
    
    
    
    3,170TOTAL LIABILITIES
    
    
    91,024
    
    
    
    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 35,108,240 and 33,506,573 shares, respectively
    
    
    549,618
    
    
    
    543,442Accumulated other comprehensive income
    
    
    6,342
    
    
    
    9,364Accumulated deficit
    
    
    (436,176
    )
    
    
    (432,601
    )TOTAL SHAREHOLDERS EQUITY
    
    
    119,784
    
    
    
    120,205TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    210,808
    
    
    $
    313,861
 See accompanying notes
 3




---



##### Table of Contents



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    
    
    
    
    20082009
    
    
    (As Adjusted)
    
    
    2009
    
    
    (As Adjusted)Revenue:Product
    
    $
    32,374
    
    
    $
    38,065
    
    
    $
    133,937
    
    
    $
    81,606Service
    
    
    26,201
    
    
    
    16,528
    
    
    
    61,863
    
    
    
    45,848Total revenue
    
    
    58,575
    
    
    
    54,593
    
    
    
    195,800
    
    
    
    127,454Cost of revenue:Cost of product revenue
    
    
    24,784
    
    
    
    17,266
    
    
    
    93,381
    
    
    
    45,681Cost of service revenue
    
    
    10,867
    
    
    
    9,362
    
    
    
    33,095
    
    
    
    26,962Total cost of revenue
    
    
    35,651
    
    
    
    26,628
    
    
    
    126,476
    
    
    
    72,643Gross profit
    
    
    22,924
    
    
    
    27,965
    
    
    
    69,324
    
    
    
    54,811Operating expenses:Research and development, net
    
    
    17,321
    
    
    
    12,364
    
    
    
    42,246
    
    
    
    37,973Sales and marketing
    
    
    6,279
    
    
    
    6,135
    
    
    
    18,683
    
    
    
    17,365General and administrative
    
    
    3,476
    
    
    
    3,775
    
    
    
    11,523
    
    
    
    10,936Total operating expenses
    
    
    27,076
    
    
    
    22,274
    
    
    
    72,452
    
    
    
    66,274Income (loss) from operations
    
    
    (4,152
    )
    
    
    5,691
    
    
    
    (3,128
    )
    
    
    (11,463
    )Other income (expense), net
    
    
    916
    
    
    
    (432
    )
    
    
    (575
    )
    
    
    361Interest income (expense), net
    
    
    35
    
    
    
    (1,763
    )
    
    
    (849
    )
    
    
    (3,382
    )Income (loss) before income taxes
    
    
    (3,201
    )
    
    
    3,496
    
    
    
    (4,552
    )
    
    
    (14,484
    )Income tax benefit (expense)
    
    
    1,094
    
    
    
    87
    
    
    
    977
    
    
    
    (302
    )Net income (loss)
    
    $
    (2,107
    )
    
    $
    3,583
    
    
    $
    (3,575
    )
    
    $
    (14,786
    )Basic and diluted net income (loss) per common share
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    (0.11
    )
    
    $
    (0.45
    )Basic weighted average shares outstanding
    
    
    33,689
    
    
    
    32,628
    
    
    
    33,491
    
    
    
    32,507Diluted weighted average shares outstanding
    
    
    33,689
    
    
    
    32,661
    
    
    
    33,491
    
    
    
    32,507
 See accompanying notes
 4




---



##### Table of Contents



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,20082009
    
    
    (As Adjusted)Operating activities:Net loss
    
    $
    (3,575
    )
    
    $
    (14,786
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    6,314
    
    
    
    8,058Share-based compensation expense
    
    
    4,581
    
    
    
    2,443Inventory write-down
    
    
    5,481
    
    
    
    730Amortization of debt issuance costs
    
    
    79
    
    
    
    388Loss on repurchase of Notes
    
    
    910
    
    
    
    Amortization of convertible notes debt discount
    
    
    832
    
    
    
    4,264Deferred income taxes
    
    
    (2,693
    )
    
    
    (351
    )Cash provided by (used in) due to changes in operating assets and liabilities:Accounts and other receivables
    
    
    51,413
    
    
    
    (25,772
    )Inventory
    
    
    21,675
    
    
    
    (100,000
    )Prepaid expenses and other assets
    
    
    12,459
    
    
    
    (7,025
    )Accounts payable
    
    
    5,766
    
    
    
    19,128Accrued payroll and related expenses, other accrued liabilities and advance research
and development payments
    
    
    (41,717
    )
    
    
    (25,704
    )Other non-current liabilities
    
    
    207
    
    
    
    81Deferred revenue
    
    
    (42,541
    )
    
    
    65,906Net cash provided by (used in) operating activities
    
    
    19,191
    
    
    
    (72,640
    )Investing activities:Sales/maturities of short-term investments
    
    
    7,850
    
    
    
    37,601Purchases of short-term investments
    
    
    (5,481
    )
    
    
    (1,673
    )(Increase) decrease in restricted cash
    
    
    (809
    )
    
    
    8,602Purchases of property and equipment
    
    
    (5,217
    )
    
    
    (2,797
    )Net cash provided by (used in) investing activities
    
    
    (3,657
    )
    
    
    41,733Financing activities:Repurchase of Notes
    
    
    (27,150
    )
    
    
    Proceeds from issuance of common stock through employee stock purchase plan
    
    
    391
    
    
    
    354Proceeds from exercises of stock options
    
    
    254
    
    
    
    512009 stock option repurchase tender offer, purchase of options
    
    
    (669
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (27,174
    )
    
    
    405Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    601
    
    
    
    (579
    )Net decrease in cash and cash equivalents
    
    
    (11,039
    )
    
    
    (31,081
    )Cash and cash equivalents:Beginning of period
    
    
    72,373
    
    
    
    120,539End of period
    
    $
    61,334
    
    
    $
    89,458Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    395
    
    
    $
    1,202Non-cash investing and financing activities:Inventory transfers to fixed assets and service inventory
    
    $
    1,585
    
    
    $
    2,282Shares issued for 401(k) match
    
    $
    1,537
    
    
    $
    1,430
 See accompanying notes
 5




---



##### Table of Contents



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Basis of Presentation
    Principles of Consolidation
  Adjustments and Reclassifications
 Debt
 Note 13  Convertible Notes
  6




---



##### Table of Contents



Use of Estimates
  Note 2  New Accounting Pronouncements
 Financial
Instruments
 Investments  Debt
and Equity Securities
 Subsequent Events,
 Generally Accepted
Accounting Principles
 Fair Value
Measurements and Disclosures
 7




---



##### Table of Contents



Multiple-Deliverable Revenue Arrangements
 Certain Revenue Arrangements that Include
Software Elements
 Note 3  Fair Value Measurement
 Fair Value Measurements and Disclosures
  Quoted
    
    
    SignificantPrices in
    
    
    OtherFair Value
    
    
    Active
    
    
    Observableat September 30,
    
    
    Markets
    
    
    InputsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)Assets:Cash, cash equivalents and restricted cash
    
    $
    64,834
    
    
    $
    64,834
    
    
    $
    Short-term investments, available-for-sale
    
    
    2,997
    
    
    
    2,997
    
    
    
    Assets measured at fair value at
September 30, 2009
    
    $
    67,831
    
    
    $
    67,831
    
    
    $
    Foreign exchange forward contracts (1)
    
    $
    (1,747
    )
    
    $
    
    
    
    $
    (1,747
    )Liabilities measured at fair value at
September 30, 2009
    
    $
    (1,747
    )
    
    $
    
    
    
    $
    (1,747
    )
 
 (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 ValueSeptember 30, 2009Treasury bills
    
    $
    2,993
    
    
    $
    4
    
    
    $
    
    
    
    $
    2,997Total short-term investments
    
    $
    2,993
    
    
    $
    4
    
    
    $
    
    
    
    $
    2,997December 31, 2008Corporate notes and bonds
    
    $
    5,351
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    5,350Total short-term investments
    
    $
    5,351
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    5,350
 8




---



##### Table of Contents



Foreign Currency Derivatives
     Fair Value
    
    Fair Valueas of
    
    as ofSeptember 30,
    
    December 31,Hedge Classification
    
    Balance Sheet Location
    
    2009
    
    2008Cash flow hedges
    
    Other accrued liabilities/Prepaid expenses and other current assets
    
    $
    (1,747
    )
    
    $
    5,478Total derivatives classified as
hedging instruments
    
    
    
    
    
    $
    (1,747
    )
    
    $
    5,478
  Note 4  Earnings (Loss) Per Share (EPS)
   9




---



##### Table of Contents



Note 5  Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008 (1)
    
    
    2009
    
    
    2008 (1)Net income (loss)
    
    $
    (2,107
    )
    
    $
    3,583
    
    
    $
    (3,575
    )
    
    $
    (14,786
    )Unrealized net gain (loss) on available-for-sale investments
    
    
    4
    
    
    
    (106
    )
    
    
    4
    
    
    
    (113
    )Cash flow hedges:Net gain (loss) on cash flow hedges
    
    
    513
    
    
    
    3,480
    
    
    
    (703
    )
    
    
    3,357Reclassification adjustment to revenue
    
    
    (1,179
    )
    
    
    319
    
    
    
    (1,667
    )
    
    
    819(666
    )
    
    
    3,799
    
    
    
    (2,370
    )
    
    
    4,176Foreign currency translation adjustment
    
    
    78
    
    
    
    (1,374
    )
    
    
    (656
    )
    
    
    (4,214
    )Comprehensive income (loss)
    
    $
    (2,691
    )
    
    $
    5,902
    
    
    $
    (6,597
    )
    
    $
    (14,937
    )
 
 (1)
    
    Net loss adjusted for retrospective application of new guidance included in ASC Topic 470,
Debt, related to convertible debt instruments that may be settled in cash upon conversion (see
Note 13  Convertible Notes) Note 6  Accounts and Other Receivables
  September 30,
    
    
    December 31,2009
    
    
    2008Trade accounts receivable
    
    $
    31,372
    
    
    $
    74,217Other receivables
    
    
    5,824
    
    
    
    1,407Unbilled receivables
    
    
    5,578
    
    
    
    6,703Advance billings
    
    
    1,190
    
    
    
    13,43943,964
    
    
    
    95,766Allowance for doubtful accounts
    
    
    (172
    )
    
    
    (99
    )Accounts and other receivables, net
    
    $
    43,792
    
    
    $
    95,667
   Note 7  Inventory
  September 30,
    
    
    December 31,2009
    
    
    2008Components and subassemblies
    
    $
    5,556
    
    
    $
    16,805Work in process
    
    
    11,041
    
    
    
    6,284Finished goods
    
    
    35,099
    
    
    
    57,348Total
    
    $
    51,696
    
    
    $
    80,437
 10




---



##### Table of Contents



Note 8  Deferred Revenue
  September 30,
    
    
    December 31,2009
    
    
    2008Deferred product revenue
    
    $
    16,718
    
    
    $
    49,326Deferred service revenue
    
    
    26,954
    
    
    
    36,520Total deferred revenue
    
    
    43,672
    
    
    
    85,846Less long-term deferred revenue
    
    
    (9,616
    )
    
    
    (18,154
    )Deferred revenue in current liabilities
    
    $
    34,056
    
    
    $
    67,692
  Note 9  Share-Based Compensation
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Risk-free interest rate
    
    
    2.0
    %
    
    
    
    
    
    
    1.6
    %
    
    
    2.9
    %Expected dividend yield
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    79
    %
    
    
    
    
    
    
    79
    %
    
    
    69
    %Expected life
    
    4.0 years
    
    
    
    
    
    4.0 years
    
    4.0 yearsWeighted average Black-Scholes value of options granted
    
    $
    4.69
    
    
    
    
    
    
    $
    2.21
    
    
    $
    3.52
  11




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of product revenue
    
    $
    51
    
    
    $
    32
    
    
    $
    175
    
    
    $
    69Cost of service revenue
    
    
    95
    
    
    
    68
    
    
    
    393
    
    
    
    137Research and development, net
    
    
    390
    
    
    
    401
    
    
    
    1,629
    
    
    
    918Sales and marketing
    
    
    182
    
    
    
    167
    
    
    
    694
    
    
    
    376General and administrative
    
    
    460
    
    
    
    397
    
    
    
    1,690
    
    
    
    943Total
    
    $
    1,178
    
    
    $
    1,065
    
    
    $
    4,581
    
    
    $
    2,443
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2008
    
    
    3,755,894
    
    
    $
    12.30Grants
    
    
    1,220,200
    
    
    $
    3.77Exercises
    
    
    (41,945
    )
    
    $
    6.06Cancellations
    
    
    (1,912,117
    )
    
    $
    16.35Outstanding at September 30, 2009
    
    
    3,022,032
    
    
    $
    6.38
    
    
    7.7 years
    
    $8.7 millionExercisable at September 30, 2009
    
    
    1,181,356
    
    
    $
    8.89
    
    
    5.4 years
    
    $2.0 millionAvailable for grant at September 30, 2009
    
    
    4,276,809
   WeightedAverageGrant dateShares
    
    
    Fair ValueOutstanding at December 31, 2008
    
    
    623,874
    
    
    $
    7.36Granted
    
    
    857,170
    
    
    
    3.79Vested
    
    
    (69,159
    )
    
    
    7.36Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2009
    
    
    1,411,885
    
    
    $
    5.19
  12




---



##### Table of Contents



Note 10  Taxes
    Note 11  Geographic Segment Information
   United States
    
    
    Other Countries
    
    
    Total2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Three months ended September 30,Product revenue
    
    $
    15,255
    
    
    $
    32,712
    
    
    $
    17,119
    
    
    $
    5,353
    
    
    $
    32,374
    
    
    $
    38,065Service revenue
    
    
    22,676
    
    
    
    10,816
    
    
    
    3,525
    
    
    
    5,712
    
    
    
    26,201
    
    
    
    16,528Total revenue
    
    $
    37,931
    
    
    $
    43,528
    
    
    $
    20,644
    
    
    $
    11,065
    
    
    $
    58,575
    
    
    $
    54,593
 United States
    
    
    Other Countries
    
    
    Total2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Nine months ended September 30,Product revenue
    
    $
    95,021
    
    
    $
    64,256
    
    
    $
    38,916
    
    
    $
    17,350
    
    
    $
    133,937
    
    
    $
    81,606Service revenue
    
    
    47,326
    
    
    
    28,340
    
    
    
    14,537
    
    
    
    17,508
    
    
    
    61,863
    
    
    
    45,848Total revenue
    
    $
    142,347
    
    
    $
    92,596
    
    
    $
    53,453
    
    
    $
    34,858
    
    
    $
    195,800
    
    
    $
    127,454
 13




---



##### Table of Contents



Note
12  Line of Credit
  Note 13  Convertible Notes
 Debt
  14




---



##### Table of Contents



As Originally
    
    
    Effect ofReported
    
    
    Change
    
    
    As AdjustedIncome Statement for the three-month period ended September 30, 2008:Interest expense, net
    
    $
    (341
    )
    
    $
    (1,422
    )
    
    $
    (1,763
    )Income before income taxes
    
    
    4,918
    
    
    
    (1,422
    )
    
    
    3,496Net income
    
    
    5,005
    
    
    
    (1,422
    )
    
    
    3,583Basic and diluted net income per common share
    
    $
    0.15
    
    
    $
    (0.04
    )
    
    $
    0.11Income Statement for the nine-month period ended September 30, 2008:Interest income (expense), net
    
    $
    750
    
    
    $
    (4,132
    )
    
    $
    (3,382
    )Loss before income taxes
    
    
    (10,352
    )
    
    
    (4,132
    )
    
    
    (14,484
    )Net loss
    
    
    (10,654
    )
    
    
    (4,132
    )
    
    
    (14,786
    )Basic and diluted net loss per common share
    
    $
    (0.33
    )
    
    $
    (0.13
    )
    
    $
    (0.45
    )Cash Flow Statement for the nine-month period ended September 30, 2008:Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Net loss
    
    $
    (10,654
    )
    
    $
    (4,132
    )
    
    $
    (14,786
    )Amortization of debt issuance costs
    
    
    520
    
    
    
    (132
    )
    
    
    388Amortization of convertible notes debt discount
    
    $
    
    
    
    $
    4,264
    
    
    $
    4,264Balance 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
 15




---



##### Table of Contents



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 First Nine Months of 2009 Results
    16




---



##### Table of Contents



Market Overview and Challenges
  
    
    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 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.
 17




---



##### Table of Contents



Expand Our Total Addressable Market.
 Extend Technology Leadership.
 Maintain Our Focus on Execution and Profitability.
  Key Performance Indicators
  Revenue.
 Gross profit margin.
 Operating expenses.
 Liquidity and cash flows.
 18




---



##### 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.
 19




---



##### Table of Contents



Project Revenue. .
 Services.
 Inventory Valuation
   Accounting for Income Taxes
   20




---



##### Table of Contents



Research and Development Expenses
     Share-based Compensation
  New Accounting Pronouncements
 Financial
Instruments
 Investments  Debt
and Equity Securities
 Subsequent Events,
 21




---



##### Table of Contents



Generally Accepted
Accounting Principles
 Fair Value
Measurements and Disclosures
 Multiple-Deliverable Revenue Arrangements
 Certain Revenue Arrangements that Include
Software Elements
 Results of Operations
 Revenue and Gross Profit Margins
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Product revenue
    
    $
    32,374
    
    
    $
    38,065
    
    
    $
    133,937
    
    
    $
    81,606Less: Cost of product revenue
    
    
    24,784
    
    
    
    17,266
    
    
    
    93,381
    
    
    
    45,681Product gross profit
    
    $
    7,590
    
    
    $
    20,799
    
    
    $
    40,556
    
    
    $
    35,925Product gross profit margin
    
    
    23
    %
    
    
    55
    %
    
    
    30
    %
    
    
    44
    %Service revenue
    
    $
    26,201
    
    
    $
    16,528
    
    
    $
    61,863
    
    
    $
    45,848Less: Cost of service revenue
    
    
    10,867
    
    
    
    9,362
    
    
    
    33,095
    
    
    
    26,962Service gross profit
    
    $
    15,334
    
    
    $
    7,166
    
    
    $
    28,768
    
    
    $
    18,886Service gross profit margin
    
    
    59
    %
    
    
    43
    %
    
    
    47
    %
    
    
    41
    %Total revenue
    
    $
    58,575
    
    
    $
    54,593
    
    
    $
    195,800
    
    
    $
    127,454Less: Total cost of revenue
    
    
    35,651
    
    
    
    26,628
    
    
    
    126,476
    
    
    
    72,643Total gross profit
    
    $
    22,924
    
    
    $
    27,965
    
    
    $
    69,324
    
    
    $
    54,811Total gross profit margin
    
    
    39
    %
    
    
    51
    %
    
    
    35
    %
    
    
    43
    %
 22




---



##### Table of Contents



Product Revenue
  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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Gross research and development expenses
    
    $
    19,197
    
    
    $
    23,797
    
    
    $
    70,089
    
    
    $
    68,105Less: Amounts included in cost of revenue
    
    
    (410
    )
    
    
    
    
    
    
    (1,705
    )
    
    
    Less: Reimbursed research and
development (excludes amounts in
revenue)
    
    
    (1,466
    )
    
    
    (11,433
    )
    
    
    (26,138
    )
    
    
    (30,132
    )Net research and development expenses
    
    $
    17,321
    
    
    $
    12,364
    
    
    $
    42,246
    
    
    $
    37,973Percentage of total revenue
    
    
    30
    %
    
    
    23
    %
    
    
    22
    %
    
    
    30
    %
 23




---



##### Table of Contents



Sales and Marketing and General and Administrative Expenses
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Sales and marketing
    
    $
    6,279
    
    
    $
    6,135
    
    
    $
    18,683
    
    
    $
    17,365Percentage of total revenue
    
    
    11
    %
    
    
    11
    %
    
    
    10
    %
    
    
    14
    %General and administrative
    
    $
    3,476
    
    
    $
    3,775
    
    
    $
    11,523
    
    
    $
    10,936Percentage of total revenue
    
    
    6
    %
    
    
    7
    %
    
    
    6
    %
    
    
    9
    %
 Sales and Marketing .
 General and Administrative
 Other Income (Expense), net
  24




---



##### Table of Contents



Interest Income (Expense)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(As Adjusted)
    
    
    
    
    
    
    (As Adjusted)Interest income
    
    $
    58
    
    
    $
    479
    
    
    $
    438
    
    
    $
    3,145Interest expense
    
    
    (23
    )
    
    
    (2,242
    )
    
    
    (1,287
    )
    
    
    (6,527
    )Net interest
income (expense)
    
    $
    35
    
    
    $
    (1,763
    )
    
    $
    (849
    )
    
    $
    (3,382
    )
   Taxes
  Liquidity and Capital Resources
    25




---



##### Table of Contents



Amounts Committed by Year2009(Less thanContractual Obligations
    
    Total
    
    
    1 Year)
    
    
    2010-2011
    
    
    2012-2013
    
    
    ThereafterDevelopment agreements
    
    $
    17,752
    
    
    $
    6,403
    
    
    $
    11,336
    
    
    $
    13
    
    
    $
    Operating leases
    
    
    28,986
    
    
    
    534
    
    
    
    6,098
    
    
    
    6,452
    
    
    
    15,902Unrecognized income tax benefits
    
    
    646
    
    
    
    292
    
    
    
    354
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    47,384
    
    
    $
    7,229
    
    
    $
    17,788
    
    
    $
    6,465
    
    
    $
    15,902
     
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
 26




---



##### Table of Contents



WeightedAveragedInterestFair Value
    
    
    Maturities
    
    
    RateTreasury bills
    
    $
    2,997
    
    
    
    2010
    
    
    
    0.4
    %Total short-term investments
    
    $
    2,997
 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.
 27




---



##### Table of Contents




    
    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 our Cray XT5 system and completing development on and selling
upgrade and successor systems including those dependent on the successful completion of two
significant product development efforts targeted for 2010;
 
    
    the successful expansion of our Custom Engineering program;
 
    
    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;
 
    
    our ability to successfully and timely design in, integrate and secure competitive
processors for our systems, including for successors to our Cray XT5 system;
 
    
    the competitiveness of our products;
 
    
    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 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 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;
 28




---



##### Table of Contents




    
    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;
 
    
    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;
 
    
    the availability of adequate customer facilities to install and operate new Cray systems;
and
 
    
    the receipt and timing of necessary export licenses.
  If DARPA terminated our DARPA HPCS program in whole or in part or if we are unable to
negotiate, 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.
 If our strategic initiatives targeting markets outside of the high end of the high performance
computer, or HPC, market are not successful, our ability to grow our revenues and achieve and
sustain profitability will be adversely affected.
 29




---



##### Table of Contents



If we are unable to successfully sell our Cray XT5 and develop and sell successor systems and
sell these systems into the high end of the HPC market, our operating results will be adversely
affected.
  
    
    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, commodity cluster systems from both large established companies and smaller
firms and demonstrate the value of our balanced high bandwidth systems to our current core
of customers comprised largely certain agencies of the U.S. and other governments as well as
other customers.
 
    
    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, 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 have
incurred 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, such as successors to the Cray XT5 system.
 
    
    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 and Cray XMT systems, 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 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. In the 2009 third quarter, we wrote off approximately
$4.5 million of estimated excess inventory primarily related to this key component, and we
may be required to write off some of the $4.5 million remaining inventory in the future.
  30




---



##### Table of Contents



Failure to overcome the technical challenges of developing competitive supercomputer systems
years before they can be sold would adversely affect our revenue and operating results in
subsequent years.
  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.
 
    
    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
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, we may not be able to
redesign such components or find alternate sources that we could use in any realistic time
frame.
 
    
    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 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 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 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, 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.
 31




---



##### Table of Contents




    
    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 be
impossible to complete.
  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 highly competitive HPC market, our business
will not be successful.
  We may fail in our efforts to keep up with rapid technological changes in the HPC industry.
 32




---



##### Table of Contents



We are subject to increasing government regulations and other requirements due to the nature
of our business, which may adversely affect our business operations.
 The funding of U.S. government programs is subject to congressional appropriations
 The U.S. government may modify, curtail or terminate our contracts.
 Our contract costs are subject to audits by U.S. government agencies
 Our business is subject to potential U.S. government inquiries and investigations.
 Our U.S. government business is also subject to specific procurement regulations and other
requirements.
 U.S. export controls could hinder our ability to make sales to foreign customers and our future
prospects .
 If we cannot retain, attract and motivate key personnel, we may be unable to effectively
implement our business plan.
 Our stock price is volatile.
 33




---



##### Table of Contents



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.
 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.
 
    
    35,108,240 shares of common stock;
 34




---



##### Table of Contents




    
    3,022,032 shares of common stock issuable upon exercise of options, of which options to
purchase 1,181,356 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;
    
    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.
  35




---



##### Table of Contents



Item 6.
    
    Exhibits
 10.1
    
    Fifth Amendment to Credit Agreement, entered into as of June 1, 2009,
between Wells Fargo Bank, National Association, and the Company (1)10.2
    
    Lease dated as of July 2, 2009, between NEA Galtier, LLC and the Company (2)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
 (1)
    
    Incorporated by reference to the Companys Current Report on Form 8-K, as filed with the SEC
on July 13, 2009.(2)
    
    Incorporated by reference to the Companys Current Report on Form 8-K, as filed with the SEC
on July 16, 2009.Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted. 36




---



##### Table of Contents



SIGNATURES
  CRAY INC.Date: November 4, 2009
    /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 37