##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2010
 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 INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements:
    
    
    3Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    3Statements of Operations for the Three Months Ended March 31, 2010 and 2009
    
    
    4Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009
    
    
    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
    
    
    23Item 4. Controls and Procedures
    
    
    24Item 4T. Controls and Procedures
    
    
    24PART II. OTHER INFORMATION
    
    
    24Item1A. Risk Factors
    
    
    24Item 6. Exhibits
    
    
    32SIGNATURES
    
    
    33EX-31.1EX-31.2EX-32.1
  Available Information
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
 
  
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    95,048
    
    
    $
    105,018Restricted cash
    
    
    5,210
    
    
    
    5,161Short-term investments, available-for-sale
    
    
    3,000
    
    
    
    2,999Accounts and other receivables, net
    
    
    38,313
    
    
    
    38,207Inventory
    
    
    39,621
    
    
    
    29,011Prepaid expenses and other current assets
    
    
    6,534
    
    
    
    5,514Total current assets
    
    
    187,726
    
    
    
    185,910Property and equipment, net
    
    
    21,463
    
    
    
    19,809Service inventory, net
    
    
    1,719
    
    
    
    1,719Deferred tax assets
    
    
    2,692
    
    
    
    2,661Other non-current assets
    
    
    13,078
    
    
    
    13,561TOTAL ASSETS
    
    $
    226,678
    
    
    $
    223,660LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,035
    
    
    $
    18,783Accrued payroll and related expenses
    
    
    9,947
    
    
    
    16,219Other accrued liabilities
    
    
    9,570
    
    
    
    9,735Deferred revenue
    
    
    63,515
    
    
    
    42,414Total current liabilities
    
    
    99,067
    
    
    
    87,151Long-term deferred revenue
    
    
    8,781
    
    
    
    9,627Other non-current liabilities
    
    
    2,574
    
    
    
    2,719TOTAL LIABILITIES
    
    
    110,422
    
    
    
    99,497Commitments and contingencies (Note 12)Shareholders equity:Preferred stock  Authorized and undesignated, 5,000,000 shares; no shares issued or outstanding
    
    
    
    
    
    
    Common stock and additional paid-in capital, par value $.01 per share  Authorized, 75,000,000
shares; issued and outstanding 35,440,006 and 35,181,407 shares, respectively
    
    
    553,804
    
    
    
    551,220Accumulated other comprehensive income
    
    
    7,254
    
    
    
    6,148Accumulated deficit
    
    
    (444,802
    )
    
    
    (433,205
    )TOTAL SHAREHOLDERS EQUITY
    
    
    116,256
    
    
    
    124,163TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    226,678
    
    
    $
    223,660
 See accompanying notes
 3




---



##### Table of Contents



Three Months EndedMarch 31,2010
    
    
    2009Revenue:Product
    
    $
    9,065
    
    
    $
    59,462Service
    
    
    19,323
    
    
    
    15,019Total revenue
    
    
    28,388
    
    
    
    74,481Cost of revenue:Cost of product revenue
    
    
    8,006
    
    
    
    46,334Cost of service revenue
    
    
    13,748
    
    
    
    10,276Total cost of revenue
    
    
    21,754
    
    
    
    56,610Gross profit
    
    
    6,634
    
    
    
    17,871Operating expenses:Research and development, net
    
    
    7,694
    
    
    
    11,215Sales and marketing
    
    
    6,264
    
    
    
    6,063General and administrative
    
    
    4,287
    
    
    
    4,146Total operating expenses
    
    
    18,245
    
    
    
    21,424Loss from operations
    
    
    (11,611
    )
    
    
    (3,553
    )Other income (expense), net
    
    
    97
    
    
    
    (754
    )Interest income (expense), net
    
    
    17
    
    
    
    (533
    )Loss before income taxes
    
    
    (11,497
    )
    
    
    (4,840
    )Income tax expense
    
    
    (100
    )
    
    
    (48
    )Net loss
    
    $
    (11,597
    )
    
    $
    (4,888
    )Basic and diluted net loss per common share
    
    $
    (0.34
    )
    
    $
    (0.15
    )Basic and diluted weighted average shares outstanding
    
    
    33,954
    
    
    
    33,197
 See accompanying notes
 4




---



##### Table of Contents



Three Months EndedMarch 31,2010
    
    
    2009Operating activities:Net loss
    
    $
    (11,597
    )
    
    $
    (4,888
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    2,201
    
    
    
    2,192Share-based compensation expense
    
    
    1,211
    
    
    
    2,370Inventory write-down
    
    
    492
    
    
    
    156Amortization of debt issuance costs
    
    
    
    
    
    
    52Amortization of convertible notes debt discount
    
    
    
    
    
    
    537Deferred income taxes
    
    
    (31
    )
    
    
    (549
    )Cash provided by (used in) due to changes in operating assets and liabilities:Accounts and other receivables
    
    
    (109
    )
    
    
    72,367Inventory
    
    
    (13,377
    )
    
    
    26,087Prepaid expenses and other assets
    
    
    (642
    )
    
    
    6,181Accounts payable
    
    
    (2,716
    )
    
    
    3,303Accrued payroll and related expenses and other accrued liabilities
    
    
    (4,202
    )
    
    
    (43,017
    )Other non-current liabilities
    
    
    (143
    )
    
    
    (99
    )Deferred revenue
    
    
    20,488
    
    
    
    (11,146
    )Net cash (used in) provided by operating activities
    
    
    (8,425
    )
    
    
    53,546Investing activities:Sales/maturities of short-term investments
    
    
    
    
    
    
    2,200Purchases of short-term investments
    
    
    
    
    
    
    (2,493
    )Purchases of property and equipment
    
    
    (1,462
    )
    
    
    (1,365
    )Net cash used in investing activities
    
    
    (1,462
    )
    
    
    (1,658
    )Financing activities:Proceeds from issuance of common stock through employee stock purchase plan
    
    
    147
    
    
    
    1442009 stock option repurchase tender offer, purchase of options
    
    
    
    
    
    
    (669
    )Net cash provided by (used in) financing activities
    
    
    147
    
    
    
    (525
    )Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (230
    )
    
    
    (308
    )Net (decrease) increase in cash and cash equivalents
    
    
    (9,970
    )
    
    
    51,055Cash and cash equivalents:Beginning of period
    
    
    105,018
    
    
    
    72,373End of period
    
    $
    95,048
    
    
    $
    123,428Supplemental disclosure of cash flow information:Non-cash investing and financing activities:Inventory transfers to fixed assets and service inventory
    
    $
    2,275
    
    
    $
    468Shares issued for 401(k) match
    
    $
    1,226
    
    
    $
    1,062
 See accompanying notes
 5




---



##### Table of Contents



Note 1  Basis of Presentation and Summary of Significant Accounting Policies
    Principles of Consolidation
  Use of Estimates
  Revenue Recognition
  6




---



##### Table of Contents



Multiple-Element Arrangements.
   Product.
 Project.
 Service.
 Note 2  New Accounting Pronouncements
 Multiple-Deliverable Revenue Arrangements
 Certain Revenue Arrangements that Include
Software Elements
 7




---



##### Table of Contents



Revenue Recognition  Milestone Method (Topic
605): Milestone Method of Revenue Recognition
 Note 3  Fair Value Measurement
 Fair Value Measurements and Disclosures
  Quoted
    
    
    SignificantPrices in
    
    
    OtherFair Value
    
    
    Active
    
    
    Observableat March 31,
    
    
    Markets
    
    
    InputsDescription
    
    2010
    
    
    (Level 1)
    
    
    (Level 2)Assets:Cash, cash equivalents and restricted cash
    
    $
    100,258
    
    
    $
    100,258
    
    
    $
    Short-term investments, available-for-sale
    
    
    3,000
    
    
    
    3,000
    
    
    
    Assets measured at fair value at March 31, 2010
    
    $
    103,258
    
    
    $
    103,258
    
    
    $
    Liabilities:Foreign exchange forward contracts (1)
    
    $
    (759
    )
    
    $
    
    
    
    $
    (759
    )Liabilities measured at fair value at March 31, 2010
    
    $
    (759
    )
    
    $
    
    
    
    $
    (759
    )
 
 (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 ValueMarch 31, 2010Treasury bills
    
    $
    2,999
    
    
    $
    1
    
    
    $
    
    
    
    $
    3,000Total short-term investments
    
    $
    2,999
    
    
    $
    1
    
    
    $
    
    
    
    $
    3,000December 31, 2009Treasury bills
    
    $
    2,996
    
    
    $
    3
    
    
    $
    
    
    
    $
    2,999Total short-term investments
    
    $
    2,996
    
    
    $
    3
    
    
    $
    
    
    
    $
    2,999
 8




---



##### Table of Contents



Foreign Currency Derivatives
     Fair Value
    
    Fair Valueas of
    
    as ofMarch 31,
    
    December 31,Hedge Classification
    
    Balance Sheet Location
    
    2010
    
    2009Cash flow hedges
    
    Prepaid expenses and other assets
    
    $
    
    
    
    $
    51Cash flow hedges
    
    Other accrued liabilities
    
    $
    (759
    )
    
    $
    (1,659
    )Total derivatives classified as hedging instruments
    
    
    
    
    
    $
    (759
    )
    
    $
    (1,608
    )
  Note 4  Earnings (Loss) Per Share (EPS)
   9




---



##### Table of Contents



Note 5  Comprehensive Loss
  Three Months EndedMarch 31,2010
    
    
    2009Net loss
    
    $
    (11,597
    )
    
    $
    (4,888
    )Unrealized loss on available-for-sale investments
    
    
    (3
    )
    
    
    (4
    )Cash flow hedges:Gain on cash flow hedges
    
    
    914
    
    
    
    536Reclassification adjustment to revenue
    
    
    
    
    
    
    24914
    
    
    
    560Foreign currency translation adjustment
    
    
    195
    
    
    
    438Comprehensive loss
    
    $
    (10,491
    )
    
    $
    (3,894
    )
 Note 6  Accounts and Other Receivables, Net
  March 31,
    
    
    December 31,2010
    
    
    2009Trade accounts receivable
    
    $
    29,181
    
    
    $
    26,375Unbilled receivables
    
    
    2,538
    
    
    
    5,791Advance billings
    
    
    3,871
    
    
    
    2,968Other receivables
    
    
    3,245
    
    
    
    3,24538,835
    
    
    
    38,379Allowance for doubtful accounts
    
    
    (522
    )
    
    
    (172
    )Accounts and other receivables, net
    
    $
    38,313
    
    
    $
    38,207
   Note 7  Inventory
  March 31,
    
    
    December 31,2010
    
    
    2009Components and subassemblies
    
    $
    11,120
    
    
    $
    10,687Work in process
    
    
    10,889
    
    
    
    14,383Finished goods
    
    
    17,612
    
    
    
    3,941Total
    
    $
    39,621
    
    
    $
    29,011
  h
 10




---



##### Table of Contents



Note 8  Deferred Revenue
  March 31,
    
    
    December 31,2010
    
    
    2009Deferred product revenue
    
    $
    38,168
    
    
    $
    18,305Deferred service revenue
    
    
    34,128
    
    
    
    33,736Total deferred revenue
    
    
    72,296
    
    
    
    52,041Less long-term deferred revenue
    
    
    (8,781
    )
    
    
    (9,627
    )Deferred revenue in current liabilities
    
    $
    63,515
    
    
    $
    42,414
  Note 9  Share-Based Compensation
    Three Months EndedMarch 31,2010
    
    2009Risk-free interest rate
    
    
    2.2
    %
    
    
    1.4
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    77
    %
    
    
    78
    %Expected life
    
    4.0 years
    
    4.0 yearsWeighted average Black-Scholes value of options granted
    
    $
    3.72
    
    
    $
    1.14
   11




---



##### Table of Contents



Three Months EndedMarch 31,2010
    
    
    2009Cost of product revenue
    
    $
    48
    
    
    $
    91Cost of service revenue
    
    
    92
    
    
    
    217Research and development, net
    
    
    387
    
    
    
    892Sales and marketing
    
    
    195
    
    
    
    364General and administrative
    
    
    489
    
    
    
    806Total
    
    $
    1,211
    
    
    $
    2,370
  WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractualOptions
    
    
    Price
    
    
    TermOutstanding at December 31, 2009
    
    
    3,116,522
    
    
    $
    6.43Grants
    
    
    10,000
    
    
    $
    6.42Exercises
    
    
    
    
    
    
    Cancellations
    
    
    (31,074
    )
    
    $
    8.60Outstanding at March 31, 2010
    
    
    3,095,448
    
    
    $
    6.40
    
    
    7.4 yearsExercisable at March 31, 2010
    
    
    1,279,717
    
    
    $
    8.64
    
    
    5.3 yearsAvailable for grant at March 31, 2010
    
    
    4,154,571
   WeightedAverageGrant dateShares
    
    
    Fair ValueOutstanding at December 31, 2009
    
    
    1,431,885
    
    
    $
    5.22Granted
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Vested
    
    
    (32,500
    )
    
    
    5.31Outstanding at March 31, 2010
    
    
    1,399,385
    
    
    $
    5.22
   Note 10  Income Taxes
  12




---



##### Table of Contents



Note 11  Geographic Segment Information
   United States
    
    
    Other Countries
    
    
    Total2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Three months ended March 31,Product revenue
    
    $
    8,697
    
    
    $
    50,709
    
    
    $
    368
    
    
    $
    8,753
    
    
    $
    9,065
    
    
    $
    59,462Service revenue
    
    
    14,310
    
    
    
    9,627
    
    
    
    5,013
    
    
    
    5,392
    
    
    
    19,323
    
    
    
    15,019Total revenue
    
    $
    23,007
    
    
    $
    60,336
    
    
    $
    5,381
    
    
    $
    14,145
    
    
    $
    28,388
    
    
    $
    74,481
   Note 12  Litigation
  13




---



##### 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 Three Months of 2010 Results
    14




---



##### 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 many-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.
    Key Performance Indicators
  Revenue.
 15




---



##### Table of Contents



Gross profit.
 Operating expenses.
 Liquidity and cash flows.
 Critical Accounting Policies and Estimates
    Revenue Recognition
  16




---



##### Table of Contents



Multiple-Element Arrangements.
   Product.
 Project.
 Service.
 Inventory Valuation
   17




---



##### Table of Contents



Accounting for Income Taxes
   Research and Development Expenses
     18




---



##### Table of Contents



Share-based Compensation
  New Accounting Pronouncements
 Multiple-Deliverable Revenue Arrangements
 Certain Revenue Arrangements that Include
Software Elements
 Revenue Recognition  Milestone Method (Topic
605): Milestone Method of Revenue Recognition
 Results of Operations
 Revenue and Gross Profit Margins
  Three Months EndedMarch 31,2010
    
    
    2009Product revenue
    
    $
    9,065
    
    
    $
    59,462Less: Cost of product revenue
    
    
    8,006
    
    
    
    46,334Product gross profit
    
    $
    1,059
    
    
    $
    13,128Product gross profit margin
    
    
    12
    %
    
    
    22
    %Service revenue
    
    $
    19,323
    
    
    $
    15,019Less: Cost of service revenue
    
    
    13,748
    
    
    
    10,276Service gross profit
    
    $
    5,575
    
    
    $
    4,743Service gross profit margin
    
    
    29
    %
    
    
    32
    %Total revenue
    
    $
    28,388
    
    
    $
    74,481Less: Total cost of revenue
    
    
    21,754
    
    
    
    56,610Gross profit
    
    $
    6,634
    
    
    $
    17,871Gross profit margin
    
    
    23
    %
    
    
    24
    %
 19




---



##### 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 EndedMarch 31,2010
    
    
    2009Gross research and development expenses
    
    $
    20,194
    
    
    $
    26,018Less: Amounts included in cost of revenue
    
    
    
    
    
    
    (582
    )Less: Reimbursed research and development (excludes amounts in cost of revenue)
    
    
    (12,500
    )
    
    
    (14,221
    )Net research and development expenses
    
    $
    7,694
    
    
    $
    11,215Percentage of total revenue
    
    
    27
    %
    
    
    15
    %
    20




---



##### Table of Contents



Sales and Marketing and General and Administrative Expenses
  Three Months EndedMarch 31,2010
    
    2009Sales and marketing
    
    $
    6,264
    
    
    $
    6,063Percentage of total revenue
    
    
    22
    %
    
    
    8
    %General and administrative
    
    $
    4,287
    
    
    $
    4,146Percentage of total revenue
    
    
    15
    %
    
    
    6
    %
 Sales and Marketing .
 General and Administrative
 Other Income (Expense), net
  Interest Income (Expense)
  Three Months EndedMarch 31,2010
    
    
    2009Interest income
    
    $
    41
    
    
    $
    270Interest expense
    
    
    (24
    )
    
    
    (803
    )Net interest income (expense)
    
    $
    17
    
    
    $
    (533
    )
   Three Months EndedMarch 31,2010
    
    
    2009Stated interest on Convertible Notes and other debt
    
    $
    
    
    
    $
    (223
    )Amortization of debt discount on Convertible Notes
    
    
    
    
    
    
    (537
    )Amortization of loan fees on Convertible Notes
    
    
    
    
    
    
    (40
    )Other interest expense
    
    
    (24
    )
    
    
    (3
    )Total interest expense
    
    $
    (24
    )
    
    $
    (803
    )
 21




---



##### Table of Contents



Taxes
  Liquidity and Capital Resources
      Amounts Committed by Year2010(Less thanContractual Obligations
    
    Total
    
    
    1 Year)
    
    
    2011-2012
    
    
    2013-2014
    
    
    ThereafterDevelopment agreements
    
    $
    23,429
    
    
    $
    14,635
    
    
    $
    8,669
    
    
    $
    125
    
    
    $
    Operating leases
    
    
    29,141
    
    
    
    3,032
    
    
    
    6,678
    
    
    
    6,519
    
    
    
    12,912Unrecognized income tax benefits
    
    
    488
    
    
    
    265
    
    
    
    223
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    53,058
    
    
    $
    17,932
    
    
    $
    15,570
    
    
    $
    6,644
    
    
    $
    12,912
    22




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  WeightedAveragedInterestFair Value
    
    Maturities
    
    RateTreasury bills
    
    $
    3,000
    
    
    
    2010
    
    
    
    0.4
    %
 Foreign Currency Risk
 23




---



##### 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.
   
    
    completing development of our Baker system, including its new interconnect chipset,
known as Gemini, and associated system software, targeted for completion in the third
quarter of 2010, manufacturing such systems in sufficient quantities and in a timely fashion
and achieving acceptances of Baker system deliveries in 2010;
    
    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;
 24




---



##### Table of Contents




    
    achieving acceptances of Cray XT6 system deliveries in 2010;
 
    
    successfully selling and delivering our Cray XT5, Cray XT6, Cray XT5m and Cray XT6m
systems and upgrade and successor systems;
    
    the successful continued expansion of our Custom Engineering strategic initiative;
    
    our expense levels, including research and development expense net of government funding,
which are affected by the amount and timing of such funding and the meeting of contractual
development milestones, including the milestones under our DARPA HPCS program;
    
    our ability to successfully and timely design, integrate and secure competitive
processors into and for our systems, including for successors to our Cray XT5 and Cray XT6
systems;
    
    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 volume or
product mix, strategic transactions, product life cycle, currency fluctuations 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 and services.
  
    
    the timely availability of acceptable components in sufficient quantities to meet
customer delivery schedules;
    
    the timing and level of government funding for research and development contracts and
product acquisitions, which may be adversely affected by the current economic and fiscal
situation and governmental budgetary limitations;
    
    the availability of adequate customer facilities to install and operate new Cray systems;
    
    price fluctuations in the commodity electronics, processor and memory markets;
    
    general economic trends, including changes in levels of customer capital spending;
    
    the introduction or announcement of competitive products;
    
    currency fluctuations, international conflicts or economic crises; and
    
    the receipt and timing of necessary export licenses.
  25




---



##### Table of Contents



If we are unable to complete development of, manufacture, deliver and obtain customer
acceptances of our Baker systems scheduled for 2010 delivery in 2010, our 2010 revenue and cash
will be substantially reduced and our financial results will be significantly adversely affected.
 If the Defense Advanced Research Projects Agency (DARPA) terminates our DARPA High Productivity Computing Systems (HPCS) program in
whole or in part or if we are unable to achieve and obtain acceptance of key DARPA milestones when
or as expected or at all, our desired strategy would be adversely affected, our net research and
development expenditures and capital requirements would increase significantly and our ability to
conduct research and development would decrease.
 If our strategic initiatives targeting markets outside of the high end of the HPC market are
not successful, our ability to grow our revenues and achieve and sustain profitability will be
adversely affected.
 26




---



##### Table of Contents



If we are unable to successfully sell and deliver our Cray XT6 systems and develop, sell and
deliver successor systems, such as our Baker system, our operating results will be adversely
affected.
  
    
    The level of product differentiation in our Cray XT6 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.
    
    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 and delays
in our ability to recognize revenue from system deliveries. 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 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, Cray XT6 and Cray XMT systems
prior to it becoming unavailable, which had to be placed before we could know all the
possible sales prospects for these products or when the key component could be made obsolete
by a successor component. If we underestimated our needs, we could limit the number of
possible sales of these products and reduce potential revenue, or if we overestimated, we
could incur inventory obsolescence charges and reduce our gross profit. Through the first
quarter of 2010, we have written off approximately $5.0 million of estimated excess
inventory primarily related to this key component, and we may be required to write off some
of the $3.0 million remaining inventory in the future.
  The continuing commoditization of HPC hardware and software have resulted in pricing pressure
and may adversely affect our operating results.
 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.
 27




---



##### Table of Contents



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
timeframe.
    
    If a supplier providing us with key research and development and design services or core
technology components with respect to integrated circuit design, network communication
capabilities or software is late, fails to provide us with effective functionality or loses
key internal talent, our development programs may be delayed or prove to be impossible to
complete.
    
    If a supplier cannot provide a competitive key component 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.
    
    If a key supplier is acquired or has a significant business change, such as the
acquisition of our file system software provider by our competitor Sun Microsystems and the
subsequent acquisition of Sun by Oracle, the production and sales of our systems and
services may be delayed or adversely affected, or our development programs may be delayed or
may be impossible to complete.
  28




---



##### Table of Contents



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.
 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.
 29




---



##### Table of Contents



The U.S. government may modify, curtail or terminate its contracts with us.
 Our U.S. government 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.
 We may infringe or be subject to claims that we infringe the intellectual property rights of
others.
 30




---



##### Table of Contents



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 significant 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.
 
    
    35,440,006 shares of common stock; and
    
    3,095,448 shares of common stock issuable upon exercise of options, of which options to
purchase 1,279,717 shares of common stock were then exercisable.
  31




---



##### Table of Contents



Provisions of our Restated Articles of Incorporation and Bylaws could make a proposed
acquisition of Cray that is not approved by our Board of Directors more difficult.
 
    
    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.
  
 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
 32




---



##### Table of Contents



SIGNATURES
  CRAY INC.Date: May 7, 2010
    
    /s/ PETER J. UNGAROPeter J. UngaroPresident and Chief Executive Officer/s/ BRIAN C. HENRYBrian C. HenryExecutive Vice President and Chief Financial Officer/s/ KENNETH D. ROSELLIKenneth D. RoselliVice President and Chief Accounting Officer/Corporate Controller
 33