##### 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, 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: 000-26820
 CRAY INC.
 (Exact name of registrant as specified in its charter)
 Washington
    
    93-0962605(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)901 Fifth Avenue, Suite 1000
Seattle, Washington
    
    98164(Address of Principal Executive 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




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##### 



CRAY INC.
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Condensed Consolidated Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June
30, 2010 and 2009 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010
and 2009 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATION
    
    
    27Item1A. Risk Factors
    
    
    27Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36EX-31.1EX-31.2EX-32.1
  Available Information
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 
  
 June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    80,039
    
    
    $
    105,018Restricted cash
    
    
    5,212
    
    
    
    5,161Short-term investments, available-for-sale
    
    
    
    
    
    
    2,999Accounts and other receivables, net
    
    
    37,695
    
    
    
    38,207Inventory
    
    
    110,554
    
    
    
    29,011Prepaid expenses and other current assets
    
    
    9,327
    
    
    
    5,514Total current assets
    
    
    242,827
    
    
    
    185,910Property and equipment, net
    
    
    20,856
    
    
    
    19,809Service inventory, net
    
    
    1,529
    
    
    
    1,719Deferred tax assets
    
    
    2,684
    
    
    
    2,661Other non-current assets
    
    
    12,707
    
    
    
    13,561TOTAL ASSETS
    
    $
    280,603
    
    
    $
    223,660LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    64,870
    
    
    $
    18,783Accrued payroll and related expenses
    
    
    11,995
    
    
    
    16,219Other accrued liabilities
    
    
    5,963
    
    
    
    9,735Deferred revenue
    
    
    75,915
    
    
    
    42,414Total current liabilities
    
    
    158,743
    
    
    
    87,151Long-term deferred revenue
    
    
    8,406
    
    
    
    9,627Other non-current liabilities
    
    
    2,413
    
    
    
    2,719TOTAL LIABILITIES
    
    
    169,562
    
    
    
    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 35,942,571 and 35,181,407 shares, respectively
    
    
    555,511
    
    
    
    551,220Accumulated other comprehensive income
    
    
    6,970
    
    
    
    6,148Accumulated deficit
    
    
    (451,440
    )
    
    
    (433,205
    )TOTAL SHAREHOLDERS EQUITY
    
    
    111,041
    
    
    
    124,163TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    280,603
    
    
    $
    223,660
 See accompanying notes
 3




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Product
    
    $
    9,253
    
    
    $
    42,101
    
    
    $
    18,318
    
    
    $
    101,563Service
    
    
    19,480
    
    
    
    20,643
    
    
    
    38,803
    
    
    
    35,662Total revenue
    
    
    28,733
    
    
    
    62,744
    
    
    
    57,121
    
    
    
    137,225Cost of revenue:Cost of product revenue
    
    
    4,587
    
    
    
    22,263
    
    
    
    12,593
    
    
    
    68,597Cost of service revenue
    
    
    12,828
    
    
    
    11,952
    
    
    
    26,576
    
    
    
    22,228Total cost of revenue
    
    
    17,415
    
    
    
    34,215
    
    
    
    39,169
    
    
    
    90,825Gross profit
    
    
    11,318
    
    
    
    28,529
    
    
    
    17,952
    
    
    
    46,400Operating expenses:Research and development, net
    
    
    7,044
    
    
    
    13,710
    
    
    
    14,738
    
    
    
    24,925Sales and marketing
    
    
    6,572
    
    
    
    6,341
    
    
    
    12,836
    
    
    
    12,404General and administrative
    
    
    4,018
    
    
    
    3,901
    
    
    
    8,305
    
    
    
    8,047Total operating expenses
    
    
    17,634
    
    
    
    23,952
    
    
    
    35,879
    
    
    
    45,376Income (loss) from operations
    
    
    (6,316
    )
    
    
    4,577
    
    
    
    (17,927
    )
    
    
    1,024Other expense, net
    
    
    (148
    )
    
    
    (737
    )
    
    
    (51
    )
    
    
    (1,491
    )Interest income (expense), net
    
    
    22
    
    
    
    (351
    )
    
    
    39
    
    
    
    (884
    )Income (loss) before income taxes
    
    
    (6,442
    )
    
    
    3,489
    
    
    
    (17,939
    )
    
    
    (1,351
    )Income tax expense
    
    
    (196
    )
    
    
    (69
    )
    
    
    (296
    )
    
    
    (117
    )Net income (loss)
    
    $
    (6,638
    )
    
    $
    3,420
    
    
    $
    (18,235
    )
    
    $
    (1,468
    )Basic and diluted net income (loss) per common share
    
    $
    (0.19
    )
    
    $
    0.10
    
    
    $
    (0.53
    )
    
    $
    (0.04
    )Basic weighted average shares outstanding
    
    
    34,246
    
    
    
    33,580
    
    
    
    34,101
    
    
    
    33,390Diluted weighted average shares outstanding
    
    
    34,246
    
    
    
    33,965
    
    
    
    34,101
    
    
    
    33,390
 See accompanying notes
 4




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##### Table of Contents



Six Months EndedJune 30,2010
    
    
    2009Operating activities:Net loss
    
    $
    (18,235
    )
    
    $
    (1,468
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    4,457
    
    
    
    4,490Share-based compensation expense
    
    
    2,489
    
    
    
    3,403Inventory write-down
    
    
    492
    
    
    
    956Amortization of debt issuance costs
    
    
    
    
    
    
    79Loss on repurchase of Notes
    
    
    
    
    
    
    910Amortization of convertible notes debt discount
    
    
    
    
    
    
    828Deferred income taxes
    
    
    (23
    )
    
    
    94Cash provided (used) due to changes in operating assets and liabilities:Accounts receivable
    
    
    511
    
    
    
    47,580Inventory
    
    
    (84,890
    )
    
    
    27,776Prepaid expenses and other assets
    
    
    (3,097
    )
    
    
    5,871Accounts payable
    
    
    46,320
    
    
    
    2,070Accrued payroll and related expenses and other accrued liabilities
    
    
    (5,480
    )
    
    
    (39,433
    )Other non-current liabilities
    
    
    (304
    )
    
    
    95Deferred revenue
    
    
    32,444
    
    
    
    (34,699
    )Net cash provided by (used in) operating activities
    
    
    (25,316
    )
    
    
    18,552Investing activities:Sales/maturities of short-term investments
    
    
    3,000
    
    
    
    5,350Purchases of short-term investments
    
    
    
    
    
    
    (5,481
    )Decrease in restricted cash
    
    
    
    
    
    
    785Purchases of property and equipment
    
    
    (2,329
    )
    
    
    (2,225
    )Net cash provided by (used in) investing activities
    
    
    671
    
    
    
    (1,571
    )Financing activities:Repurchase of Notes
    
    
    
    
    
    
    (27,150
    )Proceeds from issuance of common stock through employee stock purchase plan
    
    
    275
    
    
    
    255Proceeds from exercises of stock options
    
    
    43
    
    
    
    282009 stock option repurchase tender offer, purchase of options
    
    
    
    
    
    
    (669
    )Net cash provided by (used in) financing activities
    
    
    318
    
    
    
    (27,536
    )Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (652
    )
    
    
    (331
    )Net decrease in cash and cash equivalents
    
    
    (24,979
    )
    
    
    (10,886
    )Cash and cash equivalents: Beginning of period
    
    
    105,018
    
    
    
    72,373End of period
    
    $
    80,039
    
    
    $
    61,487Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    2
    
    
    $
    393Cash paid for income taxes
    
    $
    967
    
    
    $
    91Non-cash investing and financing activities:Inventory transfers to fixed assets and service inventory
    
    $
    2,855
    
    
    $
    1,273Value of Shares issued for 401(k) match
    
    $
    1,484
    
    
    $
    1,311
 See accompanying notes
 5




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Note 1  Basis of Presentation
    Principles of Consolidation
  Use of Estimates
  Revenue Recognition
  6




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##### Table of Contents



Multiple-Element Arrangements.
 
    
    The delivered item(s) has value to the customer on a
standalone basis; and
 
    
    If the arrangement includes a general right of return relative
to the delivered item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the Company.
     Product.
 Service.
  7




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##### Table of Contents



Project.
  
    
    It is commensurate with either of the following:
 
    
    The Companys performance to achieve the milestone; or
 
    
    The enhancement of value of the delivered item or items as a result
of a specific outcome resulting from the Companys performance to achieve the
milestone.
 
    
    It relates solely to past performance.
 
    
    It is reasonable relative to all of the deliverables and payment terms (including
other potential milestone consideration) within the arrangement.
   Note 2  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
 8




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##### Table of Contents



Note 3  Fair Value Measurement
 Fair Value Measurements and Disclosures
  Quoted
    
    
    SignificantPrices in
    
    
    OtherFair Value
    
    
    Active
    
    
    Observableat June 30,
    
    
    Markets
    
    
    InputsDescription
    
    2010
    
    
    (Level 1)
    
    
    (Level 2)Assets:Cash, cash equivalents and restricted cash
    
    $
    85,251
    
    
    $
    85,251
    
    
    $
    Foreign exchange forward contracts (1)
    
    
    83
    
    
    
    
    
    
    
    83Assets measured at fair value at June 30, 2010
    
    $
    85,334
    
    
    $
    85,251
    
    
    $
    83Liabilities:Foreign exchange forward contracts (2)
    
    $
    (951
    )
    
    $
    
    
    
    $
    (951
    )Liabilities measured at fair value at June 30, 2010
    
    $
    (951
    )
    
    $
    
    
    
    $
    (951
    )
 
 (1)
    
    Included in Prepaid expenses and other current assets on the Companys Condensed
Consolidated Balance Sheets.(2)
    
    Included in Other accrued liabilities on the Companys Condensed Consolidated Balance
Sheets. Foreign Currency Derivatives
     9




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##### Table of Contents



Fair Value
    
    Fair Valueas of
    
    as ofJune 30,
    
    December 31,Hedge Classification
    
    Balance Sheet Location
    
    2010
    
    2009Foreign currency contracts
    
    Prepaid expenses and other assets
    
    $
    83
    
    
    $
    51Foreign currency contracts
    
    Other accrued liabilities
    
    $
    (951
    )
    
    $
    (1,659
    )Total derivatives classified
as hedging instruments
    
    
    
    $
    (868
    )
    
    $
    (1,608
    )
  Note 4  Earnings (Loss) Per Share (EPS)
   Note 5  Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    (6,638
    )
    
    $
    3,420
    
    
    $
    (18,235
    )
    
    $
    (1,468
    )Unrealized net gain (loss) on available-for-sale investments
    
    
    (1
    )
    
    
    4
    
    
    
    (4
    )
    
    
    Cash flow hedges:Net gain (loss) on cash flow hedges
    
    
    90
    
    
    
    (1,515
    )
    
    
    1,004
    
    
    
    (979
    )Reclassification adjustment to revenue
    
    
    
    
    
    
    (512
    )
    
    
    
    
    
    
    (488
    )90
    
    
    
    (2,027
    )
    
    
    1,004
    
    
    
    (1,467
    )Foreign currency translation adjustment
    
    
    (373
    )
    
    
    (1,409
    )
    
    
    (178
    )
    
    
    (971
    )Comprehensive loss
    
    $
    (6,922
    )
    
    $
    (12
    )
    
    $
    (17,413
    )
    
    $
    (3,906
    )
 10




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##### Table of Contents



Note 6  Accounts and Other Receivables, Net
  June 30,
    
    
    December 31,2010
    
    
    2009Trade accounts receivable
    
    $
    28,088
    
    
    $
    26,375Unbilled receivables
    
    
    2,511
    
    
    
    5,791Advance billings
    
    
    4,037
    
    
    
    2,968Other receivables
    
    
    3,245
    
    
    
    3,24537,881
    
    
    
    38,379Allowance for doubtful accounts
    
    
    (186
    )
    
    
    (172
    )Accounts and other receivables, net
    
    $
    37,695
    
    
    $
    38,207
   Note 7  Inventory
  June 30,
    
    
    December 31,2010
    
    
    2009Components and subassemblies
    
    $
    47,083
    
    
    $
    10,687Work in process
    
    
    25,070
    
    
    
    14,383Finished goods
    
    
    38,401
    
    
    
    3,941Total
    
    $
    110,554
    
    
    $
    29,011
   Note 8  Deferred Revenue
  June 30,
    
    
    December 31,2010
    
    
    2009Deferred product revenue
    
    $
    58,440
    
    
    $
    18,305Deferred service revenue
    
    
    25,881
    
    
    
    33,736Total deferred revenue
    
    
    84,321
    
    
    
    52,041Less long-term deferred revenue
    
    
    (8,406
    )
    
    
    (9,627
    )Deferred revenue in current liabilities
    
    $
    75,915
    
    
    $
    42,414
  11




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##### Table of Contents



Note 9  Share-Based Compensation
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009Risk-free interest rate
    
    
    1.8
    %
    
    
    1.6
    %
    
    
    1.8
    %
    
    
    1.6
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    75
    %
    
    
    79
    %
    
    
    75
    %
    
    
    79
    %Expected life
    
    4.0 years
    
    4.0 years
    
    4.0 years
    
    4.0 yearsWeighted average Black-Scholes value of options granted
    
    $
    3.08
    
    
    $
    2.20
    
    
    $
    3.09
    
    
    $
    2.19
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of product revenue
    
    $
    53
    
    
    $
    33
    
    
    $
    101
    
    
    $
    124Cost of service revenue
    
    
    111
    
    
    
    81
    
    
    
    203
    
    
    
    298Research and development, net
    
    
    398
    
    
    
    347
    
    
    
    785
    
    
    
    1,239Sales and marketing
    
    
    215
    
    
    
    148
    
    
    
    410
    
    
    
    512General and administrative
    
    
    501
    
    
    
    424
    
    
    
    990
    
    
    
    1,230Total
    
    $
    1,278
    
    
    $
    1,033
    
    
    $
    2,489
    
    
    $
    3,403
 12




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##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractualOptions
    
    
    Price
    
    
    TermOutstanding at December 31, 2009
    
    
    3,116,522
    
    
    $
    6.43Grants
    
    
    678,450
    
    
    $
    5.48Exercises
    
    
    (7,611
    )
    
    $
    5.67Cancellations
    
    
    (60,236
    )
    
    $
    9.60Outstanding at June 30, 2010
    
    
    3,727,125
    
    
    $
    6.20
    
    
    7.6 yearsExercisable at June 30, 2010
    
    
    1,635,817
    
    
    $
    7.57
    
    
    5.9 yearsAvailable for grant at June 30, 2010
    
    
    3,075,412
   WeightedAverageGrant DateShares
    
    
    Fair ValueOutstanding at December 31, 2009
    
    
    1,431,885
    
    
    $
    5.22Granted
    
    
    432,000
    
    
    
    5.61Forfeited
    
    
    
    
    
    
    Vested
    
    
    (269,351
    )
    
    
    5.90Outstanding at June 30, 2010
    
    
    1,594,534
    
    
    $
    5.21
    Note 10  Taxes
   13




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##### Table of Contents



Note 11  Geographic Segment Information
   United States
    
    
    Other Countries
    
    
    Total2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Three months ended June 30,Product revenue
    
    $
    2,480
    
    
    $
    29,057
    
    
    $
    6,773
    
    
    $
    13,044
    
    
    $
    9,253
    
    
    $
    42,101Service revenue
    
    
    14,851
    
    
    
    15,023
    
    
    
    4,629
    
    
    
    5,620
    
    
    
    19,480
    
    
    
    20,643Total revenue
    
    $
    17,331
    
    
    $
    44,080
    
    
    $
    11,402
    
    
    $
    18,664
    
    
    $
    28,733
    
    
    $
    62,744
 United States
    
    
    Other Countries
    
    
    Total2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Six months ended June 30,Product revenue
    
    $
    11,177
    
    
    $
    79,766
    
    
    $
    7,141
    
    
    $
    21,797
    
    
    $
    18,318
    
    
    $
    101,563Service revenue
    
    
    29,161
    
    
    
    24,650
    
    
    
    9,642
    
    
    
    11,012
    
    
    
    38,803
    
    
    
    35,662Total revenue
    
    $
    40,338
    
    
    $
    104,416
    
    
    $
    16,783
    
    
    $
    32,809
    
    
    $
    57,121
    
    
    $
    137,225
  Note 12  Litigation
  
 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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Overview and Executive Summary
     Summary of First Six Months of 2010 Results
   15




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##### 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 driving increasing scalability
requirements;
    
    Electrical power requirements becoming a design constraint and driver in total cost of
ownership determinations;
    
    Increased micro-architectural diversity, including many-core processors with vector
extensions and growing experimentation with accelerators, as the rate of per-core
performance increases slows; and
    
    Data needs growing faster than computational needs.
    16




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##### Table of Contents



Key Performance Indicators
  Revenue.
 Gross profit.
 Operating expenses.
 Liquidity and cash flows.
 Critical Accounting Policies and Estimates
   17




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##### Table of Contents



Revenue Recognition
  Multiple-Element Arrangements.
 
    
    The delivered item(s) has value to the customer on a
standalone basis; and
    
    If the arrangement includes a general right of return relative
to the delivered item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the Company.
    18




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##### Table of Contents



Product.
 Service.
  Project.
  
    
    It is commensurate with either of the following:
 
    
    The Companys performance to achieve the milestone; or
    
    The enhancement of value of the delivered item or items as a result
of a specific outcome resulting from the Companys performance to achieve the
milestone.
 
    
    It relates solely to past performance.
    
    It is reasonable relative to all of the deliverables and payment terms (including
other potential milestone consideration) within the arrangement.
   Inventory Valuation
  19




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Accounting for Income Taxes
   Research and Development Expenses
     20




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##### 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
  21




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Revenue and Gross Profit Margins
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Product revenue
    
    $
    9,253
    
    
    $
    42,101
    
    
    $
    18,318
    
    
    $
    101,563Less: Cost of product revenue
    
    
    4,587
    
    
    
    22,263
    
    
    
    12,593
    
    
    
    68,597Product gross profit
    
    $
    4,666
    
    
    $
    19,838
    
    
    $
    5,725
    
    
    $
    32,966Product gross profit margin
    
    
    50
    %
    
    
    47
    %
    
    
    31
    %
    
    
    32
    %Service revenue
    
    $
    19,480
    
    
    $
    20,643
    
    
    $
    38,803
    
    
    $
    35,662Less: Cost of service revenue
    
    
    12,828
    
    
    
    11,952
    
    
    
    26,576
    
    
    
    22,228Service gross profit
    
    $
    6,652
    
    
    $
    8,691
    
    
    $
    12,227
    
    
    $
    13,434Service gross profit margin
    
    
    34
    %
    
    
    42
    %
    
    
    32
    %
    
    
    38
    %Total revenue
    
    $
    28,733
    
    
    $
    62,744
    
    
    $
    57,121
    
    
    $
    137,225Less: Total cost of revenue
    
    
    17,415
    
    
    
    34,215
    
    
    
    39,169
    
    
    
    90,825Total gross profit
    
    $
    11,318
    
    
    $
    28,529
    
    
    $
    17,952
    
    
    $
    46,400Total gross profit margin
    
    
    39
    %
    
    
    45
    %
    
    
    31
    %
    
    
    34
    %
 Product Revenue
  Service Revenue
  Cost of Product Revenue and Product Gross Profit
  Cost of Service Revenue and Service Gross Profit
  22




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Research and Development Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Gross research and development expenses
    
    $
    19,051
    
    
    $
    24,874
    
    
    $
    39,245
    
    
    $
    50,892Less: Amounts included in cost of revenue
    
    
    (7
    )
    
    
    (713
    )
    
    
    (7
    )
    
    
    (1,295
    )Less: Reimbursed research and
development (excludes amounts in
revenue)
    
    
    (12,000
    )
    
    
    (10,451
    )
    
    
    (24,500
    )
    
    
    (24,672
    )Net research and development expenses
    
    $
    7,044
    
    
    $
    13,710
    
    
    $
    14,738
    
    
    $
    24,925Percentage of total revenue
    
    
    25
    %
    
    
    22
    %
    
    
    26
    %
    
    
    18
    %
    Sales and Marketing and General and Administrative Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009Sales and marketing
    
    $
    6,572
    
    
    $
    6,341
    
    
    $
    12,836
    
    
    $
    12,404Percentage of total revenue
    
    
    23
    %
    
    
    10
    %
    
    
    22
    %
    
    
    9
    %General and administrative
    
    $
    4,018
    
    
    $
    3,901
    
    
    $
    8,305
    
    
    $
    8,047Percentage of total revenue
    
    
    14
    %
    
    
    6
    %
    
    
    15
    %
    
    
    6
    %
 Sales and Marketing .
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General and Administrative
  Other Income (Expense), net
  Interest Income (Expense), net
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Interest income
    
    $
    48
    
    
    $
    110
    
    
    $
    89
    
    
    $
    380Interest expense
    
    
    (26
    )
    
    
    (461
    )
    
    
    (50
    )
    
    
    (1,264
    )Interest income
(expense), net
    
    $
    22
    
    
    $
    (351
    )
    
    $
    39
    
    
    $
    (884
    )
  Taxes
  Liquidity and Capital Resources
   24




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##### Table of Contents



Six Months EndedJune 30,2010
    
    2009Cash provided by (used in):Operating Activities
    
    $
    (25,316
    )
    
    $
    18,552Investing Activities
    
    $
    671
    
    
    $
    (1,571
    )Financing Activities
    
    $
    318
    
    
    $
    (27,536
    )
 Operating Activities.
 Investing Activities.
 Financing Activities.
  Amounts Committed by Year2010(Less thanContractual Obligations
    
    Total
    
    
    1 Year)
    
    
    2011-2012
    
    
    2013-2014
    
    
    ThereafterDevelopment agreements
    
    $
    18,110
    
    
    $
    8,794
    
    
    $
    9,191
    
    
    $
    125
    
    
    $
    Operating leases
    
    
    28,210
    
    
    
    2,077
    
    
    
    6,702
    
    
    
    6,519
    
    
    
    12,912Unrecognized income tax benefits
    
    
    488
    
    
    
    265
    
    
    
    223
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    46,808
    
    
    $
    11,136
    
    
    $
    16,116
    
    
    $
    6,644
    
    
    $
    12,912
   25




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##### Table of Contents



Contractual Obligations
  
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
 Foreign Currency Risk
 
 Item 4.
    
    Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 26




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Limitations on effectiveness of control.
 
 Part II. OTHER INFORMATION
 
 Item 1A.
    
    Risk Factors
  Our operating results may fluctuate significantly and we may not achieve profitability in any
given period.
   
    
    manufacturing and delivering our new Cray XE6 systems (formerly referred to as our
Baker systems) in sufficient quantities and in a timely fashion and achieving acceptances
of Cray XE6 systems delivered 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;
    
    achieving acceptances of Cray XT6 system deliveries in 2010;
    
    successfully selling and delivering our Cray XT6, Cray XE6, and Cray XT6m systems and
upgrade and successor systems;
    
    the successful continued expansion of our Custom Engineering strategic initiative;
    
    our expense levels, including research and development expense net of government funding,
which are affected by the amount and timing of such funding and the meeting of contractual
development milestones, including the milestones under our DARPA HPCS program;
    
    our ability to successfully and timely design, integrate and secure competitive
processors into and for our systems, including for successors to our Cray XT6 and Cray XE6
systems;
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##### Table of Contents




    
    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; 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.
  If we are unable to manufacture, deliver and obtain customer acceptances of our Cray XE6
systems scheduled for delivery in 2010, our 2010 revenue and cash will be substantially reduced and
our financial results will be significantly adversely affected.
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##### Table of Contents



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,
particularly our Custom Engineering initiative, are not successful, our ability to grow our
revenues and achieve and sustain profitability will be adversely affected.
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##### Table of Contents



If we are unable to successfully sell and deliver our Cray XT6 and Cray XE6 systems and
develop, sell and deliver successor systems, our operating results will be adversely affected.
  
    
    The level of product differentiation in our Cray XT6, Cray XE6 and successor systems. We
need to compete successfully against HPC systems from large established companies and lower
bandwidth, commodity cluster systems from both large established companies and smaller
firms and demonstrate the value of our balanced high bandwidth systems.
    
    Our ability to meet all customer requirements for acceptance. Even once a system has been
delivered, we sometimes do not meet all of the contract requirements for customer acceptance
and ongoing reliability of our systems within the provided-for acceptance period, which has
resulted in contract penalties and delays in our ability to recognize revenue from system
deliveries. Most often these penalties adversely affect the gross profit through the
provision of additional equipment and services and/or service credits to satisfy delivery
delays and performance shortfalls. The risk of contract penalties is increased when we bid
for new business prior to completing development of new products when we must estimate
future system performance, such as was required with 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 second
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 has 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.
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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, re-spins 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.
  31




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##### 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.
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##### 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.
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We incorporate software licensed from third parties into the operating systems for our
products as well as in our tools to design products and any significant interruption in the
availability of these third-party software products or defects in these products could reduce the
demand for our products or cause delay in development.
  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.
 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;
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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 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
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SIGNATURES
  CRAY INC.Date: August 6, 2010
    /s/ PETER J. UNGAROPeter J. UngaroPresident and Chief Executive Officer/s/ BRIAN C. HENRYBrian C. HenryExecutive Vice President and Chief Financial Officer/s/ CHARLES D. FAIRCHILDCharles D. FairchildVice President, Corporate Controller and Chief Accounting Officer 36