##### 



SECURITIES AND EXCHANGE
    COMMISSIONWashington, D.C.
    20549
       FORM 10-K/A
 Amendment
No. 1
    þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended
    December 31, 2006o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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
    Incorporation or Organization)

(I.R.S. Employer
    Identification No.)411 First Avenue South,
    Suite 600
    Seattle, Washington(Address of Principal
    Executive Office)

98104-2860(Zip Code)   Registrants Telephone Number, Including Area Code:
 (206) 701-2000
  Securities Registered Pursuant to Section 12(b) of the
    Exchange Act: NONE
   Securities Registered Pursuant to Section 12(g) of the
    Exchange Act:
 Common Stock, $.01 par value
  o þ
  o þ
  þ o
  Regulation S-K 10-K Form 10-K þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



EXPLANATORY NOTE




---



##### 



Item 8.
    Financial
    Statements and Supplementary Data  INDEX TO
    FINANCIAL STATEMENTS*
  Consolidated
    Balance Sheets at December 31, 2005 and December 31,
    2006


F- 1Consolidated
    Statements of Operations for the years ended December 31,
    2004, 2005 and 2006


F- 2Consolidated
    Statements of Shareholders Equity and Comprehensive Income
    (Loss) for the years ended December 31, 2004, 2005 and
    2006


F- 3Consolidated
    Statements of Cash Flows for the years ended December 31,
    2004, 2005 and 2006


F- 4Notes to
    Consolidated Financial Statements


F- 5Reports of
    Independent Registered Public Accounting Firms


F-29     *
    
    The Financial Statements are located following page 7. 3




---



##### 



QUARTERLY
    FINANCIAL DATA
    (Unaudited, in thousands, except per share data)
  Quarter-to-quarter
  Form 10-K
  2005


2006For the Quarter Ended

3/31


6/30


9/30


12/31


3/31


6/30


9/30


12/31Revenue

$
37,634


$
53,419


$
44,741


$
65,257


$
48,515


$
38,513


$
32,565


$
101,424Cost of revenue


33,927



48,741



36,551



49,331



34,370



26,000



21,169



75,655Gross margin


3,707



4,678



8,190



15,926



14,145



12,513



11,396



25,769Research and development, net


13,032



13,427



6,472



8,780



7,215



6,371



9,692



5,764Sales and marketing


6,599



7,574



5,778



5,857



4,985



5,682



4,924



6,386General and administrative


4,267



4,607



3,617



3,654



5,594



4,600



4,134



4,457Restructuring, severance and
    impairment


(215
)


1,947



1,201



6,817



738



549



3



(39
)Net income (loss)


(21,035
)


(23,796
)


(10,250
)


(9,227
)


(5,305
)


(7,173
)


(8,324
)


8,732Net income (loss) per common share,
    basic

$
(0.95
)

$
(1.08
)

$
(0.46
)

$
(0.42
)

$
(0.24
)

$
(0.32
)

$
(0.37
)

$
0.36Net income (loss) per common share,
    diluted

$
(0.95
)

$
(1.08
)

$
(0.46
)

$
(0.42
)

$
(0.24
)

$
(0.32
)

$
(0.37
)

$
0.33        4




---



##### 



SIGNATURES
      By
    /s/  Peter
    J. Ungaro   Chief Executive Officer and President
     Signature

TitleBy /s/  Peter
    J. UngaroPeter
    J. Ungaro

Chief Executive Officer, President
    and DirectorBy /s/  Brian
    C. HenryBrian
    C. Henry

Principal Financial OfficerBy /s/  Kenneth
    D. Roselli     Kenneth
    D. Roselli

Principal Accounting OfficerBy /s/  William
    C. Blake*    William
    C. Blake

DirectorBy /s/  John
    B. Jones,
    Jr.*    John
    B. Jones, Jr.

DirectorBy /s/  Stephen
    C. Kiely*    Stephen
    C. Kiely

DirectorBy /s/  Frank
    L. Lederman*     Frank
    L. Lederman

Director 5




---



##### 



Signature

TitleBy /s/  Sally G. Narodick*Sally
    G. Narodick

DirectorBy /s/  Daniel
    C. Regis*Daniel
    C. Regis

DirectorBy /s/  Stephen
    C. Richards*Stephen
    C. Richards

Director*     By /s/  Kenneth
    W. JohnsonKenneth
    W. Johnson
      Attorney-in-fact  6




---



##### 



EXHIBIT INDEX
 ExhibitNumber

Description23
.2

Consent of Deloitte & Touche
LLP, Independent Registered Public Accounting Firm31
.1

Rule 13a-14(a)/15d-14(a)
    Certification of Mr. Ungaro, Chief Executive Officer31
.2

Rule 13a-14(a)/15d-14(a)
    Certification of Mr. Henry, Chief Financial Officer32
.1

Certification pursuant to
    18 U.S.C. Section 1350 by the Chief Executive Officer
    and the Chief Financial Officer     7




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
 (In
    thousands, except share data)
  December 31,


December 31,2005


2006ASSETSCurrent assets:Cash and cash equivalents

$
46,026


$
115,328Restricted cash






25,000Accounts receivable, net


55,064



44,790Inventory


67,712



58,798Prepaid expenses and other current
    assets


2,909



2,156Total current assets


171,711



246,072Property and equipment, net


31,292



21,564Service inventory, net


3,285



4,292Goodwill


56,839



57,138Deferred tax asset


575



722Intangible assets, net


1,113



1,404Other non-current assets


8,190



6,311TOTAL ASSETS

$
273,005


$
337,503LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
14,911


$
22,450Accrued payroll and related expenses


12,145



17,411Advance research and development
    payments


1,538



21,518Other accrued liabilities


9,164



5,121Deferred revenue


81,749



43,248Total current liabilities


119,507



109,748Long-term deferred revenue


5,234



2,475Other non-current liabilities


2,317



3,906Convertible notes payable


80,000



80,000TOTAL LIABILITIES


207,058



196,129Commitments 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, 22,743,377 and
    32,236,888 shares, respectively


422,691



507,356Exchangeable shares, no par
    value  Unlimited shares authorized; 19,710 and no
    shares outstanding, respectively


576



Deferred compensation


(2,811
)


Accumulated other comprehensive
    income


6,258



6,855Accumulated deficit


(360,767
)


(372,837
)TOTAL SHAREHOLDERS EQUITY


65,947



141,374TOTAL LIABILITIES AND
    SHAREHOLDERS EQUITY

$
273,005


$
337,503   See accompanying notes
 F-1




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
 (In
    thousands, except share data)
  Years Ended December 31,2004


2005


2006Revenue:Product

$
95,901


$
152,098


$
162,795Service


49,948



48,953



58,222Total revenue


145,849



201,051



221,017Operating expenses:Cost of product revenue


104,196



139,518



124,728Cost of service revenue


30,338



29,032



32,466Research and development, net


53,266



41,711



29,042Sales and marketing


34,948



25,808



21,977General and administrative


19,451



16,145



18,785Restructuring, severance and
    impairment


8,182



9,750



1,251In-process research and
    development charge


43,400







Total operating expenses


293,781



261,964



228,249Loss from operations


(147,932
)


(60,913
)


(7,232
)Other expense, net


(699
)


(1,421
)


(2,141
)Interest income (expense), net


365



(3,462
)


(2,095
)Loss before income taxes


(148,266
)


(65,796
)


(11,468
)Income tax expense (benefit)


59,092



(1,488
)


602Net loss

$
(207,358
)

$
(64,308
)

$
(12,070
)Basic and diluted net loss per
    common share

$
(9.95
)

$
(2.91
)

$
(0.53
)Basic and diluted weighted average
    shares outstanding


20,847



22,125



22,849   See accompanying notes
 F-2




---



##### 



CRAY INC.
    AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY
     AND COMPREHENSIVE INCOME (LOSS)
    (In thousands)
  Common Stock











Accumulatedand Additional


Exchangeable





OtherPaid In Capital


Shares





Comprehensive








ComprehensiveNumber





Number





Deferred


Income


Accumulated





Incomeof Shares


Amount


of Shares


Amount


Compensation


(Loss)


Deficit


Total


(Loss)BALANCE, December 31, 2003


18,203


$
312,646






$



$
(105
)

$
(807
)

$
(89,101
)

$
222,633Common stock issued in acquisition
    of OctigaBay


1,846



56,756























56,756


$
Exchangeable shares issued in
    acquisition of OctigaBay










790



24,207















24,207



Deferred compensation related to
    acquisition of OctigaBay


45



1,190



421



11,185



(14,599
)










(2,224
)


Exchangeable shares converted into
    common shares


1,067



31,219



(1,067
)


(31,219
)


















Acquisition-related stock-based
    compensation expense


















11,134











11,134



Fair value of OctigaBay options
    acquired






2,579























2,579



Issuance of shares under Employee
    Stock Purchase Plan


101



1,796























1,796



Exercise of stock options


219



2,841























2,841



Issuance of shares under Company
    401(k) Plan match


23



645























645



Exercise of warrants, less issuance
    costs of $191


320



3,634























3,634



Common stock issued for bonus


13



374























374



Compensation expense on restricted
    stock


















105











105



Compensation expense on
    modification of stock options






196























196



Compensation expense on stock
    options issued to contractors






35























35



Other comprehensive income:Unrealized loss on
    available-for-sale
    investments






















(33
)






(33
)


(33
)Currency translation adjustment


















(755
)


5,400







4,645



5,400Net loss


























(207,358
)


(207,358
)


(207,358
)BALANCE, December 31, 2004


21,837



413,911



144



4,173



(4,220
)


4,560



(296,459
)


121,965


$
(201,991
)Exchangeable shares converted into
    common shares


124



3,597



(124
)


(3,597
)

















$
Issuance of shares under Employee
    Stock Purchase Plan


200



1,211























1,211



Exercise of stock options


22



138























138



Issuance of shares under Company
    401(k) Plan match


52



770























770



Warrants issued in connection with
    financing






219























219



Restricted shares issued for
    compensation


491



2,881











(2,881
)














Amortization of deferred
    compensation


















4,106











4,106



Reversal of deferred compensation
    for stock options due to employee terminations






(116
)










116















Common shares issued in exchange
    for lease amendment


17



80























80



Other comprehensive income:Reclassification adjustment for
    available-for-sale
    realized losses included in net loss






















24







24



24Currency translation adjustment


















68



1,674







1,742



1,674Net loss


























(64,308
)


(64,308
)


(64,308
)BALANCE, December 31, 2005


22,743



422,691



20



576



(2,811
)


6,258



(360,767
)


65,947


$
(62,610
)Common stock offering, less
    issuance costs


8,625



81,250























81,250


$
Exchangeable shares converted into
    common shares


20



576



(20
)


(576
)


















Issuance of shares under Employee
    Stock Purchase Plan


64



532























532



Exercise of stock options


382



2,625























2,625



Issuance of shares under Company
    401(k) Plan match


48



394























394



Restricted shares issued for
    compensation


355































Reclassification of deferred
    compensation to additional paid in capital upon adoption of
    FAS 123R






(2,811
)










2,811















Amortization of deferred
    compensation






2,099























2,099



Other comprehensive income:Currency translation adjustment






















597







597



597Net loss


























(12,070
)


(12,070
)


(12,070
)BALANCE, December 31, 2006


32,237


$
507,356






$



$



$
6,855


$
(372,837
)

$
141,374


$
(11,473
)   See accompanying notes
 F-3




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 (In
    thousands)
  Years Ended December 31,2004


2005


2006Operating activities:Net loss

$
(207,358
)

$
(64,308
)

$
(12,070
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


17,179



19,578



16,181Share-based compensation expense


11,844



4,106



2,099In-process research and development
    charge


43,400







Inventory write-down


8,513



5,751



1,644Impairment of core technology
    intangible asset






4,912



Amortization of issuance costs,
    convertible notes payable and line of credit






1,008



1,644Deferred income taxes


59,188



(2,260
)


(124
)Other






80



Cash provided by (used in) changes
    in operating assets and liabilities, net of the effects of the
    OctigaBay acquisition:Accounts receivable


15,471



(21,623
)


10,305Inventory


(47,443
)


(10,628
)


2,410Prepaid expenses and other assets


11,555



3,908



337Service inventory


(58
)


141



Accounts payable


9,609



(8,422
)


7,562Accrued payroll and related
    expenses, other accrued liabilities and advance research and
    development payments


1,061



833



23,720Other non-current liabilities






473



36Deferred revenue


24,383



29,746



(41,136
)Net cash provided by (used in)
    operating activities


(52,656
)


(36,705
)


12,608Investing activities:Sales/maturities of short-term
    investments


68,635



44,437



Purchases of short-term investments


(68,318
)


(10,161
)


Acquisition of OctigaBay, net of
    cash acquired


(6,270
)






Proceeds from sale of investment










239(Increase) decrease in restricted
    cash


(11,437
)


11,437



(25,000
)Purchases of property and equipment


(12,518
)


(3,982
)


(2,611
)Net cash provided by (used in)
    investing activities


(29,908
)


41,731



(27,372
)Financing activities:Sale of common stock, net of
    issuance costs










81,250Proceeds from issuance of common
    stock through employee stock purchase plan


1,796



1,211



532Proceeds from exercise of options


2,841



138



2,625Proceeds from exercise of warrants


3,634







Proceeds from issuance of
    convertible notes payable


80,000







Convertible notes payable and line
    of credit issuance costs


(3,376
)


(755
)


(375
)Principal payments on capital leases


(742
)


(731
)


(123
)Net cash provided by (used in)
    financing activities


84,153



(137
)


83,909Effect of foreign exchange rate
    changes on cash and cash equivalents


370



(595
)


157Net increase in cash and cash
    equivalents


1,959



4,294



69,302Cash and cash equivalentsBeginning of period


39,773



41,732



46,026End of period

$
41,732


$
46,026


$
115,328Supplemental disclosure of cash
    flow information:Cash paid for interest

$
153


$
2,972


$
3,329Cash paid for income taxes


590



312



279Non-cash investing and financing
    activities:Inventory transfers to fixed assets
    and service inventory

$
11,281


$
8,703


$
4,860Shares issued in acquisition


83,542







Warrants issued in connection with
    line of credit arrangement






219



   See accompanying notes
 F-4




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1
    DESCRIPTION
    OF BUSINESS      NOTE 2
    REVERSE
    STOCK SPLIT  one-for-four Form 10-K
  NOTE 3
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Accounting
    Principles
    Principles
    of Consolidation
    Reclassifications
    Use of
    Estimates
   F-5




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Cash,
    Cash Equivalents and Restricted Cash
  Note 14  Convertible Notes Payable and
    Lines of Credit.
  Foreign
    Currency Derivatives
    Concentration
    of Credit Risk
  Note 17  Segment Information
  Accounts
    Receivable
    Fair
    Values of Financial Instruments
   F-6




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Inventories
  first-in,
    Property
    and Equipment, net
    98-1, Accounting for the Costs of Computer Software Developed or
    Obtained for Internal Use
  Service
    Inventory
    Goodwill
    and Other Intangible Assets
  Goodwill and Other Intangible
    Assets,
   F-7




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Impairment
    of Long-Lived Assets
  Accounting for the
    Impairment or Disposal of Long-Lived Assets,
  Revenue
    Recognition
  Revenue Recognition in Financial
    Statements
  Products.
  
    Cray X1/X1E and Cray XT3/XT4 Product
    Lines:  The Company recognizes revenue from
    product sales upon customer acceptance of the system, when there
    are no significant unfulfilled Company obligations stipulated by
    the contract that affect the customers final acceptance,
    the price is fixed or determinable and collection is reasonably
    assured. A customer-signed notice of acceptance or similar
    document is required from the customer prior to revenue
    recognition.
    Cray XD1 Product Line:  The Company recognizes
    revenue from product sales of Cray XD1 systems upon shipment to,
    or delivery to, the customer, depending upon contract terms,
    when there are no significant unfulfilled Company obligations
    stipulated by the contract, the price is fixed or determinable
    and collection is reasonably assured. If there is a contractual
    requirement for customer acceptance, revenue is recognized upon
    receipt of the notice of acceptance and when there are no
    unfulfilled obligations.  SOP 81-1, Accounting for Performance of Construction-Type and Certain
    Production-Type Contracts.
   F-8




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Services.
  Multiple-Element Arrangements. No. 00-21, Revenue Arrangements with Multiple Deliverables
  
    The element could be sold separately;
    The fair value of the undelivered element is
    established; and
    In cases with any general right of return, the Companys
    performance with respect to any undelivered element is within
    the Companys control and probable.    Foreign
    Currency Translation
    Research
    and Development
     F-9




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Income
    Taxes
  Accounting for Income Taxes
    (FAS 109).
  Stock-Based
    Compensation
  Share-Based
    Payment Accounting for Stock Issued to Employees Accounting for Stock-Based
    Compensation
   F-10




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2004

2005

2006Risk-free interest rate

4.2%

4.1%

4.5%Expected dividend yield

0%

0%

0%Volatility

82%

85%

73%Expected life

6.9 years

4.6 years

4.0 yearsWeighted average Black-Scholes
    value of options granted

$15.00

$5.44

$6.00           F-11




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2004


2005Net loss, as reported

$
(207,358
)

$
(64,308
)Add:Stock-based employee compensation
    included in reported net loss, net of related tax effects


11,844



4,106Less:Amortized stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of related tax effects


(19,423
)


(30,524
)Pro forma net loss

$
(214,937
)

$
(90,726
)   Note 15  Shareholders
    Equity  Stock Option Plans.
    2004


2005Basic and diluted net loss per
    common share:As reported

$
(9.95
)

$
(2.91
)Pro forma

$
(10.31
)

$
(4.10
)   Shipping
    and Handling Costs
    Advertising
    Costs
    Earnings
    (Loss) Per Share (EPS)
   F-12




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Accumulated
    Other Comprehensive Income
    2004


2005


2006Accumulated unrealized loss on
    available-for-sale
    investments

$
(24
)

$



$
Accumulated currency translation
    adjustment


4,584



6,258



6,855Accumulated other comprehensive
    income

$
4,560


$
6,258


$
6,855   Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes
  Fair Value Measurements
  Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities
 F-13




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 4
    ACCOUNTS
    RECEIVABLE, NET    2005


2006Trade accounts receivable

$
23,023


$
39,766Unbilled receivables


12,340



4,045Advance billings


19,894



1,07855,257



44,889Allowance for doubtful accounts


(193
)


(99
)Accounts receivable, net

$
55,064


$
44,790       NOTE 5
    INVENTORY    December 31,2005


2006Components and subassemblies

$
10,706


$
22,536Work in process


8,314



15,310Finished goods


48,692



20,952$
67,712


$
58,798      F-14




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 6
    PROPERTY
    AND EQUIPMENT, NET    December 31,2005


2006Land

$
131


$
131Buildings


9,638



9,965Furniture and equipment


14,161



14,753Computer equipment


70,704



73,825Leasehold improvements


3,046



3,06097,680



101,734Accumulated depreciation and
    amortization


(66,388
)


(80,170
)Property and equipment, net

$
31,292


$
21,564     NOTE 7
    SERVICE
    INVENTORY, NET    December 31,2005


2006Service inventory

$
26,201


$
28,797Accumulated depreciation


(22,916
)


(24,505
)Service inventory, net

$
3,285


$
4,292   NOTE 8
    GOODWILL
    AND INTANGIBLE ASSETS    2005


2006Goodwill, at January 1

$
55,644


$
56,839Foreign currency translation
    adjustments and other


1,195



299Goodwill, at December 31

$
56,839


$
57,138        F-15




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 9
    DEFERRED
    REVENUE    December 31,2005


2006Deferred product revenue

$
58,593


$
26,993Deferred service revenue


28,390



18,730Total deferred revenue


86,983



45,723Less long-term deferred revenue


(5,234
)


(2,475
)Deferred revenue in current
    liabilities

$
81,749


$
43,248     NOTE 10
    RESTRUCTURING
    AND SEVERANCE CHARGES          2004


2005


2006Balance, January 1

$
3,069


$
4,690


$
3,582Additional restructuring charge


8,077



5,092



1,284Payments


(6,420
)


(5,724
)


(3,849
)Adjustments to previously accrued
    amounts


(91
)


(255
)


(33
)Foreign currency translation
    adjustment


55



(221
)


79Total restructuring and severance
    liability, December 31


4,690



3,582



1,063Less long-term restructuring and
    severance liability






(362
)


Current restructuring and
    severance liability

$
4,690


$
3,220


$
1,063  F-16




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 11
    FOREIGN
    CURRENCY DERIVATIVE      NOTE 12
    COMMITMENTS
    AND CONTINGENCIES      Convertible Notes Payable and Lines of Credit.
  Capital


Operating


DevelopmentLeases


Leases


Agreements2007

$
32


$
3,215


$
12,9222008






2,576



432009






793



2010






205



2011






205



Thereafter






22



Minimum contractual commitments


32


$
7,016


$
12,965Less amount representing interest


(1
)Recorded capital lease obligations

$
31      F-17




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Litigation
          Other
    NOTE 13
    INCOME
    TAXES  Accounting for Income Taxes
    Year Ended December 31,2004


2005


2006United States

$
(92,654
)

$
(63,304
)

$
(10,550
)International


(55,612
)


(2,492
)


(918
)Total

$
(148,266
)

$
(65,796
)

$
(11,468
)  F-18




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2004


2005


2006Current provision:Federal

$



$



$
State






128



109Foreign


581



644



617Total current provision


581



772



726Deferred provision (benefit):Federal


61,906







State


(3,466
)






Foreign


71



(2,260
)


(124
)Total deferred provision (benefit)


58,511



(2,260
)


(124
)Total provision (benefit) for
    income taxes

$
59,092


$
(1,488
)

$
602     2004


2005


2006Federal statutory income tax rate


(35.0
)%


(35.0
)%


(35.0
)%State taxes, net of federal effect


(2.4
)


(3.1
)


(3.6
)Foreign income taxes at other than
    U.S. rates


(0.3
)


1.0



5.0In-process research and
    development write-off


10.6







Permanent differences


3.9



1.5



8.2Foreign tax credit


(0.3
)






Research and development tax credit


(1.0
)


(2.1
)


(7.6
)Other


(0.1
)


(0.4
)


(4.5
)Effect of change in valuation
    allowance on deferred tax assets


64.5



35.8



42.7Effective income tax rate


39.9
%


(2.3
)%


5.2
%  F-19




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2005


2006AssetsCurrent:Inventory

$
2,840


$
2,610Accrued compensation


1,876



4,292Deferred service revenue


684



815Gross current deferred tax assets


5,400



7,717Valuation allowance


(5,377
)


(7,717
)Net current deferred tax assets


23



0Long-Term:Property and equipment


709



455Research and experimentation


12,447



12,587Net operating loss carryforwards


115,110



117,454Accrued restructuring charge


764



240Other


576



518Gross long-term deferred tax assets


129,606



131,254Valuation allowance


(129,031
)


(130,532
)Net long-term deferred tax assets


575



722Total net deferred tax assets

$
598


$
722         NOTE 14  CONVERTIBLE
    NOTES PAYABLE AND LINES OF CREDIT
   F-20




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
             Lines of
    Credit
   F-21




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      NOTE 15
    SHAREHOLDERS
    EQUITY  Preferred Stock:
  Common Stock:
    Exchangeable Shares:
  Shareholder Warrants:
  Shares of


Exercise Price


ExpirationCommon Stock


per Share


Date of Warrants50,000


$
6.60


June 3, 20091,284,852


$
10.12


June 21, 20091,334,852     Restricted Stock: 18-month
 F-22




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Stock Option Plans:
  Accounting for Certain Transactions Involving Stock
    Compensation
  ,
   F-23




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     WeightedAverage


Remaining


AggregateExercise


Contractual


IntrinsicOptions


Price


Term


ValueOutstanding at January 1, 2004


3,035,033


$
20.92Granted


1,004,958



18.36Exercised


(218,964
)


12.92Canceled


(249,929
)


21.64Outstanding at December 31,
    2004


3,571,098



20.64Granted


1,278,567



8.56Exercised


(22,295
)


6.24Canceled


(327,225
)


16.60Outstanding at December 31,
    2005(a)


4,500,145



16.56Granted


725,430



10.44Exercised


(381,890
)


6.87Canceled


(976,270
)


23.25Outstanding at December 31,
    2006


3,867,415



14.68



7.0 years


$
7.2 millionExercisable at December 31,
    2006


3,144,887



15.64



6.4 years


$
6.2 millionAvailable for grant at
    December 31, 2006


2,319,928     (a)
    
    The weighted average exercise price of outstanding options at
    December 31, 2005 includes the impact of the 2005 repricing
    of 318,565 options, as described above.  in-the-money
    WeightedAverageGrant DateShares


Fair ValueOutstanding at December 31,
    2004





$
Granted during 2005


491,250



5.87Outstanding at December 31,
    2005


491,250



5.87Granted during 2006


354,993



10.08Outstanding at December 31,
    2006


846,243



7.63  F-24




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Outstanding Options


Exercisable OptionsWeighted


Weighted





WeightedAverage


Average





AverageRange of Exercise

Number


Remaining


Exercise


Number


ExercisePrices per Share

Outstanding


Life (Years)


Price


Exercisable


Price$ 0.00  $ 4.00


87,111



8.6


$
3.77



87,111


$
3.77$ 4.01  $ 8.00


789,160



6.9


$
6.25



780,863


$
6.24$ 8.01  $10.00


292,921



7.1


$
9.32



270,046


$
9.38$10.01   $12.00


1,092,908



8.5


$
10.67



403,008


$
10.87$12.01   $14.00


208,181



7.7


$
13.70



208,181


$
13.70$14.01   $16.00


534,145



6.6


$
15.15



534,145


$
15.15$16.01   $32.00


542,743



4.8


$
24.99



541,337


$
24.98$32.01   $54.75


320,246



5.9


$
39.37



320,196


$
39.37$0.00   $54.75


3,867,415



7.0


$
14.68



3,144,887


$
15.64     2004


2005


2006Cost of product revenue

$



$



$
60Cost of service revenue










101Research and development


5,068



3,444



386Sales and marketing


2,837



579



334General and administrative


3,229



13



1,218Total share-based compensation
    expense

$
11,134


$
4,036


$
2,099   Employee Stock Purchase Plan:
  NOTE 16  BENEFIT
    PLANS
  401(k)
    Plan
   F-25




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Pension
    Plan
    NOTE 17  SEGMENT
    INFORMATION
  Disclosure about Segments of an
    Enterprise and Related Information
    AllUnited


OtherStates


Countries


TotalFor the year ended
    December 31, 2004:Product revenue

$
86,067


$
9,834


$
95,901Service revenue

$
34,800


$
15,148


$
49,948For the year ended
    December 31, 2005:Product revenue

$
104,274


$
47,824


$
152,098Service revenue

$
33,377


$
15,576


$
48,953Long-lived assets

$
50,464


$
50,255


$
100,719For the year ended
    December 31, 2006:Product revenue

$
76,370


$
86,425


$
162,795Service revenue

$
37,979


$
20,243


$
58,222Long-lived assets

$
41,554


$
49,155


$
90,709    F-26




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      NOTE 18  RESEARCH
    AND DEVELOPMENT
    December 31,2004


2005


2006Gross research and development
    expenses

$
98,843


$
96,257


$
99,061Less: Amounts reimbursed or
    included in cost of product revenue


(45,577
)


(54,546
)


(70,019
)Net research and development
    expenses

$
53,266


$
41,711


$
29,042   NOTE 19  INTEREST
    INCOME (EXPENSE)
    2004


2005


2006Interest income

$
666


$
741


$
2,525Interest expense


(301
)


(4,203
)


(4,620
)Net interest income (expense)

$
365


$
(3,462
)

$
(2,095
)     Note 14  Convertible Notes Payable
    and Lines of Credit.
  NOTE 20  RESTATEMENT
    OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
   F-27




---



##### 



CRAY INC.
    AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Consolidated Statement of OperationsAs PreviouslyReported


As Restated


ChangeYear Ended December 31, 2004:Product revenue

$
99,236


$
95,901


$
(3,335
)Total revenue

$
149,184


$
145,849


$
(3,335
)Cost of product revenue

$
107,264


$
104,196


$
(3,068
)Research and development (a)

$
50,198


$
53,266


$
3,068Net loss

$
(204,023
)

$
(207,358
)

$
(3,335
)Basic and diluted net loss per
    common share

$
(9.79
)

$
(9.95
)

$
(0.16
)       (a)
    
    Previously reported amount was increased by $5,068 to conform to
    2005 financial statement presentation. Amount was reclassified
    from Acquisition-related Compensation Expense. F-28




---



##### 



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             Internal Control 
    Integrated Framework
    PETERSON
    SULLIVAN PLLC
    F-29




---



##### 



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             
     F-30




---



##### 



Schedule II 
    Valuation and Qualifying Accounts
    December 31, 2006
  Balance at








Balance atBeginning


Charge/(Benefit)





End ofDescription

of Period


to Expense


Deductions


PeriodYear ended December 31,
    2004:Allowance for doubtful accounts

$
1,125


$
373


$
(59
)(1)

$
1,439Warranty accrual

$
655


$



$
(655
)

$
Year ended December 31,
    2005:Allowance for doubtful accounts

$
1,439


$
165


$
(1,411
)(1)

$
193Warranty accrual

$



$



$



$
Year ended December 31,
    2006:Allowance for doubtful accounts

$
193


$
(17
)

$
(77
)(1)

$
99Warranty accrual

$



$



$



$
     (1)
    
    Represents uncollectible accounts written off, net of recoveries. F-31