Cray

2011 Annual Report

Fellow Shareholders,

2011 was a solid year for Cray led by the release of a new high-end supercomputer, several large customer
wins and significant progress in each of our new initiatives designed to broaden our market reach and drive
future growth. As you are likely aware, due to the nature of our business at the high-end of the supercomputing
market, our revenue tends to be lumpy on a quarterly basis. In spite of this, we strive to deliver profitable results
each year and in 2011 we overcame a major hurdle in order to achieve this goal. Delays related to a key
component caused a large system acceptance to slip out beyond year-end, and while we were not able to achieve
our revenue growth goals, we were able to deliver an operating profit for the year. That acceptance was achieved
early in the first quarter of 2012, getting us off to a fast start in a year in which we project strong growth for our
Company. Looking ahead, we have two guiding goals: to be the market leader in supercomputing and to deliver
profitable growth.

During 2011 we transitioned into three business units to better align our business with the opportunities we
see moving forward: High Performance Computing (HPC) Systems, Storage & Data Management, and our new
YarcData division.

First, our HPC Systems group is focused on delivering the most powerful supercomputers in the world and
will continue to be the engine that drives our Company. We had a number of exciting wins in 2011 highlighted
by an award to upgrade the fastest supercomputer in the United States at Oak Ridge National Laboratory (ORNL)
and another to deliver the supercomputer for the National Science Foundation’s Blue Waters project. When
complete, the upgraded system at ORNL will be a Cray XK6, integrating thousands of graphics processing units
into a single, tightly integrated system. The Cray XK6 is a hybrid supercomputer that combines AMD and
NVIDIA processors with our custom interconnect and a highly productive programming environment to deliver
one of the most powerful systems on the planet.

The Blue Waters project at the National Center for Supercomputing Applications at the University of
Illinois is designed to support significant research advances in a broad range of science and engineering domains,
meeting the needs of the industry’s most compute, memory and data-intensive applications. We are extremely
proud to have been selected for this ambitious undertaking where we will be delivering more system cabinets for
a single supercomputer than ever before in our history as part of a $188 million contract.

In addition to our strong momentum at the high-end of the supercomputing market, we are making good
progress with our new midrange offerings where we now offer a tightly-integrated solution starting at $200,000.
Our midrange systems offer the same technology advantages as our high-end supercomputers while allowing our
customers to run a very broad set of third-party applications. These systems span a large number of market
segments and allow us to better address the overall HPC market.

Another key to our strong momentum in 2011 was our success in breaking into several new commercial
segments. We delivered a Cray XE6m supercomputer to GE Global Research, the technology development arm
for the General Electric Company. This system will be used to support cutting-edge, simulation-based
engineering and science across various disciplines within GE. Marking a return to the energy segment, we
delivered a multi-cabinet Cray XE6 supercomputer to ExxonMobil. In the life sciences market, a Cray system is
helping one of the world’s largest pharmaceutical companies explore new advancements in personalized
medicine.

We are busy at work on our next generation supercomputer, which will be a significant step forward on our
product roadmap. This new system, codenamed “Cascade,” includes a next-generation system interconnect and a
more robust and productive operating environment to enable higher performance at scale as well as enhanced
usability. In addition, “Cascade” will open up more processing options for our systems as we plan to also
integrate Intel processors in our high-end systems for the first time. We anticipate delivering an early prototype
to the Defense Advanced Research Projects Agency (DARPA) late this year as part of its High Productivity
Computing Systems program. General release of “Cascade” is planned for the first half of 2013, and we already
have a number of contracts to deliver these systems to customers around the world.

Our second business unit, Storage & Data Management, covers our external services and storage offerings.
We launched our first ever Cray storage solution in late 2011 with the release of the Cray Sonexion 1300. This
high-performance, integrated data storage solution features the Lustre parallel file system and delivers market-
leading performance and scalability at very competitive prices. We are delivering a large Sonexion solution as
part of the Blue Waters system. When completed, it will have more than one terabyte-per-second of aggregate
storage bandwidth and more than 25 petabytes of storage capacity, placing it among the largest and fastest
storage environments in the world.

And third, our YarcData division is designed to take our unique supercomputing technology into the world
of Big Data. We launched this new division in early 2012, focused on providing differentiated, business-focused
Big Data solutions for enterprises worldwide. We recently launched the YarcData uRiKA graph appliance, a
purpose-built solution for Big Data relationship analytics. By enabling the discovery of unknown, unforeseen and
hidden relationships within existing data, uRiKA is designed to provide customers with new, strategic insights
into their business. The Big Data market is one of technology’s fastest growing markets and we are very excited
to have a unique offering in this explosive space.

In closing, I am pleased with the progress we made in 2011. With strong momentum in our high-end
supercomputer business and several exciting new growth opportunities, we are poised to deliver strong growth
and profitability in 2012. We continue to pursue our Adaptive Supercomputing vision where we will enable
computing across a broad set of science, engineering and advanced analytics applications in a single, highly
scalable system. This vision serves as an important guide as we drive towards future generation exascale systems
— 1,000 times faster than today’s petascale systems — by the end of the decade.

On behalf of our Board of Directors and management, I would like to thank all of our customers, partners,

employees and shareholders for your continued confidence and support.

Sincerely,

Peter J. Ungaro
President and Chief Executive Officer

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Í

‘

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2011
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
(State or Other Jurisdiction of
Incorporation or Organization)

901 Fifth Avenue, Suite 1000
Seattle, Washington
(Address of Principal Executive Offices)

93-0962605
(I.R.S. Employer
Identification No.)

98164
(Zip Code)

Registrant’s telephone number, including area code:
(206) 701-2000
Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $.01 par value

Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant

is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act: Yes ‘

No Í

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act: Yes ‘

No Í

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes Í

No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
such
the preceding 12 months
No ‘
files). Yes Í

required to submit and post

such shorter period that

the registrant was

for

(or

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Í

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘

Smaller reporting company ‘

Non-accelerated filer ‘

Accelerated filer Í

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2011, was
approximately $220,092,794 based upon the closing price of $6.40 per share reported on June 30, 2011, on the Nasdaq Global
Market.

No Í

As of February 15, 2012, there were 36,778,889 shares of Common Stock issued and outstanding.

Portions of the Proxy Statement to be delivered to shareholders in connection with the registrant’s Annual Meeting of

Shareholders to be held on June 7, 2012, are incorporated by reference into Part III.

DOCUMENTS INCORPORATED BY REFERENCE

CRAY INC.

FORM 10-K
For Fiscal Year Ended December 31, 2011

INDEX

PART I

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures

PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

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Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

PART IV

Cray is a federally registered trademark of Cray Inc., and Cray Sonexion, Cray Sonexion 1300, Cray XT,
Cray XT3, Cray XT4, Cray XT5, Cray XT6, Cray XE, Cray XE5, Cray XE6, Cray XE6m, Cray XK6, Cray
XK6m, Cray CX1, Cray CX1000, Gemini, Cray ECOphlex, Cascade, Cray Linux Environment, Cray
Threadstorm and YarcData are trademarks of Cray Inc. The registered trademark Linux is used pursuant to a
sublicense from LMI, the exclusive licensee of Linus Torvalds, owner of the mark on a worldwide basis. Other
trademarks used in this report are the property of their respective owners.

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties,
as well as assumptions that, if they never materialize or if they prove incorrect, could cause our actual results to
differ materially from those expressed or implied by such forward-looking statements. Forward-looking
statements are based on our management’s beliefs and assumptions and on information currently available to
them. In some cases you can identify forward-looking statements by terms such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts” and “potential”
and similar expressions, but the absence of these words does not mean that a statement is not forward-looking.
All statements other than statements of historical fact are statements that could be deemed forward-looking
statements, and examples of forward-looking statements include any projections of earnings, revenue or other
results of operations or financial results; any statements of the plans, strategies, objectives and beliefs of
management of the Company; any statements concerning proposed new products, technologies or services; any
statements regarding future research and development or co-funding for such efforts; any statements regarding
future economic conditions; and any statements of assumptions underlying any of the foregoing. These forward-
looking statements are subject to the safe harbor created by Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our actual results could differ
materially from those anticipated in these forward-looking statements for many reasons, including the risks faced
by us and described in Item 1A. Risk Factors in Part I and other sections of this report and our other filings with
the U.S. Securities and Exchange Commission, or SEC, or Commission. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this report. You should read this report
completely and with the understanding that our actual future results may be materially different from what we
expect. We assume no obligation to update these forward-looking statements, whether as a result of new
information, future events, or otherwise.

Item 1. Business

General

PART I

We design, develop, manufacture, market and service high-performance computing, or HPC, systems,
commonly known as supercomputers, and provide storage solutions and engineering services related to HPC
systems and solutions to our customers, which include government agencies, academic institutions and
commercial entities. Our supercomputer systems provide capability and sustained performance far beyond
typical server-based computer systems and address challenging scientific, engineering, commercial and national
security computing problems. Our current strategy is to gain market share in the high-end supercomputer market
segment, extend our technology leadership, maintain our focus on execution and profitability and expand our
addressable market in areas where we can leverage our experience and technology, such as in storage & data
management, data analytics of enormous volumes of data, popularly referred to as “big data” analytics, midrange
HPC systems and custom engineered solutions.

We were incorporated in the State of Washington in December 1987 under the name Tera Computer
Company. We changed our corporate name to Cray Inc. in connection with our acquisition of the Cray Research,
Inc., or Cray Research, operating assets from Silicon Graphics, Inc. in 2000. Our corporate headquarters are
located at 901 Fifth Avenue, Suite 1000, Seattle, Washington 98164. Our telephone number is (206) 701-2000
and our website address is www.cray.com. The contents of our website are not incorporated by reference into this
annual report on Form 10-K or our other SEC reports and filings.

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Products, Services and Customer Support

We concentrate on building balanced systems that are purpose-built for supercomputer users. Whether it is
one of our general-purpose supercomputer products or one that is custom engineered for a specific customer
problem, our systems address the critical computing resource challenges HPC users face today: achieving
massive scaling to tens of thousands of processors; ease of use for high productivity; and very high levels of
sustained performance on real applications. We achieve this by designing supercomputers that combine highly
capable processors, high speed interconnect technology for maximum communication efficiency, innovative
packaging to address increased density, energy efficiency and reliability requirements, and scalable system
software that enables performance and manageability at scale.

Our supercomputers utilize components and technologies designed to support the demanding requirements
of high-end HPC users. In contrast, lower bandwidth cluster system vendors use processors, interconnects and
system software designed to meet the requirements of the general purpose server market and then attempt to
leverage these commercially-oriented products into the HPC market. An important benefit of our purpose-built
approach is significantly higher sustained performance on many important applications at high scaling levels,
with performance improvements on the order of up to 10 or more times that of our commodity cluster
competition in these areas. With our supercomputers, HPC users are able to focus on their primary objectives,
including advancing scientific discovery, increasing industrial capabilities and improving national security.

Our supercomputer systems offer several additional benefits:

• upgrade paths that allow customers to leverage their investments over longer periods of time and thereby

reduce total costs of ownership;

• improved productivity, resiliency, reliability and performance through custom design of interconnect

systems and, in certain systems, proprietary processors;

• flexibility of processor type, memory and network configuration, storage configuration and system
software tools developed towards implementation of our “Adaptive Supercomputing” vision discussed
below; and

• the Cray brand name, synonymous with supercomputing and the Cray service experience, that brings with
it a proven research and development team and a global sales and service organization dedicated to the
needs of high-end HPC users.

We expect the continued advancement of many-core and accelerator processors to be advantageous to us,
complementing our technical strengths in networking, scaling system software and cooling and power
management technologies. The growing number of cores on each processor will amplify the scaling issues that
customers face today by putting increased stress on all aspects of the system while accelerator processors
(e.g., graphical processor units, or GPUs) will further unbalance systems from a computational performance
perspective putting increased pressure on the system’s communications network in which we specialize. We
believe our balanced approach to system design will become increasingly critical in enabling customers to take
advantage of the benefits of many-core processing.

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HPC Systems

Cray XE6 System. The Cray XE6 system is our flagship massively parallel processing, or MPP, system
and is the successor system to the Cray XT6, Cray XT5, Cray XT4 and Cray XT3 systems. The Cray XE6 system
combines scalability with manageability, resiliency, lower cost of ownership with reduced power and cooling
requirements, and broader application support. The Cray XE6 system has industry leading compute density and
high memory bandwidth, supporting very high density processor configurations of 192 AMD Opteron processor
sockets or up to 3,072 processor cores and delivering more than 20 teraflops (20 trillion floating point operations
per second) of computational capacity per cabinet, with system peak and sustained performance designed to
exceed ten petaflops. Customers can upgrade to the Cray XE6 system from the Cray XT4, Cray XT5 or Cray
XT6 systems by upgrading the network, processors, memory and a compute blade or they can choose to just
upgrade the network to create a Cray XE5 system, thereby leveraging their investment over a longer period of
time. The Cray XE6 Linux-based operating system efficiently supports the extreme levels of scaling featured in
each of our supercomputers as well as a large range of industry applications with our Cluster Compatibility
Mode, or CCM, software environment. The Cray XE6 system can be liquid cooled through use of Cray
ECOphlex technology or air cooled.

Cray XE6m System. Our Cray XE6m supercomputer is designed to make our HPC technology available to
more users by targeting a lower price band in the supercomputer market segment with price points starting at
approximately $200,000. The Cray XE6m system incorporates our Cray Gemini network specially designed and
optimized for systems with peak performances starting at under 7 teraflops and scaling to our high-end systems,
providing superior bandwidth, upgradeability and manageability at prices comparable to those of commodity
clusters. Offered with up to six cabinets, the Cray XE6m series features multi-core AMD Opteron processors and
can be liquid cooled through use of Cray ECOphlex technology or air cooled. The Cray Linux Environment
enables the use of a wide range of open source tools as well as streamlined porting of a broad set of applications
from independent software vendors. The Cray XE6m system compute blades, like the Cray XE6 compute blades,
are designed for maximum power efficiency with only the components needed for MPP: processors, memory and
interconnect. The Cray XE6m series can be upgraded or expanded to take advantage of new technologies, such as
next-generation compute processors, memory and I/O technologies as they become available, and can be
upgraded to a full Cray XE6 supercomputer.

Cray XK6 System. The Cray XK6 supercomputer combines our proven Gemini interconnect, AMD’s
leading multi-core scalar processors and NVIDIA’s powerful many-core GPU processors to create a true,
productive hybrid supercomputer. Capable of scaling to 500,000 scalar processors and 50 petaflops of hybrid
peak performance, every aspect of the Cray XK6 system — from its resiliency features to its scalability-boosting
technologies — has been engineered to meet science’s real-world demands.

Cray XK6m System. The Cray XK6m supercomputer leverages all of the technology in the Cray XE6m

system and integrates GPUs.

Our Adaptive Supercomputing Vision and Cascade Program

Our Adaptive Supercomputing vision is our vision of the best way to support the anticipated future needs of
HPC customers by incorporating many of our technical strengths,
including system scalability, multiple
processing technologies and high bandwidth networks — into a single system that we believe will make
supercomputing capabilities accessible to a greater number of end-users. With Adaptive Supercomputing we
expect to expand the concept of heterogeneous computing to a fully integrated view of both hardware and
software supporting multiple processing technologies within a single, highly scalable system. Our plan is to
increasingly integrate these processing technologies, such as x86 CPUs and accelerators, into a single Linux-
based platform. We expect to include powerful compilers and related software that will allow users to more
transparently leverage the heterogeneous underlying hardware in the system and help enable programmers to
write code in a more natural way.

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Our “Cascade” development program implements our Adaptive Supercomputing vision. Our “Cascade”
efforts are co-funded by the U.S. government. Under our funding agreement with the Defense Advanced
Research Projects Agency, or DARPA, we are completing the development of a prototype system that
demonstrates the functionality required for scaling to multiple sustained petaflops levels of performance on real
applications. The “Cascade” system involves a new system architecture that combines future processor
technologies, a new high-performance network and an adaptive software layer into a single integrated system. It
is expected to be commercially available in 2013.

YarcData Division

Future “Big Data” Analytics Solution. As previously announced in early 2012, we created a new division
within our organization called YarcData which focuses on providing solutions to the “big data” market by
extending our supercomputing platform to data analytics problems. Cray’s future “big data” analytics solution
includes a scalable massively multithreaded platform with a shared memory architecture that is ideally suited for
tasks such as pattern matching, complex searches, scenario development, behavioral prediction, anomaly
identification and graph analysis. This system is purpose-built for parallel applications that are dynamically
changing, require random access to shared memory and typically do not run well on conventional systems. This
system is ideal for massive unstructured and irregular data mining problems. The design is based on a Cray XT
compute blade but utilizes custom Cray Threadstorm processors developed for massively multithreaded
processing. A single Cray Threadstorm processor can sustain 128 simultaneous threads and is connected to
memory that is globally accessible by any other Cray Threadstorm processor in the system.

Storage & Data Management

Cray Sonexion 1300. We offer industry-leading storage & data management solutions and select the best
combination of functionality and price performance for each customer project. With the introduction of the Cray
Sonexion 1300 integrated storage system, we provide HPC customers with an industry leading high-bandwidth,
high capacity integrated Lustre solution. In addition, we continue to support partner storage offerings from
companies such as Data Direct Networks and NetApp through our esFS solutions. This flexibility ensures customers
always have access to the best storage & data management technologies from us and our partners. The new Cray
Sonexion 1300 system is a modular, high performance, high reliability storage system that takes full advantage of
the Lustre file system at any scale in a scale-out network attached storage, or NAS, solution. The system combines
next-generation hardware and software technology into an efficient modular design that scales from a hundred
terabytes to petabytes and offers optimal reliability, performance and ease of management. At the heart of the Cray
Sonexion scalable storage architecture is the storage scalable unit, or SSU, which consolidates and integrates
traditional block storage, network and file system components. Each SSU is a balanced performance, high-capacity
building block fully integrated with Lustre according to best practices.

Services

Custom Engineering. To address those HPC users whose needs cannot be met through our standard
product offerings, we provide an alternative. Cray Custom Engineering leverages our amassed intellectual
property portfolio, deep domain expertise, and HPC know-how to design and build solutions and services
designed to match a customer’s specific needs. The need for a unique solution often stems from special
processing needs, often performance, application or capacity related; special environmental needs, commonly
size, weight, power and cooling limitations; or unique interface or integration requirements.

We provide deliverables ranging from specific components to complete integrated systems, focusing on
custom-designed hardware, software, packaging, power and cooling solutions to address an HPC customer’s
unique challenges in special processing or application performance, environmental limitations or integration with
distinct equipment. In addition to our custom technologies, we may integrate commodity components or
specialized third-party technologies into the complete system. Our services encompass the entire life cycle of a
product or system, spanning design, development, program management, application characterization,
production, installation, integration and support.

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Customer Support. Our worldwide customer support organization delivers our customers the “Cray
experience” that provides us with a competitive advantage and a predictable flow of revenue and cash. We
believe that the quality of our customer support personnel plays an important role in our ability to maintain long-
term customer relationships. Support services are important to our customers, and we generally locate our
support personnel at or near customer sites globally, which are supported by a central service organization. Our
support services include hardware and software maintenance in support of our systems, applications support,
installation project management, system installation and de-installation, site preparation and technical training
for our systems. In addition, we offer ancillary services in application consulting, site engineering, on-site
analysts for defined projects and specialized training. In recent years, annual maintenance service revenue has
accounted for roughly fourteen to twenty-one percent of our total revenue. Maintenance support services are
provided under separate contracts with our product customers. These contracts generally provide for support
services on an annual basis, although some cover multiple years. While most customers pay for support on an
annual basis, others pay on a monthly, quarterly or multi-year basis. Customers may select levels of support and
response times, ranging from next business day parts only to 24 x 7 coverage with two-hour response.

Our Markets

Our systems are installed at more than 100 sites around the world. Our target markets for our products

designed for the supercomputer market segment are:

Scientific Research. Scientific research includes governmental

research laboratories and research
universities around the world. The Department of Defense,
through its High Performance Computing
Modernization Program, funds a number of research organizations that are target customers for us. The Office of
Science in the Department of Energy and its laboratories are key target customers, as are the National Science
Foundation and the National Aeronautics and Space Administration and related agencies around the world.

National Security. Classified work in U.S. government agencies has represented an important customer
market for us over many years. Certain U.S. governmental departments also continue to provide funding support
for our research and development efforts to meet their objectives. Current and target customers for our products
include a number of Department of Defense-related classified customers,
the National Nuclear Security
Administration of the Department of Energy and certain foreign counterparts.

Defense. The U.S. government and defense segment has wide ranging needs for HPC systems that in some
ways are unique and in other ways are similar to market segments such as life sciences. HPC systems can assist in
the development of defense technologies, equipment and secure communications infrastructure, as well as in the
identification and analysis of military intelligence. Intelligence supports real-time development of defense strategy
and decision making, while technology advancements are necessary to maintain military advantages and deterrents.

Earth Sciences. Weather forecasting and climate modeling applications require increasing speed and
larger volumes of data. Forecasting models and climate applications have grown increasingly complex with an
ever-increasing number of interactive variables, making improved supercomputing capabilities increasingly
critical. We have a number of customers running weather and climate applications, including customers in Korea,
Brazil, Switzerland, Denmark, Finland, India, Spain and the United States.

Life Sciences. The life sciences industry has evolved dramatically over the past decade, and the
simulations used today test the limits of HPC systems. In the life sciences, HPC methods cover a vast area that
includes modular and quantum mechanics and dynamics, quantitative structure-activity relationship models,
genomic assembly and comparison, whole cell process simulations, and medical imaging, just to name a
few. HPC computing systems in this market utilize a mix of high capability and high throughput technologies.

Energy. Supercomputing in the energy sector is driven largely by research by and for oil and gas
exploration and processing. The simulation methods used are both CPU and GPU compute intensive and often
require fast networks. We currently have customers utilizing both Cray XE6 and Cray XK6 systems and we are
targeting this segment for future products.

Computer-Aided Engineering. Supercomputers are used to design lighter, safer and more durable vehicles,
study wind noise and airflow around vehicles, improve airplane flight characteristics and, in many other
computer-aided engineering applications, to improve time-to-market and product quality. We currently have
customers in the aerospace, automotive, life sciences and manufacturing industries around the world.

5

Data Analytics. The ability to perform data analytics in enormous volumes of data, or “big data” analytics,
has become an important driver to the success of both business and academic research. A change in the analytics
industry is occurring, from the generation of reports about historical transactions, to the ability to assess what is
happening in real time and to make useful, actionable predictions. Data analytics is a new market for us, but one
that plays well to our core strengths, namely the ability to process vast amounts of data at very high speeds and to
make predictions. We are in early implementations of our solutions with various research, governmental and life
sciences organizations.

Agencies of the U.S. government or customers serving the U.S. government, directly and indirectly through
system integrators and other resellers, accounted for approximately 54% of our revenue in 2011, 62% of our
2010 revenue, and 72% of our 2009 revenue. Significant customers with over 10% of our annual revenue,
including those funded by the U.S. Government, were the High Performance Computing Center Stuttgart and the
National Energy Research Scientific Computing Center in 2011, the Korean Meteorological Administration and
Los Alamos National Laboratory in 2010, and Oak Ridge National Laboratory and the University of Tennessee
in 2009. International customers accounted for 35% of our total revenue in 2011, 34% of our total revenue in
2010, and 24% of our total revenue in 2009.

We have three operating segments for financial reporting purposes. Segment information and related
disclosures are set forth in Note 14 — Segment Information in the Notes to Consolidated Financial Statements in
Item 15. Exhibits and Financial Statement Schedules in Part IV of this annual report.

Sales and Marketing

We focus our sales and marketing activities on government agencies, academic institutions and commercial
entities that purchase HPC systems and storage. We sell our high-end products and custom engineered solutions
primarily through a seasoned supercomputing direct sales force that operates throughout the United States and in
Canada, Europe, Japan and Asia-Pacific. We serve smaller vertical and remote markets through sales
representatives. About half of our sales force is located in the United States and Canada, with the remainder
overseas.

A formal request-for-proposal process for HPC systems or technology drives a majority of our high-end
systems sales and custom engineering engagements. We utilize pre-sales technical experts to develop technical
proposals that meet the customer requirements and benchmarking teams to demonstrate the advantages of our
particular supercomputing products or service being proposed. For a majority of our larger sales opportunities,
the proposal process, including establishing system size, options, pricing and other commitments, involves a
number of resources outside of our sales organization. While we often tailor our supercomputer solutions for
each customer, especially so in our custom engineering engagements, there is substantial commonality in the
underlying components and systems, allowing us to leverage manufacturing and supply chain operations.

As government agencies and government-funded scientific research institutions comprise a large portion of
our customer base, our government programs efforts are an integral part of our overall strategy. Our government
programs personnel actively manage our relationship with U.S. government agencies and Congress.

Our marketing staff is primarily responsible for product marketing, business development and marketing
communications. Product marketing bridges our research and development organization and our sales staff to
help ensure that our products meet the demands and requirements of our key customers and a broader set of
prospects for our HPC business and each of our new business initiatives. Marketing communications focus on
our overall brand messaging, press releases, conferences, trade shows and marketing campaigns. Business
development focuses on providing products and services to specific customer sets, such as earth sciences,
computer-aided engineering, life sciences and energy.

Our Technology

We focus our research and development activities on designing system architecture, hardware and software

necessary to implement our product roadmap.

6

Architecture

Massively parallel processing, or MPP, architectures typically link up to tens of thousands of commodity
processors and their memory systems. These systems are best suited for large computing problems that can be
segmented into many parts and distributed across a large number of processors. The performance of these
systems depends in large part on the synchronization and communication capabilities of the inter-processor
interconnects. The Cray XE family of supercomputer systems is based on this architecture.

We have world-class expertise in developing highly scalable, high-performance multiprocessor
interconnects. Our interconnects are designed to scale effectively to very large numbers of processors under
heavy communication loads, providing lower latency and less performance variability than commodity networks
do. Our network roadmap includes support for globally addressable memory, highly efficient synchronization
primitives and very high transaction rates.

We have processor design expertise, with a strong understanding of how processors interact with compilers
and networks for HPC applications. This allows us to better consult with processor vendors on future product
designs, as well as design custom multithreaded processors for our future “big data” analytics solution.
Multithreading is designed to provide latency tolerance by supporting a large number of executable threads per
processor and quickly switching to another thread when a thread waits for data to be computed or to return from
global shared memory. These systems are particularly effective for access to large irregular data sets and graph-
based algorithms. Our future “big data” analytics solution is based on this technology.

Hardware

We have extensive experience in designing hardware components of HPC systems, including integrated circuits,
memory controllers, interconnect systems, I/O subsystems and cooling, power, and packaging infrastructures, and
integrating them into a single system. Our hardware research and development experience includes:

• High-speed interconnect. We design high speed and high bandwidth interconnect systems using a
combination of custom I/O circuits, high-density connectors, carefully chosen transmission media and
highly optimized logic;

• Packaging and cooling. We use very dense packaging in order to produce systems with high processing
capabilities and complementary bandwidth. This packaging generates more heat per unit volume than
standard packaging. We use specialized cooling techniques to address this issue, including liquid cooling
and high volume air cooling; and

• Integrated circuit design. We have designed custom and standard cell integrated circuits, including
vector and multithreaded processors. Our processors and other integrated circuits have special features
that let them use highly available memory bandwidth efficiently.

Software

We have extensive experience in designing, developing and adapting system software such as the operating
system, hardware supervisory system as well as programming environment software as an integral aspect of our
scalable HPC systems and distribute that software as part of system sales. We are transitioning to a common
system software and a common programming environment across all of our platforms, an important aspect of our
Adaptive Supercomputing vision. Our software research and development experience includes: operating
systems; provision of scalable hardware control RAS infrastructure systems for managing hardware, including
power control, monitoring of environmental data and hardware diagnostics; and programming environments,
including our own and commercially available compilers, libraries and tools.

We purchase or license software technologies from third parties when necessary to provide appropriate
support to our customers, while focusing our own resources where we believe we add the highest value. We have
not marketed or sold application programs separate from our systems.

For information relating to amounts spent on research and development, see Note 15 — Research and
Development in the Notes to Consolidated Financial Statements in Item 15. Exhibits and Financial Statement
Schedules in Part IV of this annual report.

7

Manufacturing and Supply Chain

We subcontract the manufacture of a majority of the hardware components for our high-end products and
custom-engineered systems, including integrated circuits, printed circuit boards, connectors, cables, power
supplies and memory parts, on a sole or limited source basis to third-party suppliers. We use contract
manufacturers to assemble our components. Our manufacturing strategy centers on build-to-order systems,
focusing on obtaining competitive assembly and component costs and concentrating on the final assembly, test
and quality assurance stages. This strategy allows us to avoid the large capital commitment and overhead
associated with establishing full-scale manufacturing facilities and to maintain the flexibility to adopt new
technologies as they become available without the risk of equipment obsolescence, provide near real-time
configuration changes to exploit faster and/or less expensive technologies and provide a higher level of large
scale system quality. We perform final system integration, testing and quality check-out of our systems. Our
manufacturing personnel are located primarily in Chippewa Falls, Wisconsin. We work closely with an original
equipment manufacturer to provide integrated and tested Cray Sonexion storage products.

Our systems designed for the supercomputer market segment and our custom-engineered solutions incorporate
components that are available from single or limited sources, often containing our proprietary designs. Such
components include integrated circuits, interconnect systems and certain memory devices. Prior to development of a
particular product, proprietary components are competitively bid to a short list of technology partners. The
technology partner that provides the highest value solution for the component is generally awarded the contract for
the life of the component. Once we have engaged a technology partner, changing our product designs to utilize
another supplier’s integrated circuits can be a costly and time-consuming process. We also have sole or limited
sources for less critical components, such as peripherals, power supplies, cooling and chassis hardware. We
currently obtain key processors from AMD and NVIDIA for our Cray XE and XK systems and from Taiwan
Semiconductor Manufacturing Company for our Cray future “big data” analytics solution and Gemini interconnect
chip. In the near future we will incorporate processors from Intel. Our procurements from these vendors are
primarily through purchase orders. We have chosen to deal with sole sources in specific cases due to the availability
of specific technologies, economic advantages and other factors. Reliance on single or limited source vendors
involves several risks, including the possibility of shortages of key components, long lead times, reduced control
over delivery schedules and changes in direction by vendors. We have been adversely affected by delays in
obtaining qualified competitive components in 2011 and in previous years.

Competition

The broad HPC market is very competitive. Many of our competitors in the U.S. and internationally are
established companies well known in the HPC supercomputing market, including IBM, Hewlett-Packard, NEC,
Hitachi, Fujitsu, Silicon Graphics International, and Bull S.A. Most of these competitors have substantially
greater total research, engineering, manufacturing, marketing and financial resources than we do.

We also compete with systems builders and resellers of systems that are constructed from commodity
components using processors manufactured by Intel, AMD and others. IBM builds systems leveraging third-party
processors as well as its own processors. These competitors include the previously named companies and Dell
Computer as well as smaller companies that assemble systems from commercially available commodity products.
These companies have capitalized on developments in parallel processing and increased computer performance
in commodity-based networking and cluster systems. While these companies’ products are more limited in
applicability and scalability, they have achieved growing market acceptance as they can offer significant price/
peak performance on larger problems lacking complexity. Such companies, because they may offer high peak
performance per dollar, can put pricing pressure on us in certain procurements.

To the extent that Intel, IBM and other processor suppliers develop processors with greater capabilities than
the processors we use from AMD, our Cray XE and Cray XK systems may be at a competitive disadvantage to
systems utilizing such other processors. We expect to help mitigate this risk in the future when we begin to also
provide Intel processors across our range of products, including in our “Cascade” systems.

8

For our products designed for the supercomputer market segment, we compete primarily on the basis of
product performance, scalability, breadth of features, price/performance, performance per unit of power, quality,
reliability, upgradeability, service and support, corporate reputation, brand image and account relationships. Our
market approach is more focused than many of our competitors, as we concentrate on high-end supercomputing
with products designed for the needs of this specific market. We work to offer systems that provide greater
performance on the largest, most difficult computational problems and superior price/performance on many
important applications in the upper-end of the supercomputer market segment. Our systems often offer superior
total cost of ownership advantages as they typically use less electric power and cooling and occupy less space
than lower bandwidth cluster systems.

The competitive landscape in the “big data” market is similar to that of our high-end supercomputer systems
(by company), though the majority of competition stems from vendors that offer large shared memory systems,
like Silicon Graphics International, or commodity cluster systems with specialized software for data analytics.
Also in the competitive field are business intelligence vendors such as Teradata, Oracle, EMC, Lexis-Nexis and
IBM (Netezza). The market for knowledge discovery from “big data” is nascent and fragmented as no dominant
applications have yet emerged and so custom and open source software approaches are generally used, such as
Hadoop/MapReduce. We expect to compete primarily on the basis of product performance, ease of use,
scalability and total cost of ownership. We believe our offerings can compete effectively on these factors and that
our market approach is more focused than our competition, as we develop technologies specifically for complex
analysis of large scale data.

Our storage products compete with a number of manufacturers and integrators of parallel storage solutions
including IBM with its GPFS parallel filesystem and with Data Direct Network, NetApp, Terascala and others.
The parallel storage and filesystem market is currently fragmented with a number of competing providers in the
HPC marketplace. We believe our offerings have an advantage against our competition when the prospective
target market has overlap with our system target market due to our experience, engineering know-how and
reputation in high-performance computing.

The market for our technology in custom engineering is competitive. Competition typically occurs at the
design stage of a prospective customer’s proposed product or need, where the customer evaluates alternative
technologies and design approaches. A design win provides an initial engagement, and while it often leads to a
long-term multi-phase engagement of development, manufacturing and support, there is no guarantee of the
subsequent phases. The principal competitive factors in our market are product performance, reputation, ability
to execute on time, price and integration and support services. Our competitive strengths include innovative
engineering, deep knowledge of relevant technologies, a reputation for quality, and our ability to respond to
varied customer requirements. There are a limited number of competitors with which we compete but most of
them are much larger and thus have greater resources than we do. We compete primarily with defense
contractors, such as General Dynamics, Lockheed Martin and Northrop Grumman and selected systems vendors
such as IBM and Hewlett-Packard. Like us, these competitors have long-standing customer relationships and
government program insights, but given their size, their reach and breadth of services are much greater.

Intellectual Property

We attempt to protect our trade secrets and other proprietary rights through formal agreements with our
employees, customers, suppliers and consultants, and through patent protection. Although we intend to protect
our rights vigorously, there can be no assurance that our contractual and other security arrangements will be
successful.

Our general policy is to seek patent protection for those inventions and improvements that give us a
competitive advantage and are likely to be incorporated into our products and services. We have a number of
patents and pending patent applications relating to our hardware and software technologies. While we believe our
patents and applications have value, no single patent or group of patents is in itself essential to us as a whole or to
any of our key products. Any of our proprietary rights could be challenged, invalidated or circumvented and may
not provide significant competitive advantage.

9

We have licensed certain patents and other intellectual property from Silicon Graphics International. We
obtained our initial license to these patents and intellectual property as a result of our acquisition of the Cray
Research operations from Silicon Graphics, Inc. These licenses contain restrictions on our use of the underlying
technology, generally limiting the use to historic Cray products. We have also entered into cross-license
arrangements with other companies involved in the HPC industry.

Backlog

We do not believe backlog is a meaningful indicator of our future business prospects due to the uncertainty
of converting orders into recognized revenue in any given period or at all. Factors impacting the amount of
backlog and our ability to recognize revenue from backlog in any given period include the possibility of
significant contract amendments, the timing of our product development, manufacturing and delivery schedules
and changes in delivery schedules requested by our customers. Therefore, we believe that backlog information is
not material to an understanding of our overall business.

Employees

As of December 31, 2011, we had 860 employees. We have no collective bargaining agreement with our

employees. We have not experienced a work stoppage and believe that our employee relations are very good.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, are available free of charge at our website at www.cray.com, as soon as reasonably
practicable after we file such reports with the SEC electronically. The public may read and copy any materials
that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The
the Public Reference Room by calling the SEC
public may obtain information on the operation of
at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. In
addition, we have set forth our Code of Business Conduct, Corporate Governance Guidelines, the charters of the
Audit, Compensation, Corporate Governance and Strategic Technology Assessment Committees of our Board of
Directors and other governance documents on our website, www.cray.com, under “Investors — Corporate
Governance.”

Item 1A. Risk Factors

In addition to the other information contained in this annual report, you should carefully read and consider
the following risk factors. If any of these risks actually occur, our business, financial condition or operating
results could be materially adversely affected and the trading price of our common stock could decline.

Our operating results fluctuate significantly and we may not achieve profitability in any given
period. Our operating results are subject to significant fluctuations which make estimating revenue and
operating results for any specific period very difficult, particularly because a material portion of product revenue
recognized in any given quarter or year typically depends on a very limited number of system sales expected for
that quarter or year and the product revenue generally depends on the timing of product acceptances by
customers and contractual provisions affecting revenue recognition. Delays in recognizing revenue from a
product
transaction or transactions due to development or product delivery delays, not receiving needed
components timely or with anticipated quality and performance, not achieving customer acceptances of installed
systems, contractual provisions or for other reasons, could have a material adverse effect on our operating results
in any specific quarter or year, and could shift associated revenue, gross profit and cash receipts from one quarter
to another, or even from one year to another in the case of revenue expected to be realized in the fourth quarter of
any year. The amount and timing of research and development co-funding (such as from our DARPA, High
Productivity Computing Systems, or HPCS program) can also materially affect our expenses for any given
quarter or year. In addition, because our revenue is often concentrated in particular quarters rather than evenly
spread throughout a year, we generally do not expect to sustain profitability over successive quarters even if we
are profitable for the year.

10

Although we recorded positive net income in 2010 and 2011, we have historically experienced net losses and,
prior to 2010, had last recorded positive annual net income in 2003. For example, we recorded a net loss of $10.6
million in 2007, a net loss of $40.7 million in 2008, which included a non-cash goodwill impairment charge of
approximately $54.5 million and a net loss of $0.6 million in 2009. Net income in 2011 benefited from the partial
reduction of the valuation allowance held against our U.S. deferred tax assets of $13.9 million and a complete
reduction of the valuation allowance held against the deferred tax assets of our German subsidiary of $0.8 million.

Whether we will be able to increase our revenue and achieve and sustain profitability on a quarterly and

annual basis depends on a number of factors, including:

• successfully delivering and obtaining customer acceptances of our Cray XE6 and Cray XK6 systems,
including the systems delivered or to be delivered to the Department of Energy’s Oak Ridge National
Laboratory and the University of Illinois’ National Center for Supercomputing Applications;

• the level of revenue recognized in any given period, which is affected by the very high average sales
prices and limited number of significant system sales and resulting potential acceptances in any quarter,
the timing of product acceptances by customers and contractual provisions affecting the timing and
amount of revenue recognition;

• 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, longer than expected customer acceptance cycles
or penalties resulting from system acceptance issues;

• our ability to successfully and timely design, integrate and secure competitive processors for our Cray
XE6 and Cray XK6 systems and upgrades and successors systems, including for the planned upgrade to
our current Cray XK6 system that will be based on the NVIDIA “Kepler” GPUs;

• our ability to secure orders for our Cray XE6/Cray XE6m and Cray XK6/Cray XK6m systems as well as

upgrades and successor systems;

• our ability to successfully generate revenue and profitability from opportunities developed from our

YarcData division and storage & data management business;

• 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 secure additional government funding for future development projects, in particular funding

targeted for “exascale” computing initiatives;

• the level of product gross profit contribution in any given period due to volume or product mix,
competitive factors, strategic transactions, product life cycle, currency fluctuations, acceptance penalties
and component costs;

• the competitiveness of our products;

• maintaining our product development projects on schedule and within budgetary limitations;

• the level and timing of maintenance contract renewals with existing customers;

• the terms and conditions of sale or lease for our products and services.

The receipt of orders and the timing of shipments and acceptances impact our quarterly and annual results,

including cash flows, and are affected by events outside our control, such as:

• the timely availability of acceptable components, including, but not limited to, processors, in sufficient

quantities to meet customer delivery schedules;

• the timing and level of government funding for product acquisitions and research and development
contracts, which may be adversely affected by the current economic and fiscal uncertainties and increased
governmental budgetary limitations;

• the introduction or announcement of competitive or key industry supplier products;

• price fluctuations in the commodity electronics, processor and memory markets;

11

• general economic trends, including changes in levels of customer capital spending;

• the availability of adequate customer facilities to install and operate new Cray systems;

• currency fluctuations, international conflicts or economic crises, including the ongoing macroeconomic

challenges in the United States and the debt crisis in certain countries in the European Union; and

• the receipt and timing of necessary export licenses.

Because of the numerous factors affecting our revenue and results of operations, we may not have net
income on a quarterly or annual basis in the future. We anticipate that our quarterly results will fluctuate
significantly, and include losses, even in years where we expect or achieve positive annual net income. Delays in
component availability, product development, receipt of orders, level and timing of approved government fiscal
budgets, product acceptances, reductions in outside funding for our research and development efforts and
achieving contractual development milestones have had a substantial adverse effect on our past results and could
continue to have such an effect on our results in 2012 and in future years.

If we are unable to complete and obtain acceptance on the final DARPA milestones when or as expected
or at all, our net research and development expenditures would increase significantly and our operating
results would be adversely affected. The DARPA HPCS program calls for the delivery of prototype systems in
late 2012, and currently provides for a contribution by DARPA to us of up to $180 million assuming we meet
certain milestones, $158 million of which we had already earned as of December 31, 2011, leaving $22 million to
be earned through three milestones. In February of 2010, the total possible contribution from DARPA over the term
of the HPCS program was reduced from $250 million to $190 million and, in October 2011, it was further reduced
to $180 million. If the completion of any remaining development milestone is delayed, our reported net research and
development expenses, and our operating results, would be adversely affected. If we are unable to complete the
remaining milestones, or one or more milestone payments are delayed, reduced and/or eliminated or the program is
terminated, our cash flows and expenses would be adversely impacted. If we do not achieve and have accepted a
milestone in the period we had originally estimated, we may incur research and development expense without
offsetting co-funding by DARPA, resulting in increased net research and development expense during the period.
We incurred some delays in payments for program milestones by DARPA in 2007 and 2008; in addition, as a result
of our discussions with DARPA on the changes in scope and program schedule, results for the third and fourth
quarters of 2009 and full-year 2009 were adversely impacted by delays in completing development milestones. The
amount of DARPA funds we can recognize as an offset to our periodic research and development expenses depends
on our estimates of the total costs and the time to complete the program; changes in our estimates may decrease the
amount of funding recognized in any period, which may increase the amount of net research and development
to subsequent
expense recognized in that quarter. DARPA’s future financial commitments are subject
Congressional and federal inter-agency action, and our development efforts and the level of reported research and
development expenses would be adversely impacted if DARPA does not receive expected funding, a delay in the
timing of milestones or a decision to terminate the program before completion.

If our current and future strategic initiatives targeting markets outside of our traditional markets,
primarily our YarcData division and storage & data management business, are not successful, our ability to
grow our revenues and achieve and sustain profitability will be adversely affected. Our ability to materially
grow our revenues and achieve and sustain profitability will be adversely affected if we are unable to generate
sufficient revenue from strategic initiatives targeting markets outside of our traditional market, particularly if those
market segments do not grow significantly. We are currently focusing on data analytics and storage & data
management opportunities originally developed from our Custom Engineering business and selling our Cray XE6m
and Cray XK6m systems into the mid-sized supercomputing segment. To grow our revenue from new opportunities
outside our primary market, we must continue to win awards for new contracts, timely perform on existing
contracts, develop our capability for broader market sales and business development and successfully develop and
introduce new solution-oriented offerings, notwithstanding that these are relatively new businesses for Cray and we
do not have significant experience targeting these markets. The Cray XE6m, Cray XK6m and successor systems
require successful sales in a lower priced segment of the supercomputer market as well as in relatively new
commercial market segments. These data analytics and storage & data management opportunities and our Cray
XE6m/Cray XK6m (and successor systems) efforts require monetary investments ahead of revenue, including
adding experienced personnel and initiating new marketing and sales efforts.

12

If

fewer
the U.S. government and other governments purchase, or fund the purchase of,
supercomputers or delay such purchases, our revenue would be reduced and our operating results would
be adversely affected. Historically, sales to the U.S. government and customers primarily serving the
U.S. government have represented the largest single market segment for supercomputer sales worldwide,
including our products and services. In 2009, 2010 and 2011, approximately 72%, 62% and 54% respectively, of
our revenue was derived from such sales. Our plans for the foreseeable future contemplate significant sales to
U.S. government agencies and customers primarily serving the U.S. government. Sales to government agencies
and customers primarily serving the U.S. government, including further sales pursuant to existing contracts, may
be adversely affected by factors outside our control, such as the current economic uncertainty, the downgrading
of U.S. government debt, the political climate in a U.S. presidential election year focusing on cutting or limiting
budgets and their effect on government budgets, the effects of the potential Congressional failure or success in
addressing, limits on federal borrowing capacity, changes in procurement policies, budgetary considerations
including Congressional delays in completing appropriation bills as occurred in 2011, domestic crises, and
international political developments, such as the downgrading of European debt. If agencies and departments of
the United States or other governments were to stop, reduce or delay their use and purchases of supercomputers,
our revenue and operating results would be adversely affected.

Our reliance on third-party suppliers poses significant risks to our operating results, business and
prospects. We rely upon third-party vendors to supply processors for our systems and storage subsystems and
use service providers to co-develop key technologies, including integrated circuit design and verification. We
subcontract the manufacture of a majority of the hardware components for our high-end products, including
integrated circuits, printed circuit boards, connectors, cables, power supplies and memory parts, on a sole or
limited source basis to third-party suppliers. We use contract manufacturers to assemble certain important
components for all of our systems. We also rely on third parties to supply key software and hardware capabilities,
such as file systems, solution-specific servers and storage subsystems. Because specific components must be
designed into our systems well in advance of initial deliveries of those systems, we are particularly reliant on our
processor vendors to deliver on the capabilities and pricing expected at the time we design key elements of the
system. We are subject to substantial risks because of our reliance on these and other limited or sole source
suppliers, including the following risks:

• If a supplier does not provide components that meet our specifications in sufficient quantities on time or
deliver when required, then production, delivery, acceptance and revenue from our systems could be
delayed and we could be subject to costly penalties even once delivered and accepted, which happened
during the fourth quarter of 2011 and adversely affected our efforts to complete the acceptance process on
the Cray XK6 upgrade at Oak Ridge National Laboratory, which in turn significantly lowered our total
revenue for fiscal year 2011;

• 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 reduced delivery 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 or processors, we may not
be able to redesign such components or find alternate sources that we could use in any realistic timeframe;

• If a supplier of a component is subject to a claim that the component infringes a third-party’s intellectual
property rights, as has happened with one of our suppliers, our ability to obtain necessary components
could be adversely affected or our cost to obtain such components could increase significantly;

• 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 (for example, due to inadequate performance or a
prohibitive price) or eliminates key features from components, such as with the processors we design into
our systems, our systems may be less competitive than systems using components with greater capabilities;

13

• As a result of the unprecedented flooding in Thailand in 2011 and the impact the flooding had on the
suppliers of hard disk drives, we may have difficulty obtaining the quantity of hard disk drives required to
satisfy the production and sales of our systems;

• If a supplier provides us with hardware or software that contains bugs or other errors or is different from
what we expected, as is occurring with a key component, our development projects and production
systems may be adversely affected through reduced performance or capabilities, additional design testing
and verification efforts, re-spins of integrated circuits and/or development of replacement components,
and the production and sales of our systems could be delayed and systems installed at customer sites
could require significant, expensive field component replacements or result in penalties;

• 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; and

• 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.

For example, our DARPA HPCS project was adversely affected by changes by a major microprocessor
supplier in its high performance technology roadmap that affected our ability to complete that program
successfully and resulted in a reduction in the amount of funding we could receive from DARPA by $60 million.
In addition, our Cray XE6 and Cray XE6m systems are based on certain AMD Opteron processors. Delays in the
availability of certain acceptable reliable components, including processors and memory parts, and increases in
order lead times for certain components, adversely affected our revenue and operating results in prior periods,
including in 2011, and could adversely affect future results. In particular, planned upgrades to and variants of our
Cray XK6 and Cray XK6m systems are dependent upon the NVIDIA “Kepler” graphics processors. If we are
unable to obtain adequate quantities of this processor when needed or meet the anticipated specifications our
revenue in 2012 and in subsequent periods would be adversely affected.

If we are unable to secure additional government research and development funding, our desired
strategy would be adversely affected and our ability to conduct research and development would
decrease. The significant government research and development funding we receive from the DARPA HPCS
program is scheduled to end in 2012. If we are unable to secure sufficient additional government research and
development funding beyond 2012, in particular funding targeted for “exascale” computing initiatives, or similar
next-generation technology development government initiatives, our desired strategy would be adversely affected
and our ability to continue research and development efforts on next-generation systems would decrease.

If we are unable to compete successfully in the highly competitive HPC market, our business will not
be successful. The market for HPC systems is very competitive. An increase in competitive pressures in our
market or our failure to compete effectively may result in pricing reductions, reduced gross margins and loss of
market share and revenue. Many of our competitors are established companies well known in the HPC market,
including IBM, NEC, Hewlett-Packard, Fujitsu, Hitachi, Silicon Graphics International, and Bull S.A. Most of
these competitors have substantially greater research, engineering, manufacturing, marketing and financial
resources than we do. We also compete with systems builders and resellers of systems that are constructed from
commodity components using processors manufactured by Intel, AMD and others. These competitors include the
companies named above and Dell, with IBM using both third-party processors and its own proprietary
processors, as well as smaller companies that benefit from the low research and development costs needed to
assemble systems from commercially available commodity products. Such companies, because they can offer
high peak performance per dollar, can put pricing pressure on us in certain competitive procurements. In
addition, to the extent that Intel, IBM and other processor suppliers develop processors with greater capabilities
or at a lower cost than the processors we currently use, such as those from AMD, our Cray XE6, Cray XE6m,
Cray XK6 and successor systems may be at a competitive disadvantage to systems utilizing such other processors
until we can design in, integrate and secure competitive processors, if at all. Although our collaboration with
Intel is intended to help mitigate this risk, Intel processors are not expected to be delivered in our supercomputers
targeted at the high-end of the supercomputer market segment until 2013.

14

Periodic announcements by our competitors of new HPC systems or plans for future systems and price
adjustments may reduce customer demand for our products. Many of our potential customers already own or
lease high performance computer systems. Some of our competitors may offer substantial discounts to potential
customers. We have in the past and may again be required to provide substantial discounts to make strategic
sales, which may reduce or eliminate any gross profit on such transactions, or to provide lease financing for our
products, which could result
in a deferral of our receipt of cash and revenue for these systems. These
developments limit our revenue and resources and reduce our ability to be profitable.

If we are unable to successfully sell and deliver our Cray XE6 and the Cray XK6 systems and develop,
sell and deliver successor systems, such as our “Cascade” system, our operating results will be adversely
affected. We expect that a substantial portion of our revenue in the foreseeable future will come from sales and
deliveries of Cray XE6 and successor systems, such as our “Cascade” system, and systems including integration
of GPU “accelerators,” such as with the Cray XK6 systems, or future processors. Because of the long technology
development cycles required to compete effectively in this market, we must begin development of products years
ahead of our ability to sell such systems. With procurements for large systems that require that we link together
multiple cabinets containing powerful processors and other components into an integrated system, our Cray XE6,
Cray XK6 and successor systems, such as our “Cascade” system, must also scale to unprecedented levels of
performance. During our internal testing and the customer acceptance processes, we may discover that we cannot
achieve acceptable system stability or scalability across these large systems without incurring significant
additional delays and expense. Any additional delays in receiving acceptable components or in product
development, assembly, final testing and obtaining large system stability would delay delivery, installation and
acceptance of Cray XE6, Cray XK6 and successor systems, such as our “Cascade” system.

Many factors affect our ability to successfully develop and sell these systems, including the following:

• The level of product differentiation in our Cray XE6, Cray XK6 and successor systems, such as our
“Cascade” system. 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 companies 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 have adversely
affected 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 our Cray XE6 and Cray XK6 systems and is occurring for
subsequent systems.

• Our ability to source competitive, key components in appropriate quantities, in a timely fashion and on
acceptable terms and conditions. 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, as has happened in the past.

• Whether potential customers delay purchases of our products because they decide to wait for successor
systems or upgrades that we have announced, such as our “Cascade” system, or they believe will be
available in the future.

Failure to successfully sell our Cray XE6 and Cray XK6 systems and develop and sell upgrades and
successor systems, such as our “Cascade” system, into the high-end of the HPC market will adversely affect our
operating results.

15

Customers and other third parties may make statements speculating about or announcing an
intention to complete purchases of Cray products before such purchases are substantially certain, and
these proposed purchases may not be completed when or as expected, if at all. From time to time,
customers and other third parties may make statements speculating about or announcing a potential purchase of
Cray products before Cray has obtained an order for such purchases or completed negotiations and signed a
contract for the purchase of such products. In some instances, government and government-funded customers
may announce possible purchases even before they have obtained the necessary budget to procure the products.
As a result, these statements or announcements do not mean that Cray will ultimately be able to secure the sale
when or as expected or at all as it is not certain that the contract or order negotiations will be completed
successfully or as expected or that the customer will be able to obtain the budget they hope for or expect.

The continuing commoditization of HPC hardware and software has resulted in pricing pressure and
may adversely affect our operating results. The continuing commoditization of HPC hardware, particularly
processors and interconnect systems, and the growing commoditization of software, including plentiful building
blocks and more capable open source software, as well as the potential for integration of differentiated
technology into already-commoditized components, has resulted in, and may result in, the expansion and
acceptance of lower-bandwidth cluster systems using processors manufactured by Intel, AMD and others
combined with commercially available commodity networking and other components. These systems may offer
higher theoretical peak performance for equivalent cost
than equivalent Cray systems, and “price/peak
performance” is often the dominant factor in HPC procurements outside of the high-end HPC or supercomputer
market segment. Vendors of such systems often put pricing pressure on us in competitive procurements, even at
times in larger procurements, and this pricing pressure may cause us to reduce our pricing in order to remain
competitive which can negatively impact our gross margins and adversely affect our operating results.

Failure to overcome the technical challenges of developing competitive supercomputer systems well in
advance of when they can be sold would adversely affect our revenue and operating results in subsequent
years. We continue to develop successor systems to the Cray XE6 and Cray XK6 systems, such as our
“Cascade” system, and expect to incorporate Intel technologies into our products as part of our DARPA HPCS
program and our “Cascade” systems. We are also planning to continue to incorporate GPU “accelerators” into
our supercomputer systems, such as with the Cray XK6 systems. The incorporation of GPUs and future many-
core processors into our systems designed for the supercomputing segment of the market poses unique challenges
in both hardware and software integration.

These development efforts are lengthy and technically challenging processes, and require a significant
investment of capital, engineering and other resources often years ahead of the time when we can be assured that
they will result in competitive products. We may invest significant resources in alternatives that prove ultimately
unfruitful. Unanticipated performance and/or development issues may require more engineers, time or testing
resources than are currently available. In the past several years, directing engineering resources to solving current
issues has adversely affected the timely development of successor products required for our longer-term product
roadmap. Given the breadth of our engineering challenges and our limited engineering and technical personnel
resources, we periodically review the anticipated contributions and expense of our product programs to
determine their long-term viability, and we may substantially modify or terminate one or more development
programs. We may not be successful in meeting our development schedules for technical reasons and/or because
of insufficient engineering resources, which could result in an uncompetitive product or cause a lack of
confidence in our capabilities among our key customers. To the extent that we incur delays in completing the
design, development and production of hardware components, delays in development of requisite system
software, cancellation of programs due to technical or economic infeasibility or investment in unproductive
development efforts, our revenue, results of operations and cash flows, and the reputation of such systems in the
market, could be adversely affected.

16

We are subject to increasing government regulations and other requirements due to the nature of our
business, which may adversely affect our business operations.
In 2009, 2010 and 2011, 72%, 62% and 54%
respectively, of our revenue was derived from the U.S. government or customers primarily serving the U.S.
government. In addition to normal business risks, our contracts with the U.S. government are subject to unique
risks, some of which are beyond our control. Our contracts with the U.S. government are subject to particular
risks, including:

The funding of U.S. government programs is subject to congressional appropriations. Many of the U.S.
government programs in which we participate may extend for several years; however, these programs are
normally funded annually. Changes in U.S. strategy and priorities, particularly in this U.S. Presidential election
year, may affect our future procurement opportunities and existing programs. Long-term government contracts
and related orders are subject to cancellation, or delay, if appropriations for subsequent performance periods are
not made. The termination of funding for existing or new U.S. government programs could result in a material
adverse effect on our results of operations and financial condition.

The U.S. government may modify, curtail or terminate its contracts with us. The U.S. government may
modify, curtail or terminate its contracts and subcontracts with us, without prior notice at its convenience upon
payment for work done and commitments made at the time of termination. Modification, curtailment or
termination of our major programs or contracts could have a material adverse effect on our results of operations
and financial condition.

Our U.S. government contract costs are subject to audits by U.S. government agencies. U.S. government
representatives may audit the costs we incur on our U.S. government contracts, including allocated indirect costs.
Such audits could result in adjustments to our contract costs. Any costs found to be improperly allocated to a
specific contract will not be reimbursed, and such costs already reimbursed must be refunded. If any audit
uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension
or prohibition from doing business with the U.S. government.

Our business is subject to potential U.S. government inquiries and investigations. We may be subject to
U.S. government inquiries and investigations of our business practices due to our participation in government
contracts. Any such inquiry or investigation could potentially result in a material adverse effect on our results of
operations and financial condition.

is also subject

Our U.S. government business

regulations and other
requirements. These requirements, although customary in U.S. government contracts, increase our performance
and compliance costs. These costs might increase in the future, reducing our margins, which could have a
negative effect on our financial condition. Failure to comply with these regulations and requirements could lead
to suspension or debarment, for cause, from U.S. government contracting or subcontracting for a period of time
and could have a negative effect on our reputation and ability to secure future U.S. government contracts.

to specific procurement

U.S. export controls could hinder our ability to make sales to foreign customers and our future
prospects. The U.S. government regulates the export of HPC systems such as our products. Occasionally we
have experienced delays for up to several months in receiving appropriate approvals necessary for certain sales,
which have delayed the shipment of our products. Delay or denial in the granting of any required licenses could
make it more difficult to make sales to certain foreign customers, eliminating an important source of potential
revenue. Our ability to have certain components manufactured in certain foreign countries for a lower cost has
also been adversely affected by export restrictions covering information necessary to allow such foreign
manufacturers to manufacture components for us.

17

If we cannot retain, attract and motivate key personnel, we may be unable to effectively implement our
business plan. Our success depends in large part upon our ability to retain, attract and motivate highly skilled
management, development, marketing, sales and service personnel. The loss of and failure to replace key
engineering management and personnel could adversely affect multiple development efforts. Recruitment and
retention of senior management and skilled technical, sales and other personnel is very competitive, and we may not
be successful in either attracting or retaining such personnel. From time to time, we have lost key personnel to other
high technology companies. For example, during the third quarter of 2011 our Chief Technology Officer resigned to
join another company in our industry. As part of our strategy to attract and retain key personnel, we may offer
equity compensation through stock options and restricted stock grants. Potential employees, however, may not
perceive our equity incentives as attractive enough and current employees who have significant options with
exercise prices significantly above current market values for our common stock may seek other employment. In
addition, due to the intense competition for qualified employees, we may be required to increase the level of
compensation paid to existing and new employees, which could materially increase our operating expenses.

Our stock price is volatile. The trading price of our common stock is subject to significant fluctuations in
response to many factors, including our quarterly operating results, changes in analysts’ estimates or our outlook,
our capital raising activities, announcements of technological innovations and customer contracts by us or our
competitors, a significant aggressive seller or buyer, general economic conditions and conditions in our industry.

We may infringe or be subject to claims that we infringe the intellectual property rights of
others. Third parties in the past have asserted, and may in the future assert intellectual property infringement
claims against us. As a result of such intellectual property infringement claims, we could be required or
otherwise decide that it is appropriate to:

• pay third-party infringement claims;

• discontinue manufacturing, using, or selling particular products subject to infringement claims;

• discontinue using the technology or processes subject to infringement claims;

• develop other technology not subject to infringement claims, which could be time-consuming and costly

or may not be possible; or

• license technology from the third-party claiming infringement, which license may not be available on

commercially reasonable terms.

Regardless of the merits, any intellectual property infringement claim would require management attention

and could be expensive to defend.

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. The operating system as well as other software we develop for our HPC systems
contains components that are licensed to us under open source software licenses. Our business could be disrupted
if this software, or functional equivalents of this software, were either no longer available to us or no longer
offered to us on commercially reasonable terms. In either case we would be required to redesign our operating
system software to function with alternative third-party software, or develop these components ourselves, which
would result in increased costs and could result in delays in product shipments. Our supercomputer systems
utilize software system variants that incorporate Linux technology. The open source licenses under which we
have obtained certain components of our operating system software may not be enforceable. Any ruling by a
court that these licenses are not enforceable, or that Linux-based operating systems, or significant portions of
them, may not be copied, modified or distributed as provided in those licenses, would adversely affect our ability
to sell our systems. In addition, as a result of concerns about the risks of litigation and open source software
generally, we may be forced to protect our customers from potential claims of infringement. In any such event,
our financial condition and results of operations may be adversely affected.

18

We also incorporate proprietary incidental software from third parties, such as for file systems, job
scheduling and storage subsystems. We have experienced some functional issues in the past with implementing
such software with our supercomputer systems. In addition, we may not be able to secure needed software
systems on acceptable terms, which may make our systems less attractive to potential customers. These issues
may result in lost revenue, additional expense by us and/or loss of customer confidence.

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. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a
report by our management and a report by our independent registered public accounting firm on our internal
control over financial reporting in our annual reports on Form 10-K as to whether we have any material
weaknesses in our internal controls over financial reporting. Depending on their nature and severity, any future
material weaknesses could result in our having to restate financial statements, could make it difficult or
impossible for us to obtain an audit of our annual financial statements or could result in a qualification of any
such audit. In such events, we could experience a number of adverse consequences, including our inability to
comply with applicable reporting and listing requirements, a loss of market confidence in our publicly available
information, delisting from the NASDAQ Global Market, an inability to complete a financing, loss of other
financing sources such as our line of credit, and litigation based on the events themselves or their consequences.

We may not be able to protect our proprietary information and rights adequately. We rely on a
combination of patent, copyright and trade secret protection, nondisclosure agreements and licensing
arrangements to establish, protect and enforce our proprietary information and rights. We have a number of
patents and have additional applications pending. There can be no assurance, however, that patents will be issued
from the pending applications or that any issued patents will adequately protect those aspects of our technology
to which such patents will relate. Despite our efforts to safeguard and maintain our proprietary rights, we cannot
be certain that we will succeed in doing so or that our competitors will not independently develop or patent
technologies that are substantially equivalent or superior to our technologies. The laws of some countries do not
protect intellectual property rights to the same extent or in the same manner as do the laws of the United States.
Additionally, under certain conditions, the U.S. government might obtain non-exclusive rights to certain of our
intellectual property. Although we continue to implement protective measures and intend to defend our
proprietary rights vigorously, these efforts may not be successful.

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. Provisions of our Restated Articles of
Incorporation and Bylaws could make it more difficult for a third-party to acquire us. These provisions could
limit the price that investors might be willing to pay in the future for our common stock. For example, our
Restated Articles of Incorporation and Bylaws provide for:

• 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.

19

These provisions could delay, defer or prevent a merger, consolidation,
transaction between us and a third-party that is not approved by our Board of Directors.

takeover or other business

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal properties are as follows:

Location of Property

Uses of Facility

Approximate
Square Footage

Chippewa Falls, WI

. . . . . . . . . . . . . . . . . . . . . . Manufacturing, hardware development,

227,800

central service and warehouse

Seattle, WA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive offices, hardware and software

54,000

development, sales and marketing

St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software development, sales and marketing

62,200

We own 179,200 square feet of manufacturing, development, service and warehouse space in Chippewa

Falls, Wisconsin, and lease the remaining space described above.

We lease a total of 8,594 square feet of office space, primarily for hardware development, in Austin, Texas.
We lease a total of 5,600 square feet of office space, primarily for software development, in Pleasanton,
California. We also lease a total of approximately 6,200 square feet, primarily for sales and service offices, in
other domestic locations. In addition, various foreign sales and service subsidiaries have leased an aggregate of
approximately 12,600 square feet of office space. We believe our facilities are adequate to meet our needs at least
through 2012.

Item 3. Legal Proceedings

We are currently not a party to any material legal proceedings.

Item 4. Mine Safety Disclosures

Not applicable.

20

PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of

Equity Securities

Price Range of Common Stock and Dividend Policy

Our common stock is traded on the Nasdaq Global Market under the symbol CRAY. On February 15, 2012,

we had 36,778,889 shares of common stock outstanding that were held by 355 holders of record.

The quarterly high and low sales prices of our common stock for the periods indicated are as follows:

Year Ended December 31, 2011:

First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2010:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

$8.38
$6.87
$6.52
$6.85

$6.85
$7.45
$6.90
$7.70

$6.14
$5.83
$4.97
$4.96

$4.52
$4.51
$4.95
$5.39

We have not paid cash dividends on our common stock and we do not anticipate paying any cash dividends

on our common stock in the foreseeable future.

Equity Compensation Plan Information

The following table provides information as of December 31, 2011, with respect to compensation plans
under which shares of our common stock are authorized for issuance, including plans previously approved by our
shareholders and plans not previously approved by our shareholders.

Plan Category

Number of Shares of
Common Stock to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights

Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Shares of
Common Stock Available
for Future Issuance Under
Equity Compensation
Plans (excluding shares
reflected in 1st column)

Equity compensation plans approved by

shareholders(1) . . . . . . . . . . . . . . . . . . . .

Equity compensation plans not approved

by shareholders(2) . . . . . . . . . . . . . . . . .

2,913,857

504,063

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,417,920

$6.40

$5.61

$6.28

2,476,528

—

2,476,528

(1) The shareholders approved our 1995, 1999 and 2003 stock option plans, our 2004, 2006 and 2009 long-term
equity compensation plans and our 2001 employee stock purchase plan (including as amended); the 1995 and
1999 stock option plans have terminated and no more options may be granted under those plans. Pursuant to
these stock option plans, incentive options may be granted to employees (including officers) and nonqualified
options may be granted to employees, officers, directors, agents and consultants with exercise prices at least
equal to the fair market value of the underlying common stock at the time of grant. While the Board may grant
options with varying vesting periods under these plans, most options granted to employees vest over four years,
with 25% of the options vesting after one year and the remaining options vesting monthly over the next three
years, and most option grants to non-employee directors vesting monthly over the twelve months after grant.
Under the 2004, 2006 and 2009 long-term equity compensation plans, the Board may grant restricted and
performance stock grants in addition to incentive and nonqualified stock options. As of December 31, 2011,
under the option and equity compensation plans approved by shareholders under which we may grant stock
options, an aggregate of 2,476,528 shares remained available for grant as options and, under the option and
equity compensation plans approved by shareholders under which we may grant restricted and bonus awards,
an aggregate of 1,341,792 shares were available for such awards.

21

(2) The shareholders did not approve the 2000 non-executive employee stock option plan. Under the
2000 non-executive employee stock option plan approved by the Board of Directors on March 30, 2000, an
aggregate of 1,500,000 shares pursuant to non-qualified options could be issued to employees, agents and
consultants but not to officers or directors. Otherwise, the 2000 non-executive employee stock option plan is
the
similar
2000 non-executive employee stock option plan was terminated, which ended future grants but did not affect
then outstanding options. At December 31, 2011, under the 2000 non-executive employee stock plan we had
options for 474,973 shares outstanding.

to the stock option plans described in footnote (1) above. On March 30, 2010,

On April 1, 2004, in connection with the acquisition of OctigaBay Systems Corporation, subsequently
renamed Cray Canada Inc., we assumed that company’s key employee stock option plan, including existing
options. Options could be granted to Cray Canada employees, directors and consultants. Otherwise the Cray
Canada key employee stock option plan is similar to the stock option plans described in footnote (1) above.
On March 8, 2006, the Cray Canada plan was terminated, which ended future grants but did not affect then
outstanding options. Under the Cray Canada key employee stock option plan, we had 29,090 options
outstanding as of December 31, 2011.

We had no warrants outstanding as of December 31, 2011.

Unregistered Sales of Securities

We had no unregistered sales of our securities in 2011 not previously reported.

Issuer Repurchases

We did not repurchase any of our common stock in 2011.

22

STOCK PERFORMANCE GRAPH

The graph below compares the cumulative total return to shareholders for our common stock with the
comparable return of the Nasdaq Stock Market (U.S. companies) Index and the Nasdaq Computer Manufacturer
Stocks Index.

The graph assumes that a shareholder invested $100 in our common stock on December 31, 2006, and that
all dividends were reinvested. We have never paid cash dividends on our common stock. All return information
is historical and is not necessarily indicative of future performance.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG OUR COMMON STOCK,
THE NASDAQ STOCK MARKET (U.S. COMPANIES) INDEX AND THE NASDAQ
COMPUTER MANUFACTURER STOCKS INDEX THROUGH DECEMBER 31, 2011

S
R
A
L
L
O
D

250

200

150

100

50

0

2006

2007

2008

2009

2010

2011

Cray Inc.

Nasdaq Stock Market (U.S.) 

Nasdaq Computer Manufacturer Stocks 

Cray Inc.

Nasdaq Stock Market (U.S.)

Nasdaq Computer Manufacturer Stocks

12/31/06

12/31/07

12/31/08

12/31/09

12/31/10

12/31/11

100.0

100.0

100.0

50.4

108.5

146.3

17.5

52.3

61.5

54.0

75.1

60.4

89.2

135.0

192.6

54.5

113.8

226.0

23

Item 6. Selected Consolidated Financial Data

The following table presents selected historical consolidated financial data for Cray Inc. and its subsidiaries,

which is derived from our audited consolidated financial statements:

Operating Data:

2011

Years Ended December 31,
2009
(In thousands, except for per share data)

2010

2008

2007

Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$155,561
80,485

$239,085
80,303

$199,114
84,933

$218,970
63,883

$133,455
52,698

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .

236,046

319,388

284,047

282,853

186,153

Cost of product revenue . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . .

101,000
40,680

155,027
54,404

130,444
47,719

133,715
38,062

89,475
31,247

Total cost of revenue . . . . . . . . . . . . . . . . . . . . . .

141,680

209,431

178,163

171,777

120,722

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,366

109,957

105,884

111,076

65,431

. . . . . . . . . . . . . . . .
Research and development, net
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . .
. . . . . . . .
Restructuring, severance and impairment

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) from operations . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . . . . . . .
(Provision) benefit for income taxes . . . . . . . . . . . .

49,452
26,134
15,840
1,783

93,209

1,157
(989)
(33)

135
14,194

43,618
31,085
17,767
—

62,947
26,601
16,579
—

51,775
24,988
16,742
54,450

37,883
22,137
14,956
(48)

92,470

106,127

147,955

74,928

17,487
(766)
219

16,940
(1,878)

(243)
(430)
(805)

(1,478)
874

(36,879)
588
(4,068)

(40,359)
(387)

(9,497)
1,112
(1,076)

(9,461)
(1,174)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 14,329

$ 15,062

$

(604) $ (40,746) $ (10,635)

Net income (loss) per common share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average outstanding shares:

$

$

0.41

0.40

$

$

0.44

0.43

$

$

(0.02) $

(1.25) $

(0.33)

(0.02) $

(1.25) $

(0.33)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,122

34,313

33,559

32,573

31,892

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,072

35,278

33,559

32,573

31,892

Cash Flow Data:

Cash provided by (used in):

Operating activities . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Purchases of property and equipment

Balance Sheet Data:
Cash, cash equivalents, restricted cash and short-term
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . .
Convertible notes, net of discount, current
Convertible notes, net of discount, non-current . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (3,823) $ (49,164) $ 66,684
(7,682)
(27,209)
8,454
7,581

(4,779)
1,462
8,601
4,916

500
933
9,431
3,736

$ (45,507) $ 38,650
(35,426)
1,695
13,359
2,768

46,207
(47,196)
10,232
4,430

$ 54,187
137,733
283,099
—
—
166,814

$ 61,295
125,377
260,628
—
—
145,821

$113,178
98,759
223,660
—
—
124,163

$ 80,414
114,179
313,861
25,681
—
120,205

$179,121
150,839
355,648
—
68,330
159,618

24

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” below includes “forward-looking statements” as described in the section “Forward-Looking
Statements” preceding Part I of this annual report on Form 10-K, and is subject to the safe harbor created by
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Our actual results could differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks faced by us and described in Item 1A. Risk Factors in Part I and other sections of
this report and our other filings with the Securities and Exchange Commission. The following discussion should
also be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto.

Overview and Executive Summary

We design, develop, manufacture, market and service high-performance computing, or HPC, systems,
commonly known as supercomputers, and provide storage solutions and engineering services related to
HPC systems and solutions to our customers, which include government agencies, academic institutions and
commercial entities. Our supercomputer systems provide capability and sustained performance far beyond
typical server-based computer systems and address challenging scientific, engineering, commercial and national
security computing problems. Our current strategy is to gain market share in the high-end supercomputer market
segment, extend our technology leadership, maintain our focus on execution and profitability and expand our
addressable market in areas where we can leverage our experience and technology, such as in storage & data
management, “big data” analytics, midrange HPC systems and custom engineered solutions.

Summary of 2011 Results

Revenue decreased by $83.3 million in 2011 compared to 2010 to $236.0 million. Product revenue
decreased by $83.5 million and service revenue increased by $0.2 million. The decrease in product revenue was
principally the result of our inability to complete the acceptance process of the Cray XK6 upgrade at Oak Ridge
National Laboratory due to supply issues related to a key component, which resulted in a delay in the recognition
of the associated revenue. As our revenue is driven by relatively few, large transactions, significant variability in
annual and quarterly results is expected. If the Oak Ridge National Laboratory acceptance had not been delayed,
our 2011 revenue would have been approximately $65 million higher and the decreases in revenue and product
revenue would have been less pronounced. Additionally, product revenue from sales of our external storage
systems was lower in 2011. Gross profit margin from services was higher in 2011 compared to 2010 on
approximately the same revenue. The higher service gross profit margin was partially attributable to higher
margins on maintenance services due to an increased number of systems in the field with low associated variable
costs. Also contributing to the increase in service gross profit margin was an additional $6.2 million in revenue
recorded on a Custom Engineering contract in 2011, where the associated costs were recorded in prior periods, as
revenue was recognized on the cash basis as our ability to collect payment was not reasonably assured.

We recorded income from operations of $1.2 million in 2011 compared to income from operations of
$17.5 million in 2010. Total gross profit decreased $15.6 million in 2011 from 2010 due to lower product
revenue. This was partially offset by higher gross profit on service revenue. Operating expenses increased
$0.7 million principally due to lower reimbursements for research and development from our DARPA HPCS
Phase III program, which was largely offset by lower incentive compensation expense and outside services
expense. Incentive compensation costs are principally driven by pre-bonus operating income and, to a lesser
extent, product revenue.

Net income decreased from $15.1 million in 2010 to $14.3 million in 2011. Net income in 2011 includes
$14.7 million ($.41 per diluted share) attributable to a partial reduction of the valuation allowance held against
our U.S. deferred tax assets and a complete reduction of the valuation allowance held against the deferred tax
assets of our German subsidiary.

Net cash used in operations during 2011 was $3.8 million, as compared to net cash used in operations of
$49.2 million in 2010. The decrease in net cash used in operations was principally due to higher collections from
customers, partially offset by higher inventory levels on hand at the end of 2011.

25

Market Overview and Challenges

Significant trends in the HPC industry include:

• 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 increased usage of many-core processors and growing

experimentation with accelerators, as the rate of per-core performance increases slows; and

• Data needs growing faster than computational needs.

Several of these trends have resulted in the expansion and acceptance of lower-bandwidth cluster systems
using processors manufactured by Intel, AMD and others combined with commercially available commodity
networking and other components, particularly in the middle and lower segments of the HPC market. These
systems may offer higher theoretical peak performance for equivalent cost, and “price/peak performance” is
often the dominant factor in HPC procurements outside of the high-end supercomputer market segment. Vendors
of such systems often put pricing pressure on us in competitive procurements.

In the markets for the largest systems, those costing significantly in excess of $3 million, the use of
commodity components can result in increasing data transfer bottlenecks as these components do not balance
processor power with network communication capability. With the arrival of increasing processor core counts
due to new many-core processors, these unbalanced systems will typically have even lower productivity,
especially in larger systems running more complex applications. We and other vendors have also begun to
augment standard microprocessors with other processor types, such as field programmable gate arrays and
graphics processing units, in order to increase computational power, further complicating programming models.
In addition, with increasing scale, bandwidth and processor core counts,
large computer systems use
progressively higher amounts of power to operate and require special cooling capabilities.

To position ourselves to meet the market’s demanding needs, we concentrate our research and development
efforts on technologies that enable our supercomputers to perform at scale — that is, to continue to increase
actual performance as systems grow ever larger in size – and in areas where we can leverage our core expertize
in other markets. We also have demonstrated expertise in several processor technologies. We expect to be in a
comparatively advantageous position as larger many-core processors become available and as multiple
processing technologies become integrated into single systems in heterogeneous environments. In addition, we
intend to expand our addressable market by leveraging our technologies and customer base, the Cray brand and
industry trends by introducing complementary products and services to new and existing customers, as
demonstrated by our emphasis on strategic initiatives, such as storage & data management, “big data” analytics,
midrange HPC systems and custom engineered solutions.

26

Key Performance Indicators

Our management monitors and analyzes several key performance indicators in order to manage our business

and evaluate our financial and operating performance, including:

Revenue. Product revenue generally constitutes the major portion of our revenue in any reporting period
and, for the reasons discussed elsewhere in this annual report on Form 10-K, is subject to significant variability
from period to period. In the short term, we closely review the status of product shipments, installations and
acceptances in order to forecast revenue and cash receipts; longer-term, we monitor the status of the pipeline of
product sales opportunities and product development cycles. Product revenue growth over several quarters is an
indicator of whether we are achieving our objective of increased market share in the supercomputing market. The
introduction of the Cray XE and Cray XK families and our longer-term product roadmap are efforts to increase
product revenue. We are also increasing our business and product development efforts on certain new initiatives
such as storage & data management, “big data” analytics, midrange HPC systems and custom engineered
solutions. Maintenance service revenue is more constant in the short term and assists, in part, to offset the impact
that the variability in product revenue has on total revenue.

Gross profit margin. Our product gross profit margin was 35% in 2010 and 2011. Service gross profit
margin increased from 32% in 2010 to 49% in 2011. The increase in service gross profit margin is due to higher
margins from our maintenance services due to an increased number of systems in the field with low associated
variable costs and an additional $6.2 million in revenue recorded on a Custom Engineering contract in 2011
where revenue was recognized on the cash basis, where the associated costs were recorded in prior periods, as
our ability to collect payment was not reasonably assured. The increase in our service gross margin drove the
increase in our total gross profit margin from 34% in 2010 to 40% in 2011.

Operating expenses. Our operating expenses are driven largely by headcount, the level of recognized
co-funding for research and development, contracted third-party research and development services, and
incentive compensation. As part of our ongoing efforts to control operating expenses, we monitor headcount
levels in specific geographic and operational areas.

Liquidity and cash flows. Due to the variability in product revenue, new contracts, and payment terms, our
cash position also varies significantly from quarter-to-quarter and within a quarter. We monitor our expected
cash levels, particularly in light of increased inventory purchases for large system installations and the risk of
delays in product shipments and acceptances and, longer-term, in product development. Cash receipts often lag
customer acceptances and, because we had a number of large customer acceptances in the fourth quarter of 2011,
we anticipate significant cash receipts in the first quarter of 2012.

27

Results of Operations

Revenue and Gross Profit

Our product and service revenue for the indicated years ended December 31 were (in thousands, except for

percentages):

Year Ended December 31,
2010

2009

2011

Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cost of product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .

$155,561
101,000

$239,085
155,027

$199,114
130,444

Product gross profit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 54,561

$ 84,058

$ 68,670

Product gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35%
$ 80,485
40,680

35%
$ 80,303
54,404

34%
$ 84,933
47,719

Service gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 39,805

$ 25,899

$ 37,214

Service gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49%
$236,046
141,680

32%
$319,388
209,431

44%
$284,047
178,163

Total gross profit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 94,366

$109,957

$105,884

Total gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40%

34%

37%

Product Revenue

Product revenue in 2011 decreased $83.5 million, or 35%, over 2010 principally due to our inability to
complete the acceptance process of the Cray XK6 upgrade at Oak Ridge National Laboratory in 2011, which
resulted in a delay in the recognition of the associated revenue. Additionally, revenue from sales of our external
storage systems was lower in 2011 as fewer customers implemented large storage systems during the year.

Product revenue in 2010 increased $40.0 million, or 20%, over 2009 due primarily to the release of the Cray

XE6 system and higher external storage sales as part of our data management practice.

Service Revenue

Service revenue for 2011 increased $0.2 million from 2010. Lower revenues on certain Custom Engineering
projects were offset by a $6.3 million increase in revenue from our Maintenance and Support group due to an
increased number of systems in the field. Custom Engineering service revenue in 2011 included an additional
$6.2 million in revenue recorded on a contract in 2011 where revenue was recognized on the cash basis as our
ability to collect payment was not reasonably assured.

Service revenue for 2010 decreased $4.6 million, or 5%, from 2009 primarily due to our inability to record
revenue on a Custom Engineering contract in 2010 for services that were performed but where not all revenue
recognition criteria had been met.

Cost of Product Revenue and Product Gross Profit

Cost of product revenue for 2011 decreased by $54.0 million compared to 2010 driven by lower product
revenue. Product gross profit percentage in 2011 was unchanged from the gross profit percentage in 2010 of
35%. Lower component costs, principally memory, contributed to maintaining product gross margin levels in
2011. This was partially offset by penalties incurred on 2011 product acceptances resulting from delays in the
availability of a key component.

Product gross profit percentage improved one percentage point

in 2010 compared to 2009. The
improvement in product gross profit percentage was due to lower charges for excess and obsolete inventory of
$0.9 million in 2010 compared to $5.4 million in 2009. Cost of product revenue increased $24.6 million due to
higher product revenue partially offset by lower charges for excess and obsolete inventory.

28

Cost of Service Revenue and Service Gross Profit

Cost of service revenue decreased $13.7 million and service gross profit margin increased by 17 percentage
points to 49% in 2011 compared to 2010. The increase in service gross profit margin was due to increases in
revenue from our Maintenance and Support group from the large systems that were accepted in the fourth quarter
of 2010 with a minimal increase in costs and an additional $6.2 million in revenue in 2011 recorded on a Custom
Engineering contract where revenue was being recorded on a cash basis, where the associated costs were
recorded in prior periods, as the Company’s ability to collect payment was not reasonably assured. The
Company’s workforce reductions in March 2011 and other cost reduction actions also contributed to an increase
in service gross profit for 2011.

Service gross profit percentage declined 12 percentage points and cost of service revenue increased
$6.7 million in 2010 as compared to 2009. Custom Engineering service revenue was negatively impacted by the
transition of certain projects from development (service revenue) to production (product revenue). In addition,
revenue was not recognized on a contract in 2010 for services that were performed but where not all revenue
recognition criteria had been met, while related project costs were expensed in 2010.

Operating Expenses

Research and Development

Research and development expenses for the indicated years ended December 31 were as follows (in

thousands, except for percentages):

Gross research and development expenses . . . . . . . . . . . . . . . . . .
Less: Amounts included in cost of revenue . . . . . . . . . . . . . . . . . .
Less: Reimbursed research and development (excludes amounts

2011

2010

2009

$ 76,993
(410)

$ 82,525
(79)

$ 91,874
(1,789)

in revenue) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(27,131)

(38,828)

(27,138)

Net research and development expenses . . . . . . . . . . . . . . . . . . . .

$ 49,452

$ 43,618

$ 62,947

Percentage of total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21%

14%

22%

Gross research and development expenses in the table above reflect all research and development
expenditures. Research and development expenses include personnel expenses, depreciation, allocations for
certain overhead expenses, software, prototype materials and outside contracted expenses.

In February 2010 and again in October 2011, we amended the Phase III agreement with DARPA. As with
the previous contract, we expect to receive reimbursement after the achievement of a series of predefined
milestones culminating in the delivery of a prototype system. Consistent with the changes, certain deliverables
have been eliminated from the contract, reducing the overall scope and cost of the project. Pursuant to the
the full co-funding amount was revised to $180.0 million from $190 million. As of
amended contract,
December 31, 2011, we had earned and received $158.0 million of reimbursement under the DARPA Phase III
agreement, leaving $22 million to be earned and received. We expect to earn and receive the remaining
$22 million in 2012.

In 2011, gross research and development expenses decreased $5.5 million from 2010 levels primarily due to
decreased incentive based compensation expense and lower third-party service expenses, partially offset by higher
salary expense resulting from higher headcount. Reimbursed research and development decreased $11.7 million in
2011 compared to 2010 due to $12.5 million less in reimbursements recognized in connection with our DARPA
HPCS Phase III project as we passed two milestones in 2011 compared to three milestones in 2010.

In 2010, gross research and development expenses decreased $9.3 million from 2009 primarily due to lower
spending on the DARPA HPCS Phase III project, as a result of lower third-party costs, primarily related to a
modification in the DARPA contract, which was partially offset by higher incentive-based compensation
expenses. Reimbursed research and development increased by $11.7 million in 2010 compared to 2009 due to
higher DARPA HPCS Phase III reimbursements as we passed three milestones in 2010 compared to passing two
milestones in 2009.

29

Other Operating Expenses

Our sales and marketing and general and administrative expenses for

the indicated years ended

December 31 were (in thousands, except for percentages):

Year Ended December 31,
2010

2009

2011

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$26,134
11%
$15,840
7%
$1,783
1%

$31,085
10%
$17,767
6%
—
—

$26,601
9%
$16,579
6%
—
—

Sales and Marketing. The $5.0 million decrease in sales and marketing expenses in 2011 compared to

2010 was due principally to lower incentive-based compensation and lower commissions.

The $4.5 million increase in sales and marketing expenses in 2010 compared to 2009 was due principally to
$1.0 million in higher commissions on higher revenues, increased headcount in strategic initiatives and higher
other incentive-based compensation.

General and Administrative. The $1.9 million decrease in general and administrative expenses in 2011
compared to 2010 was primarily due to lower incentive-based compensation and lower salary expense due to
lower headcount.

The $1.2 million increase in general and administrative expenses in 2010 compared to 2009 was primarily

due to higher incentive-based compensation.

Restructuring. Restructuring expenses in 2011 were primarily due to the elimination of positions in our

workforce rebalancing announced in March 2011.

Other Expense, Net

We recorded $1.0 million and $0.8 million of net other expense for the years ended December 31, 2011 and
2010, respectively, principally due to foreign exchange transaction losses. For the year ended December 31,
2009, we recognized $0.4 million of net other expense due principally to foreign exchange transaction gains
offset by a $0.9 million loss on the repurchase of $27.6 million principal amount of our 3.0% Convertible Senior
Subordinated Notes due in 2024 (“Notes”).

Interest Income (Expense), Net

Our interest income and interest expense for the years ended December 31 were (in thousands):

Year Ended December 31,
2009
2010

2011

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$229
(262)

$485
(266)

$477
(1,282)

Net interest income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (33)

$ 219

$ (805)

Interest income in 2011 decreased as compared to 2010 due to lower average invested balances and lower
short-term interest rates. Interest income in 2010 was consistent with interest income in 2009. The higher interest
expense in 2009 compared to 2011 and 2010 resulted from outstanding convertible debt
that was fully
repurchased in late 2009.

Taxes

We recorded an income tax benefit of $14.2 million in 2011, income tax expense of $1.9 million in 2010,

and an income tax benefit of $0.9 million in 2009.

30

An income tax benefit, in the amount of $14.7 million ($.41 per diluted share), was recorded in 2011 as a
result of the partial reduction of the valuation allowance held against the Company’s U.S. deferred tax assets, as
well as to a much lesser extent the complete reduction of the valuation allowance held against the deferred tax
assets of the Company’s German subsidiary. The foregoing tax benefit was partially offset by income taxes due
in the U.S. and certain foreign jurisdictions. Income tax expense recorded in 2010 related primarily to higher
pre-tax earnings. The income tax benefit recorded in 2009 related primarily to the partial reduction of the
valuation allowance held against the deferred tax assets of our Japanese subsidiary and a $0.7 million benefit
recorded as a result of tax legislation that enabled a corporation to recover certain previously generated
U.S. income tax credits, offset somewhat by income taxes due in the U.S. and various foreign jurisdictions.

The partial reduction of the valuation allowance held against the Company’s U.S. deferred tax assets and the
complete reduction of the valuation allowance held against the deferred tax assets of our German subsidiary was
based upon an evaluation of all available positive and negative evidence. We consider our actual historical results
over several years to have stronger weight than other more subjective indicators, including forecasts, when
considering whether to establish or reduce a valuation allowance on deferred tax assets. As of December 31,
2011 we have generated cumulative pre-tax income in recent years. In addition to our cumulative income
position, our assessment of our ability to utilize our deferred tax assets included an assessment of all known
business risks and industry trends, as well as forecasted domestic and international earnings over a number of
years. Our ability to forecast results significantly into the future is severely limited due to the rapid rate of
technological change in the industry in which we operate. Included in our forecast was the impact of two
unusually large contracts that were finalized during the fourth quarter of 2011; namely a $188.0 million contract
with the University of Illinois National Center for Supercomputing Applications and a $97.0 million contract
with the Department of Energy’s Oak Ridge National Laboratory.

Our conclusion about the realizability of our deferred tax assets and therefore the appropriateness of the
valuation allowance will be reviewed quarterly and could change in future periods depending on our future
assessment of all available evidence in support of the likelihood of realization of our deferred tax assets.

As of December 31, 2011, we had federal income tax net operating loss carryforwards of approximately

$215.9 million that will expire between 2019 through 2031, if not utilized.

Liquidity and Capital Resources

We generate cash from operations predominantly from the sale of high performance computer systems and
related services. We typically have a small number of significant contracts that make up the majority of total
revenue. The material changes in certain of our balance sheet accounts were due to the timing of product deliveries,
customer acceptances, contractually determined billings and cash collections. Working capital requirements,
including inventory purchases and normal capital expenditures, are generally funded with cash from operations.

Inventory increased from $49.2 million at December 31, 2010 to $97.9 million at December 31, 2011 as
certain systems and system upgrades had been delivered to customer sites but had not completed the acceptance
process as of December 31, 2011. Partially offsetting these impacts on our liquidity position has been a decrease
in accounts and other receivables from $106.3 million at December 31, 2010 to $72.4 million at December 31,
2011 as we received a higher number of customer acceptances in the fourth quarter of 2010 than 2011. The final
payments for these systems are not due until early in the following year.

In early 2012 we anticipate that our cash position will improve, at least in part, as we collect payment for the

receivables related to significant system acceptances in late fourth quarter 2011 and in the first part of 2012.

Cash and cash equivalents and restricted cash totaled $54.2 million at December 31, 2011 compared to
$61.3 million at December 31, 2010. As of December 31, 2011, we had working capital of $137.7 million
compared to $125.4 million as of December 31, 2010.

Cash flow information for the years ended December 31 included the following (in thousands):
2010

2011

2009

Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(3,823) $(49,164) $ 66,684
(7,682)
(4,779)
(27,209)
1,462

500
933

31

Operating Activities. Net cash used in operating activities was $3.8 million and $49.2 million in 2011 and
2010, respectively. Net cash provided by operating activities was $66.7 million in 2009. For the year ended
December 31, 2011, cash used in operating activities was principally the result of a significant increase in
inventory partially offset by a decrease in accounts receivable. For the year ended December 31, 2010, cash used
by operating activities was principally the result of a large increase in accounts receivable due to final billings
related to fourth quarter acceptances due in early 2011. For the year ended December 31, 2009, cash provided by
operating activities was principally the result of significant decreases in accounts receivable and inventory.

Investing Activities. Net cash used in investing activities was $4.8 million in 2011. Net cash provided by
investing activities was $0.5 million in 2010. Net cash used in investing activities was $7.7 million in 2009. For
the year ended December 31, 2011, net cash used in investing activities was principally the result of purchases of
property and equipment. For the year ended December 31, 2010, net cash provided by investing activities was a
result of the sale of $3.0 million in short-term investments and a $1.2 million decrease in restricted cash, offset
by property and equipment purchases of $3.7 million. For the year ended December 31, 2009, net cash used in
investing activities was principally the result of purchases of property and equipment.

Financing Activities. Net cash provided by financing activities was $1.5 million in 2011. Net cash
provided by financing activities was $0.9 million in 2010. Net cash used in financing activities was $27.2 million
in 2009. For the years ended December 31, 2011 and 2010, net cash provided by financing activities was due
primarily to proceeds from stock option exercises and stock purchases from our employee stock purchase plan.
For the year ended December 31, 2009, net cash used in financing activities was due primarily to $27.3 million
of cash paid to repurchase our Notes. As of December 31, 2009, there was no outstanding balance on our Notes.

Over the next twelve months, we expect our significant cash requirements will relate to operational
expenses, consisting primarily of personnel costs, costs of inventory associated with certain large-scale product
deliveries, spare parts, outside engineering expenses, and the acquisition of property and equipment. In addition,
we lease certain equipment and facilities used in our operations under operating leases in the normal course of
business. The following table summarizes our contractual cash obligations as of December 31, 2011 (in
thousands):

Contractual Obligations

Amounts Committed by Year

Total

1 Year

Years 2-3 Years 4-5 Thereafter

Development agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,856
26,509

$4,533
4,375

$ 323
8,049

$ — $ —
6,651
7,434

Total contractual cash obligations . . . . . . . . . . . . . . . . . . . . .

$31,365

$8,908

$8,372

$7,434

$6,651

We have a line of credit with Wells Fargo Bank, National Association of $3.5 million which has a maturity
date of June 1, 2012. In September 2010, we entered into a secured line of credit with Silicon Valley Bank in the
amount of $25.0 million. The first $15.0 million is available at any time and the additional $10.0 million is
available if certain minimum financial ratios are exceeded. Our line of credit with Silicon Valley Bank has a
maturity date of September 13, 2012. We made no draws in 2011 nor are there any outstanding borrowings on
these lines of credit as of December 31, 2011.

In our normal course of operations, we have development arrangements under which we engage outside
engineering resources to work on our research and development projects. For the year ended December 31, 2011,
we incurred $4.7 million for such arrangements.

At any particular time, our cash position is affected by the timing of cash receipts for product sales,
maintenance contracts, government co-funding for research and development activities and our payments for
inventory, resulting in significant fluctuations in our cash balance from quarter-to-quarter and within a quarter.
Our principal sources of liquidity are our cash and cash equivalents, short-term investments and cash from
operations. We expect our cash resources to be adequate for at least the next twelve months.

The adequacy of our cash resources is dependent on the amount and timing of government funding as well
as our ability to sell our products with adequate gross profit. Beyond the next twelve months, the adequacy of our
cash resources will largely depend on our success in achieving profitable operations and positive operating cash
flows on a sustained basis.

32

Critical Accounting Policies and Estimates

This discussion as well as disclosures included elsewhere in this annual report on Form 10-K are based upon
our consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingencies. In preparing our financial statements in accordance with
GAAP, there are certain accounting policies that are particularly important. These include revenue recognition,
inventory valuation, income taxes, research and development expenses and share-based compensation. We
believe these accounting policies and others set forth in Note 2 — Summary of Significant Accounting Policies of
the Notes to Consolidated Financial Statements in Item 15. Exhibits and Financial Statement Schedules in
Part IV of this annual report should be reviewed as they are integral to understanding our results of operations
and financial condition. In some cases, these policies represent required accounting. In other cases, they may
represent a choice between acceptable accounting methods or may require substantial judgment or estimation.

Additionally, we consider certain judgments and estimates to be significant, including those relating to the
estimated selling price determination used in revenue recognition, percentage of completion accounting,
estimates of proportional performance on co-funded engineering contracts and prepaid engineering services,
determination of inventory at the lower of cost or market, useful lives for depreciation and amortization,
determination of future cash flows associated with impairment testing of long-lived assets, determination of the
fair value of stock options and other assessments of fair value, calculation of deferred income tax assets,
including our ability to utilize such assets, potential income tax assessments and other contingencies. We base
our estimates on historical experience, current conditions and on other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions.

Our management has discussed the selection of significant accounting policies and the effect of judgments

and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition

We recognize revenue when it is realized or realizable and earned. We consider revenue realized or
realizable and earned when we have persuasive evidence of an arrangement, delivery has occurred, the sales
price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until the products
have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where
applicable, a customer acceptance has been obtained. The sales price is not considered to be fixed or
determinable until all material contingencies related to the sales have been resolved. We record revenue in the
Consolidated Statements of Operations net of any sales, use, value added or certain excise taxes imposed by
governmental authorities on specific sales transactions. In addition to the aforementioned general policy, the
following are our statements of policy with regard to multiple-element arrangements and specific revenue
recognition policies for each major category of revenue.

Multiple-Element Arrangements. We commonly enter into revenue arrangements that include multiple
deliverables of our product and service offerings due to the needs of our customers. Product may be delivered in
phases over time periods which can be as long as five years. Maintenance services generally begin upon
acceptance of the first equipment delivery and future deliveries of equipment generally have an associated
maintenance period. We consider the maintenance period to commence upon acceptance of the product or
installation in situations where a formal acceptance is not required, which may include a warranty period and
accordingly allocate a portion of the arrangement consideration as a separate deliverable which is recognized as
service revenue over the entire service period. Other services such as training and engineering services can be
delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement is separated into
more than one unit of accounting if the following criteria are met:

• 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 our control.

33

If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result
in revenue being recognized ratably over the contract term or being deferred until the earlier of when such
criteria are met or when the last undelivered element is delivered. If these criteria are met for each element, the
arrangement consideration is allocated to the separate units of accounting based on each unit’s relative estimated
selling price.

We follow a selling price hierarchy in determining the best estimate of the selling price of each deliverable.
Certain products and services are sold separately in standalone arrangements for which we are sometimes able to
determine vendor specific objective evidence, or VSOE. We determine VSOE based on normal pricing and
discounting practices for the product or service when sold separately.

When we are not able to establish VSOE for all deliverables in an arrangement with multiple elements, we
attempt to establish the selling price of each remaining element based on third-party evidence, or TPE. Our
inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system
size and contract terms which can be due to infrequently selling each element separately, not pricing products
within a narrow range, or only having a limited sales history, such as in the case of certain advanced and
emerging technologies. TPE is determined based on our prices or competitor prices for similar deliverables when
sold separately. However, we are often unable to determine TPE, as our offerings contain a significant level of
customization and differentiation from those of competitors and we are often unable to reliably determine what
similar competitor products’ selling prices are on a standalone basis.

When we are unable to establish selling price using VSOE or TPE, we use estimated selling price, or ESP,
in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would
transact a sale if the product or service were sold on a standalone basis. In determining ESP, we use either the list
price of the deliverable less a discount or the cost to provide the product or service plus a margin. When using list
price less a discount, we use discounts from list price for previous transactions. This approach incorporates
several factors, including the size of the transaction and any changes to list prices. The data is collected from
prior sales, and although the data may not have the sample size or consistency to establish VSOE, it is
sufficiently objective to estimate the selling price. When using cost plus a margin, we consider the total cost of
the product or service, including customer-specific and geographic factors. We also consider the historical
margins of the product or service on previous contracts and several factors including any changes to pricing
methodologies, competitiveness of products and services and cost drivers that would cause future margins to
differ from historical margins.

Products. We most often recognize revenue from sales of products upon customer acceptance of the
system. Where formal acceptance is not required, we recognize revenue upon delivery or installation. When the
product is part of a multiple element arrangement, we allocate a portion of the arrangement consideration to
product revenue based on estimates of selling price.

Services. Maintenance services are provided under separate maintenance contracts with customers. These
contracts generally provide for maintenance services for one year, although some are for multi-year periods,
often with prepayments for the term of the contract. We consider the maintenance period to commence upon
acceptance of the product or installation in situations where a formal acceptance is not required, which may
include a warranty period. When service is part of a multiple element arrangement, we allocate a portion of the
arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance
contracts that are billed in advance of revenue recognition are recorded as deferred revenue. Maintenance
revenue is recognized ratably over the term of the maintenance contract.

Revenue from engineering services is recognized as services are performed.

34

build

Project

contracts

from design

Revenue. Revenue

the
and
percentage-of-completion, or POC method. Under the POC method, revenue is recognized based on the costs
incurred to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that
change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the
estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such
revisions are recorded in income in the period in which the circumstances that gave rise to the revision become
known by management. We perform ongoing profitability analyses of our contracts accounted for under the POC
method in order to determine whether the latest estimates of revenue, costs and extent of progress require
updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for
the remainder of the contract is recorded immediately.

recognized

under

is

We record revenue from certain research and development contracts which include milestones using the
milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive
if management believes there is substantive uncertainty that it will be achieved and the milestone consideration
meets all of the following criteria:

• It is commensurate with either of the following:

• Our 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 our 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.

The individual milestones are determined to be substantive or nonsubstantive in their entirety and milestone

consideration is not bifurcated.

Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work

performed.

Nonmonetary Transactions. We value and record nonmonetary transactions at the fair value of the asset
surrendered unless the fair value of the asset received is more clearly evident, in which case the fair value of the
asset received is used.

Inventory Valuation

We record our inventory at the lower of cost or market. We regularly evaluate the technological usefulness
and anticipated future demand for our inventory components. Due to rapid changes in technology and the
increasing demands of our customers, we are continually developing new products. Additionally, during periods
of product or inventory component upgrades or transitions, we may acquire significant quantities of inventory to
support estimated current and future production and service requirements. As a result, it is possible that older
inventory items we have purchased may become obsolete, be sold below cost or be deemed in excess of
quantities required for production or service requirements. When we determine it is not likely we will recover the
cost of inventory items through future sales, we write-down the related inventory to our estimate of its market
value.

Because the products we sell have high average sales prices and because a high number of our prospective
customers receive funding from U.S. or foreign governments, it is difficult to estimate future sales of our
products and the timing of such sales. It also is difficult to determine whether the cost of our inventories will
ultimately be recovered through future sales. While we believe our inventory is stated at the lower of cost or
market and that our estimates and assumptions to determine any adjustments to the cost of our inventories are
reasonable, our estimates may prove to be inaccurate. We have sold inventory previously reduced in part or in
whole to zero, and we may have future sales of previously written-down inventory. We also may have additional
expense to write-down inventory to its estimated market value. Adjustments to these estimates in the future may
materially impact our operating results.

35

Accounting for Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted
tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or
settled. A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not
that all or a portion of the deferred tax assets will not be realized through future operations. This assessment is
based upon consideration of available positive and negative evidence, which includes, among other things, our
recent results of operations and expected future profitability. We consider our actual historical results over
including forecasts, when
several years to have stronger weight
considering whether to establish or reduce a valuation allowance on deferred tax assets. Cray has significant
difficulty projecting future results due to the nature of the business and the industry in which the Company
operates.

than other more subjective indicators,

We recognize the income tax benefit from a tax position only if it is more likely than not that the tax
position will be sustained on examination by the applicable taxing authorities, based on the technical merits of
our position. The tax benefit recognized in the financial statements from such a position is measured based on the
largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

Estimated interest and penalties are recorded as a component of interest expense and other expense,

respectively.

As of December 31, 2011, we had approximately $128.0 million of net deferred tax assets, against which we
provided a $110.5 million valuation allowance, resulting in a net deferred tax asset of $17.5 million. In 2011, the
Company reduced the valuation allowances against deferred tax assets established in prior years. The aggregate
reduction of $14.7 million ($.41 per diluted share) in deferred tax valuation allowances was attributable to a
$13.9 million reduction related to a portion of the Company’s U.S. deferred tax assets and $0.8 million reduction
related to all of the deferred tax assets of our German subsidiary. The reductions in previously established
allowances were based upon an evaluation of all available positive and negative evidence including an
assessment of known business risks and industry trends, as well as forecasted domestic and international
earnings. We continue to provide a partial valuation allowance against our U.S. deferred tax assets and a full
valuation allowance against deferred tax assets arising in a limited number of foreign jurisdictions as the
realization of such assets is not considered to be more likely than not at this time. In a future period the
Company’s assessment of the realizability of our deferred tax assets and therefore the appropriateness of the
valuation allowance could change based on an assessment of all available evidence, both positive and negative in
the realizability of our deferred tax assets and therefore the
that future period. If our conclusion about
appropriateness of the valuation allowance changes in a future period we could record a substantial tax provision
or benefit in our Consolidated Statement of Operations when that occurs.

Research and Development Expenses

Research and development expenses include costs incurred in the development and production of our
hardware and software, costs incurred to enhance and support existing product features, costs incurred to support
and improve our development processes, and costs related to future product development. Research and
development costs are expensed as incurred, and may be offset by co-funding from third parties. We may also
enter into arrangements whereby we make advance, non-refundable payments to a vendor to perform certain
research and development services. These payments are deferred and recognized over the vendor’s estimated
performance period.

Amounts to be received under co-funding arrangements with the U.S. government or other customers are
based on either contractual milestones or costs incurred. These co-funding milestone payments are recognized in
operations as performance is estimated to be completed and are measured as milestone achievements occur or as
costs are incurred. These estimates are reviewed on a periodic basis and are subject to change, including in the
near term. If an estimate is changed, net research and development expense could be impacted significantly.

36

We do not record a receivable from the U.S. government prior to completing the requirements necessary to
bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget
restrictions and milestones may be subject to completion risk, and as a result, there may be periods in which
research and development costs are expensed as incurred for which no reimbursement is recorded, as milestones
have not been completed or the U.S. government has not funded an agreement. Accordingly, there can be
substantial variability in the amount of net research and development expenses from quarter to quarter and year
to year.

We classify amounts to be received from funded research and development projects as either revenue or a
reduction to research and development expense based on the specific facts and circumstances of the contractual
arrangement, considering total costs expected to be incurred compared to total expected funding and the nature of
the research and development contractual arrangement. In the event that a particular arrangement is determined
to represent revenue, the corresponding research and development costs are classified as cost of revenue.

Share-based Compensation

We measure compensation cost for share-based payment awards at fair value and recognize it as
compensation expense over the service period for awards expected to vest. We recognize share-based
compensation expense for all share-based payment awards, net of an estimated forfeiture rate. We recognize
compensation cost for only those shares expected to vest on a straight-line basis over the requisite service period
of the award.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards
requires subjective assumptions, including the expected life of the share-based payment awards and stock price
volatility. We utilize the Black-Scholes options pricing model to value the stock options granted under our
options plans. In this model, we utilize assumptions related to stock price volatility, stock option term and
forfeiture rates that are based upon both historical factors as well as management’s judgment.

The fair value of restricted stock and restricted stock units is determined based on the number of shares or

units granted and the quoted price of our common stock at the date of grant.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”)
No. 2011-05, Comprehensive Income, or ASU 2011-05. The guidance in ASU 2011-05 revises the manner in
which entities present comprehensive income in their financial statements. An entity is required to report the
components of comprehensive income in either one or two consecutive financial statements:

• A single, continuous statement must present the components of net income and total net income, the
components of other comprehensive income and total other comprehensive income, and a total for
comprehensive income.

• In a two-statement approach, an entity must present the components of net income and total net income in
the first statement. That statement must be immediately followed by a financial statement that presents
the components of other comprehensive income, a total for other comprehensive income, and a total for
comprehensive income.

ASU 2011-05 does not change the items that must be reported in other comprehensive income. The
amendments in ASU 2011-05 are effective for fiscal years beginning after December 15, 2011. The Company
does not believe the adoption of ASU 2011-05 will have a material impact on the presentation of information in
its financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates and equity price fluctuations.

37

Interest Rate Risk: We invest our available cash in money market mutual funds whose underlying
investments include investment-grade debt instruments of corporate issuers and in debt instruments of the
U.S. government and its agencies. We do not have any derivative instruments or auction rate securities in our
investment portfolio. We protect and preserve invested funds by limiting default, market and reinvestment risk.
Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk.
Fixed-rate securities may have their fair market value adversely affected due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors,
our future investment income may fall short of expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.
Although we have the above noted risks, a 0.5% change in interest rates would not be material.

Foreign Currency Risk: We sell our products primarily in North America, Asia and Europe. As a result,
our financial results could be affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Our products are generally priced based on U.S. dollars, and a
strengthening of the dollar could make our products less competitive in foreign markets. While we often sell
products with payments in U.S. dollars, our product sales contracts may call for payment in foreign currencies
and to the extent we do so, or engage with our foreign subsidiaries in transactions deemed to be short-term in
nature, we are subject to foreign currency exchange risks. As of December 31, 2011, we had entered into forward
exchange contracts that hedge approximately $55.8 million of anticipated cash receipts on specific foreign
currency denominated sales contracts. These forward contracts hedge the risk of foreign exchange rate changes
between the time that the related contracts were signed and when the cash receipts are expected to be received.
Our foreign maintenance contracts are typically paid in local currencies and provide a partial natural hedge
against foreign exchange exposure. To the extent that we wish to repatriate any of these funds to the United
States, however, we are subject to foreign exchange risks. As of December 31, 2011, a 10% change in foreign
exchange rates could impact our annual earnings and cash flows by approximately $0.5 million. We do not hold
or purchase any currency forward exchange contracts for trading purposes.

38

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS*

Consolidated Balance Sheets at December 31, 2011 and December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 . . . . . . . . .
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended

F-1
F-2

F-3
December 31, 2011, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-28

* The Financial Statements are located following page F-1.

The selected quarterly financial data required by this item is set forth in Note 18 of the Notes to

Consolidated Financial Statements.

39

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be
disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to
management, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the
participation and under the supervision of our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer/Corporate Controller, evaluated the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this report, and based on that evaluation, our Chief Executive Officer and
Chief Financial Officer determined that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the fourth quarter of
2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined by Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of
assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States of America,
and that our receipts and expenditures are being made only in accordance with authorizations of our management
and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Our management,

including our Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in
“Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO. Based on this evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31, 2011.

Peterson Sullivan LLP, an independent registered public accounting firm, has expressed an unqualified

opinion on the effectiveness of our internal control over financial reporting as of December 31, 2011.

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Cray Inc.

We have audited Cray Inc. and Subsidiaries’ (“the Company”) internal control over financial reporting as of
December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States of America,
and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of December 31, 2011 and 2010, and the
related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash
flows for each of the three years in the period ended December 31, 2011, and our report dated February 27, 2012,
expressed an unqualified opinion on those consolidated financial statements.

/s/ PETERSON SULLIVAN LLP

Seattle, Washington
February 27, 2012

41

Item 9B. Other Information

None.

Item 10. Directors, Executive Officers and Corporate Governance

PART III

The information required by this Item is contained in part in the sections captioned “Our Common Stock
Ownership,” “The Board of Directors,” “Executive Officers” and “Proposal 1: To Elect Eight Directors for
One-Year Terms” in the proxy statement for our annual meeting of shareholders scheduled to be held on or
around June 7, 2012, and such information is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this Item is contained in the section captioned “The Board of Directors —
Compensation of Directors” and “Compensation of the Executive Officers” of the proxy statement for our annual
meeting of shareholders scheduled to be held on or around June 7, 2012, and such information is incorporated
herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder

Matters

The information required by this Item is contained in part in the section captioned “Our Common Stock
Ownership” in the proxy statement for our annual meeting of shareholders scheduled to be held on or around
June 7, 2012, and such information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is contained in the sections captioned “The Board of Directors —
Independence” and “Transactions With Related Persons” of the proxy statement for our annual meeting of
shareholders scheduled to be held on or around June 7, 2012, and such information is incorporated herein by
reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item is contained in the section captioned “Proposal 2: To Ratify the
Appointment of Peterson Sullivan LLP as Our Independent Auditors” of the proxy statement for our annual
meeting of shareholders scheduled to be held on or around June 7, 2012, and such information is incorporated
herein by reference.

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements

PART IV

Consolidated Balance Sheets at December 31, 2011 and December 31, 2010

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended

December 31, 2011, 2010 and 2009

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

42

(a)(2) Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts — The financial statement schedule for the years ended
December 31, 2011, 2010, and 2009 should be read in conjunction with the consolidated financial statements of
Cray Inc. filed as part of this annual report on Form 10-K.

Schedules other than that listed above have been omitted since they are either not required, not applicable,

or because the information required is included in the consolidated financial statements or the notes thereto.

(a)(3) Exhibits

The Exhibits listed in the Exhibit Index, which appears immediately following the signature page and is
incorporated herein by reference, are filed as part of this annual report on Form 10-K. Each management contract
or compensatory plan or agreement listed on the Exhibit Index is identified by an asterisk.

43

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on February 27, 2012.

SIGNATURES

CRAY INC.

By

/s/ PETER J. UNGARO
Peter J. Ungaro
Chief Executive Officer and President

Each of the undersigned hereby constitutes and appoints Peter J. Ungaro, Brian C. Henry and Michael C. Piraino
and each of them, the undersigned’s true and lawful attorney-in-fact and agent, with full power of substitution, for the
undersigned and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this
Annual Report on Form 10-K and any other instruments or documents that said attorneys-in-fact and agents may deem
necessary or advisable, to enable Cray Inc. to comply with the Securities Exchange Act of 1934 and any requirements
of the Securities and Exchange Commission in respect thereof, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them full power and
authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each such
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by

the following persons on behalf of the Company and in the capacities indicated on February 27, 2012.

Signature

Title

By /s/ PETER J. UNGARO

Peter J. Ungaro

By /s/ BRIAN C. HENRY
Brian C. Henry

Chief Executive Officer, President and Director
(Principal Executive Officer)

Chief Financial Officer and Executive Vice President
(Principal Financial Officer)

By /s/ CHARLES D. FAIRCHILD

Charles D. Fairchild

Chief Accounting Officer, Controller and Vice
President (Principal Accounting Officer)

By /s/ WILLIAM C. BLAKE

William C. Blake

By /s/

JOHN B. JONES, JR.

John B. Jones, Jr.

By /s/ STEPHEN C. KIELY

Stephen C. Kiely

By /s/ FRANK L. LEDERMAN

Frank L. Lederman

By /s/ SALLY G. NARODICK

Sally G. Narodick

By /s/ DANIEL C. REGIS
Daniel C. Regis

By /s/ STEPHEN C. RICHARDS

Stephen C. Richards

44

Director

Director

Director

Director

Director

Director

Director

EXHIBIT INDEX

Exhibit
Number

Exhibit Description

Incorporated by Reference

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

3.1

3.2

Restated Articles of Incorporation

Amended and Restated Bylaws

10.0*

1999 Stock Option Plan

10.1*

2000 Non-Executive Employee Stock Option Plan

10.2*

2001 Employee Stock Purchase Plan, as Amended

10.3*

2003 Stock Option Plan

10.4*

2004 Long-Term Equity Compensation Plan

000-26820

06/08/06

000-26820

02/12/07

333-57970

03/30/01

333-57970

03/30/01

000-26820

04/14/05

000-26820

03/31/03

000-26820

03/24/04

3.3

3.1

4.1

4.2

A

A

B

8-K

8-K

S-8

S-8

DEF
14A

DEF
14A

DEF
14A

10.5*

2005 Executive Bonus Plan

8-K

000-26820

03/25/05

10.1

10.6* Cray Canada Inc. Amended and Restated Key

S-8

333-114243

04/06/04

Employee Stock Option Plan

10.7*

2006 Long-Term Equity Compensation Plan

10.8*

2009 Long-Term Equity Compensation Plan

000-26820

04/28/06

000-26820

03/31/09

DEF
14A

DEF
14A

4

B

A

10.9*

Form of Officer Non-Qualified Stock Option
Agreement

10-K

000-26820

04/01/05

10.32

10.10* Form of Officer
Agreement

Incentive

Stock Option

10-K

000-26820

04/01/05

10.33

10.11* Form of Director Stock Option Agreement

10-K

000-26820

04/01/05

10.34

10.12* Form of Director Stock Option Agreement,

10-K

000-26820

04/01/05

10.35

immediate vesting

10.13* Form of Employee Restricted Stock Agreement,

10-K

000-26820

03/09/07

10.11

current form

10.14* Form of Director Restricted Stock Agreement

10.15* 2007 Cash Incentive Plan

10.16* Senior Officer Cash Incentive Plan for annual cash

incentive awards

8-K

8-K

8-K

000-26820

06/08/06

000-26820

02/12/07

000-26820

05/14/08

10.1

10.1

10.1

10.17* Letter Agreement between the Company and Peter

8-K

000-26820

03/08/05

10.1

J. Ungaro, dated March 4, 2005

10.18* Offer Letter between the Company and Margaret

8-K

000-26820

05/09/05

10.1

A. Williams, dated April 14, 2005

10.19* Offer Letter between the Company and Brian C.

10-Q

000-26820

11/09/05

10.1

Henry, dated May 16, 2005

45

Exhibit
Number

Exhibit Description

Incorporated by Reference

10.20* Form of Management Continuation Agreement
between the Company and its Executive Officers
and certain other Employees

10.21* Form of Management Retention Agreement, dated
as of December 19, 2008, including Annex A-1 and
Annex A-2 applicable to Peter J. Ungaro and Brian
C. Henry, respectively

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

10-Q 000-26820

05/17/99

10.1

8-K 000-26820

12/22/08

10.1

10.22* Executive Severance Policy,

as

adopted

on

8-K 000-26820

12/17/10

10.1

December 13, 2010

10.23* Retention Agreement between the Company and
Peter J. Ungaro, dated December 20, 2005

10.24* Retention Agreement between the Company and
Brian C. Henry, dated December 20, 2005

8-K 000-26820

12/22/05

10.2

8-K 000-26820

12/22/05

10.3

10.25* Retention Agreement between the Company and

8-K 000-26820

12/22/05

10.4

Margaret A. Williams, dated December 20, 2005

10.26* Summary sheet setting forth amended compensation
arrangements for non-employee Directors

8-K 000-26820

02/21/06

10.1

10.27* Amended and Restated 2001 Employee Stock

10-K 000-26820

03/04/11

10.28

Purchase Plan

10.28* Form of Indemnification Agreement

8-K 000-26820

02/08/11

8-K 000-26820

08/29/08

10.1

10.1

10.29

10.30

Lease Agreement between 900 Fourth Avenue
Property LLC and the Company, dated as of
August 11, 2008

FAB I Building Lease Agreement between Union
Semiconductor Technology Corporation and the
Company, dated June 30, 2000

10.31 Amendment No. 1 to the FAB Building Lease
Agreement
Semiconductor
Technology Corporation and the Company, dated as
of August 19, 2002

between

Union

10-K 000-26820

04/02/01

10.9

10-K 000-26820

03/28/03

10.13

10.32 Conference Center Lease Agreement between
Union Semiconductor Technology Corporation and
the Company, dated June 30, 2000

10-K 000-26820

04/02/01

10.10

10.33 Amendment No. 1 to the Conference Center Lease
Agreement
Semiconductor
Technology Corporation and the Company, dated as
of August 19, 2002

between

Union

10-K 000-26820

03/28/03

10.15

10.34 Development Building and Conference Center
Lease Agreement
between Northern Lights
Semiconductor Corporation and the Company,
dated as of February 1, 2008

10.35

Lease Agreement between NEA Galtier, LLC and
the Company, dated as of July 2, 2009

46

8-K 000-26820

02/01/08

10.1

8-K 000-26820

07/16/09

10.1

Exhibit
Number

10.36

Exhibit Description

Incorporated by Reference

Technology Agreement between Silicon Graphics,
Inc. and the Company, effective as of March 31,
2000

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

10-Q 000-26820

05/15/00

10.3

10-Q 000-26820

08/07/07

10.1

8-K 000-26820

04/08/08

10.1

8-K 000-26820

01/04/07

10.1

10-K 000-26820

03/09/07

10.42

8-K 000-26820

01/04/08

10.1

8-K 000-26820

08/29/08

10.2

10-K 000-26820

03/16/10

10.44

8-K 000-26820

07/13/09

10.1

8-K 000-26820

09/17/10

10.1

10.37 Amendment No. 2 to the Technology Agreement
between Silicon Graphics, Inc. and the Company,
dated as of March 30, 2007

10.38 Amendment No. 3 to the Technology Agreement
between Silicon Graphics, Inc. and the Company,
dated as of March, 28, 2008

10.39 Credit Agreement between Wells Fargo Bank,
National Association and the Company, dated
December 29, 2006

10.40

10.41

10.42

10.43

10.44

10.45

10.46

10.47

to Credit Agreement between
First Amendment
Wells Fargo Bank, National Association and the
Company, dated January 31, 2007

Second Amendment to Credit Agreement between
Wells Fargo Bank, National Association and the
Company, effective as of December 31, 2007

Third Amendment
to Credit Agreement between
Wells Fargo Bank, National Association and the
Company, dated August 22, 2008

Fourth Amendment to Credit Agreement between
Wells Fargo Bank, National Association and the
Company, dated April 20, 2009

Fifth Amendment
to Credit Agreement between
Wells Fargo Bank, National Association and the
Company, dated June 1, 2009

Sixth Amendment
Wells Fargo Bank, National Association and the
Company, dated June 1, 2010

to Credit Agreement between

Seventh Amendment to Credit Agreement between
Wells Fargo Bank, National Association and the
Company, dated June 1, 2011

Loan and Security Agreement between Silicon
Valley Bank and the Company, dated September 13,
2010

10.48 Amendment No. 1 to Loan and Security Agreement

between Silicon Valley Bank and the Company,
dated June 21, 2011

21.1

23.1

24.1

Subsidiaries of the Company

Consent of Peterson Sullivan LLP, Independent
Registered Public Accounting Firm

Power of Attorney for directors and officers
(included on the signature page of this report)

47

X

X

X

X

X

X

Exhibit Description

Incorporated by Reference

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

Exhibit
Number

31.1

31.2

32.1

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

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

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

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase

Document

101.LAB XBRL Taxonomy Extension Label Linkbase

Document

101.PRE XBRL Taxonomy Extension Presentation

Linkbase Document

*

Management contract or compensatory plan or arrangement.

X

X

X

X

X

X

X

X

Excluded from this list of exhibits, pursuant to Paragraph (b)(4)(iii)(a) of Item 601 of Regulation S-K, may
be one or more instruments defining the rights of holders of long-term debt of the Company. The Company
hereby agrees that it will, upon request of the Securities and Exchange Commission, furnish to the Commission a
copy of any such instrument.

48

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

December 31,
2011

December 31,
2010

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts and other receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 50,411
3,776
72,381
97,881
12,932

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
Service inventory, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

237,381
16,462
1,611
13,352
14,293

$ 57,381
3,914
106,268
49,241
5,901

222,705
17,953
1,887
3,105
14,978

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 283,099

$ 260,628

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 38,328
11,270
5,414
44,636

$ 20,384
20,668
6,380
49,896

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99,648
14,184
2,453

97,328
14,954
2,525

TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

116,285

114,807

Commitments and Contingencies (Note 9)

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 36,763,379 and
36,068,081 shares, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

564,148
6,480
(403,814)

559,058
4,906
(418,143)

TOTAL SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

166,814

145,821

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . .

$ 283,099

$ 260,628

See accompanying notes

F-1

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

Years Ended December 31,
2010

2009

2011

Revenue:

Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$155,561
80,485

$239,085
80,303

$199,114
84,933

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

236,046

319,388

284,047

Cost of revenue:

Cost of product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

101,000
40,680

155,027
54,404

130,444
47,719

Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141,680

209,431

178,163

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,366

109,957

105,884

Operating expenses:

Research and development, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49,452
26,134
15,840
1,783

43,618
31,085
17,767
—

62,947
26,601
16,579
—

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

93,209

92,470

106,127

Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,157
(989)
(33)

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

135
14,194

17,487
(766)
219

16,940
(1,878)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 14,329

$ 15,062

Basic net income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

0.41

0.40

$

$

0.44

0.43

(243)
(430)
(805)

(1,478)
874

(604)

(0.02)

(0.02)

$

$

$

Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,122

34,313

33,559

Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . .

36,072

35,278

33,559

See accompanying notes

F-2

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands)

BALANCE, December 31, 2008 . . . . . . . . . . . . . . . . . .
Issuance of shares under employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of shares under Company 401(k) Plan

match . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Restricted shares issued for compensation, net of

forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . .
Stock option repurchase . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss:

Unrealized gain on available-for-sale securities . . . .
Currency translation adjustment
. . . . . . . . . . . . . . . .
Unrealized loss on cash flow hedges, net of

reclassification adjustments . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common Stock
and Additional
Paid In Capital

Number
of Shares Amount

Accumulated
Other
Comprehensive
Income

Accumulated
Deficit

Total

Comprehensive
Income (Loss)

33,507

$543,442

$ 9,364

$(432,601)

$120,205

108
43

671

852
—
—

—
—

—
—

510
264

1,780

—
5,811
(587)

—
—

—
—

—
—

—

—
—
—

4
(882)

(2,338)
—

—
—

—

—
—
—

—
—

510
264

1,780

—
5,811
(587)

4
(882)

—
(604)

(2,338)
(604)

—
—

—

—
—
—

4
(882)

(2,338)
(604)

BALANCE, December 31, 2009 . . . . . . . . . . . . . . . . . .

35,181

$551,220

$ 6,148

$(433,205)

$124,163

$ (3,820)

Issuance of shares under employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of shares under Company 401(k) Plan

match . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Restricted shares issued for compensation, net of

forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income:

Reclassification adjustment for gains on

available-for-sale securities included in net
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .

Currency translation adjustment
Unrealized loss on cash flow hedges, net of

reclassification adjustments . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

84
92

355

356
—

—
—

—
—

497
436

1,978

—
4,927

—
—

—
—

—
—

—

—
—

(3)
350

(1,589)
—

—
—

—

—
—

—
—

497
436

1,978

—
4,927

—
—

—

—
—

(3)
350

(3)
350

—
15,062

(1,589)
15,062

(1,589)
15,062

BALANCE, December 31, 2010 . . . . . . . . . . . . . . . . . .

36,068

$559,058

$ 4,906

$(418,143)

$145,821

$13,820

Issuance of shares under employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares issued for compensation, net of

forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income:

Currency translation adjustment
Unrealized gain on cash flow hedges, net of

. . . . . . . . . . . . . . . .

reclassification adjustments . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65
248

382
—

—

—
—

372
1,090

—
3,628

—

—
—

—
—

—
—

785

789
—

—
—

—
—

—

372
1,090

—
3,628

—
—

—
—

785

785

—
14,329

789
14,329

789
14,329

BALANCE, December 31, 2011 . . . . . . . . . . . . . . . . . .

36,763

$564,148

$ 6,480

$(403,814)

$166,814

$15,903

See accompanying notes

F-3

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Years Ended December 31,
2010

2009

2011

Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory write-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of issuance costs, convertible notes payable and line of credit . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of convertible notes debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on repurchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash (used in) provided by operations due to changes in operating assets and liabilities:

Accounts and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses and other accrued liabilities . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 14,329

$ 15,062

$

(604)

8,601
503
3,628
—
—
(14,396)
—
—

34,180
(50,950)
(2,275)
18,099
(9,493)
(71)
(5,978)

9,431
504
4,927
887
—
(251)
—
—

(68,077)
(25,300)
(2,040)
1,600
1,480
(194)
12,807

8,454
—
5,811
5,431
11
(1,411)
834
910

56,735
44,119
16,078
2,028
(37,033)
(456)
(34,223)

Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:

(3,823)

(49,164)

66,684

Sales/maturities of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment

—
—
137
(4,916)

3,000
—
1,236
(3,736)

Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4,779)

500

7,850
(5,481)
(2,470)
(7,581)

(7,682)

Financing activities:

Proceeds from issuance of common stock through employee stock purchase plan . . . . .
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . .

372
1,090
—
—

1,462
170

510
497
264
436
—
(669)
— (27,314)

933
94

(27,209)
852

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents:

(6,970)

(47,637)

32,645

Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57,381

105,018

72,373

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 50,411

$ 57,381

$105,018

Supplemental disclosure of cash flow information:

Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

98
1,495

Non-cash investing and financing activities:

Inventory transfers to fixed assets and service inventory . . . . . . . . . . . . . . . . . . . . . . . . .
Value of shares issued for 401(k) match . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,310
—

$

$

3
1,530

4,183
1,978

$

$

469
1,262

1,876
1,780

See accompanying notes

F-4

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 DESCRIPTION OF BUSINESS

Cray Inc., or Cray, or the Company designs, develops, manufactures, markets and services high
performance computer, or HPC, systems, commonly known as supercomputers, and provides storage solutions
and engineering services related to HPC systems. Cray’s supercomputer systems provide capability and sustained
performance far beyond typical server-based computer systems and address challenging scientific, engineering,
commercial and national security computing problems. The Company’s customers include government agencies,
academic institutions and commercial entities.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Principles

The consolidated financial statements and accompanying notes are prepared in accordance with accounting

principles generally accepted in the United States of America, or GAAP.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned

subsidiaries. Intercompany balances and transactions have been eliminated.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation. There has

been no impact on previously reported net income (loss) or shareholders’ equity from such reclassifications.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates
and assumptions that affect the amounts reported in the Company’s consolidated financial statements and
accompanying notes. Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of highly liquid financial instruments that are readily convertible to cash
and have original maturities of three months or less at the time of acquisition. The Company maintains cash and
cash equivalent balances with financial institutions that exceed federally insured limits. As of December 31,
2011, the Company had restricted cash of $3.8 million, of which $3.5 million related to the Company’s line of
credit with Wells Fargo and $0.3 million resulted from a performance bond on a sales contract. As of
December 31, 2010, the Company had restricted cash of $3.9 million, of which $3.5 million related to the
Company’s line of credit with Wells Fargo and $0.4 million resulted from a performance bond on a sales
contract.

Short-term investments

Investments generally mature between three months and one year from the purchase date. All short-term
investments are classified as available-for-sale and are recorded at fair value, based on quoted market prices; as
such, unrealized gains and losses are recorded in “Accumulated other comprehensive income,” unless losses are
considered other than temporary, in which case, losses would be included in results of operations. The Company
had no assets classified as short-term investments as of December 31, 2011 or 2010.

F-5

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Derivatives

The Company uses forward foreign currency exchange contracts to hedge certain foreign currency
exposures. Forward contracts are cash flow hedges of the Company’s foreign currency exposures on certain
revenue contracts and are recorded at the contract’s fair value. Any gains or losses on the effective portion of the
is initially reported in “Accumulated other comprehensive income,” a component of
forward contract
shareholders’ equity, with a corresponding asset or liability recorded based on the fair value of the forward
contract. When the hedged transaction is settled, any unrecognized gains or losses on the hedged transaction are
reclassified into results of operations in the same period. Any hedge ineffectiveness is recorded to operations in
the current period. The Company measures hedge effectiveness by comparing changes in fair values of the
forward contract and expected cash flows based on changes in the spot prices of the underlying currencies. Cash
flows from forward contracts accounted for as cash flow hedges are classified in the same category as the cash
flows from the items being hedged. The Company does not use derivative financial instruments for speculative
purposes.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk
consist primarily of cash and cash equivalents, accounts receivable and forward foreign currency exchange
contracts.

The Company maintains cash and cash equivalents and forward contracts with various financial institutions.
As part of its risk management process, the Company performs periodic evaluations of the relative credit
standing of the financial institutions. The Company has not sustained any credit losses from instruments held at
financial institutions. The Company utilizes forward contracts to protect against the effects of foreign currency
fluctuations. Such contracts involve the risk of non-performance by the counterparty, which could result in a
material loss.

The Company currently derives a significant portion of its revenue from sales of products and services to
different agencies of the U.S. government or commercial customers primarily serving various agencies of the
U.S. government. See Note 14 — Segment Information for additional information. Given the type of customers,
the Company does not believe its accounts receivable represent significant credit risk.

Other Concentration

The Company obtains certain components from single source suppliers due to technology, availability,
price, quality or other considerations. The loss of a single source supplier, the single source supplier’s inability to
deliver the required components or intellectual property due to natural disaster or other reasons, the deterioration
of the relationship with a single source supplier, or any unilateral modification of contract terms under which the
Company is supplied components by a single source supplier could have a significant adverse effect on the
Company’s revenue and gross margins.

Accounts Receivable

Accounts receivable are stated at principal amounts and are primarily comprised of amounts contractually
due from customers for products and services and amounts due from government reimbursed research and
development contracts. The Company provides an allowance for doubtful accounts based on an evaluation of
customer past due account balances. In determining whether to record an allowance for a specific customer, the
Company considers a number of factors, including prior payment history and financial information for the
customer.

F-6

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Values of Financial Instruments

The Company measures certain financial assets and liabilities at fair value based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants. The Company’s financial
instruments primarily consist of time deposits, money market funds, and foreign currency derivatives. See Note 3
for a further discussion on fair value of financial instruments.

Inventories

Inventories are valued at the lower of cost or market, with cost computed on a first-in, first-out basis. The
Company regularly evaluates the technological usefulness and anticipated future demand for various inventory
components and the expected use of the inventory. When it is determined that these components do not function
as intended, or quantities on hand are in excess of estimated requirements, the costs associated with these
components are charged to expense.

In connection with certain of its sales agreements, the Company may receive used equipment from a
customer. This inventory generally will be recorded at no value based on the expectation that the Company will
not be able to resell or otherwise use the equipment. In the event that the Company has a specific contractual plan
for resale at the date the inventory is acquired, the inventory is recorded at its estimated fair value.

Property and Equipment, net

Property and equipment are recorded at cost less accumulated depreciation and amortization. Additions and
improvements are capitalized and maintenance and repairs are expensed as incurred. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the related assets, ranging from 18 months to seven
years for furniture and fixtures, three years for computer equipment, and eight years to 25 years for buildings and
land improvements. Leasehold improvements are depreciated over the life of the lease or asset, whichever is
shorter.

The Company capitalizes certain internal and external costs incurred to acquire or create internal use
software, principally related to software coding, design system interfaces and installation and testing of the
software. The Company amortizes internal use software costs using the straight-line method over the estimated
useful lives of the software, generally from three to five years.

Service Inventory

Service inventory is valued at the lower of cost or market and represents inventory used to support service
and maintenance agreements with customers. As inventory is utilized, replaced items are returned to us and are
either repaired or scrapped. Costs incurred to repair inventory to a usable state are charged to expense as
incurred. Service inventory is recorded at cost and is amortized over the estimated service life of the related
product platform (generally four years).

Impairment of Long-Lived Assets

The Company evaluates property, plant and equipment and purchased intangible assets with finite lives for
impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow
the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash
flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any,
are less than the carrying value of the asset. When the Company identifies an impairment, the carrying value of
the asset is reduced to its estimated fair value based on a discounted cash flow approach or, when available and
appropriate, to comparable market values.

F-7

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers
revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has
occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not
occur until the products have been shipped or services provided to the customer, risk of loss has transferred to the
customer, and, where applicable, a customer acceptance has been obtained. The sales price is not considered to
be fixed or determinable until all material contingencies related to the sales have been resolved. The Company
records revenue in the Consolidated Statements of Operations net of any sales, use, value added or certain excise
taxes imposed by governmental authorities on specific sales transactions. In addition to the aforementioned
general policy,
the following are the Company’s statements of policy with regard to multiple-element
arrangements and specific revenue recognition policies for each major category of revenue.

Multiple-Element Arrangements. The Company commonly enters into revenue arrangements that include
multiple deliverables of its product and service offerings due to the needs of its customers. Product may be
delivered in phases over time periods which can be as long as five years. Maintenance services generally begin
upon acceptance of the first equipment delivery and future deliveries of equipment generally have an associated
maintenance period. The Company considers the maintenance period to commence upon acceptance of the
product or installation in situations where a formal acceptance is not required, which may include a warranty
period and accordingly allocates a portion of the arrangement consideration as a separate deliverable which is
recognized as service revenue over the entire service period. Other services such as training and engineering
services can be delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement
is separated into more than one unit of accounting if the following criteria are met:

• 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.

If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result
in revenue being recognized ratably over the contract term or being deferred until the earlier of when such
criteria are met or when the last undelivered element is delivered. If these criteria are met for each element, the
arrangement consideration is allocated to the separate units of accounting based on each unit’s relative estimated
selling price.

The Company follows a selling price hierarchy in determining the best estimate of the selling price of each
deliverable. Certain products and services are sold separately in standalone arrangements for which the Company
is sometimes able to determine vendor specific objective evidence, or VSOE. The Company determines VSOE
based on normal pricing and discounting practices for the product or service when sold separately.

When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple
elements, the Company attempts to establish the selling price of each remaining element based on third-party
evidence, or TPE. The Company’s inability to establish VSOE is often due to a relatively small sample of
customer contracts that differ in system size and contract terms which can be due to infrequently selling each
element separately, not pricing products within a narrow range, or only having a limited sales history, such as in
the case of certain advanced and emerging technologies. TPE is determined based on the Company’s prices or
competitor prices for similar deliverables when sold separately. However, the Company is often unable to
determine TPE, as the Company’s offerings contain a significant level of customization and differentiation from
those of competitors and the Company is often unable to reliably determine what similar competitor products’
selling prices are on a standalone basis.

F-8

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated
selling price, or ESP, in its allocation of arrangement consideration. The objective of ESP is to determine the
price at which the Company would transact a sale if the product or service were sold on a standalone basis. In
determining ESP, the Company uses either the list price of the deliverable less a discount or the cost to provide
the product or service plus a margin. When using list price less a discount, the Company uses discounts from list
price for previous transactions. This approach incorporates several factors, including the size of the transaction
and any changes to list prices. The data is collected from prior sales, and although the data may not have the
sample size or consistency to establish VSOE, it is sufficiently objective to estimate the selling price. When
using cost plus a margin, the Company considers the total cost of the product or service, including customer-
specific and geographic factors. The Company also considers the historical margins of the product or service on
previous contracts and several factors including any changes to pricing methodologies, competitiveness of
products and services and cost drivers that would cause future margins to differ from historical margins.

Products. The Company most often recognizes revenue from sales of products upon customer acceptance
of the system. Where formal acceptance is not required, the Company recognizes revenue upon delivery or
installation. When the product is part of a multiple element arrangement, the Company allocates a portion of the
arrangement consideration to product revenue based on estimates of selling price.

Services. Maintenance services are provided under separate maintenance contracts with customers. These
contracts generally provide for maintenance services for one year, although some are for multi-year periods,
often with prepayments for the term of the contract. The Company considers the maintenance period to
commence upon acceptance of the product or installation in situations where a formal acceptance is not required,
which may include a warranty period. When service is part of a multiple element arrangement, the Company
allocates a portion of the arrangement consideration to maintenance service revenue based on estimates of selling
price. Maintenance contracts that are billed in advance of revenue recognition are recorded as deferred revenue.
Maintenance revenue is recognized ratably over the term of the maintenance contract.

Revenue from engineering services is recognized as services are performed.

build

Project

contracts

from design

Revenue. Revenue

the
and
percentage-of-completion, or POC method. Under the POC method, revenue is recognized based on the costs
incurred to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that
change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the
estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such
revisions are recorded in income in the period in which the circumstances that gave rise to the revision become
known by management. The Company performs ongoing profitability analyses of its contracts accounted for
under the POC method in order to determine whether the latest estimates of revenue, costs and extent of progress
require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated
loss for the remainder of the contract is recorded immediately.

recognized

under

is

The Company records revenue from certain research and development contracts which include milestones
using the milestone method if the milestones are determined to be substantive. A milestone is considered to be
substantive if management believes there is substantive uncertainty that it will be achieved and the milestone
consideration meets all of the following criteria:

• 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.

F-9

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The individual milestones are determined to be substantive or nonsubstantive in their entirety and milestone

consideration is not bifurcated.

Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work

performed.

Nonmonetary Transactions. The Company values and records nonmonetary transactions at the fair value
of the asset surrendered unless the fair value of the asset received is more clearly evident, in which case the fair
value of the asset received is used.

Foreign Currency Translation

The Company uses the U.S. dollar predominantly as its functional currency. Assets and liabilities of foreign
subsidiaries that have a functional currency denominated in non-U.S. dollars are translated into U.S. dollars at
year-end exchange rates, and revenue and expenses of these foreign subsidiaries are translated at average rates
prevailing during the year. Translation adjustments are included in “Accumulated other comprehensive income,”
a separate component of shareholders’ equity. Transaction gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity involved are included in “Other
expense, net” in the accompanying Consolidated Statements of Operations. Net transaction gains (losses) were
$(1.3) million, ($1.0) million, and $0.3 million for 2011, 2010, and 2009, respectively.

Research and Development

Research and development expenses include costs incurred in the development and production of the
Company’s hardware and software, costs incurred to enhance and support existing product features, costs
incurred to support and improve the Company’s development processes, and costs related to future product
development. Research and development costs are expensed as incurred, and may be offset by co-funding from
third parties. The Company may also enter into arrangements whereby the Company makes advance,
non-refundable payments to a vendor to perform certain research and development services. These payments are
deferred and recognized over the vendor’s estimated performance period. During the third quarter of 2009, the
Company amended a vendor agreement to settle outstanding performance issues. The Company had made
advance payments of $16.2 million to the vendor. Due to the amendment, the Company received a refund of
$10.0 million of amounts previously paid to the vendor and the right to receive rebates on future purchases. The
Company estimated the fair value of this rebate right to be $6.2 million. The Company believes the rebate right is
recoverable and it has been classified in “Other non-current assets” in the Consolidated Balance Sheets. No gain
or loss was recorded as a result of this amendment. The Company anticipates the rebates will begin to be realized
in 2013.

Amounts to be received under co-funding arrangements with the U.S. government or other customers are
based on either contractual milestones or costs incurred. These co-funding milestone payments are recognized in
operations as performance is estimated to be completed and are measured as milestone achievements occur or as
costs are incurred. These estimates are reviewed on a periodic basis and are subject to change, including in the
near term. If an estimate is changed, net research and development expense could be impacted significantly.

The Company does not record a receivable from the U.S. government prior to completing the requirements
necessary to bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain
budget restrictions and milestones may be subject to completion risk, and as such, there may be periods in which
research and development costs are expensed as incurred for which no reimbursement is recorded, as milestones
have not been completed or the U.S. government has not funded an agreement. Accordingly, there can be
substantial variability in the amount of net research and development expenses from quarter to quarter and year
to year.

F-10

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company classifies amounts to be received from funded research and development projects as either
revenue or a reduction to research and development expense based on the specific facts and circumstances of the
contractual arrangement, considering total costs expected to be incurred compared to total expected funding and
the nature of the research and development contractual arrangement. In the event that a particular arrangement is
determined to represent revenue, the corresponding research and development costs are classified as cost of
revenue.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted
tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or
settled. A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not
that all or a portion of the deferred tax assets may not be realized through future operations. This assessment is
based upon consideration of available positive and negative evidence, which includes, among other things, our
recent results of operations and expected future profitability. The Company considers its actual historical results
over several years to have stronger weight than other more subjective indicators, including forecasts, when
considering whether to establish or reduce a valuation allowance on deferred tax assets.

The Company recognizes the income tax benefit from a tax position only if it is more likely than not that the
tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits
of the Company’s position. The tax benefit recognized in the financial statements from such a position is
measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement.

Estimated interest and penalties are recorded as a component of interest expense and other expense,

respectively.

As of December 31, 2011, the Company had approximately $128.0 million of net deferred tax assets,
against which the Company provided a $110.5 million valuation allowance, resulting in a net deferred tax asset
of $17.5 million. In 2011, the Company reduced the valuation allowances against deferred tax assets established
in prior years. The aggregate reduction of $14.7 million ($.41 per diluted share) in deferred tax asset valuation
allowances was attributable to a $13.9 million reduction related to a portion of the Company’s U.S. deferred tax
assets and a $0.8 million reduction related to all of the deferred tax assets of the Company’s German subsidiary.
The reductions in previously established allowances were based upon an evaluation of all available positive and
negative evidence including an assessment of known business risks and industry trends, as well as forecasted
domestic and international earnings. The Company continues to provide a partial valuation allowance against its
U.S. deferred tax assets and a full valuation allowance against deferred tax assets arising in a limited number of
foreign jurisdictions as the realization of such assets is not considered to be more likely than not at this time. In a
future period the Company’s assessment of the realizability of its deferred tax assets and therefore the
appropriateness of the valuation allowance could change based on an assessment of all available evidence, both
positive and negative in that future period. If the Company’s conclusion about the realizability of its deferred tax
assets and therefore the appropriateness of the valuation allowance changes in a future period the Company could
record a substantial tax provision or benefit in its Consolidated Statement of Operations when that occurs.

Share-Based Compensation

The Company measures compensation cost for share-based payment awards at fair value and recognizes it
as compensation expense over the service period for awards expected to vest. Share-based compensation expense
is recognized for all share-based payment awards, net of an estimated forfeiture rate. Compensation cost only is
only recognized for those shares expected to vest on a straight-line basis over the requisite service period of the
award.

F-11

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Determining the appropriate fair value model and calculating the fair value of share-based payment awards
requires subjective assumptions, including the expected life of the share-based payment awards and stock price
volatility. The Company utilizes the Black-Scholes options pricing model to value the stock options granted
under its options plans. In this model, the assumptions utilized relate to stock price volatility, stock option term
and forfeiture rates that are based upon both historical factors as well as management’s judgment.

The fair value of restricted stock and restricted stock units is determined based on the number of shares or

units granted and the quoted price of our common stock at the date of grant.

Shipping and Handling Costs

Costs related to shipping and handling are included in “Cost of product revenue” and “Cost of service

revenue” in the accompanying Consolidated Statements of Operations.

Advertising Costs

Sales and marketing expenses in the accompanying Consolidated Statements of Operations include
advertising expenses of $0.6 million, $0.8 million, and $0.9 million in 2011, 2010, and 2009, respectively. The
Company incurs advertising costs for representation at certain trade shows, promotional events and sales lead
generation, as well as design and printing costs for promotional materials. The Company expenses all advertising
costs as incurred.

Earnings (Loss) Per Share, or EPS

Basic EPS is computed by dividing net income available to common shareholders by the weighted average
number of common shares, excluding unvested restricted stock outstanding during the period. Diluted EPS is
computed by dividing net income available to common shareholders by the weighted average number of common
and potential common shares outstanding during the period, which includes the additional dilution related to
conversion of stock options, unvested restricted stock and restricted stock units and common stock purchase
warrants as computed under the treasury stock method and the common shares issuable upon conversion of the
outstanding convertible notes. For the years ended December 31, 2011 and 2010, the added shares from these
items included in the calculation of diluted shares and EPS totaled approximately 0.9 million and 1.0 million
respectively. For the year ended December 31, 2009, outstanding stock options, unvested restricted stock,
restricted stock units, warrants, and shares issuable upon conversion of the convertible notes were antidilutive,
and, as such, their effect has not been included in the calculation of diluted net loss per share. Potentially dilutive
shares of 2.2 million, 1.9 million, and 5.3 million, respectively, have been excluded from the denominator in the
computation of diluted EPS for the years ended December 31, 2011, 2010, and 2009, respectively, because they
are antidilutive.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income, a component of Shareholders’ equity, consisted of the following

at December 31 (in thousands):

2011

2010

2009

Accumulated unrealized net gain on available-for-sale investments . . . .
Accumulated unrealized net gain on cash flow hedges . . . . . . . . . . . . . .
Accumulated currency translation adjustment . . . . . . . . . . . . . . . . . . . . .

$ — $ — $
2,136
4,344

1,347
3,559

3
2,936
3,209

Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . .

$6,480

$4,906

$6,148

F-12

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued ASU No. 2011-05, Comprehensive Income,
or ASU 2011-05. The guidance in ASU 2011-05 revises the manner in which entities present comprehensive
income in their financial statements. An entity is required to report the components of comprehensive income in
either one or two consecutive financial statements:

• A single, continuous statement must present the components of net income and total net income, the
components of other comprehensive income and total other comprehensive income, and a total for
comprehensive income.

• In a two-statement approach, an entity must present the components of net income and total net income in
the first statement. That statement must be immediately followed by a financial statement that presents
the components of other comprehensive income, a total for other comprehensive income, and a total for
comprehensive income.

ASU 2011-05 does not change the items that must be reported in other comprehensive income. The
amendments in ASU 2011-05 are effective for fiscal years beginning after December 15, 2011. The Company
does not believe the adoption of ASU 2011-05 will have a material impact on the presentation of information in
its financial statements.

NOTE 3 FAIR VALUE MEASUREMENTS

Under FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures,
based on the observability of the inputs used in the valuation techniques used to determine the fair value of
certain financial assets and liabilities, the Company is required to provide the following information according to
the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to
determine fair values.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active
or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for
the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
The following table presents information about the Company’s financial assets and liabilities that have been
measured at fair value as of December 31, 2011 and 2010, and indicates the fair value hierarchy of the valuation
inputs utilized to determine such fair value (in thousands):

Description

Fair Value
at December 31,
2011

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Assets:
Cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts(1) . . . . . . . . . . . . . . . . . . . . .

$54,187
3,251

$54,187

$ —
— 3,251

Assets measured at fair value at December 31, 2011 . . . . . . . . .

$57,438

$54,187

$3,251

Liabilities:
Foreign exchange forward contracts(2) . . . . . . . . . . . . . . . . . . . . .

Liabilities measured at fair value at December 31, 2011 . . . . . .

$

3

3

—

$ — $

3

3

F-13

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Description

Fair Value
at December 31,
2010

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Assets:
Cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts(3) . . . . . . . . . . . . . . . . . . . . .

$61,295
2,044

$61,295

$ —
— 2,044

Assets measured at fair value at December 31, 2010 . . . . . . . . .

$63,339

$61,295

$2,044

Liabilities:
Foreign exchange forward contracts(2) . . . . . . . . . . . . . . . . . . . . .

Liabilities measured at fair value at December 31, 2010 . . . . . .

$

704

704

—

704

$ — $ 704

(1) $2.1 million of this amount is included in “Prepaid expenses and other current assets” and $1.1 million is
included in “Other non-current assets” at December 31, 2011 on the Company’s Consolidated Balance
Sheet.

(2) Included in “Other accrued liabilities” on the Company’s Consolidated Balance Sheets.
(3) Included in “Other non-current assets” at December 31, 2010 on the Company’s Consolidated Balance

Sheet.

The fair values of Level 1 assets are determined through market, observable and corroborated sources. The
fair values of Level 2 assets and liabilities do not have observable prices, but have inputs that are based on
observable inputs, such as foreign currency exchange rates, either directly or indirectly.

Foreign Currency Derivatives

As of December 31, 2011 and 2010, the Company had outstanding forward contracts which have been
designated as cash flow hedges of anticipated future cash receipts on sales contracts payable in foreign
currencies. As of December 31, 2011, the outstanding notional amounts were approximately 3.5 million British
pound sterling, 33.7 million euro and 20.6 million Norwegian Kroner. As of December 31, 2010, the outstanding
notional amounts were approximately 2.0 million British pound sterling, 37.8 million euro and 53.3 million
Swedish krona. As of December 31, 2011 and 2010, these contracts hedged foreign currency exposure of
approximately $55.8 million and $63.0 million, respectively. The associated cash receipts are expected to be
received between 2012 and 2014, during which time the revenue on the associated sales contracts is expected to
be recognized. As of December 31, 2011 and 2010, the fair value of outstanding forward contracts totaled a net
gain of $3.2 million and $1.3 million, respectively. As of December 31, 2011 and 2010, unrecognized gains of
$2.1 million and $1.4 million, respectively, were included in “Accumulated other comprehensive income” on the
Company’s Consolidated Balance Sheets. The Company recognized approximately $0.4 million, $3.5 million
and $2.0 million in net reclassification adjustments, which increased product revenue, as revenue on the
associated sales contracts was recognized for the years ended December 31, 2011, 2010 and 2009, respectively.

F-14

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 4 ACCOUNTS AND OTHER RECEIVABLES, NET

A summary of net accounts and other receivables follows (in thousands):

December 31,

2011

2010

Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advance billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$34,927
7,307
24,490
5,767

$ 79,891
1,785
22,445
2,270

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72,491
(110)

106,391
(123)

Accounts and other receivables, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$72,381

$106,268

Unbilled receivables represent amounts where the Company has recognized revenue in advance of the
contractual billing terms. Advance billings represent billings made based on contractual terms for which no
revenue has yet been recognized.

As of December 31, 2011 and 2010, accounts receivable included $32.2 million and $56.4 million,
respectively, due from U.S. government agencies and customers primarily serving the U.S. government. Of this
amount, $0.7 million and $0.5 million, respectively, were unbilled, based upon contractual billing arrangements
with these customers. As of December 31, 2011, one non-U.S. government customer accounted for 30% of total
accounts and other receivables. As of December 31, 2010, two non-U.S. government customers accounted for
32% of total accounts and other receivables.

NOTE 5

INVENTORY

A summary of inventory follows (in thousands):

December 31,

2011

2010

Components and subassemblies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$29,402
19,956
48,523

$11,481
5,670
32,090

$97,881

$49,241

As of December 31, 2011 and 2010, $47.9 million and $31.5 million, respectively, of finished goods
inventory was located at customer sites pending acceptance. At December 31, 2011, two customers accounted for
$46.4 million of finished goods inventory. At December 31, 2010, two customers accounted for $29.4 million of
finished goods inventory.

During 2010 and 2009, the Company wrote-off $0.9 million and $5.4 million, respectively, of inventory

primarily related to the Cray XT product lines. There were no inventory write-offs during 2011.

F-15

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 PROPERTY AND EQUIPMENT, NET

A summary of property and equipment follows (in thousands):

December 31,

2011

2010

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

131
11,540
12,277
69,794
361

$

131
11,060
10,432
68,801
367

Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,103
(77,641)

90,791
(72,838)

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 16,462

$ 17,953

Depreciation expense on property and equipment for 2011, 2010 and 2009 was $7.6 million, $8.1 million

and $7.1 million, respectively.

NOTE 7 SERVICE INVENTORY, NET

A summary of service inventory follows (in thousands):

Service inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 14,692
(13,081)

$ 27,663
(25,776)

Service inventory, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,611

$ 1,887

December 31,

2011

2010

NOTE 8 DEFERRED REVENUE

Deferred revenue consisted of the following (in thousands):

December 31,

2011

2010

Deferred product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22,068
36,752

$ 19,959
44,891

Total deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58,820
(14,184)

64,850
(14,954)

Deferred revenue in current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 44,636

$ 49,896

At December 31, 2011, three customers accounted for 50% of total deferred revenue. At December 31,

2010, one customer accounted for 28% of total deferred revenue.

NOTE 9 COMMITMENTS AND CONTINGENCIES

The Company has recorded rent expense under leases for buildings or office space, which are accounted for

as operating leases, in 2011, 2010 and 2009 of $4.9 million, $4.7 million, and $4.4 million, respectively.

F-16

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Minimum contractual commitments as of December 31, 2011, were as follows (in thousands):

Operating
Leases

Development
Agreements

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

$ 4,375
4,216
3,833
3,693
3,741
6,651

Minimum contractual commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$26,509

$4,533
323
—
—
—
—

$4,856

In its normal course of operations, the Company engages in development arrangements under which it hires
its existing internal staff in order to complete research and
outside engineering resources to augment
development projects, or parts thereof. For the years ended December 31, 2011, 2010 and 2009, the Company
incurred $4.7 million, $8.2 million, and $17.8 million for such arrangements, respectively.

Litigation

From time to time, the Company is subject to various legal proceedings that arise in the ordinary course of

business; none of which are currently material to the Company’s business.

NOTE 10

INCOME TAXES

Income taxes are recognized for the amount of taxes payable for the current year and for the impact of
deferred tax assets and liabilities, which represent consequences of events that have been recognized differently
in the financial statements under GAAP than for tax purposes.

Most of the Company’s deferred tax assets result from net operating loss carryforwards. As of December 31,
2011, the Company had U.S. federal net operating loss carryforwards of approximately $215.9 million, of which
approximately $21 million was related to stock-based income tax deductions in excess of amounts that have been
recognized for financial reporting purposes. Any reduction in the deferred tax asset valuation allowance for
stock-based income tax deductions in excess of amounts that have been recognized for financial reporting
purposes will be directly credited to shareholders’ equity. As of December 31, 2011, the Company had gross
federal research and development tax credit carryforwards of approximately $14.0 million. The federal net
operating loss carryforwards will expire from 2019 through 2031, and the research and development tax credits
will expire from 2021 through 2031 if not utilized. Utilization of the Company’s federal net operating loss and
research and development
tax credit carryforwards generated prior to May 10, 2001 are limited under
Section 382 of the Internal Revenue Code. As of December 31, 2011, the Company had approximately
$16.8 million of foreign net operating loss carryforwards in various jurisdictions. Most of the Company’s foreign
net operating losses can be carried forward indefinitely, with certain amounts expiring from 2016 to 2030.

Income (loss) before income taxes consisted of the following (in thousands):

Year Ended December 31,
2010

2009

2011

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(2,847)
2,982

$16,319
621

$(3,233)
1,755

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

135

$16,940

$(1,478)

F-17

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax provision (benefit) for income taxes related to operations consisted of the following (in thousands):

Year Ended December 31,
2010

2011

2009

Current provision (benefit):

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

(106)
37
271

$ 636
258
1,235

$ (783)
6
1,314

Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

202

2,129

537

Deferred benefit:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(12,935)
(936)
(525)

—
—
(251)

—
—
(1,411)

Total deferred benefit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(14,396)

(251)

(1,411)

Total provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . .

$(14,194)

$1,878

$ (874)

The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax

rate as follows (in thousands):

Year Ended December 31,
2010

2011

2009

Income tax provision (benefit) at statutory rate . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed dividends for U.S. income tax purposes . . . . . . . . . . . . . . .
Meals and entertainment expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disallowed compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credit . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of change in valuation allowance on deferred tax assets . . . . .

$

47
(972)
(406)
338
86
156
—
0
(1,524)
(11,919)

$ 5,929
237
1,948
152
102
66
—
169
(1,389)
(5,336)

$ (517)
(78)
152
677
103
33
16
—
(2,199)
939

Effective income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . .

$(14,194)

$ 1,878

$ (874)

F-18

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant components of the Company’s deferred income tax assets and liabilities follow (in thousands):

December 31,

2011

2010

Current:
Deferred Income Tax Assets

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

$

6,552
2,341
6,899
7,232
937

$

4,378
1,347
8,872
0
83

Gross current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,961
(19,773)

14,680
(14,680)

Current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,188

Net current deferred tax asset

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,188

$

—

—

Long-Term:
Deferred Income Tax Assets

Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and experimentation credit carryforwards . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

$

852
18,285
79,431
975
4,907

$

2,392
16,371
92,261
1,213
4,723

Gross long-term deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104,450
(90,664)

116,960
(113,259)

Long-term deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,786

3,701

Deferred Income Tax Liabilities

Other

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-term deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(434)

(434)

(596)

(596)

Net long-term deferred tax asset

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 13,352

$

3,105

The Company’s net current deferred tax asset is included in prepaid expenses and other current assets in the

Company’s Consolidated Balance Sheet.

During 2011, the Company recorded an income tax benefit of $14.7 million ($.41 per diluted share) due to a
partial reduction, in the amount of $13.9 million, of the valuation allowance held against its U.S. deferred tax
assets and the complete reduction, in the amount of $0.8 million, of the valuation allowance held against the
deferred tax assets of the Company’s Germany subsidiary.

F-19

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The partial reduction of the valuation allowance held against the Company’s U.S. deferred tax assets and the
complete reduction of the valuation allowance held against the deferred tax assets of the Company’s German
subsidiary was based upon an evaluation of all available positive and negative evidence. The Company considers
its actual historical results over several years to have stronger weight than other more subjective indicators,
including forecasts, when considering whether to establish or reduce a valuation allowance on deferred tax assets.
As of December 31, 2011 the Company has generated cumulative pre-tax income in recent years. In addition to
the Company’s cumulative income position, the assessment of the Company’s ability to utilize its deferred tax
assets included an assessment of all known business risks and industry trends, as well as forecasted domestic and
international earnings over a number of years. The Company’s ability to forecast results significantly into the
future is severely limited due to the rapid rate of technological change in the industry in which it operates.
Included in the Company’s forecast was the impact of two contracts that were finalized during the fourth quarter
of 2011; namely a $188 million contract with the University of Illinois National Center for Supercomputing
Applications and a $97 million contract with the Department of Energy’s Oak Ridge National Laboratory. The
Company’s conclusion about the realizability of its deferred tax assets, and therefore the appropriateness of the
valuation allowance, will be reviewed quarterly and could change in future periods depending on the Company’s
future assessment of all available evidence in support of the likelihood of realization of its deferred tax assets.

The valuation allowance on deferred tax assets decreased by $17.5 million and $5.9 million in 2011 and

2010, respectively, and increased by $0.9 million in 2009.

Undistributed earnings relating to certain of the Company’s foreign subsidiaries are considered to be
permanently reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided
thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability
is not practicable due to the complexities associated with this hypothetical calculation. As of December 31, 2011
the Company’s foreign subsidiaries held cash in the amount of $14.3 million.

The following table summarizes changes in the amount of the Company’s unrecognized tax benefits for

uncertain tax positions for the three years ended December 31, 2011 (in thousands):

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to prior year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease related to prior year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of state of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to prior year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 646
35
(50)
(143)

$ 488
7
(265)
(210)

$ 20
(20)

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

F-20

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Company defines its major tax jurisdictions to include Australia, the United Kingdom
and the United States. The Company is no longer subject to income tax examinations with respect to Australia for
periods before 2006 and for periods before 2010 in the United Kingdom. With respect to the U.S. federal and
various state jurisdictions we are no longer subject to income tax examinations with respect to periods before
2008, although in such jurisdictions net operating loss and tax credit carryforwards generated in a year are
subject to examination and adjustment for at least three years following the year in which such losses or credits
are actually used to offset taxable income.

Estimated interest and penalties are recorded as a component of interest expense and other expense,

respectively. Such amounts were not material for 2011, 2010 and 2009.

NOTE 11 LINES OF CREDIT

The Company has a Credit Agreement with Wells Fargo Bank, National Association, or Wells Fargo, with a
principal amount of the credit facility of $3.5 million and a maturity date of June 1, 2012. This facility may be
used to secure foreign exchange contracts (with a potential exposure of no more than $1.8 million) and to support
letters of credit (up to no more than $1.7 million in aggregate). The Company is required to maintain at least
$3.5 million of cash, cash equivalents and similar investments to secure the facility and to maintain $3.5 million
of additional liquid assets. The Credit Agreement provides support for the Company’s existing letters of credit.
The available borrowing base under the Credit Agreement is reduced by the amount of outstanding letters of
credit at that date.

In September 2010, the Company entered into a secured line of credit with Silicon Valley Bank in the
amount of $25 million. The first $15 million is available at any time and the additional $10 million is available if
certain minimum financial ratios are exceeded. In connection with this line of credit, a blanket lien has been
granted in substantially all assets. The line of credit with Silicon Valley Bank has a maturity date of
September 13, 2012.

As of December 31, 2011 and 2010, the Company had no outstanding borrowings on these lines of credit

and was in compliance with all covenants.

NOTE 12 SHAREHOLDERS’ EQUITY

Preferred Stock: The Company has 5,000,000 shares of undesignated preferred stock authorized, and no

shares of preferred stock outstanding.

Common Stock: The Company has 75,000,000 authorized shares of common stock with a par value of

$0.01 per share.

Restricted Stock and Restricted Stock Units: During 2011, 2010 and 2009, respectively, the Company
issued an aggregate of 513,587, 501,157, and 877,170 shares of restricted stock and restricted stock units,
respectively, to certain directors, executives and other employees. The grant date fair value of these grants was
approximately $3.1 million, $2.8 million, and $3.4 million for 2011, 2010 and 2009, respectively. Stock
compensation expense is recorded over the vesting period, which has generally been two years for non-employee
directors and four years for officers and employees of the Company. As of December 31, 2011, $4.0 million
remains to be expensed over the remaining vesting periods of these grants.

As of December 31, 2011 and 2010, the Company had issued and outstanding 15,000 and 25,000 restricted
stock units, respectively. Restricted stock units have similar vesting characteristics as restricted stock but are not
outstanding shares and do not have any voting or dividend rights. The Company records stock-based
compensation expense over the vesting period. Once a restricted stock unit vests, a share of common stock of the
Company will be issued.

F-21

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Option Plans: As of December 31, 2011, the Company had five active stock option plans that
provide shares available for option grants to employees, directors and others. Options granted to employees
under the Company’s option plans generally vest over four years or as otherwise determined by the plan
administrator. Options to purchase shares expire no later than ten years after the date of grant.

In determining the fair value of stock options, the Company used the Black-Scholes option pricing model

that employed the following key weighted average assumptions:

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average Black-Scholes value of options granted . . . . . .

0.7%
0%
74%
4.0 years
$3.34

1.8%
0%
74%
4.0 years
$3.04

1.6%
0%
79%
4.0 years
$2.41

2011

2010

2009

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The
Company does not anticipate declaring dividends in the foreseeable future. Volatility is based on historical data.
The expected life of an option was based on the assumption that options will be exercised, on average, about two
years after vesting occurs. The Company recognizes compensation expense for only the portion of options or
stock units that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived
from historical employee termination data and adjusted for expected future employee turnover rates. The
estimated forfeiture rates applied for the years ended December 31, 2011, 2010 and 2009 were 5.2%, 7.6%, and
8.0%, respectively. If the actual number of forfeitures differs from those estimated by management, additional
adjustments to compensation expense may be required in future periods. The Company’s stock price volatility,
option lives and expected forfeiture rates involve management’s best estimates at the time of such determination,
all of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately,
the expense that will be recognized over the life of the option.

A summary of the Company’s stock option activity and related information follows:

Outstanding at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Remaining
Contractual
Term

Weighted
Average
Exercise
Price

$12.30
4.12
6.07
16.35

Options

3,755,894
1,320,200
(43,535)
(1,916,037)

Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . .

3,116,522

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

715,950
(92,280)
(294,482)

3,445,710
476,500
(248,271)
(256,019)

Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .

3,417,920

Exercisable at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .

2,097,443

Available for grant at December 31, 2011 . . . . . . . . . . . . . . . .

2,476,528

6.43

5.50
4.73
7.32

6.20
6.08
4.39
6.65

6.28

6.84

6.9 years

5.9 years

F-22

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2011, there was $3.6 million of aggregate intrinsic value of outstanding stock options,
including $2.1 million of aggregate intrinsic value of exercisable stock options. Intrinsic value is the total pretax
intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on
the last trading day of 2011 and the exercise price, multiplied by the number of shares) that would have been
received by the option holders had all option holders exercised their options as of December 31, 2011. This
amount changes, based on the fair market value of the Company’s stock. Total intrinsic value of options
exercised was $0.5 million, $0.2 million, and $0.1 million for the years ended December 31, 2011, 2010 and
2009, respectively.

A summary of the Company’s unvested restricted stock and restricted stock unit grants and changes during

the years ended December 31 was as follows:

Outstanding at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

623,874
877,170
—
(69,159)

1,431,885
501,157
(145,125)
(407,426)

1,380,491
513,587
(146,677)
(444,987)

Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,302,414

Weighted
Average
Grant Date
Fair Value

$7.36
3.87
—
7.36

5.22
5.54
4.54
7.40

4.77
6.04
5.29
4.03

5.47

The aggregate fair value of restricted shares vested during 2011, 2010 and 2009 was $2.9 million,

$2.2 million, and $0.3 million, respectively.

As of December 31, 2011, the Company had $7.9 million of total unrecognized compensation cost related to
unvested stock options and unvested restricted stock grants and restricted stock units, which is expected to be
recognized over a weighted average period of 2.2 years.

Outstanding and exercisable options by price range as of December 31, 2011, were as follows:

Outstanding Options

Exercisable Options

Range of Exercise
Prices per Share

$0.00 – $ 4.00 . . . . . . . . . . . . . . . . .
$4.01 – $ 6.00 . . . . . . . . . . . . . . . . .
$6.01 – $ 8.00 . . . . . . . . . . . . . . . . .
$8.01 – $50.28 . . . . . . . . . . . . . . . . .

Number
Outstanding

943,644
888,143
1,254,729
331,404

$0.00 – $50.28 . . . . . . . . . . . . . . . . .

3,417,920

Weighted
Average
Remaining
Life (Years)

Weighted
Average
Exercise
Price

7.2
6.6
7.5
4.3

6.9

$ 3.73
$ 5.60
$ 6.44
$14.80

$ 6.28

Number
Exercisable

596,827
520,128
694,918
285,570

2,097,443

Weighted
Average
Exercise
Price

$ 3.73
$ 5.70
$ 6.66
$15.84

$ 6.84

F-23

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table (in thousands) sets forth the share-based compensation cost resulting from stock options
and stock grants recorded in the Company’s Consolidated Statements of Operations for the years ended
December 31, 2011, 2010 and 2009.

Cost of product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011

2010

2009

$ 177
369
784
490
1,808

$ 218
432
1,628
603
2,046

$ 222
502
2,022
880
2,185

Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .

$3,628

$4,927

$5,811

In February 2009, the Company commenced a tender offer to purchase up to 2.1 million of eligible vested
and unvested employee and director stock options outstanding. The tender offer was for options with a grant
price of $8.00 or more, that were granted prior to May 2007. The tender offer was completed on March 20, 2009,
and the Company purchased 1.8 million options for $669,000. The amount charged to shareholders’ equity for
stock options purchased at or below the estimated fair value of the options on the date of repurchase was
$587,000, with the balance of $82,000 charged to compensation expense as amounts paid were in excess of
estimated fair value. During the year ended December 31, 2009, the Company recorded $1.4 million of stock-
based compensation expense related to previously unrecognized compensation cost of unvested stock options that
were purchased.

Employee Stock Purchase Plan (ESPP): Under the Company’s employee stock purchase plan, the
maximum number of shares of the Company’s common stock that employees could acquire under the ESPP is
1,750,000 shares. Eligible employees are permitted to acquire shares of the Company’s common stock through
payroll deductions not exceeding 15% of base wages. The purchase price per share under the ESPP is 95% of the
closing market price on the fourth business day after the end of each offering period. As of December 31, 2011
and 2010, 959,784 and 894,667 shares, respectively, had been issued under the ESPP.

NOTE 13 BENEFIT PLANS

401(k) Plan

For the three years ended December 31, 2011, the Company’s retirement plan covered substantially all
U.S. employees and provided for voluntary salary deferral contributions on a pre-tax basis in accordance with
Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company matches a portion of employee
contributions. The 2011, 2010 and 2009 Company match expense was $1.1 million, $2.1 million and
$2.0 million, respectively.

Pension Plan

The Company’s German subsidiary maintains a defined benefit pension plan. At December 31, 2011 and
2010, the Company recorded a liability of $2.3 million which approximates the excess of plan assets over the
projected benefit obligation of $0.1 million and the excess of the projected benefit obligation over plan assets of
$0.8 million, respectively. Plan assets are invested in insurance policies payable to employees. Net pension
expense was not material for any period. Contributions to the plan are not expected to be significant to the
financial position of the Company.

F-24

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 14 SEGMENT INFORMATION

The Company has three reportable business segments: Cray Products; Custom Engineering; and
Maintenance and Support. The segments represent components of the Company for which separate financial
information is available that is utilized on a regular basis by the Chief Executive Officer, who is the Chief
Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance.
The segments are determined based on several factors, including the Company’s internal operating structure, the
manner in which the Company’s operations are managed, client base, similar economic characteristics and the
availability of separate financial information. The Company is undergoing an organizational change and its
reportable segments, as a result, may change in the future.

Cray Products

Cray Products include a suite of highly advanced systems, including the Cray XE6, Cray XE6m, Cray XK6,
Cray XK6m, Cray CX1000 and Cray CX1, which are used by single users all the way up through large research
centers.

Custom Engineering

Custom Engineering designs, builds and implements custom high-performance computing solutions.

Maintenance and Support

Maintenance and Support provides ongoing maintenance of Cray systems and systems analysts to help

customers achieve their mission objectives.

The following table presents revenues and gross margin for the Company’s operating segments for the years

ended December 31 (in thousands):

2011

2010

2009

Revenue:

Cray Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custom Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$140,973
32,687
62,386

$201,260
61,999
56,129

$196,039
30,656
57,352

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$236,046

$319,388

$284,047

Cost of Revenue:

Cray Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custom Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 91,096
19,026
31,558

$128,807
47,924
32,700

$128,662
17,877
31,624

Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$141,680

$209,431

$178,163

Gross Profit:

Cray Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custom Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 49,877
13,661
30,828

$ 72,453
14,075
23,429

$ 67,377
12,779
25,728

Total gross profit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 94,366

$109,957

$105,884

Revenue and cost of revenue is the only discrete financial information the Company prepares for its

segments. Other financial results or assets are not separated by segment.

F-25

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to

be reported.

Product and service revenue and long-lived assets classified by significant country were as follows

(in thousands):

United
States

All
Other
Countries

Total

For the year ended December 31, 2011:
Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 95,929

$59,632

$155,561

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 56,660

$23,825

$ 80,485

Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 28,281

$ 4,085

$ 32,366

For the year ended December 31, 2010:
Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$153,599

$85,486

$239,085

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 58,406

$21,897

$ 80,303

Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 30,450

$ 4,368

$ 34,818

For the year ended December 31, 2009:
Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$151,733

$47,381

$199,114

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 64,840

$20,093

$ 84,933

Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 30,934

$ 4,155

$ 35,089

Revenue attributed to foreign countries is derived from sales to customers located outside the United States.
Revenue derived from U.S. government agencies or commercial customers primarily serving the
U.S. government, and therefore under its control, totaled approximately $127.8 million, $197.9 million and
$204.7 million in 2011, 2010 and 2009, respectively. In 2011, two customers accounted for an aggregate of
approximately 30% of total revenue. In 2010, two customers accounted for an aggregate of approximately 25%
of total revenue. In 2009, two customers accounted for an aggregate of approximately 30% of total revenue. In
general, concentrations of revenue by customer encompass all segments. In 2011, revenue in Germany accounted
for 12% of total revenue. In 2010, revenue in South Korea accounted for 13% of total revenue. In 2009 no
foreign country accounted for more than 10% of the Company’s revenue.

NOTE 15 RESEARCH AND DEVELOPMENT

The detail for the Company’s net research and development costs for the years ended December 31 follows

(in thousands):

Gross research and development expenses . . . . . . . . . . . . . . . . . .
Less: Amounts included in cost of revenue . . . . . . . . . . . . . . . . . .
Less: Reimbursed research and development (excludes amounts

2011

December 31,
2010

2009

$ 76,993
(410)

$ 82,525
(79)

$ 91,874
(1,789)

in revenue) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(27,131)

(38,828)

(27,138)

Net research and development expenses . . . . . . . . . . . . . . . . . . . .

$ 49,452

$ 43,618

$ 62,947

F-26

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 16

INTEREST INCOME (EXPENSE)

The detail of interest income (expense) for the years ended December 31 follows (in thousands):

2011

2010

2009

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 229
(262)

$ 485
(266)

$
477
(1,282)

Net interest income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (33)

$ 219

$ (805)

Interest income is earned by the Company on cash and cash equivalent and short-term investment balances.

NOTE 17 QUARTERLY DATA (UNAUDITED)

The following table presents unaudited quarterly financial

the two years ended
December 31, 2011. In the opinion of management, this information contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation thereof.

information for

The operating results are not necessarily indicative of results for any future periods. Quarter-to-quarter
comparisons should not be relied upon as indicators of future performance. The Company’s business is driven by
a few significant contracts and, as a result, the Company’s operating results are subject to very large quarterly
fluctuations.

(In thousands, except per share data)

For the Quarter Ended

3/31

6/30

9/30

12/31

3/31

6/30

9/30

12/31

2011

2010

Revenue . . . . . . . . . . . . . . . . . . . $39,867 $67,920 $ 36,705 $91,554 $ 28,388 $28,733 $ 42,836 $219,431
138,166
Cost of revenue . . . . . . . . . . . . . . 22,667

56,426

17,415

32,096

20,421

42,166

21,754

Gross profit . . . . . . . . . . . . . . . . . 17,200
Research and development,

25,754

16,284

35,128

6,634

11,318

10,740

81,265

net . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . .
General and administrative . . . . .
Restructuring . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . .
Net income (loss) per common

6,456
6,356
4,137
1,118
(1,485)

18,464
6,373
3,777
58
(2,958)

17,949
6,233
3,693
687

6,583
7,172
4,233
(80)
(12,232) 31,004

7,694
6,264
4,287
—
(11,597)

7,044
6,572
4,018
—
(6,638)

18,563
6,512
4,166
—
(18,776)

10,317
11,737
5,296
—
52,073

share, basic . . . . . . . . . . . . . . . $ (0.04) $ (0.08) $ (0.35) $

0.88 $

(0.34) $ (0.19) $

(0.55) $

1.50

Net income (loss) per common

share, diluted . . . . . . . . . . . . . . $ (0.04) $ (0.08) $ (0.35) $

0.85 $

(0.34) $ (0.19) $

(0.55) $

1.46

Diluted net income per common share for the fourth quarter of 2011 included approximately 1.1 million
equivalent shares for outstanding employee stock options and unvested restricted stock grants. Diluted net
income per common share for the fourth quarter of 2010 included approximately 1.1 million equivalent shares
for outstanding employee stock options and unvested restricted stock grants. Net income in the fourth quarter of
2011 includes $14.7 million ($.41 per diluted share) attributable to a partial reduction of the valuation allowance
held against our U.S. deferred tax assets and a complete reduction of the valuation allowance held against the
deferred tax assets of our Germany subsidiary.

F-27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Cray Inc.

We have audited the accompanying consolidated balance sheets of Cray Inc. and Subsidiaries
(“the Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations,
shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period
ended December 31, 2011. Our audits also included the financial statement schedule listed in the index at item
15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Cray Inc. and Subsidiaries as of December 31, 2011 and 2010, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2011, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2011, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 27, 2012, expressed an
unqualified opinion on the Company’s internal control over financial reporting.

/s/ PETERSON SULLIVAN LLP

Seattle, Washington
February 27, 2012

F-28

Schedule II — Valuation and Qualifying Accounts(1)
December 31, 2011
(In Thousands)

Description

Year ended December 31, 2009:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31, 2010:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31, 2011:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .

Balance at
Beginning
of Period

Charge/(Benefit)
to Expense

Deductions

Balance at
End of
Period

$ 99

$213

$(140)(2)

$172

$172

$ 89

$(138)(2)

$123

$123

$ (13)

$

0(2)

$110

(1) The Company does not have any warranty liabilities.
(2) Represents uncollectible accounts written off, net of recoveries.

F-29

INVESTOR INFORMATION

BOARD OF DIRECTORS

Stephen C. Kiely, Chairman
Private Investor

William C. Blake
Industry Consultant

John B. Jones, Jr.
Private Investor

Frank L. Lederman
Private Investor

Sally G. Narodick
Private Investor

Daniel C. Regis
General Partner
Regis Investments, LP

Stephen C. Richards
Private Investor

Peter J. Ungaro
President and Chief Executive Officer
Cray Inc.

EXECUTIVE OFFICERS

Peter J. Ungaro
President and Chief Executive Officer

Brian C. Henry
Executive Vice President
and Chief Financial Officer

Barry C. Bolding
Vice President, Storage & Data
Management and Corporate Marketing

Charles D. Fairchild
Vice President, Corporate Controller
and Chief Accounting Officer

Charles A. Morreale
Vice President, Field Operations

Arvind Parthasarathi
Senior Vice President and
General Manager of YarcData

Michael C. Piraino
Vice President Administration,
General Counsel and Corporate
Secretary

Margaret A. Williams
Senior Vice President, High
Performance Computing Systems

CRAY ANNUAL MEETING

JUNE 7, 2012 – 3:00 P.M.
901 Fifth Avenue
Fifth Avenue Conference Room
Seattle, WA 98164

CORPORATE HEADQUARTERS
Cray Inc.
901 Fifth Avenue, Suite 1000
Seattle, WA 98164
206-701-2000
206-701-2500 fax

OTHER PRINCIPAL OFFICES
1050 Lowater Road
Chippewa Falls, WI 54729
280 Jackson Street, Suite 210
St. Paul, MN 55101

INTERNET
E-Mail:
ir@cray.com

Website:
www.cray.com

LEGAL COUNSEL
Fenwick & West LLP
Seattle, WA

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Peterson Sullivan LLP
Seattle, WA

STOCK MARKET INFORMATION
Cray Inc. common stock is traded on the
Nasdaq Global Market under the
Symbol CRAY.

EQUAL OPPORTUNITY
Cray is an equal opportunity employer.

SHAREHOLDER SERVICES
BNY Mellon Shareowner Services,
our transfer agent and registrar, can be
contacted as indicated below to help you
with a variety of shareholder-related
services including:

• Change of address
• Lost stock certificates
• Transfer of stock to another person
• Additional administrative services
• Account consolidation

BNY Mellon Shareowner Services
Shareholder Relations
P. O. Box 358015
Pittsburgh, PA 15252
or

480 Washington Boulevard
Jersey City, NJ 07310
www.bnymellon.com/shareowner/isd
Telephone: 877-522-7762
TDD for Hearing Impaired:
800-231-5469
Foreign Shareholders:
201-680-6578
TDD Foreign Shareholders:
201-680-6610
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, our
other SEC reports and filings, our Code of
Business Conduct, Corporate Governance
Guidelines, the charters of our Board
committees and other governance
documents and information are available on
our website, www.cray.com,
under “Investors.”
You may also obtain a copy of our
Form 10-K filed with the SEC and other
Company information without charge, by
writing or calling:
Cray Inc.
Investor Relations
901 Fifth Avenue
Suite 1000
Seattle, WA 98164
Telephone: 866-729-2729
Shareholders who own Cray Inc. stock
through a brokerage account and receive
multiple copies of this annual report can
contact their broker to request
consolidation of their accounts.

Safe Harbor Statement
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, including, but not limited to, statements related to Cray’s expected future operating results, its ability to grow revenue, including from its sales of Cray XK6, Cray
XK6m, Cray XE6, and Cray XE6m systems, sales of its YarcData uRiKA graph appliance and Cray Sonexion sales, and its product development plans, including its next
generation “Cascade” system and its product delivery plans, including deliveries to Oak Ridge National Laboratory, National Center for Supercomputing Applications and
the Defense Advanced Research Projects Agency (DARPA) and other statements described in the section “Forward-Looking Statements” in the Company’s annual report
on Form 10-K for the year ended December 31, 2011 included in this Annual Report. These statements involve current expectations, forecasts of future events and other
statements that are not historical facts. Inaccurate assumptions and known and unknown risks and uncertainties can affect the accuracy of forward-looking statements and
cause actual results to differ materially from those anticipated by these forward-looking statements. Factors that could affect actual future events or results include, but are
not limited to, the risk that Cray does not achieve the operational or financial results that it expects, the risk that Cray is not able to successfully complete its planned product
development efforts, including those related to the “Cascade” system, within the planned timeframes or at all, the risk that planned updates to third-party processors,
including NVIDIA’s next generation “Kepler” GPUs, are not available with the performance expected or when expected, the risk that products ordered by customers are not
delivered when expected or do not perform as expected once delivered, the risk that customer acceptances are not received when expected or at all, the risk that Cray will not
be successful in growing revenue as expected or at all from its high performance computing systems business unit, its YarcData division or its Storage and Data
Management division, the risk that Cray is not able to achieve acceptance of co-funded milestones or deliver a prototype “Cascade” system to DARPA when expected or at
all, the risk that Cray will not be able to broaden and penetrate its addressable market as expected or at all and such other risks as are identified in the Company’s annual
report on Form 10-K included in this Annual Report, and from time to time in other reports filed by Cray with the U.S. Securities and Exchange Commission. You should
not rely unduly on these forward-looking statements, which apply only as of the date of this Annual Report. Cray undertakes no duty to publicly announce or report
revisions to these statements as new information becomes available that may change the Company’s expectations.
Cray is a registered trademark of Cray Inc. in the United States and other countries, and Cray Sonexion, Cray XE6, Cray XE6m, Cray XK6, Cray XK6m, uRiKA,
YarcData and the other trademarks listed in the Company’s annual report on Form 10-K included in this Annual Report are trademarks of Cray Inc. Other trademarks
used in this Annual Report are the trademarks of their respective owners.

Cray Inc. | 901 Fifth Avenue, Suite 1000, Seattle, WA 98164 | 206-701-2000 tel | 206-701-2500 fax