Cray

2012 Annual Report

Fellow Shareholders,

2012 was a tremendous year for our company. We posted record revenue and profitability, led by the
completion of the largest supercomputer and storage solution in our company’s history, as well as by the largest
system we’ve ever delivered to a commercial customer. Revenue grew across all of our product lines as we
updated our product offerings from top to bottom, dramatically expanding our addressable market and continuing
to build on our competitive position. In fact, over 15% of our revenue came from our new growth initiatives,
exceeding our original goal by more than 50%.

This past year also marked the completion of the largest R&D project we’ve ever undertaken, as our new,
high-end Cray XC30 supercomputer began shipping to customers around the world during the fourth quarter.
This is the most advanced system in our history, featuring the new Aries system interconnect, an innovative
packaging and cooling solution to lower total cost of ownership, our next generation Cray Linux and
programming environment software and the ability to integrate a wide variety of processor types. The XC30 is an
excellent showcase of our Adaptive Supercomputing vision, which allows us to customize the system to best
match our customers’ unique needs, enabling computing across a broad set of scientific, engineering and
advanced analytics applications in a single, highly scalable system. The XC30 is the first in a family of highly
innovative supercomputers that we believe will be our flagship offering over the next few years.

We remain focused on creating value for our shareholders. During the second quarter, we made the decision
to divest our future interconnect hardware development program and its associated intellectual property to Intel
Corporation. In return, we received $140 million and other future benefits we expect to realize over the coming
years. This was a very strategic transaction for our company as it preserves the base technology we need to be
successful and keep our product roadmap intact and allows us to continue to shift our R&D efforts toward
software innovation, which will increase the future differentiation of our supercomputers. During the fourth
quarter of 2012, we leveraged our strong balance sheet and acquired Appro International, a leading provider of
high-performance cluster supercomputers. This acquisition expands our product portfolio in the HPC market and
leverages our worldwide sales organization.

We have already generated strong momentum in the supercomputing market with our XE6 and XK7
systems and expect to build on that momentum with our new XC30, which we launched with over $100 million
in orders. These contracts are distributed around the world,
including in Europe at Germany’s National
Meteorological Service, one of the world’s premier numerical weather prediction centers, in the Asia Pacific
region at the Pawsey Centre in Australia, where we will support the data-intensive Australian Square Kilometer
Array project, and at the Department of Energy’s National Energy Research Scientific Computing Center in the
U.S.

Our new cluster solutions from our Appro acquisition round out our supercomputing offerings. These
scalable, flexible systems are well suited for a wide range of HPC applications, from our traditional research
customers to a number of commercial market verticals. As we move forward, we are expanding the global reach
of these products to capitalize on opportunities around the world. Our cluster products also serve as a
complementary platform to deliver our storage and big data analytics products. A great example of this is our
recently announced solution combining Apache Hadoop software with our CS300 line of cluster supercomputers.
We’re also exploring new ways to further leverage our systems technology and expertise to enhance our future
cluster solutions.

Our big data storage offerings are led by our Sonexion line, which we brought to market during the first half
of 2012. This network-attached storage appliance leverages the open source Lustre file system to deliver high
performance storage capable of scaling to multi-petabytes of capacity, with a simple, modular architecture well
suited to a broad range of applications and workloads. We installed what is believed to be the fastest storage
system in the world as part of the Blue Waters system at the University of Illinois, featuring data access rates
exceeding one terabyte per second across more than 25 petabytes of our Sonexion storage. For 2013, we are
broadening our storage offerings to include the ability to attach Sonexion to other vendors’ systems, which we
call “cluster-attached storage”, significantly expanding our addressable market.

On the analytics side of big data, our YarcData team was extremely busy in 2012. We began beta-testing of
an early version of our uRiKA graph analytics appliance during the first half of the year and followed through
with a production-ready version during the fourth quarter. We continued building out our YarcData team,
including hiring leaders in each of our four target market segments. One of these vertical markets is
cybersecurity, where companies need to run big data threat analytics in real-time and are dealing with
exponentially growing amounts of information spread over a wide variety of data sources. Our uRiKA appliance
is uniquely designed to complete this type of analysis in a fraction of the time of other systems on the market,
revealing hidden relationships or unknown patterns within complex data sets.

As we shift

to 2013 and beyond, we’re focused on delivering our unique and highly differentiated
technology into two related markets, supercomputing and big data. Our goal is to grow our businesses within
these markets at more than twice the annual market growth rates. In supercomputing, which market analysts
forecast is growing at about 7-8%, we’re targeting 15% growth. In big data, the storage and data management
market segment is growing at about 12% and the advanced analytics segment of the market at about 40%, and
we’re currently targeting annual growth rates of roughly 25% and 100% in these segments, respectively.

2012 was an excellent year for our company and while I’m pleased with what we accomplished, I’m even
more excited about what lies ahead. The dividing line between traditional supercomputing and big data continues
to blur, with supercomputing technology beginning to impact the analytics market in new and exciting ways. I
believe we’re in the early stages of this convergence and as we move forward, we are focused on leveraging our
R&D and technology to expand our presence in this exciting, rapidly evolving space. With a growing customer
base and expanding opportunities across many markets around the world, we are well positioned to deliver
continued growth in 2013 and beyond.

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 of Cray.

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, 2012
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
files). Yes Í No ‘

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, 2012, was
approximately $436,397,248 based upon the closing price of $12.08 per share reported on June 29, 2012, on the Nasdaq Global
Market.

No Í

As of February 14, 2013, there were 39,420,462 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 13, 2013, are incorporated by reference into Part III.

DOCUMENTS INCORPORATED BY REFERENCE

CRAY INC.

FORM 10-K
For Fiscal Year Ended December 31, 2012

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.

Page

1
11
20
21
21
21

22
25
26
39
40
41
41
43

43
43

43
43
43

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

43

PART IV

Cray is a federally registered trademark of Cray Inc., and Sonexion, Cray XT, Cray XT4, Cray XT5, Cray
XT6, Cray XE, Cray XE6, Cray XE6m, Cray XK6, Cray XK6m, ECOphlex, Threadstorm, Cluster Compatibility
Mode, Cray Xtreme-X, Cray Xtreme-Cool, HPC Software Stack, Advanced Cluster Engine, uRiKA, Cray
Cluster Solutions, Cray XC30, Cray XK7, Cray XK7m and YarcData are trademarks of Cray Inc. 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,
including categories of systems commonly known as supercomputers and/or clusters, and provide storage
solutions, software and engineering services related to HPC systems to our customers, which include government
agencies and government-funded entities, academic institutions and commercial entities. We provide customer-
focused solutions based on two models. Firstly, we provide highly integrated supercomputing, storage and data
analytics solutions, complete with highly tuned software, that stress capability, scalability, sustained performance
and reliability at scale. Secondly, we provide flexible commodity-based “cluster” supercomputing and storage
solutions based upon choosing best-of-breed components and working with our customers to define solutions that
meet specific needs. All of our solutions also emphasize total cost of ownership, energy efficiency and data
center flexibility as key features. 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 grow by
expanding our addressable market in areas where we can leverage our experience and technology, such as in
storage of and analytics on enormous volumes of data, popularly referred to as “Big Data”, technical enterprise-
class 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.

On May 2, 2012, pursuant to an Asset Purchase Agreement with Intel Corporation dated April 24, 2012, we
completed the sale to Intel of certain intellectual property and other assets related to the research and

1

development of hardware network interconnect technologies to Intel. 73 of our employees who had been engaged
in the research and development of these technologies joined Intel. Pursuant to the terms of the Asset Purchase
Agreement, we received $140 million in cash. This transaction dramatically strengthened our balance sheet and
allows us to focus in technology areas that we believe will create key differentiation in the future while our
agreement with Intel preserves our ability to sell our highly-integrated supercomputing products, including Aries
interconnect-based systems, and provides the opportunity to leverage important differentiating features of certain
future Intel products.

On November 21, 2012, we completed our acquisition of Appro International, Inc., or Appro, pursuant to an
Agreement and Plan of Merger with Appro dated, November 8, 2012. Cray paid cash consideration of $24.9
million ($21.8 million of the cash consideration was paid to Appro security holders and $3.1 million was paid to
other parties related to Appro’s transaction costs). Our Cray Cluster Solutions, or CCS, business, focused on
flexible commodity-based cluster supercomputing systems, is the result of our acquisition of Appro. This
acquisition allows us to expand our portfolio of innovative supercomputing solutions and our addressable market.

Products, Services and Customer Support

We concentrate on building product solutions for our customers in two major markets: the supercomputing
portion of HPC and Big Data, including storage and data analytics. We also provide a range of service offerings
around these products that leverage our high quality support and intimate understanding of our customer uses.

Cray Supercomputing Systems

Whether it is one of our general-purpose supercomputer products, a highly configurable supercomputing
cluster, or a solution that is custom engineered for a specific customer problem, our supercomputing offerings
span a broad performance spectrum and 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 and integrating
supercomputers that combine highly capable processors; high speed interconnect technology for maximum
communication efficiency; innovative packaging to address increased density, upgradability, energy efficiency
and reliability requirements; and scalable system software that enables performance and manageability at scale.
With our “Adaptive Supercomputing” vision, we expect to expand the concept of heterogeneous computing to a
fully integrated view of hardware and software supporting both multiple processing technologies and diverse
workloads.

Our supercomputers are the result of our Adaptive Supercomputing vision that

integrates diverse
technologies into a unified architecture enabling customers to match the computational solution to the need. Our
systems utilize components and technologies designed to support the demanding requirements of high-end HPC
users. Our Aries-based XC30 supercomputers emphasize high scalability for capability customer needs. The
important benefit of scalability in our XC30 supercomputers is to provide significantly higher sustained
performance on many important applications that require the very highest levels of scaling, with performance
improvements over comparable commodity technologies. Our Xtreme family of supercomputer cluster solutions
emphasize flexibility, capacity and industry standard designs for compute intensive customer needs. All of our
supercomputers are designed to allow HPC users to focus on their primary objectives, including advancing
scientific discovery, increasing industrial capabilities and improving national security in the most demanding
environments.

Our supercomputer systems offer several additional benefits:

• excellent price-performance;

• open standards including Linux-based operating systems, open file systems (e.g., Lustre and OpenSFS)

and open programming models (e.g, OpenMP and OpenACC);

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

reduce total costs of ownership;

• flexibility of processor type, memory, network configuration, storage configuration and system software

tools developed towards our Adaptive Supercomputing vision; and

2

• 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 HPC users.

We expect the continued advancement of many-core and accelerator processors to be advantageous to us as
they complement 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 accelerators or coprocessors
will further unbalance systems from a computational performance perspective putting increased pressure on the
system’s communications network. We believe our balanced approach to system design and support for
innovative parallel programming methodologies will become increasingly critical in enabling customers to take
advantage of the benefits of many-core processing.

Cray XC30 System. The Cray XC30 supercomputer is our most recent highly integrated supercomputing
product, which delivers on our commitment to an Adaptive Supercomputing architecture providing both extreme
scale and sustained performance. The Cray XC30 system provides the HPC user community the advantage of the
computational resources of our supercomputers powered by Intel Xeon E5 processors combined with our Aries
interconnect, flexible Dragonfly network topology, our powerful and fully-integrated software environment and
innovative power and cooling technologies. In addition, the Cray XC family of supercomputers can be expanded
in the future to include new Intel Xeon Phi coprocessors and NVIDIA Tesla graphics processor units, or GPUs,
based on the next-generation NVIDIA Kepler GPU architecture.

The Cray XC30 supercomputer utilizes the Cray Linux Environment, which was used in the Cray XE and
XK product families and provides the same workload flexibility. Customers may buy a single Cray XC30
supercomputer to run both a highly scalable custom workload and an industry-standard independent software
vendor workload. The Cray XC30 system includes powerful compiler, runtime and related software that allows
users to transparently leverage the underlying heterogeneous hardware.

Cray XK7/XK7m System. The Cray XK7 supercomputer combines the proven Gemini

interconnect,
AMD’s multi-core scalar processors and NVIDIA’s many-core GPUs to create a true, productive hybrid
supercomputer. The Cray XK7 supercomputer is capable of scaling to 500,000 processors and more than 30
petaflops of hybrid peak performance. The Cray XK7 system has been engineered to meet science’s real-world
demands. The Cray XK7 supercomputer brings our reliability, flexibility and scalability to the many-core GPU
HPC environment. Our Cray XK7m supercomputer is designed for the technical enterprise market. It leverages
all the advantages of the Cray XE6m systems addressing technical enterprise applications and price points while
additionally integrating NVIDIA Tesla GPU accelerators. Building on the same technology base of the Gemini
interconnect and AMD scalar processors, the Cray XK7m is ideal for users wanting to enter the domain of many-
core computing without risking a complete change of architecture. The Cray XK7m development environment
provides the same high standard of reliability and service, while also delivering innovative parallel programming
support for these high performance hybrid systems.

Cray XE6/XE6m System. The Cray XE6 system is a massively parallel processing, or MPP, system that
combines scalability with manageability, resiliency, lower cost of ownership with reduced power and cooling
requirements and broader application support. The Cray XE6 system supports very high density processor
configurations of 192 AMD Opteron processor sockets or up to 3,072 processor cores and delivering more than
30 teraflops (30 trillion floating point operations per second) of computational capacity in each 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, 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 software environment. The
Cray XE6 system can be liquid cooled through use of Cray ECOphlex technology or air cooled. Our Cray XE6m
supercomputer addresses the technical enterprise market and is designed to make our HPC technology available
to more users by targeting a lower price band in the HPC technical enterprise market segment with price points
starting at approximately $200,000.

Cray Xtreme-X Supercomputer. The Cray Xtreme-X supercomputer cluster system offers an energy-
efficient, air-cooled architecture featuring high performance, high availability computing. It includes flexible

3

configuration options for a wide range of data center cooling architecture requirements through the use of air or
chilled cooling rear door heat exchangers. The Cray Xtreme-X system is integrated with the HPC Software
Stack, software tools compatible with most open source and commercial compilers, tools, schedules and libraries
to run complex applications. This solution is also integrated with the Advanced Cluster Engine. This
management software suite is designed to substantially reduce the complexity of managing HPC clusters by
offering server, cluster, storage, and network management features combined with node provisioning, failover,
load-balancing, job scheduling and revision control capabilities with multi-Linux OS support.

Cray Xtreme-Cool Supercomputer. The Cray Xtreme-Cool cluster supercomputer system offers the
features and benefits of the Cray Xtreme-X system with superior energy savings, lower total cost of operation
and faster return on investment by requiring fewer or no air conditioning units in the data center. Its unique
design uses warm water liquid-cooling heat exchangers with no chillers, reducing typical energy consumption
used to cool the data center by 50%. This system offers high performance and three times more energy efficiency
per rack versus traditional air-cooled designs. It also produces 80% heat capture to the warm water for possible
heat reuse. The Cray Xtreme-Cool solution isolates the primary data center loop and uses a low-pressure isolated
secondary data center liquid loop to cool the server’s critical components such as processors and memory
improving cooling system reliability and safety.

YarcData

YarcData uRiKA Graph Appliance. Our YarcData business focuses on providing solutions to the Big Data
market by extending our supercomputing platform to graph analytics problems. The YarcData uRiKA graph
appliance solution includes scalable massively multithreaded processors with a massive shared memory
architecture that is ideally suited for tasks such as research discovery, 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 a large 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 compute infrastructure 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. The uRiKA system complements an existing data warehouse or Hadoop
cluster by offloading graph workloads and interoperating within the existing analytics workflow. Subscription
pricing for on-premise deployment of the appliance eases the adoption of the uRiKA system into existing IT
environments.

Storage and Data Management

Our storage and data management division offers storage and data management solutions for HPC and Big
Data leveraging years of experience delivering high performance parallel storage and file systems to our
customers. We are able to rapidly deploy scalable file systems that integrate effectively with computing solutions
ranging from third-party Linux clusters to highly integrated Cray supercomputers. Our storage systems business
offers the choice of two product families for customers.

Cray Sonexion Storage Systems. Our flagship storage product line, Cray Sonexion 1600, embeds the
Lustre parallel file system and other software in an optimal configuration to reduce deployment time, increase
reliability and precisely scale performance and capacity. Cray Sonexion offers an optimal combination of
performance and capacity, scaling capacity from terabytes to petabytes and with performance from three
gigabytes to over one terabyte in a single file system. High density is achieved through reducing storage
componentry and cabling. Sonexion systems are engineered to be installed and put into production much more
quickly than other current HPC storage solutions and support attaching to a wide range of industry-standard
Linux compute clusters, including our clusters. Currently we sell two versions of Sonexion, the Sonexion 1300
and Sonexion 1600.

Cray esFS Storage Solutions. For customers requiring high degrees of flexibility in configuration and
storage array choice, we sell pre-validated partner solutions built on strategic partner platforms from partners
such as Data Direct Networks (DDN), NetApp (E-Series) and other storage partners such as Spectra and

4

Quantum. Our component-based solutions provide a single point of support and ensure customers have access to
leading storage and data management technologies. Our component-based solutions utilize software and services
provided through our data management software and services suite of offerings.

Data Management Software and Services. We provide a suite of data management and storage
connectivity products and services enabling data movement for and management of both our and third-party
storage platforms. Our data management solutions enable customers to better utilize deployed storage
investments and flexibly manage data across a variety of storage platforms.

Engineering and Customer Services

Custom Engineering. To address those HPC users whose needs cannot be met through our standard
product offerings, we provide an alternative. Our Custom Engineering business leverages our amassed
intellectual property and technology 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 that are often performance, application or capacity related; special environmental
needs that might include special size dimension, weight, power and cooling limitations; or unique interface or
integration requirements.

We provide solutions 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 processing, 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 to create a unique, specialized 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.

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 in many cases we locate our
support personnel at or near customer sites globally, 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 twelve to twenty-one percent of our total revenue. Our support arrangements 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. Typically, customers may select levels
of support and response times, ranging from delivery of parts only to 24 x 7 coverage with two-hour response
times.

Sales and Marketing

We focus our sales and marketing activities on government computing labs, academic institutions and
commercial entities that purchase HPC and Big Data systems and storage. We sell our solutions primarily
through a seasoned supercomputing direct sales force that operates throughout the United States and in Canada,
South America, Europe, Japan and Asia-Pacific. Over 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 highest-end
systems sales and engineering service 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 (including
cluster) solutions for each customer, there is substantial commonality in the underlying components and systems,
allowing us to leverage manufacturing and supply chain operations.

5

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 market 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 demand creation marketing campaigns.
Business development focuses on providing products and services to specific customer sets, such as earth
sciences, manufacturing and computer-aided engineering, life sciences and energy.

Our Technology

We are dependent on the successful identification, development and timely introduction of new products
and capabilities. The focus of our research and development activities include identification of new trends,
technologies and workload needs in the ever changing HPC and Big Data markets, and subsequent leveraging of
this research in the design of system architectures, hardware and software necessary to implement our expanding
product portfolio.

Product Architectures

Our product portfolio covers a breath of architectures including tightly integrated massively parallel
supercomputers, highly flexible and configurable supercomputers, world class data storage and management
solutions and a purpose-built Big Data analytics appliance.

Hardware

We have extensive experience in the definition, design and integration of the hardware components required
of HPC system solutions. This includes integrated circuits, board design, memory controllers, network and
interconnect technologies, I/O subsystems, power, cooling and packaging infrastructures. The majority of our
hardware research and development investments are in the following areas:

• High-speed interconnect and board integration and design.

Integration of a variety of network devices
using a combination of custom and industry standard printed circuit boards, high-density connectors,
carefully chosen transmission media and optimized topologies.

• Power, packaging and cooling. We use a variety of dense packaging techniques in order to produce
systems with superior performance, socket densities and energy efficiency. This packaging conjoins
industry standard and custom-designed technologies in the areas of printed circuit board assemblies,
power distribution and liquid and air cooling.

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
product portfolio and distributing that software as part of system sales. 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 meet certain specific

customer requirements, while focusing our own resources where we believe we add the highest value.

For information relating to amounts spent on research and development, see Note 18 — 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.

6

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, 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 and Milpitas, California. We work closely with a
supplier 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 typically 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 Intel for our Cray XC systems, AMD and
NVIDIA for our Cray XE and XK systems and the Aries interconnect chip from Avago through Taiwan
Semiconductor Manufacturing Company who also provides the YarcData uRiKA Graph Appliance Threadstorm
processor and the Gemini and SeaStar interconnect chips. 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 2012 and in previous years.

Our Markets

Our key target markets are the supercomputing portion of the HPC market and the Big Data (including
storage and analytics) market. As the ability to store, and perform data analytics on, enormous volumes of data
has developed into an important success driver for businesses and government and academic research, the Big
Data market has developed into an important target market for us. Big Data is a relatively new target market for
us, but certain of our core strengths, such as the abilities to process vast amounts of unique data at very high
speeds and to make “predictions,” are essential to addressing Big Data challenges. The market segments we are
targeting in the supercomputing portion of HPC and Big Data are as follows:

Scientific Research. Scientific research includes governmental

research laboratories and research
universities around the world. In the U.S., 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 similar agencies around the world. These
research centers also provide supercomputing and Big Data resources to their affiliated organizations (such as the
Department of Defense contractors) and industrial partners.

National Security/Cybersecurity. Classified work in various worldwide government agencies has represented
an important customer market for us over many years. Certain U.S. governmental departments have also to
provided funding support for our research and development efforts to meet their objectives. Current and target
customers for our full range of 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.

7

Defense. The defense segment has wide-ranging needs for HPC systems that in some ways are unique and
in other ways are similar to our other market segments. 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, storage and analytics
capabilities increasingly critical. We have a number of customers running weather and climate applications,
including customers in Germany, 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 and storage 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 and for oil and gas exploration
and processing, from seismic analysis to reservoir simulations. The simulation methods used are both CPU and
GPU compute intensive and often require fast networks. We currently have customers utilizing both Cray
systems and storage and we are targeting this segment for future products.

Manufacturing/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
to improve time-to-market and product quality. We
many other computer-aided engineering applications,
currently have customers in the aerospace, automotive and other manufacturing industries around the world.

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 68% of our revenue in 2012, 54% of our
2011 revenue, and 62% of our 2010 revenue. Significant customers with over 10% of our annual revenue,
including those funded by the U.S. government, were the National Center for Supercomputing Applications
(NCSA) at the University of Illinois, the first phase of the upgrade at the Oak Ridge National Laboratory and a
commercial customer in 2012; the High Performance Computing Center Stuttgart and the National Energy
Research Scientific Computing Center in 2011; and the Korean Meteorological Administration and Los Alamos
National Laboratory in 2010. International customers accounted for 18% of our total revenue in 2012, 35% of our
total revenue in 2011 and 34% of our total revenue in 2010.

We have three operating segments that are reportable for financial reporting purposes. Segment information
and related disclosures are set forth in Note 17 — Segment Information in the Notes to Consolidated Financial
Statements in Item 15. Exhibits and Financial Statement Schedules in Part IV of this annual report.

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

8

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 when competing in procurements. The introduction of the
new CCS products, via our acquisition of Appro, helps us better address this market by providing flexible HPC
offering alternatives with market competitive pricing.

To the extent that IBM and other processor suppliers develop processors with greater capabilities than the
processors we use from Intel, AMD and NVIDIA our systems may be at a competitive disadvantage to systems
utilizing such other processors.

For our products designed for the high-end supercomputer market segment, we compete primarily on the
basis of product performance, scalability, breadth of features, price/performance, total cost of ownership, quality,
reliability, upgradeability, service and support, corporate reputation, brand image and account relationships. Our
market approach here is more focused than many of our competitors, with high-end supercomputing products
designed with high levels of integration to meet the exacting needs of this performance and scalability driven
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 highly-integrated 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.

For our products designed for the technical enterprise HPC market segment, we provide configurations and
cluster products that target applications requiring less than the most extreme levels of performance/bandwidth. In
addition, for cost-sensitive markets that may necessitate a smaller footprint, we provide less dense HPC systems
with or without the need for upgrading in the future. These Cray systems often leverage the technological
advances made through developing our biggest and highest performing supercomputers, with cost-economized
configuration options, or CCS products enabling the optimal balance of flexibility, price, performance, power
and footprint. With this expansion of enterprise caliber products, we have now addressed the price-sensitive
product application space with Cray HPC architectures, which scale up, or configure down, to meet customer
needs and compete across the price/performance spectrum.

The market for our CCS products is competitive. The majority of competition is from IBM, HP, Dell, SGI,
Bull and Fujitsu that offer open-standards cluster solutions with special software to address the growth in the
mid-range supercomputing market. We compete primarily on the basis of price/performance, open-standards
architecture,
cluster
management, corporate reputation and account relationships. Our market approach is to offer cluster solutions
that provide greater performance on the large and complex computational problems and superior price/
performance on many important applications in this market segment.

energy-efficiency,

comprehensive

configurations,

scalability,

reliability,

flexible

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 and
IBM. The market for knowledge discovery from “Big Data”, enhanced by graph analytics, 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 should 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 file system, as well as solutions from Data Direct Network, NetApp,
Panasas and other storage companies. The parallel storage and file system market is currently fragmented with a
number of competing providers in the HPC marketplace. We believe our offerings compete effectively 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 engineering services, including custom engineering, is competitive.
Competition typically occurs at the design stage of a prospective customer’s proposed product or research need,

9

where the customer evaluates alternative technologies and design approaches. A design win provides an initial
engagement, and while it may lead 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.

We have licensed certain patents and other intellectual property from others in our industry. These licenses
often contain restrictions on our use of the underlying technology. We have also entered into cross-license
arrangements with other companies involved in the HPC industry. On May 2, 2012, we sold certain intellectual
property and other assets related to the research and development of hardware network interconnect technologies
to Intel Corporation.

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, 2012, we had 929 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
public may obtain information on the operation of the Public Reference Room by calling the SEC 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

10

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 “About Cray — 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. For example, a system sale to the University
of Illinois’ National Center for Supercomputing Applications accounted for approximately $143 million of our
revenue in fiscal 2012. Delays in achieving customer acceptances of installed systems and 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, inability of a system to meet performance
requirements or targets, 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 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.

Although we recorded positive net income in 2010, 2011 and 2012, 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:

• our ability to secure sufficient orders for our Cray XC30 systems as well as upgrades and successor

systems;

• successfully delivering and obtaining customer acceptances of our Cray XC30 systems, as well as
obtaining customer acceptance of the Cray XK7 system delivered to the Department of Energy’s Oak
Ridge National Laboratory;

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

YarcData and storage and data management businesses;

• our ability to scale our internal processes effectively to enable growth;

• 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;

11

• our expense levels, including research and development expense net of government funding;

• our ability to successfully and timely design, integrate and secure competitive processors for our Cray

XC30 system and upgrades and successors systems;

• our ability to secure additional government funding for future development projects such as funding
targeted for “exascale” and other computing initiatives as our DARPA HPCS program has been
completed;

• the level of product gross profit contribution in any given period due to volume or product mix,
particularly with the introduction of flexible commodity-based supercomputers, 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; and

• 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;

• 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 2013 and in future years.

If we are unable to successfully develop, sell and deliver our Cray XC30 systems and successor
systems, and recognize revenue for these systems, our operating results will be adversely affected. We
expect that a substantial portion of our revenue in the foreseeable future will come from acceptances of delivered
Cray XC30 and successor systems, including systems integrating future processors. The development effort
related to these systems 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

12

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.

In addition, many factors affect our ability to successfully sell and recognize revenue for these systems,

including the following:

• The level of product differentiation in our Cray XC30 and successor systems. We need to compete
successfully against HPC 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 XC30, Cray XE6, Cray XK6 systems and 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; and

• Whether potential customers delay purchases of our products because they decide to wait for successor

systems or upgrades that we have announced or they believe will be available in the future.

Failure to successfully develop and sell our Cray XC30 and successor systems into the high-end of the HPC

market and recognize revenue for such systems will adversely affect our operating results.

If our current and future growth initiatives targeting markets outside of our traditional markets,
primarily our YarcData subsidiary, storage and data management business and technical enterprise HPC
systems, 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 growth initiatives targeting markets
outside of our traditional market, particularly if those market segments do not grow significantly. We are
currently focusing on Big Data analytics and storage and data management opportunities and selling HPC
systems into the technical enterprise/midrange 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. Technical enterprise 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 and data management opportunities and our technical
enterprise efforts require significant monetary investments ahead of revenue, including product development
efforts, adding experienced personnel and initiating new marketing and sales efforts and therefore may reduce net
income in the short term even if successful.

If our Cluster Solutions business is not successful, our operating results will be adversely
affected. Our Cluster Solutions business is the result of our acquisition of Appro International, Inc. in the

13

fourth quarter of 2012. We have not previously sold a cluster-based solution into the same markets we sell our
core HPC systems, and for this business to be successful we must successfully do so without impairing our
ability to sell tightly-integrated solutions, such as our Cray XC products. We must also successfully complete the
integration of the Appro business into Cray. If we are unable to successfully integrate and grow our Cluster
Solutions business, our operating results will be adversely affected.

We have recently completed an acquisition, and may make acquisitions in the future, which could
require significant management attention, disrupt our business, result in dilution to our stockholders,
deplete our cash reserves and adversely affect our financial results. Acquisitions involve numerous risks,
including the following:

• Difficulties in successfully integrating the operations, systems, technologies, products, offerings and

personnel of the acquired company or companies;

• Insufficient revenue to offset increased expenses associated with acquisitions;

• Diversion of management’s attention from normal daily operations of the business and the challenges of

managing larger and more widespread operations resulting from acquisitions;

• Potential difficulties in completing projects associated with in-process research and development

intangibles;

• Difficulties in entering markets in which we have no or limited direct prior experience and where

competitors in such markets have stronger market positions;

• Initial dependence on unfamiliar supply chains or relatively small supply partners; and

• The potential loss of key employees, customers, distributors, vendors and other business partners of the

companies we acquire following and continuing after announcement of acquisition plans.

Acquisitions may also cause us to:

• Use a substantial portion of our cash reserves or incur debt;

• Issue equity securities or grant equity incentives to acquired employees that would dilute our current

shareholders’ percentage ownership;

• Assume liabilities, including potentially unknown liabilities;

• Record goodwill and nonamortizable intangible assets that are subject to impairment testing on a regular

basis and potential periodic impairment charges;

• Incur amortization expenses related to certain intangible assets;

• Incur large and immediate write-offs and restructuring and other related expenses; or

• Become subject to intellectual property or other litigation.

Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors
outside of our control, and no assurance can be given that our recently completed or future acquisitions will be
successful and will not materially adversely affect our business, operating results, or financial condition. Failure
to manage and successfully integrate acquisitions could materially harm our business and operating results.

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 2010, 2011 and 2012, approximately 62%, 54% and 68%, 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 potential “sequestration” or other Congressional

14

failures or successes in addressing budget concerns, current economic uncertainty, the downgrading of U.S.
government debt, the political climate in the U.S. focusing on cutting or limiting budgets and their effect on
government budgets, the limits on federal borrowing capacity, changes in procurement policies, budgetary
considerations including Congressional delays in completing appropriation bills as occurred in 2011 and 2012,
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 solutions and
subsystems and use service providers to co-develop key technologies. 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, and in the case of the Cray Sonexion products, we rely on a third-party original
equipment manufacturers to supply complete storage systems. 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 or systems 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 2011 and 2012 and adversely affected our efforts to complete the acceptance processes
on the upgrades at Oak Ridge National Laboratory, which in turn significantly lowered our total revenue
for fiscal year 2011 and, to a lesser extent for fiscal year 2012;

• 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;

• 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 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;

15

• 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.
Certain delays in the availability of acceptable 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 2012, and could adversely affect future results.

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, our Cray XC 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.

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
in a deferral of our receipt of cash and revenue for these systems. These
products, which could result
developments limit our revenue and resources and reduce our ability to be profitable.

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 pricing pressure that 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.

We may not realize the anticipated benefits, or minimize the possible risks, of the sale of certain
interconnect hardware assets to Intel Corporation, which could alter the revenue, costs and nature of our
business.
In connection with our sale of certain interconnect hardware assets to Intel, we conducted business,
legal and financial due diligence with the goal of identifying and evaluating material risks involved in the
transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks
and, as a result, might not realize the intended advantages of the transaction. Additionally, the process of

16

transitioning our employees and technologies to Intel may result in unforeseen operating difficulties and
expenditures and could involve a number of potential adverse risks to our business, including the following:

• harm to our ability to compete in relevant markets or in customer perception of our products;

• unanticipated costs, adverse tax consequences and unforeseen accounting charges or fluctuations;

• exposure to potential liabilities to third parties or Intel, or claims for indemnification by Intel, including

with respect to third-party litigation matters;

• failure to successfully further develop our current products or disruption to our current or future product

roadmaps and ongoing business;

• delays and difficulties in receiving key components for our products from suppliers, including Intel;

• loss of customers, vendors or alliances; and

• failure to create shareholder value with the additional cash resources.

If we fail to realize the expected benefits from the transaction, or to minimize the expected risks of the
transaction, whether as a result of unidentified risks or other unforeseen events, our business, results of
operations and financial condition could be adversely affected.

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. 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. 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 particularly in the case of personnel associated with our “Big
Data” efforts.

Customers and other third parties may make statements speculating about or announcing an
intention to complete purchases or acceptances of Cray products before such purchases or acceptances are
substantially certain, and these proposed purchases or acceptances 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. In addition, from time to time, customers and other third parties may make statements
speculating about or announcing the completion of an acceptance process of a delivery system before such
acceptance is completed or certain. As a result, these statements or announcements do not mean that Cray will
ultimately be able to obtain the acceptance when or as expected.

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 2010, 2011 and 2012, 62%, 54% and 68%
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

17

normally funded annually. Changes in U.S. strategy and priorities 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 or non-compliance with the terms of a specific contract, 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.

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

18

• 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.

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.

19

We maintain confidential and proprietary information on our computer networks and employ
security measures designed to protect this information from unauthorized access. If our security measures
are breached, we could lose proprietary data and may suffer economic losses. We maintain confidential
information on our computer networks, including information and data that are proprietary to our customers and
third parties, as well as to us. Although we have designed and employed and continue to enhance a multitude of
security measures to protect this information from unauthorized access, security breaches may occur as a result
of third-party action, including computer hackers, employee error, malfeasance or otherwise, that could result in
someone obtaining unauthorized access to our customers’ data or our data, including our intellectual property and
other confidential business information. Because the techniques employed by hackers to obtain unauthorized
access or to sabotage systems change frequently, we may be unable to anticipate these techniques or to
implement adequate preventative measures. Any security breach could result in disclosure of our trade secrets or
disclosure of confidential customer, supplier or employee data. If this should happen, we could be exposed to
potentially significant legal liability, remediation expense, harm to our reputation and other harm to our business.

Provisions of our Restated Articles of Incorporation and Amended and Restated 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 Amended and Restated 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 Amended and Restated
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.

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.

20

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

development, sales and marketing

St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software development, sales and marketing
Milpitas, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing, warehouse and engineering

54,000

61,900
38,500

We own 179,100 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 8,600 square feet of office space, primarily for hardware development, in Austin, Texas.
We lease a total of 5,200 square feet of office space, primarily for hardware and software engineering, in The
Woodlands, 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 7,400 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 10,000 square feet of office space. We believe our facilities are adequate to meet our
needs at least through 2013.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

21

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 14, 2013,

we had 39,420,462 shares of common stock outstanding that were held by 321 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, 2012:

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

Year Ended December 31, 2011:

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

High

Low

$ 8.39
$12.24
$13.56
$16.02

$ 8.38
$ 6.87
$ 6.52
$ 6.85

$ 6.09
$ 6.55
$10.80
$11.76

$ 6.14
$ 5.83
$ 4.97
$ 4.96

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, 2012, 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) . . . . . . . . . . . . . . . . . . . . .

2,112,510

180,995

Total

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

2,293,505

$7.50

$5.08

1,044,074

—

1,044,074

(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, 2012,
under the option and equity compensation plans approved by shareholders under which we may grant stock
options, an aggregate of 1,044,074 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 165,212 shares were available for such awards.

22

(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 similar to
the stock option plans described in footnote (1) above. On March 30, 2010, the 2000 non-executive
employee stock option plan was terminated, which ended future grants but did not affect then outstanding
options. At December 31, 2012, under the 2000 non-executive employee stock plan we had options for
180,995 shares outstanding.

Unregistered Sales of Securities

We had no unregistered sales of our securities in 2012 not previously reported.

Issuer Repurchases

We did not repurchase any of our common stock in 2012.

23

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, 2007, 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, 2012

S
R
A
L
L
O
D

300

250

200

150

100

50

0

2007

2008

2009

2010

2011

2012

Cray Inc.

Nasdaq Stock Market (U.S) 

Nasdaq Computer Manufacturer Stocks 

12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012

Cray Inc.

Nasdaq Stock Market (U.S.)

Nasdaq Computer Manufacturer Stocks

100.0

100.0

100.0

34.7

61.2

42.0

107.2

87.9

92.3

119.7

104.1

131.7

108.0

104.7

154.5

266.3

123.8

196.4

24

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:

2012

Years Ended December 31,
2010
(In thousands, except for per share data)

2009

2011

2008

Operating Data:

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

$353,767
67,291

$155,561
80,485

$239,085
80,303

$199,114
84,933

$218,970
63,883

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

421,058

236,046

319,388

284,047

282,853

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

231,237
38,643

101,000
40,680

155,027
54,404

130,444
47,719

133,715
38,062

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

269,880

141,680

209,431

178,163

171,777

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

151,178

94,366

109,957

105,884

111,076

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

64,303
37,180
20,707
—

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

122,190

Net gain on sale of interconnect hardware development

program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

139,068

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

168,056
472
204

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

93,209

—

1,157
(989)
(33)

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

168,732
(7,491)

135
14,194

43,618
31,085
17,767
—

62,947
26,601
16,579
—

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

92,470

106,127

147,955

—

17,487
(766)
219

16,940
(1,878)

—

(243)
(430)
(805)

(1,478)
874

—

(36,879)
588
(4,068)

(40,359)
(387)

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

$161,241

$ 14,329

$ 15,062

$

(604) $ (40,746)

Net income (loss) per common share:

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

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

Weighted average outstanding shares:

$

$

4.42

4.27

$

$

0.41

0.40

$

$

0.44

0.43

$

$

(0.02) $

(1.25)

(0.02) $

(1.25)

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

36,509

35,122

34,313

33,559

32,573

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

37,789

36,072

35,278

33,559

32,573

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 investments . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible notes, net of discount, current . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$156,892
37,694
7,827
8,652
10,843

$323,205
283,352
510,314
—
340,546

25

$ (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)
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

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,
including categories of systems commonly known as supercomputers and/or clusters, and provide storage
solutions, software and engineering services related to HPC systems to our customers, which include government
agencies and government-funded entities, academic institutions and commercial entities. We provide customer-
focused solutions based on two models. Firstly, we provide highly integrated supercomputing, storage and data
analytics solutions, complete with highly tuned software, that stress capability, scalability, sustained performance
and reliability at scale. Secondly, we provide flexible commodity-based “cluster” supercomputing and storage
solutions based upon choosing best-of-breed components and working with our customers to define solutions that
meet specific needs. All of our solutions also emphasize total cost of ownership, energy efficiency and data
center flexibility as key features. 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 grow by
expanding our addressable market in areas where we can leverage our experience and technology, such as in
storage of and analytics on enormous volumes of data, popularly referred to as “Big Data”, technical enterprise-
class systems and custom engineered solutions.

Summary of 2012 Results

Revenue increased by $185.0 million in 2012 compared to 2011 to $421.1 million. Product revenue
increased by $198.2 million and service revenue decreased by $13.2 million. The increase in product revenue
was principally the result of two significant system acceptances, one at the National Center for Supercomputing
Applications (NCSA) at the University of Illinois and another for the first phase of the upgrade at the Oak Ridge
National Laboratory. Service revenue decreased in part due to lower revenue from our former Special Purpose
Systems practice and the effect of an additional $6.2 million in revenue recorded on a Custom Engineering
contract in 2011, as revenue was recognized on the cash basis as our ability to collect payment was not
reasonably assured. Cray Cluster Solutions contributed $600,000 in revenue in 2012.

Product gross profit margin for 2012 of 35% was consistent with 2011. Gross profit margin from services
was lower in 2012 compared to 2011 due to the additional revenue from the Custom Engineering contract
referred to above and the associated costs having been recorded in prior periods, as well as $2.1 million in higher
incentive compensation expense in 2012.

We recorded income from operations of $168.1 million in 2012 compared to income from operations of
$1.2 million in 2011. The increase in net income from operations was primarily attributable to both a $139.1
million gain on the sale of our interconnect hardware development program to Intel and an increase in gross
profit of $56.8 million in 2012 over 2011 due to higher product revenue. This was partially offset by lower
service revenue and lower gross profit on service revenue. Operating expenses increased $29.0 million
principally due to additional investments in research and development activities, lower research and development
reimbursements and an additional $12.7 million in incentive-based compensation and commissions. Incentive
compensation costs are principally driven by pre-bonus operating income and, to a lesser extent, product revenue.

Net income increased from $14.3 million in 2011 to $161.2 million in 2012 due to the increase in operating

income discussed above, partially offset by an increase in income tax expense of $21.7 million.

26

Net cash provided by operations during 2012 was $156.9 million, as compared to net cash used in
operations of $3.8 million in 2011. The increase in net cash provided by operations was principally due to higher
net income and higher collections from customers.

Market Overview and Challenges

Significant trends in the HPC industry include:

• Supercomputing with many-core commodity processors driving increasing scalability requirements;

• Increased micro-architectural diversity, including increased usage of many-core processors and growing

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

• Data needs growing faster than computational needs;

• The commoditization of HPC hardware, particularly processors and interconnect systems;

• Electrical power requirements becoming a design constraint and driver in total cost of ownership

determinations;

• The growing commoditization of software, including plentiful building blocks and more capable open

source software; and

• Cloud Computing for cost-effective computing on loosely-coupled HPC applications.

Several of these trends have resulted in the expansion and acceptance of loosely-coupled cluster systems
using processors manufactured by Intel, AMD and others combined with commercially available, low cost,
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, and most scalable systems, those often 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 graphics processing units and
field programmable gate arrays , 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 whose applications demand these tightly-coupled architectures. 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 have begun to expand our addressable market by
leveraging our
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 and data management and “Big Data” analytics. We have also recently
significantly expanded our addressable market with the acquisition of Appro. Appro provides cluster systems and
solutions to the HPC market. Appro had the third-highest number of systems in the top 100 of the November
2012 Top500 Supercomputer Sites ranking. Appro became Cray Cluster Solutions, or CCS, following the
acquisition.

technologies and customer base,

27

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 XC30 and the addition of CCS products, along with longer-term product roadmap are
efforts to increase product revenue. We are also increasing our business and product development efforts in
storage and data management, “Big Data” analytics, technical enterprise 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 2011 and 2012. The new cluster systems
products typically have lower gross margins than our other products, which is somewhat offset by lower
operating costs. Service gross profit margin decreased from 49% in 2011 to 43% in 2012. The decrease in service
gross profit margin is due to higher incentive compensation expense and an additional $6.2 million in revenue
recorded on a Custom Engineering contract in 2011 where revenue was recognized on the cash basis, and the
associated costs were recorded in prior periods, as our ability to collect payment was not reasonably assured. The
decrease in our service gross margin drove the decrease in our total gross profit margin from 40% in 2011 to 36%
in 2012.

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 expense. 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. The net proceeds from
the sale of our interconnect hardware development program to Intel of $139.2 million in 2012 substantially
increased our liquidity position.

28

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,
2011

2012

2010

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

$353,767
231,237

$155,561
101,000

$239,085
155,027

Product gross profit

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

$122,530

$ 54,561

$ 84,058

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

35%
67,291
38,643

35%
80,485
40,680

35%
80,303
54,404

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

$ 28,648

$ 39,805

$ 25,899

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

43%
$421,058
269,880

49%
$236,046
141,680

32%
$319,388
209,431

Total gross profit

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

$151,178

$ 94,366

$109,957

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

36%

40%

34%

Product Revenue

Product revenue in 2012 increased $198.2 million, or 127%, over 2011 principally as the result of two
significant system acceptances, one at NCSA at the University of Illinois (Blue Waters) and another for the first
phase of the upgrade at the Oak Ridge National Laboratory. Additionally, revenue from our Storage and Data
Management business unit increased from $7.2 million in 2011 to $50.2 million in 2012. A large portion of
Storage and Data Management revenues in 2012 were attributable to the Blue Waters system at the University of
Illinois.

Product revenue in 2011 decreased $83.5 million, or 35%, over 2010 principally due to our inability to
complete the acceptance process of the first phase of the upgrade at the Oak Ridge National Laboratory in 2011,
which resulted in a delay in the recognition of the associated revenue until 2012. Additionally, revenue from
sales of our external storage systems was lower in 2011 as fewer customers implemented large storage systems
during the year.

Service Revenue

Service revenue for 2012 decreased $13.2 million from 2011. Service revenue decreased in part due to an
additional $6.2 million in revenue recorded on a Custom Engineering contract in 2011, as revenue was
recognized on the cash basis as our ability to collect payment was not reasonably assured in 2010.

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 where revenue was recognized on the cash basis as our ability to
collect payment was not reasonably assured.

Cost of Product Revenue and Product Gross Profit

Cost of product revenue for 2012 increased by $130.2 million compared to 2011 driven by significantly

higher product revenue. Product gross profit percentage was 35% in 2012 and 2011.

Product gross profit percentage was unchanged at 35% in 2011 and 2010. 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.

29

Cost of Service Revenue and Service Gross Profit

Cost of service revenue decreased $2.0 million and service gross profit margin decreased by six percentage
points to 43% in 2012 compared to 2011. Gross profit margin from services was lower in 2012 compared to 2011
due to an additional $6.2 million in revenue in 2011 recorded on a Custom Engineering contract where revenue
was being recorded on a cash basis, and the associated costs were recorded in prior periods, as the Company’s
ability to collect payment was not reasonably assured, as well as $2.1 million in higher incentive compensation in
2012.

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.

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

2012

2011

2010

$ 86,305
(1,080)

$ 76,993
(410)

$ 82,525
(79)

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

(20,922)

(27,131)

(38,828)

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

$ 64,303

$ 49,452

$ 43,618

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

15%

21%

14%

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 2012, the Company’s Phase III agreement with DARPA was amended to eliminate certain deliverables
and reduce the co-funding amount to $178.5 million. As of December 31, 2012, the DARPA Phase III agreement
was substantially complete and we have received all $178.5 million in reimbursement.

In 2012, gross research and development expenses increased $9.3 million from 2011 levels primarily due to
increased investments in the development of new products for our new initiatives as well as $5.8 million in
additional incentive based compensation expense. Reimbursed research and development decreased $6.2 million
in 2012 compared to 2011 primarily due to $3.5 million less in reimbursements recognized in connection with
our DARPA HPCS Phase III project.

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.

30

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,
2011

2012

2010

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

$37,180
9%
$20,707
5%
—
—

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

$31,085
10%
$17,767
6%
—
—

Sales and Marketing. The $11.0 million increase in sales and marketing expenses in 2012 compared to
incentive-based compensation and

2011 was due to higher headcount and $4.5 million in additional
commissions.

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.

General and Administrative. The $4.9 million increase in general and administrative expenses in 2012
compared to 2011 was partly due to $2.5 million higher incentive-based compensation and $0.9 million of costs
incurred for the Appro acquisition.

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.

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

workforce rebalancing.

Sale of Interconnect Hardware Development Program

On May 2, 2012, we sold our interconnect hardware development program to Intel for cash consideration of
$140 million. As part of the transaction, 73 of our employees joined Intel, and certain intellectual property and
fixed assets were transferred to Intel. We retained certain rights to use the transferred assets and intellectual
property. As a result of the sale, we recorded a gain of $139.1 million for the year ended December 31, 2012.

Other Income (Expense), Net

We recorded $0.5 million in net other income and $1.0 million and $0.8 million of net other expense for the
years ended December 31, 2012, 2011 and 2010, respectively, principally due to foreign exchange transaction
gains and losses.

Interest Income (Expense), Net

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

Year Ended December 31,
2010
2011
2012

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

$ 397
(193)

$ 229
(262)

$ 485
(266)

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

$ 204

$ (33)

$ 219

Interest income in 2012 increased as compared to 2011 due to higher average invested balances. Interest
income in 2011 decreased as compared to 2010 due to lower average invested balances and lower short-term
interest rates. Interest expense decreased modestly in 2012 as a result of changes in our credit arrangements.
Interest expense in 2011 was consistent with 2010.

31

Taxes

We recorded income tax benefit (expense) for the years ended December 31 as follows (in thousands):

Year Ended December 31,

2012

2011

2010

Net income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$168,732
(7,491)

$

135
14,194

$16,940
(1,878)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$161,241

$14,329

$15,062

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4)% 10,514%

(11)%

The primary reason for the difference between the income tax provision at the federal statutory rate of
35.0% and our effective income tax rate of (4)% for the year ended December 31, 2012 is that the gain from the
sale of our interconnect hardware development program did not result in significant income tax expense. We had
existing deferred tax assets that were subject to valuation allowances and deductible temporary differences that
were previously unrecognized. The sale of the interconnect hardware development program was never
anticipated in previous evaluations of the realizability of our deferred tax assets and consequently the sale,
together with a tax benefit that was recognized as a result of restructuring a subsidiary, resulted in our ability to
experience a relatively small tax consequence from the sale. The tax benefit recorded by us during the year ended
December 31, 2011 was primarily attributable to a partial reduction, in the amount of $13.9 million, of the
valuation allowance held against our 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 German subsidiary.
Income tax expense recorded in 2010 related primarily to income taxes payable.

During the year ended December 31, 2012, we reduced the valuation allowance held against our deferred
tax assets by $18.4 million as a result of the sale of the Company’s interconnect hardware development program.
The Company further reduced the valuation allowance held against its U.S. deferred tax assets by $10.7 million
during the year ended December 31, 2012 due to actual income from operations during the year ended
December 31, 2012 exceeding amounts previously used in the evaluation of the realizability of the Company’s
deferred tax assets at the beginning of the year and based upon an assessment of all positive and negative
evidence relating to future years, including changes resulting from the Company’s acquisition of Appro. We
consider our actual historical results over several years to have stronger weight than other more subjective
indicators when considering whether to establish or reduce a valuation allowance on deferred tax assets. The
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 and
competitive change in the industry in which we operate. Our conclusion about the realizability of our deferred tax
assets, and therefore the appropriateness of the valuation allowance, is 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, 2012, we had federal income tax net operating loss carryforwards of approximately

$153.7 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.

Cash and cash equivalents and restricted cash increased by $198.9 million from December 31, 2011 to
December 31, 2012. The increase is attributable to the $140 million received from the sale of our interconnect
hardware development program to Intel and large collections from systems such as the NCSA Blue Waters

32

system and the first phase of the upgrade at Oak Ridge National Laboratory. Partially offsetting these items were
the net cash used in the Appro acquisition of $24.2 million and the purchases of debt instruments of others of
$70.2 million. No debt securities were held at December 31, 2011.

Accrued payroll and related expenses increased from $11.3 million at December 31, 2011 to $25.9 million
at December 31, 2012 primarily due to higher accruals for incentive compensation expense. The current portion
of deferred revenues increased to $68.1 million as of December 31, 2012 from $44.6 million at December 31,
2011, resulting principally from advance payments billed to customers prior to acceptance of the associated
system.

Cash and cash equivalents and restricted cash totaled $253.1 million at December 31, 2012 compared to
$54.2 million at December 31, 2011. As of December 31, 2012, we had working capital of $283.4 million
compared to $137.7 million as of December 31, 2011.

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

2012

2011

2010

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

$156,892
37,694
7,827

$(3,823) $(49,164)
500
(4,779)
933
1,462

Operating Activities. Net cash provided by operating activities in 2012 was $156.9 million and net cash
used in operating activities in 2011 was $3.8 million. Net cash used by operating activities was $49.2 million in
2010. For the year ended December 31, 2012, cash provided by operating activities was principally the result of
significant decreases in accounts receivable and increases in deferred revenue. 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.

Investing Activities. Net cash provided by investing activities was $37.7 million in 2012. Net cash used in
investing activities was $4.8 million in 2011. Net cash provided by investing activities was $0.5 million in 2010.
For the year ended December 31, 2012, net cash provided by investing activities was due principally to the sale
of our interconnect hardware development program to Intel for $139.2 million, net of direct transaction costs,
partially offset by purchases of investments of $70.2 million and the acquisition of Appro of $24.2 million, net of
cash assumed. 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.

Financing Activities. Net cash provided by financing activities was $7.8 million, $1.5 million, and $0.9
million in 2012, 2011 and 2010, respectively. Net cash provided by financing activities was due primarily to
proceeds from stock option exercises as a consequence of a significant increase in our average stock price and
stock purchases from our employee stock purchase plan.

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, 2012 (in thousands):

Contractual Obligations

Amounts Committed by Year

Total

1 Year

Years 2-3 Years 4-5 Thereafter

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

$ 4,885
22,963

$4,885
4,940

$ — $ — $ —
3,495
6,833
7,695

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

$27,848

$9,825

$7,695

$6,833

$3,495

33

As of December 31, 2012, we had a $10.0 million unsecured line of credit with Wells Fargo Bank, National
Association. This facility has a maturity date of October 15, 2013. As of December 31, 2012, we had a $10.0
million letter of credit facility with Silicon Valley Bank. The Silicon Valley Bank facility is unsecured and may
be used only to support the issuance of letters of credit. This facility has a maturity date of October 17, 2013. We
have made no draws and had no outstanding borrowings on any lines of credit as of December 31, 2012.

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, 2012,
we incurred $4.9 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.

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

34

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.

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.

35

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.

Project Revenue. Revenue from design and build contracts is recognized under the 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.

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.

36

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.

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
several years to have stronger weight
including forecasts, when
considering whether to establish or reduce a valuation allowance on deferred tax assets. We have significant
difficulty projecting future results due to the nature of the business and the industry in which we operate.

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, 2012, we had approximately $95.6 million of net deferred tax assets, against which we
provided a $82.5 million valuation allowance, resulting in a net deferred tax asset of $13.1 million. During the
year ended December 31, 2012 the Company reduced the valuation allowance held against our deferred tax assets
by $18.4 million as a result of the sale of the Company’s interconnect hardware development program. The
Company further reduced the valuation allowance held against its U.S. deferred tax assets by $10.7 million
during the year ended December 31, 2012 due to actual income from operations during the year ended
December 31, 2012 exceeding amounts previously used in the evaluation of the realizability of the Company’s
deferred tax assets at the beginning of the year and based upon an assessment of all positive and negative
evidence relating to future years, including changes resulting from the Company’s acquisition of Appro. The
Company considers its actual historical results over several years to have stronger weight than other more
subjective indicators when considering whether to establish or reduce a valuation allowance on deferred tax
assets. The 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 and competitive change in the industry in which we operate.

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 our 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 that future period. If our
conclusion about the realizability of our deferred tax assets and therefore the 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.

37

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.

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 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.

38

ASU 2011-05 does not change the items that must be reported in other comprehensive income. We adopted

this standard in 2012 and have elected to present separate Consolidated Statements of Comprehensive Income.

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.

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, 2012, we had entered into forward
exchange contracts that hedge approximately $79.3 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, 2012, 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.

39

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS*

Consolidated Balance Sheets at December 31, 2012 and December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010 . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and

F-1
F-2

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-3

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012, 2011 and

F-4
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32

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

The selected quarterly financial data required by this item is set forth in Note 20 of the Notes to

Consolidated Financial Statements.

40

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
2012 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, 2012.

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, 2012.

41

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, 2012, 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, 2012, 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, 2012 and 2011, and the
related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2012, and our report dated February 28, 2013,
expressed an unqualified opinion on those consolidated financial statements.

/s/ PETERSON SULLIVAN LLP

Seattle, Washington
February 28, 2013

42

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 Seven Directors for One-
Year Terms” in the proxy statement for our annual meeting of shareholders scheduled to be held on or around
June 13, 2013, 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 13, 2013, 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 13, 2013, 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 13, 2013, and such information is incorporated herein by
reference.

Item 14. Principal Accounting 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 13, 2013, 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, 2012 and December 31, 2011

Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements Comprehensive Income for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

43

(a)(2) Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts — The financial statement schedule for the years ended
December 31, 2012, 2011, and 2010 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.

44

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant 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 28, 2013.

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 28, 2013.

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/

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

45

Director

Director

Director

Director

Director

Director

EXHIBIT INDEX

Exhibit Description

Incorporated by Reference

Exhibit
Number

2.1

2.2

3.1

3.2

3.3

Purchase Agreement

Asset
Intel
Corporation and the Company, dated April 24,
2012

between

Agreement and Plan of Merger by and among
Astro Acquisition Corp., Appro International,
Inc., the Shareholders’ Agent and the Company,
dated November 8, 2012

Restated Articles of Incorporation

Amended and Restated Bylaws

First Amendment
Bylaws

to Amended and Restated

10.0*

1999 Stock Option Plan

10.1*

10.2*

2000 Non-Executive Employee Stock Option
Plan

2001 Employee Stock Purchase Plan,
Amended

as

10.3*

2003 Stock Option Plan

10.4*

2004 Long-Term Equity Compensation Plan

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

8-K

000-26820

04/25/12

2.1

8-K

000-26820

11/09/12

2.1

000-26820

06/08/06

000-26820

02/12/07

000-26820

04/19/12

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

8-K

8-K

8-K

S-8

S-8

DEF
14A

DEF
14A

DEF
14A

3.3

3.1

3.1

4.1

4.2

A

A

B

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

46

Exhibit
Number

Exhibit Description

Incorporated by Reference

10.17* Letter Agreement between the Company and
Peter J. Ungaro, dated March 4, 2005

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

8-K 000-26820

03/08/05

10.1

10.18* Offer Letter between the Company and

8-K 000-26820

05/09/05

10.1

Margaret A. Williams, dated April 14, 2005

10.19* Offer Letter between the Company and

10-Q 000-26820

11/09/05

10.1

Brian C. Henry, dated May 16, 2005

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

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
compensation arrangements
Directors

forth

amended
for non-employee

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

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

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

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

between Union

47

8-K 000-26820

02/08/11

8-K 000-26820

08/29/08

10.1

10.1

10-K 000-26820

04/02/01

10.9

10-K 000-26820

03/28/03

10.13

10-K 000-26820

04/02/01

10.10

10-K 000-26820

03/28/03

10.15

Exhibit
Number

Exhibit Description

Incorporated by Reference

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

10.35

10.36

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

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

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

First Amendment to Credit Agreement between
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 to Credit Agreement between
Wells Fargo Bank, National Association and the
Company, dated June 1, 2010

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.

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

to Loan

1

48

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

8-K 000-26820

02/01/08

10.1

8-K 000-26820

07/16/09

10.1

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

10-K 000-26820

02/27/12

10.45

10-K 000-26820

02/27/12

10.46

8-K 000-26820

09/17/10

10.1

10-K 000-26820

02/27/12

10.48

Exhibit Description

Incorporated by Reference

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

10-Q 000-26820

04/26/12

10.1

10-Q 000-26820

04/26/12

10.2

8-K 000-26820

05/03/12

10.1

10-Q 000-26820

07/31/12

10.2

10-Q 000-26820

07/31/12

10.1

Exhibit
Number

10.49*

10.50*

10.51

10.52

10.53

21.1

23.1

24.1

31.1

31.2

32.1

Offer Letter between the Company and Arvind
Parthasarathi, dated January 13, 2012

Offer Letter between the Company and William
C. Blake, dated March 26, 2012

Intellectual Property Agreement between Intel
Corporation and the Company, dated May 2,
2012

to Credit Agreement
Eighth Amendment
between Wells
National
Fargo
Association and the Company, dated June 1,
2012

Bank,

Restated Credit Agreement between Wells Fargo
Bank, National Association and the Company,
dated October 1, 2012

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)

13a-14(a)/15d-14(a) Certification

Rule
Mr. Ungaro, Chief Executive Officer

13a-14(a)/15d-14(a) Certification

Rule
Mr. Henry, Chief Financial Officer

of

of

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
Linkbase Document

Extension

Calculation

101.LAB XBRL Taxonomy Extension Label Linkbase

Document

101.PRE XBRL

Taxonomy
Linkbase Document

Extension

Presentation

*

Management contract or compensatory plan or arrangement.

X

X

X

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.

49

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

December 31,
2012

December 31,
2011

Current assets:

ASSETS

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

$ 253,065
—
52,563
13,440
89,796
11,823

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
Service inventory, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

420,687
17,577
25,543
1,490
14,182
7,981
10,041
12,813

$ 50,411
3,776
—
72,381
97,881
12,932

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

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

$ 510,314

$ 283,099

Current liabilities:

LIABILITIES AND SHAREHOLDERS’ EQUITY

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

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

$ 34,732
25,927
8,616
68,060

137,335
29,254
3,179

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

99,648
14,184
2,453

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

169,768

116,285

Commitments and contingencies (Note 12)

Shareholders’ equity:

Preferred stock — Authorized and undesignated, 5,000,000 shares; no shares

issued or outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Common stock and additional paid-in capital, par value $.01 per share —
Authorized, 75,000,000 shares; issued and outstanding 39,435,215 and
36,763,379 shares, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

577,938
5,181
(242,573)

564,148
6,480
(403,814)

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

340,546

166,814

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

$ 510,314

$ 283,099

See accompanying notes

F-1

CRAY INC. AND SUBSIDIARIES

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

Years Ended December 31,
2011

2012

2010

Revenue:

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

$353,767
67,291

$155,561
80,485

$239,085
80,303

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

421,058

236,046

319,388

Cost of revenue:

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

231,237
38,643

101,000
40,680

155,027
54,404

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

269,880

141,680

209,431

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

151,178

94,366

109,957

Operating expenses:

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

64,303
37,180
20,707
—

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

43,618
31,085
17,767
—

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

122,190

93,209

92,470

Net gain on sale of interconnect hardware development program . . . . . . . . . . .

139,068

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

168,056
472
204

—

1,157
(989)
(33)

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

168,732
(7,491)

135
14,194

—

17,487
(766)
219

16,940
(1,878)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$161,241

$ 14,329

$ 15,062

Basic net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

4.42

4.27

$

$

0.41

0.40

$

$

0.44

0.43

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

36,509

35,122

34,313

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

37,789

36,072

35,278

See accompanying notes

F-2

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

Years Ended December 31,
2011

2012

2010

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax:

$161,241

$14,329

$15,062

Unrealized loss on available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments on cash flow hedges included in net income . . . .

(46)
(43)
(567)
(643)

—
785
1,232
(443)

347
1,869
(3,458)

Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,299)

1,574

(1,242)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$159,942

$15,903

$13,820

See accompanying notes

F-3

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)

Common Stock
and Additional
Paid In Capital

Number
of Shares Amount

Accumulated
Other
Comprehensive
Income

Accumulated
Deficit

Total

BALANCE, December 31, 2009 . . . . . . . . . . . . . . . . . 35,181 $551,220
Issuance of shares under employee stock purchase

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

84
92

497
436

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

355

1,978

Restricted shares issued for compensation, net of

forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

356
—

—
4,927

$ 6,148

$(433,205) $124,163

497
436

1,978

—
4,927
(1,242)
15,062

(1,242)

15,062

BALANCE, December 31, 2010 . . . . . . . . . . . . . . . . . 36,068 $559,058

$ 4,906

$(418,143) $145,821

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 . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65
248

382
—

372
1,090

—
3,628

372
1,090

—
3,628
1,574
14,329

1,574

14,329

BALANCE, December 31, 2011 . . . . . . . . . . . . . . . . . 36,763 $564,148

$ 6,480

$(403,814) $166,814

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 loss . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38
1,346

1,288
—

397
7,430

—
5,963

397
7,430

—
5,963
(1,299)
161,241

(1,299)

161,241

BALANCE, December 31, 2012 . . . . . . . . . . . . . . . . . 39,435 $577,938

$ 5,181

$(242,573) $340,546

See accompanying notes

F-4

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Years Ended December 31,
2011

2012

2010

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

operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of interconnect hardware development program . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory write-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

$ 161,241

$ 14,329

$ 15,062

8,652
128
(139,068)
5,963
2,329
3,020

8,601
503
—
3,628
—
(14,396)

9,431
504
—
4,927
887
(251)

60,744
7,004
1,763
(6,489)
15,202
492
35,911

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

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

156,892

(3,823)

(49,164)

Sales/maturities of short-term investments . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . .
Decrease in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of interconnect hardware development program,

net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in acquisition, net of cash acquired . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
(70,218)
3,776

139,225
(24,246)
(10,843)

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

37,694

Financing activities:

Proceeds from issuance of common stock through employee stock

purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

397
7,430

7,827
241

—
—
137

—
—
(4,916)

(4,779)

372
1,090

1,462
170

3,000
—
1,236

—
—
(3,736)

500

497
436

933
94

202,654

(6,970)

(47,637)

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

50,411

57,381

105,018

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

$ 253,065

$ 50,411

$ 57,381

Supplemental disclosure of cash flow information:

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

$

90
2,804

$

98
1,495

$

3
1,530

Non-cash investing and financing activities:

Inventory transfers to fixed assets and service inventory . . . . . . . . . . . . .

$

6,278

$ 2,310

$

4,183

See accompanying notes

F-5

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 computing, or HPC, systems, commonly known as supercomputers, and provides storage solutions
and engineering services related to HPC systems. Cray’s supercomputer systems 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 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. The Company
had no restricted cash balances as of December 31, 2012.

Investments

The Company’s investments consist primarily of commercial paper, corporate debt, and other debt
securities. Debt securities are classified as available-for-sale and are reported at fair value with unrealized gains
and losses, net of applicable taxes, recorded in accumulated other comprehensive income, a component of
shareholders’ equity. The realized gains and losses for available-for-sale securities are included in other income
and expense in the Consolidated Statements of Operations. Realized gains and losses are calculated based on the
specific identification method.

The Company monitors its investment portfolio for impairment on a periodic basis. When the carrying value
of an investment in debt securities exceeds its fair value and the decline in value is determined to be an
other-than-temporary decline, and it is not more likely than not that the Company will be required to sell the debt
securities prior to recovery of its amortized cost basis, the Company records an impairment charge.

Investments that mature between three months and one year from the purchase date are classified as short-
term investments in the Consolidated Balance Sheet. Investments that mature beyond one year from the purchase
date are classified as long-term investments in the Consolidated Balance Sheet.

F-6

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, available-for-sale investments, accounts receivable and forward
foreign currency exchange contracts.

The Company maintains cash and cash equivalents, available-for-sale securities 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 17 — 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.

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

F-7

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

market for the asset or liability in an orderly transaction between market participants. The Company’s financial
instruments primarily consist of debt securities, time deposits, money market funds, and foreign currency
derivatives. See Note 5 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 the Company determines it is not likely the cost of
inventory items will be recovered through future sales, the Company writes-down the related inventory to its
estimated market value.

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 and Intangible Assets, 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 amortizes purchased intangible assets with finite lives using the straight-line method over the

estimated economic lives of the assets, ranging from two to ten 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 and Intangibles

The Company evaluates property, plant and equipment and 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.

Goodwill

Goodwill is not amortized but is tested for impairment at least annually. The Company reviews goodwill for
the beginning of its fourth fiscal quarter and whenever events or changes in
impairment annually at
circumstances indicate the carrying value of the asset may not be recoverable. When evaluating goodwill for
impairment, we first perform a qualitative assessment to assess whether the fair value of the reporting unit is

F-8

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

more likely than not less than the carrying amount, including goodwill. If through our qualitative assessment we
conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the
Company determines the fair value of each reporting unit and compares it to its carrying value. If the fair value
of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired
and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds
the fair value of the reporting unit, then the Company must perform the second step of the impairment test in
order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting
unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.

Business Combinations

The Company accounts for business combinations using the purchase method of accounting and allocates
the purchase price to the tangible and intangible assets acquired and the liabilities assumed based upon their
estimated fair values at the acquisition date. The difference between the purchase price and the fair value of the
net assets acquired is recorded as goodwill. The Company uses estimates and assumptions to accurately value
assets acquired and liabilities assumed at the acquisition date. During the measurement period, which may be up
to one year from the acquisition date, any refinements made to the fair value of the assets and liabilities assumed
are recorded with retrospective effect.

The fair values of intangible assets acquired are estimated using a discounted cash flow approach with Level
3 inputs. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-
tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To
calculate fair value, the Company uses risk-adjusted cash flows discounted at rates considered appropriate given
the inherent risks associated with each type of asset. The Company believes the level and timing of cash flows
appropriately reflects market participant assumptions.

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 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. Products 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,
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.

F-9

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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.

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, 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 revenue is recognized ratably over the term of
the maintenance contract. Maintenance contracts that are billed in advance of revenue recognition are recorded as
deferred revenue.

Revenue from engineering services is recognized as services are performed.

Project Revenue. Revenue from design and build contracts is recognized under

the 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

F-10

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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.

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.

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
(income) expense, net” in the accompanying Consolidated Statements of Operations. Net transaction losses were
$(0.1) million, ($1.3) million, and ($1.0) million for 2012, 2011, and 2010, 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

F-11

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. As of December 31, 2012, $5.8 million in rebates remain
available for use.

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.

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, 2012, the Company had approximately $95.6 million of net deferred tax assets, against
which the Company provided a $82.5 million valuation allowance, resulting in a net deferred tax asset of $13.1
million. During the year ended December 31, 2012 the Company reduced the valuation allowance held against its
deferred tax assets by $18.4 million as a result of the sale of the Company’s interconnect hardware development
program. The Company further reduced the valuation allowance held against its U.S. deferred tax assets by $10.7

F-12

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

million during the year ended December 31, 2012 due to actual income from operations during the year ended
December 31, 2012 exceeding amounts previously used in the evaluation of the realizability of the Company’s
deferred tax assets at the beginning of the year and based upon an assessment of all positive and negative
evidence relating to future years, including changes resulting from the Company’s acquisition of Appro. The
Company considers its actual historical results over several years to have stronger weight than other more
subjective indicators when considering whether to establish or reduce a valuation allowance on deferred tax
assets. 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 is only
recognized for 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. 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 $1.2 million, $0.6 million, and $0.8 million in 2012, 2011, and 2010, 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 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 as computed under the treasury
stock method. For the years ended December 31, 2012, 2011 and 2010, the added shares from these items
included in the calculation of diluted shares and EPS totaled approximately 1.3 million, 0.9 million, and

F-13

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1.0 million, respectively. Potentially dilutive shares of 0.4 million, 2.2 million, and 1.9 million, respectively,
have been excluded from the denominator in the computation of diluted EPS for the years ended December 31,
2012, 2011 and 2010, 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):

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

$ (46)
4,301
926

$ — $ —
3,559
4,344
1,347
2,136

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

$5,181

$6,480

$4,906

2012

2011

2010

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
Company adopted this standard in 2012 and has elected to present separate Consolidated Statements of
Comprehensive Income.

NOTE 3 ACQUISITION

On November 21, 2012, the Closing Date, the Company acquired all the outstanding shares of Appro
International, Inc., or Appro, for cash consideration of $24.9 million. Appro is a provider of cluster solutions in
the high performance computing market. The acquisition of Appro will allow the Company to expand its product
offering in the high performance computing market. The Company reports the financial results of the Appro
business in the HPC Systems segment.

The measurement of deferred tax assets and liabilities and residual goodwill are not yet finalized and are
subject to change. The Company expects to continue to obtain information to assist it in determining the fair
value of the net assets acquired at the acquisition date during the measurement period. Measurement period
adjustments that the Company determines to be material will be applied retrospectively to the period of
acquisition in the Company’s consolidated financial statements.

The Company utilized a third-party appraisal in its determination of the fair value of the various assets
acquired and liabilities assumed. The fair value of the acquired assets, net of assumed liabilities, equals the $24.9
million cash consideration paid by the Company.

F-14

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following are the estimated fair values of the assets acquired and liabilities assumed:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

634,534
7,526,300
5,701,634
(2,400,000)
(2,917,973)
(3,684,677)
(2,060,692)

Net tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,799,126

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill

300,000
5,400,000
1,800,000
400,000
14,181,570

Total net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,880,696

The fair values of the major components of the intangible assets acquired and their estimated useful lives are

as follows (in thousands):

Intangible Asset Class

Fair Value

Useful Life
(in Years)

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 300
$5,400
$1,800
$ 400

5
3
10
2

The revenue and net

loss of Appro from the Closing Date to December 31, 2012 included in the

accompanying consolidated statements of operations were $0.6 million and $1.3 million, respectively.

The Company incurred acquisition-related costs (i.e., legal, accounting, valuation, and other costs) of
$899,000 during the year ended December 31, 2012. The acquisition-related costs were expensed in the period in
which the costs were incurred and are recorded in the accompanying Consolidated Statements of Operations.

The following unaudited pro forma condensed financial information presents the combined results of

operations of the Company and Appro as if the acquisition had occurred on January 1, 2011 (in thousands):

Year Ended December 31,

2012

2011

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$494,369

$291,409

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$161,985

$ 10,487

The unaudited pro forma condensed financial information is not intended to represent or be indicative of the
results of operations of the Company that would have been reported had the acquisition been completed as of the
beginning of the period presented, and should not be taken as representative of the future consolidated results of
operations of the Company.

The goodwill recorded in connection with the acquisition of Appro is primarily related to the synergies
expected to be achieved and the value of the assembled workforce. The goodwill balance is not deductible for tax
purposes.

F-15

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The carrying amount of purchased intangibles at December 31, 2012 is as follows (in thousands):

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . .

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

$ 300
5,400
1,800
400

$7,900

$

7
200
20
22

$249

$ 293
5,200
1,780
378

$7,651

Aggregate amortization expense for the years ending December 31 are as follows (in thousands):

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,240
2,218
1,840
240
233

$6,771

For the year ended December 31, 2012, amortization expense related to purchased intangibles was

$249,000.

NOTE 4 — SALE OF INTERCONNECT HARDWARE DEVELOPMENT PROGRAM

On May 2, 2012, the Company sold its interconnect hardware development program to Intel Corporation
(“Intel”) for cash consideration of $140 million. As part of the transaction, 73 of the Company’s employees
joined Intel, and certain intellectual property and fixed assets were transferred to Intel. The Company retained
certain rights to use the transferred assets and intellectual property. As a result of the sale, the Company recorded
a gain of $139.1 million in “Net gain on sale of interconnect hardware development program” on the
Consolidated Statements of Operations for the year ended December 31, 2012.

NOTE 5 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.

F-16

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 on a recurring basis as of December 31, 2012 and 2011, and indicates the fair value
hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

Description

Fair Value
as of December 31,
2012

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Assets:
Cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . .
Available for sale investments(1) . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts(2) . . . . . . . . . . . . . . . . . . .

$253,065
70,140
1,101

$253,065
70,140

$ —
—
— 1,101

Assets measured at fair value at December 31, 2012 . . . . . . .

$324,306

$323,205

$1,101

Liabilities:
Foreign exchange forward contracts(3) . . . . . . . . . . . . . . . . . . .

Liabilities measured at fair value at December 31, 2012 . . . .

$

651

651

—

651

$

— $ 651

Description

Fair Value
as of 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(2) . . . . . . . . . . . . . . . . . . .

$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(3) . . . . . . . . . . . . . . . . . . .

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

$

3

3

—

$ — $

3

3

(1) Included in “Short-term investments” and “Long-term investments” on the Company’s Consolidated

Balance Sheets.

(2) Included in “Prepaid expenses and other current assets” and “Other non-current assets” on the Company’s

Consolidated Balance Sheet.

(3) Included in “Other accrued liabilities” and “Other non-current liabilities” on the Company’s Consolidated

Balance Sheets.

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.

F-17

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Derivatives

As of December 31, 2012 and 2011, 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, 2012, the outstanding notional amounts were approximately 57.5 million euro
and 277.9 million Japanese yen. 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,
2012 and 2011, these contracts hedged foreign currency exposure of approximately $79.3 million and $55.8
million, respectively. The associated cash receipts are expected to be received through 2016, during which time
the revenue on the associated sales contracts is expected to be recognized. As of December 31, 2012 and 2011,
the fair value of outstanding forward contracts totaled a net gain of $0.5 million and $3.2 million, respectively.
As of December 31, 2012 and 2011, unrecognized gains of $0.9 million and $2.1 million, respectively, were
included in “Accumulated other comprehensive income” on the Company’s Consolidated Balance Sheets. The
Company recognized approximately $0.6 million, $0.4 million and $3.5 million in net reclassification
adjustments, which increased product revenue, as revenue on the associated sales contracts was recognized for
the years ended December 31, 2012, 2011 and 2010, respectively.

NOTE 6 — INVESTMENTS

The Company’s investments in debt securities with original maturities greater than three months are

classified as “available-for-sale.” Changes in fair value are reflected in other comprehensive income (loss).

The carrying amount of the Company’s investments in available-for-sale securities as of December 31, 2012

is shown in the table below:

Short-term available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
2014

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

$52,650
17,567

$70,217

$(87)
10

$(77)

Due in

Cost

Unrealized
Gains
(Losses)

Fair Value

$52,563
17,577

$70,140

As of December 31, 2012, the Company’s debt securities were investment grade and carried a long-term

rating of A2/A or higher.

The Company had no investments in debt securities at December 31, 2011.

NOTE 7 ACCOUNTS AND OTHER RECEIVABLES, NET

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

December 31,

2012

2011

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

$ 9,596
415
278
3,156

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

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

13,445
(5)

72,491
(110)

Accounts and other receivables, net

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

$13,440

$72,381

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.

F-18

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2012 and 2011, accounts receivable included $5.1 million and $32.2 million,
respectively, due from U.S. government agencies and customers primarily serving the U.S. government. Of this
amount, $0.1 million and $0.7 million, respectively, were unbilled, based upon contractual billing arrangements
with these customers. As of December 31, 2012, no non-U.S. government customer accounted for more than
10% of total accounts and other receivables. As of December 31, 2011, one non-U.S. government customer
accounted for 30% of total accounts and other receivables.

NOTE 8

INVENTORY

A summary of inventory follows (in thousands):

December 31

2012

2011

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

$21,865
11,245
56,686

$29,402
19,956
48,523

$89,796

$97,881

As of December 31, 2012 and 2011, $56.1 million and $47.9 million, respectively, of finished goods
inventory was located at customer sites pending acceptance. At December 31, 2012, two customers accounted for
$35.9 million of finished goods inventory. At December 31, 2011, two customers accounted for $46.4 million of
finished goods inventory.

During 2012, the Company wrote-off $2.3 million of inventory related to the Cray XE and Cray XK product
lines. During 2010, the Company wrote-off $0.9 million of inventory primarily related to the Cray XT product
lines. There were no inventory write-offs during 2011.

NOTE 9 PROPERTY AND EQUIPMENT, NET

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

December 31,

2012

2011

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

$

131
13,885
14,068
80,698
420

$

131
11,540
12,277
69,794
361

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

109,202
(83,659)

94,103
(77,641)

Property and equipment, net

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

$ 25,543

$ 16,462

Depreciation expense on property and equipment for 2012, 2011 and 2010 was $7.4 million, $7.6 million

and $8.1 million, respectively.

F-19

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 SERVICE INVENTORY, NET

A summary of service inventory follows (in thousands):

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

$ 15,641
(14,151)

$ 14,692
(13,081)

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

$ 1,490

$ 1,611

December 31,

2012

2011

NOTE 11 DEFERRED REVENUE

Deferred revenue consisted of the following (in thousands):

December 31

2012

2011

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

$ 36,848
60,466

$ 22,068
36,752

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

97,314
(29,254)

58,820
(14,184)

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

$ 68,060

$ 44,636

At December 31, 2012, four customers accounted for 62% of total deferred revenue. At December 31, 2011,

three customers accounted for 50% of total deferred revenue.

NOTE 12 COMMITMENTS AND CONTINGENCIES

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

as operating leases, in 2012, 2011 and 2010 of $4.6 million, $4.9 million, and $4.7 million, respectively.

Minimum contractual commitments as of December 31, 2012, were as follows (in thousands):

Operating
Leases

Development
Agreements

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

$ 4,940
3,962
3,733
3,741
3,092
3,495

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

$22,963

$4,885
—
—
—
—
—

$4,885

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, 2012, 2011 and 2010, the Company
incurred $4.9 million, $4.7 million and $8.2 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.

F-20

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13

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,
2012, the Company had U.S. federal net operating loss carryforwards of approximately $153.7 million, of which
approximately $26 million was related to stock-based income tax deductions in excess of amounts that have been
recognized for financial reporting purposes. Any reduction of taxes payable 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, 2012, the Company had gross federal research and
development
tax credit carryforwards of approximately $14.4 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, 2012, the Company had approximately $11.8 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 2013 to 2020.

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

Year Ended December 31,
2011

2012

2010

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

$161,592
7,140

$(2,847)
2,982

$16,319
621

Total

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

$168,732

$

135

$16,940

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

Year Ended December 31,
2011

2012

2010

Current provision (benefit):

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

$1,162
2,768
541

$

(106)
37
271

$ 636
258
1,235

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

4,471

202

2,129

Deferred provision (benefit):

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

Total deferred provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . .

1,362
1,415
243

3,020

(12,935)
(936)
(525)

(14,396)

—
—
(251)

(251)

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

$7,491

$(14,194)

$1,878

F-21

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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,
2011

2012

2010

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

$ 59,056
4,183
(518)
2,352
549
(30,704)
492
—
(27,919)

$

47
(972)
(406)
338
242
—
—
(1,524)
(11,919)

$ 5,929
237
1,948
152
168
—
169
(1,389)
(5,336)

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

$ 7,491

$(14,194)

$ 1,878

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

December 31,

2012

2011

Current:
Deferred Income Tax Assets

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

$ 5,397
912
6,185
3,467
1,092

$

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

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

17,053
(13,970)

23,961
(19,773)

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

3,083

4,188

Net current deferred tax asset

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

$ 3,083

$

4,188

Long-Term:
Deferred Income Tax Assets

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

$

411
18,301
59,039
912
5,563

$

852
18,285
79,431
975
4,907

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

84,226
(68,547)

104,450
(90,664)

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

15,679

13,786

Deferred Income Tax Liabilities

Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

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

(1,363)
(3,002)
(1,273)

(5,638)

—
—
(434)

(434)

Net long-term deferred tax asset

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

$ 10,041

$ 13,352

F-22

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Company’s Consolidated Balance Sheet.

The Company recorded income tax expense of $7.5 million, an income tax benefit of $14.2 million and
income tax expense of $1.9 million during the years ended December 31, 2012, 2011 and 2010, respectively. The
primary reason for the difference between the income tax provision at the statutory rate and the Company’s
effective income tax provision for the year ended December 31, 2012 is that the gain from the sale of the
Company’s interconnect hardware development program did not result in significant income tax expense. The
Company had existing deferred tax assets that were subject to valuation allowances and deductible temporary
differences that were previously unrecognized. The sale of the interconnect hardware development program was
never anticipated in previous evaluations of the realizability of the Company’s deferred tax assets and
consequently the sale, together with a tax benefit that was recognized as a result of a restructuring of a
subsidiary, resulted in the Company’s ability to experience a relatively small tax consequence from the sale. The
tax benefit recorded by the Company during the year ended December 31, 2011 was primarily attributable to a
partial reduction, in the amount of $13.9 million, of the valuation allowance held against the Company’s
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 German subsidiary. The tax expense recorded by the
Company during the year ended December 31, 2010 was primarily attributable to income taxes payable.

During the year ended December 31, 2012 the Company reduced the valuation allowance held against its
deferred tax assets by $18.4 million as a result of the sale of the Company’s interconnect hardware development
program. The Company further reduced the valuation allowance held against its U.S. deferred tax assets by $10.7
million during the year ended December 31, 2012 due to actual income from operations during the year ended
December 31, 2012 exceeding amounts previously used in the evaluation of the realizability of the Company’s
deferred tax assets at the beginning of the year and based upon an assessment of all positive and negative
evidence relating to future years, including changes resulting from the Company’s acquisition of Appro. The
Company considers its actual historical results over several years to have stronger weight than other more
subjective indicators when considering whether to establish or reduce a valuation allowance on deferred tax
assets. 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 and competitive change in the industry in which it operates. The Company’s conclusion
about the realizability of its deferred tax assets, and therefore the appropriateness of the valuation allowance, is
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 $27.9 million, $17.5 million and $5.9 million

in 2012, 2011 and 2010, respectively.

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, 2012,
the Company’s foreign subsidiaries held cash in the amount of $13.2 million.

F-23

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2012 (in thousands):

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to current year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 488
7
(265)
(210)

$ 20
(20)
$ —
470

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 470

The balance of unrecognized tax benefits as of December 31, 2012 was $.5 million of tax benefits that, if

recognized, would affect the effective tax rate.

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, Germany, the
United Kingdom and the United States. The Company is no longer subject to income tax examinations with
respect to Australia for periods before 2007 and for periods before 2008 and 2011 in Germany and the
United Kingdom, respectively. With respect to the U.S. federal and various state jurisdictions the Company is no
longer subject to income tax examinations with respect to periods before 2009, 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 2012, 2011 and 2010.

NOTE 14 CREDIT FACILITIES

As of December 31, 2012, the Company had a $10.0 million unsecured line of credit with Wells Fargo

Bank. This facility has a maturity date of October 15, 2013.

As of December 31, 2012, the Company had a $10.0 million letter of credit facility with Silicon Valley
Bank. This facility is unsecured and may be used only to support the issuance of letters of credit. This facility has
a maturity date of October 17, 2013.

The Company made no draws and had no outstanding borrowings on any credit facilities as of

December 31, 2012.

NOTE 15 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 2012, 2011 and 2010, respectively, the Company
issued an aggregate of 1,316,447, 513,587, and 501,157 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 $15.8 million, $3.1 million, and $2.8 million for 2012, 2011 and 2010, respectively. Stock

F-24

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2012, $15.6 million
remains to be expensed over the remaining vesting periods of these grants. The 2012 balances include $9.5
million for performance vesting restricted stock subject to performance measures which are currently not
considered probable. None of the expense related to these shares has been recognized due to the fact that the
performance measures are not probable at this time.

As of December 31, 2012 and 2011, the Company had issued and outstanding 12,500 and 15,000 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.

The Company has two classes of stock: common stock and unvested share-based payment awards.

Stock Option Plans: As of December 31, 2012, the Company had four 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:

2012

2011

2010

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

0.56%
—

1.80%
—

0.67%
—
74.8% 74.37% 74.00%
4.0
4.0
$ 3.34
$6.56

4.0
$ 3.04

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, 2012, 2011 and 2010 were 6.6%, 5.2%, and
7.6%, 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.

F-25

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Outstanding at January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options

3,116,522
715,950
(92,280)
(294,482)

Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . .

3,445,710

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

Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

476,500
(248,271)
(256,019)

3,417,920
359,500
(1,346,326)
(137,589)

Outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .

2,293,505

Exercisable at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . .

1,266,533

Available for grant at December 31, 2012 . . . . . . . . . . . . . . . . .

1,044,074

Weighted
Average
Remaining
Contractual
Term
(Years)

7.2

6.1

Weighted
Average
Exercise
Price

$ 6.43
5.50
4.73
7.32

6.20

6.08
4.39
6.65

6.28
11.90
5.52
11.35

7.31

6.79

As of December 31, 2012, there was $20.6 million of aggregate intrinsic value of outstanding stock options,
including $12.3 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 2012 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, 2012. This
amount changes, based on the fair market value of the Company’s stock. Total intrinsic value of options
exercised was $7.6 million, $0.5 million, and $0.2 million for the years ended December 31, 2012, 2011 and
2010, respectively.

F-26

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

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

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

1,302,414
1,316,447
(31,771)
(384,352)

Outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,202,738

Weighted
Average
Grant Date
Fair Value

$ 5.22
5.54
4.54
7.40

4.77
6.04
5.29
4.03

5.47
11.99
7.64
5.86

9.27

The aggregate fair value of restricted shares vested during 2012, 2011 and 2010 was $4.2 million, $2.9

million, and $2.2 million, respectively.

As of December 31, 2012, the Company had $19.7 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 1.9 years. This includes $9.5 million for performance vesting
restricted stock subject to performance measures which are currently not considered probable. None of the
expense related to these shares has been recognized due to the fact that the performance measures are not
probable at this time.

Outstanding and exercisable options by price range as of December 31, 2012, were as follows:

Outstanding Options

Exercisable Options

Weighted
Average
Remaining
Life (Years)

Weighted
Average
Exercise
Price

Number
Exercisable

367,137
280,998
429,362
189,036

Weighted
Average
Exercise
Price

$ 3.72
$ 5.50
$ 6.51
$15.31

$ 3.72
$ 5.48
$ 6.33
$13.14

$ 7.31

1,266,533

$ 6.79

6.3
7.0
7.5
7.5

7.2

Range of Exercise
Prices per Share

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

Number
Outstanding

460,301
477,743
789,091
566,370

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

2,293,505

F-27

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, 2012, 2011 and 2010.

2012

2011

2010

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

$

57
258
1,327
1,717
2,604

$ 177
369
784
490
1,808

$ 218
432
1,628
603
2,046

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

$5,963

$3,628

$4,927

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, 2012
and 2011, 998,118 and 959,784 shares, respectively, had been issued under the ESPP.

NOTE 16 BENEFIT PLANS

401(k) Plan

For the three years ended December 31, 2012, 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 2012, 2011 and 2010 Company match expense was $1.0 million, $1.1 million and $2.1
million, respectively.

Pension Plan

The Company’s German subsidiary maintains a defined benefit pension plan. At December 31, 2012, the
excess of plan assets over the projected benefit obligation of $2.4 million was $0.1 million. At December 31,
2011, the excess of plan assets over the projected benefit obligation of $2.3 million was $0.1 million. 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.

NOTE 17 SEGMENT INFORMATION

The Company has the following reportable segments: HPC Systems, Maintenance and Support, and Storage
and Data management. The Company’s reportable 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
the manner in which the Company’s operations are managed, client base, similar economic
structure,
characteristics and the availability of separate financial information.

HPC Systems

HPC Systems includes a suite of highly advanced systems, including the Cray XC30, Cray XE6, Cray
XE6m, Cray XK7, Cray XK6m, and Cray Cluster Solutions products, which are used by single users all the way
up through large research centers.

F-28

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Maintenance and Support

Maintenance and Support provides ongoing maintenance of Cray HPC and Big Data systems and systems

analysts to help customers achieve their mission objectives.

Storage and Data Management

Storage and Data Management offers the Cray Sonexion 1600 as well as other third-party storage products,

Engineering Services and Other

Included within Engineering Services and Other is the Company’s YarcData division and Custom

Engineering.

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

ended December 31 (in thousands):

Revenue:

2012

2011

2010

HPC Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance & Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Storage and Data Management
. . . . . . . . . . . . . . . . . . . . . .
Engineering Services and Other . . . . . . . . . . . . . . . . . . . . . .

$298,255
62,244
50,246
10,313

$139,590
62,386
7,197
26,873

$200,334
56,129
34,081
28,844

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

$421,058

$236,046

$319,388

Cost of Revenue:

HPC Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance & Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Storage and Data Management
. . . . . . . . . . . . . . . . . . . . . .
Engineering Services and Other . . . . . . . . . . . . . . . . . . . . . .

$193,295
36,510
35,642
4,432

$ 90,686
31,558
6,557
12,879

$128,728
32,700
23,729
24,274

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

$269,879

$141,680

$209,431

Gross Profit:

HPC Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance & Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Storage and Data Management
. . . . . . . . . . . . . . . . . . . . . .
Engineering Services and Other . . . . . . . . . . . . . . . . . . . . . .

$104,960
25,734
14,604
5,881

$ 48,904
30,828
640
13,994

$ 71,606
23,429
10,352
4,570

Total gross profit

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

$151,179

$ 94,366

$109,957

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.

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

be reported.

F-29

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2012:
Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$301,162

$52,605

$353,767

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

$ 42,359

$24,932

$ 67,291

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

$ 57,549

$ 4,460

$ 62,009

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

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 $286.9 million, $127.8 million and
$197.9 million in 2012, 2011 and 2010, respectively. In 2012, three customers accounted for an aggregate of
approximately 63% of total revenue. 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
general, concentrations of revenue by customer encompass all segments. In 2012, no foreign country accounted
for more than 10% of the Company’s revenue. In 2011, revenue in Germany accounted for 12% of total revenue.
In 2010 revenue in South Korea accounted for 13% of total revenue.

NOTE 18 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

2012

December 31
2011

2010

$ 86,305
(1,080)

$ 76,993
(410)

$ 82,525
(79)

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

(20,922)

(27,131)

(38,828)

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

$ 64,303

$ 49,452

$ 43,618

F-30

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 19

INTEREST INCOME (EXPENSE)

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

2012

2011

2010

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

$ 397
(193)

$ 229
(262)

$ 485
(266)

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

$ 204

$ (33)

$ 219

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

NOTE 20 QUARTERLY DATA (UNAUDITED)

The following table presents unaudited quarterly financial

the two years ended
December 31, 2012. 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

2012

2011

Revenue . . . . . . . . . . . . . . . . . . . . $112,307 $ 84,183 $35,739 $188,829 $39,867 $67,920 $ 36,705 $91,554
20,421 56,426
Cost of revenue . . . . . . . . . . . . . .

18,407 134,634

67,151

42,166

49,688

22,667

Gross profit
. . . . . . . . . . . . . . . . .
Research and development, net . .
Sales and marketing . . . . . . . . . . .
General and administrative . . . . .
Restructuring . . . . . . . . . . . . . . ..
Net income (loss) . . . . . . . . . . . . .
Net income (loss) per common

45,156
23,750
7,873
5,130
—

34,495
6,893
10,233
4,971
—
4,964 147,422

17,332
15,483
6,495
3,324
—
(5,151)

54,195
18,177
12,579
7,282

17,200
6,456
6,356
4,137
— 1,118
(1,485)

14,006

25,754
18,464
6,373
3,777
58
(2,958)

16,284 35,128
6,583
17,949
7,172
6,233
4,233
3,693
(80)
687
(12,232) 31,004

share, basic . . . . . . . . . . . . . . . . $

0.14 $

4.05 $ (0.14)$

0.38 $ (0.04) $ (0.08) $

(0.35)$

0.88

Net income (loss) per common

share, diluted . . . . . . . . . . . . . . $

0.13 $

3.90 $ (0.14)$

0.36 $ (0.04) $ (0.08) $

(0.35)$

0.85

Net income in the second quarter of 2012 includes a gain of $139.1 million from the sale of our interconnect
hardware development program. 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-31

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, 2012 and 2011, and the related consolidated statements of operations,
comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2012. 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, 2012 and 2011, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2012, 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, 2012, 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 28, 2013, expressed an
unqualified opinion on the Company’s internal control over financial reporting.

/s/ PETERSON SULLIVAN LLP

Seattle, Washington
February 28, 2013

F-32

Schedule II — Valuation and Qualifying Accounts(1)
December 31, 2012
(In Thousands)

Description

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

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

Year ended December 31, 2012:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .

Balance at
Beginning
of Period

Charge/(Benefit)
to Expense

Deductions

Balance at
End of
Period

$172

$ 89

(138)(2)

$123

$123

$(13)

0(2)

$110

$110

$(62)

(43)(2)

$

5

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

F-33

[THIS PAGE INTENTIONALLY LEFT BLANK]

INVESTOR INFORMATION

BOARD OF DIRECTORS

Stephen C. Kiely, Chairman
Private Investor

Prithviraj Banerjee
Executive Vice President and Chief Technology Officer,
ABB Ltd.

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

William C. Blake
Senior Vice President and Chief Technology Officer

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

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

Geun-Bum (Daniel) Kim
Senior Vice President, General Manager, Cluster Solutions

Charles A. Morreale
Vice President, Field Operations

Arvind Parthasarathi
Senior Vice President and General Manager, YarcData

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

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

SHAREHOLDER SERVICES

CRAY ANNUAL MEETING

JUNE 13, 2013 – 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

380 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.

Computershare, 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

Computershare
Shareholder Relations
P. O. Box 43006
Providence, RI 02940-3006

or
250 Royall Street
Canton, MA 02021-1011

www.computershare.com/investor

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 XC and Cray CS systems, YarcData uRiKA graph analytics appliances and Cray Sonexion products, its product development and delivery plans, its
plans to grow its businesses in the supercomputing and big data markets, its ability to expand and penetrate its addressable markets 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, 2012 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 in a timely fashion or at all, the risk
that Cray’s big data and supercomputing growth initiatives or cluster solutions business are not successful or do not grow as expected or at all, the risk that Cray will
not be able to secure orders for Cray supercomputing systems when or at the levels expected, the risk that the supercomputing systems 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 able to broaden and penetrate its addressable markets 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 federally registered trademark of Cray Inc., and Sonexion, Cray XT, Cray XT4, Cray XT5, Cray XT6, Cray XE, Cray XE6, Cray XE6m, Cray XK6, Cray
XK6m, ECOphlex, Threadstorm, Cluster Compatibility Mode, Cray Xtreme-X, Cray Xtreme-Cool, HPC Software Stack, Advanced Cluster Engine, uRiKA, Cray
Cluster Solutions, Cray XC30, Cray XK7, Cray XK7m and YarcData are trademarks of Cray Inc. Other trademarks used in this report are the property of their
respective owners.

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