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

Form 10-Q

For the transition period from ____________ to __________

Commission file number 0-26820

411 First Avenue South, Suite 600
Seattle, WA 98104-2860
(206) 701- 2000

(Address of principal executive offices)
(Registrant’s telephone number, including area code)

     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  [X]    No  [   ]

     As of November 12, 2002, 51,702,953 shares of the Company’s Common Stock, par value $0.01 per share, were outstanding.

Table of Contents

CRAY INC. AND SUBSIDIARIES

TABLE OF CONTENTS

						Page No.
PART I				FINANCIAL INFORMATION
		Item 1.		Unaudited Condensed Consolidated Financial Statements:
				Balance Sheets as of December 31, 2001 And September 30, 2002		3
				Statements of Operations for the Three And Nine Months Ended September 30, 2001 and 2002		4
				Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2002		5
				Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2002		6
				Notes to Financial Statements		7
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk		21
		Item 4.		Controls and Procedures		21
PART II				OTHER INFORMATION
		Item 1.		Legal Proceedings		22
		Item 2.		Changes in Securities and Use of Proceeds		22
		Item 5.		Other Information		23
		Item 6.		Exhibits and Reports on Form 8-K		23

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CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

ASSETS

					December 31,				September 30,
					2001				2002
Current assets:
	Cash and cash equivalents				$	12,377			$	27,350
	Restricted cash					353				38
	Accounts receivable, net of allowance of $936 in 2001 and 2002					24,764				25,285
	Inventory, net					18,950				18,221
	Prepaid expenses and other assets					3,954				6,889
			Total current assets			60,398				77,783
Property and equipment, net						27,668				26,024
Service spares, net						12,267				9,365
Goodwill, net						22,680				22,680
Long-term receivable						550				550
Deferred tax asset						743				998
Other assets						2,781				3,297
			TOTAL		$	127,087			$	140,697
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	11,295			$	6,600
	Accrued payroll and related expenses					12,063				15,588
	Accrued loss on purchase commitment					4,602
	Other accrued liabilities					5,850				6,581
	Deferred revenue					22,762				19,807
	Current portion of warranty reserves					6,574				4,262
	Current portion of obligations under capital leases					347				286
	Current portion of term loan					2,143				2,143
	Current portion of notes payable					486				265
			Total current liabilities			66,122				55,532
Warranty reserves						8,479				3,262
Obligations under capital leases						421				262
Term loan payable						3,928				2,321
Notes payable										22
Convertible subordinated debentures						8,387				8,472
Shareholders’ equity:
	Series A Convertible Preferred Stock, par $.01 - Authorized, issued and outstanding, 3,125 shares					24,946				24,946
	Common Stock, par $.01 - Authorized, 100,000 shares; issued and outstanding, 42,187 and 51,464 shares					173,318				199,904
	Accumulated other comprehensive loss					(762	)			(347	)
	Accumulated deficit					(157,752	)			(153,677	)
						39,750				70,826
			TOTAL		$	127,087			$	140,697

See accompanying notes

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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

						Three Months Ended								Nine Months Ended
						September 30,								September 30,
						2001				2002				2001				2002
REVENUE:
	Product					$	9,124			$	21,322			$	45,333			$	55,491
	Service						20,252				20,729				62,213				60,397
			Total revenue				29,376				42,051				107,546				115,888
OPERATING EXPENSES:
	Cost of product revenue						5,996				12,367				24,777				29,242
	Cost of service revenue						11,116				12,063				29,780				32,755
	Research and development						13,211				7,301				40,398				26,440
	Marketing and sales						5,276				5,158				14,859				14,935
	General and administrative						1,937				2,108				6,320				6,041
	Restructuring charge						1,284								1,284				1,878
	Amortization of goodwill						1,772								5,318
		Total operating expenses					40,592				38,997				122,736				111,291
		Income (loss) from operations					(11,216	)			3,054				(15,190	)			4,597
OTHER INCOME (EXPENSE), NET							1,105				62				(255	)			2,464
INTEREST INCOME (EXPENSE), NET							(209	)			(503	)			(1,490	)			(1,537	)
		Income (loss) before income taxes					(10,320	)			2,613				(16,935	)			5,524
PROVISION FOR INCOME TAXES							479				474				961				1,449
		Net income (loss)				$	(10,799	)		$	2,139			$	(17,896	)		$	4,075
		Net income (loss) per common share:
				Basic		$	(0.26	)		$	0.04			$	(0.45	)		$	0.09
				Diluted		$	(0.26	)		$	0.04			$	(0.45	)		$	0.08
		Weighted average shares outstanding:
				Basic			41,529				49,221				40,130				46,221
				Diluted			41,529				59,923				40,130				51,291

See accompanying notes

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CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)

				Series A
				Preferred Stock								Common Stock
																								Currency
				Number of								Number of								Accumulated				Translation
				Shares				Amount				Shares				Amount				Deficit				Adjustment				Total
BALANCE, January 1, 2002					3,125			$	24,946				42,187			$	173,318			$	(157,752	)		$	(762	)		$	39,750
	Common stock issued, less issuance costs of $273												1,950				3,627												3,627
	Exercise of warrants, less issuance costs of $116												970				1,823												1,823
	Other comprehensive income:
		Cumulative currency translation adjustment																							(502	)			(502	)
	Net income																				749								749
BALANCE, March 31, 2002					3,125			$	24,946				45,107			$	178,768			$	(157,003	)		$	(1,264	)		$	45,447
	Issuance of shares under Employee Stock Purchase Plan												222				679												679
	Issuance of shares under Company 401(k) Plan												257				568												568
	Common stock issued for accrued interest notes payable												96				224												224
	Exercise of stock options												260				677												677
	Exercise of warrants, less issuance costs of $429												2,390				8,940												8,940
	Warrants issued for consulting services																230												230
	Other comprehensive income:
		Cumulative currency translation adjustment																							794				794
	Net income																				1,187								1,187
BALANCE, June 30, 2002					3,125			$	24,946				48,332			$	190,086			$	(155,816	)		$	(470	)		$	58,746
	Issuance of shares under Employee Stock Purchase Plan												89				299												299
	Exercise of stock options												102				219												219
	Common stock issued, less issuance costs of $700												2,941				9,300												9,300
	Other comprehensive income: