10-Q

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

Form 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
March 31, 2002

OR

[   ] 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 0-26820

CRAY INC.

(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction of
incorporation or organization) 93-0962605
(I.R.S. Employer
Identification No.)

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 May 10, 2002, 45,491,974 shares of the Company’s Common Stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS

		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
	Item 2. Changes in Securities
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 3.1
EXHIBIT 10.1

CRAY INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page No.
PART I		FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited):
		Condensed Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002	3
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2002	4
		Condensed Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2002	5
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2002	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
PART II		OTHER INFORMATION
	Item 2.	Changes in Securities	27
	Item 6.	Exhibits and Reports on Form 8-K	27

2

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS

			December 31,			March 31,
			2001			2002
						(unaudited)
Current assets:
	Cash and cash equivalents		$	12,377		$	5,864
	Restricted cash			353			245
	Accounts receivable, net of allowance of $936 in 2001 and 2002			24,764			33,012
	Inventory, net			18,950			22,391
	Prepaid expenses and other assets			3,954			4,061
		Total current assets		60,398			65,573
Property and equipment, net				27,668			27,863
Service spares, net				12,267			11,124
Goodwill, net				22,680			22,680
Long-term receivable				550			550
Deferred tax asset				743			862
Other assets				2,781			2,742
		TOTAL	$	127,087		$	131,394
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	11,295		$	10,439
	Accrued payroll and related expenses			12,063			15,730
	Accrued loss on purchase commitment			4,602			1,044
	Other accrued liabilities			5,850			5,033
	Deferred revenue			22,762			22,774
	Current portion of warranty reserves			6,574			6,719
	Line of credit						3,486
	Current portion of obligations under capital leases			347			346
	Current portion of term loan			2,143			2,143
	Current portion of notes payable			486			408
		Total current liabilities		66,122			68,122
Warranty reserves				8,479			5,647
Obligations under capital leases				421			361
Term loan payable				3,928			3,392
Notes payable				8,387			8,425
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 45,107 shares			173,318			178,768
	Accumulated other comprehensive loss			(762	)		(1,264	)
	Accumulated deficit			(157,752	)		(157,003	)
				39,750			45,447
		TOTAL	$	127,087		$	131,394

See accompanying notes

3

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

					Three Months Ended
					March 31,
					2001			2002
Revenue:
	Product				$	27,597		$	15,071
	Service					21,150			20,129
			Total revenue			48,747			35,200
Operating expenses:
	Cost of product revenue					14,395			4,628
	Cost of service revenue					8,060			10,925
	Research and development					13,039			10,551
	Marketing and sales					4,701			4,857
	General and administrative					2,139			2,040
	Restructuring charge								1,878
	Amortization of goodwill					1,772
		Total operating expenses				44,106			34,879
		Income from operations				4,641			321
Other income (expense), net						(424	)		1,384
Interest income (expense), net						(1,143	)		(571	)
		Income before income taxes				3,074			1,134
Provision for income taxes						285			385
		Net income			$	2,789		$	749
		Net income per common share:
				Basic	$	0.07		$	0.02
				Diluted	$	0.07		$	0.02
		Weighted average shares outstanding:
				Basic		37,435			43,615
				Diluted		37,471			47,812

See accompanying notes

4

CRAY INC. AND SUBSIDIARIES

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

			Series A
			Preferred Stock				Common Stock							Accumulated
														Other
			Number of				Number of				Accumulated			Comprehensive
			Shares		Amount		Shares		Amount		Deficit			Loss			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

See accompanying notes

5

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

			For the Three Months Ended
			March 31,
			2001			2002
Operating activities
	Net income		$	2,789		$	749
Adjustments to reconcile net income to net cash used by operating activities:
	Depreciation and amortization			3,524			3,751
	Gain on sale of assets						(38	)
	Amortization of goodwill			1,772
	Beneficial conversion feature of notes payable			747			99
	Non-cash warrant and option expense			374
Cash provided (used) by changes in operating assets and liabilities:
	Accounts receivable			(18,587	)		(8,248	)
	Inventory			9,307			(2,744	)
	Other assets			(1,801	)		(187	)
	Accounts payable			3,716			(856	)
	Other accrued liabilities			(3,316	)		(4,375	)
	Accrued payroll and related expenses			85			3,667
	Warranty reserve			(5,578	)		(2,687	)
	Deferred revenue			(1,048	)		12
Net cash used by operating activities				(8,016	)		(10,857	)
Investing activities
	Purchases of spares			(1,439	)		(352	)
	Proceeds from sale of assets						46
	Purchases of property and equipment			(2,147	)		(3,156	)
Net cash used by investing activities				(3,586	)		(3,462	)
Financing activities
	Restricted cash			97			108
	Payment received on related party loan			138
	Proceeds from term loan			7,500
	Principal payments on term loan						(536	)
	Proceeds from line of credit						3,486
	Sale of common stock			3,159			3,627
	Proceeds from exercise of warrants						1,823
	Principal payments on bank note			(562	)		(139	)
	Principal payments on capital leases			(121	)		(61	)
Net cash provided by financing activities				10,211			8,308
Effect of foreign exchange rate changes on cash and cash equivalents				(833	)		(502	)
Net decrease in cash and cash equivalents				(2,224	)		(6,513	)
Cash and cash equivalents
	Beginning of period			4,626			12,377
	End of period		$	2,402		$	5,864
Supplemental disclosure of cash flow information:
		Cash paid for interest	$	171		$	192
Non-cash investing and financing activities
	Inventory reclassed to fixed assets						697
	Note payable converted to common stock			7,781

See accompanying notes

6

CRAY INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Basis of Presentation

     In the opinion of management, the accompanying unaudited condensed consolidated balance sheets and related interim condensed consolidated statements of operations, shareholders’ equity and cash flows have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S—X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments considered necessary for fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ from those estimates.

Principles of Consolidation

     The accompanying condensed consolidated financial statements include the accounts of Cray Inc. and its wholly-owned subsidiaries (the Company). All material intercompany accounts and transactions have been eliminated.

Inventory, net

     Inventory consisted of the following (in thousands):

	December 31,			March 31,
	2001			2002
Components and subassemblies	$	14,874		$	20,379
Work in process		10,994			10,197
Finished goods		1,545			773
		27,413			31,349
Allowance for excess and obsolete		(8,463	)		(8,958	)
Inventory, net	$	18,950		$	22,391

Revenues in the first quarter of 2002 include $5.9 million from the sale of obsolete inventory recorded at a zero cost basis.

7

Comprehensive Income

     The components of comprehensive income are as follows:

	Three months
	ended March 31,
	2001			2002
Net income	$	2,789		$	749
Foreign currency translation adjustment		(833	)		(502	)
Comprehensive income	$	1,956		$	247

Segment Information

     Revenue from U.S. government agencies or commercial customers primarily serving the U.S. government totaled approximately $41.2 million and $29.9 million for the three months ended March 31, 2001 and 2002, respectively.

     The Company operates in three geographic segments: United States; Europe, the Middle East and Africa (EMEA); and Asia Pacific (Japan, Australia, Korea, China and Taiwan). Intercompany transfers between operating segments and geographic areas are primarily accounted for at prices that approximate arm’s length transactions.

     Segment information for the three months ended March 31, 2002 and 2001 were as follows (in thousands):

		United					Asia
Three months ended March 31, 2002:		States			EMEA		Pacific		Total
	Product revenue	$	9,504		$	3,787	$	1,780	$	15,071
	Service revenue	$	12,961		$	5,317	$	1,851	$	20,129
	Net income (loss)	$	(136	)	$	470	$	415	$	749
	Total assets	$	116,113		$	10,795	$	4,486	$	131,394
Three months ended March 31, 2001:
	Product revenue	$	25,973		$	1,624	$	—	$	27,597
	Service revenue	$	14,188		$	4,872	$	2,090	$	21,150
	Net income (loss)	$	332		$	1,575	$	882	$	2,789
	Total assets	$	125,760		$	11,417	$	5,928	$	143,105

8

Earnings Per Share

     Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period, which includes the additional dilution related to conversion of stock options as computed under the treasury stock method and the conversion of the preferred stock under the if-converted method.

     In the first quarter of 2001 and 2002, the Company had convertible debt outstanding with weighted average conversion prices of $1.65, representing 300,000 shares, and $2.21, representing 4.2 million shares. The dilutive effect of these notes is calculated using the “if converted” method. Under this method, the interest expense related to the convertible debt is added back to net income. All convertible debt for the first quarter of 2001 and 2002 was antidilutive.

     In the first quarter of 2001 and 2002, 24.5 million and 29.0 million shares, respectively, were not included in the calculation of fully diluted EPS as they were antidilutive.

Reclassifications

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

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than their fair value. We have applied SFAS No. 142 in the first quarter of 2002. In 2001 our annual amortization of goodwill was $7.2 million. We have tested goodwill for impairment using the two-step approach prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We have determined that there is no impairment of goodwill as of January 1, 2002.

9

The following adjusts reported first quarter 2001 net income and earnings per share to exclude goodwill amortization:

	Three Months
	Ended March 31,
	2001
Reported net income	$	2,789
Plus: goodwill amortization		1,772
Adjusted net income	$	4,561
Reported basic and diluted net income per share	$	0.07
Plus: goodwill amortization per share		0.05
Adjusted basic and diluted net income per share	$	0.12

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our financial position or results of operations.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. It retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. We adopted SFAS No. 144 on January 1, 2002. The adoption of this statement had no impact on our financial position or results of operations.

10

Restructuring Charges

     As of December 31, 2001, an accrued liability associated with restructuring charges related to the termination of employees in the third and fourth quarters of 2001 was $1.7 million. A restructuring charge expense related to termination of employees in the first quarter of 2002 was $1.9 million. Substantially all of the restructuring charge incurred in 2002 represents severance expenses for terminated employees and is expected to be paid in the next eighteen months. The reserve activity for the quarter is as follows (in thousands):

	Severance and
	related costs
Liability balance at December 31, 2001	$	1,700
Additional restructuring charges		1,900
Payments		(883	)
Liability balance at March 31, 2002	$	2,717

Accrued Loss on Purchase Commitment

     As part of the acquisition of the Cray Research business unit from SGI on April 1, 2000, the company assumed a purchase commitment for $6.3 million for which a liability was accrued at the date of acquisition. The $6.3 million consisted of cancellation fees and commitments under contractual obligations to acquire inventory components deemed unusable. As of December 31, 2001, the Company had a remaining obligation of $4.6 million. In the first quarter of 2002 the Company satisfied a portion of the purchase commitment obligation through receipt of inventory and negotiated reductions in cancellation fees of $2.1 million and $1.4 million, respectively. The reduction in the cancellation fee was credited to other income in the amount of $1.4 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Preliminary Note Regarding Forward-Looking Statements

     The information set forth in this Item 2 includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, and is subject to the safe harbor created by those sections. Factors that realistically could cause results to differ materially from those projected in the forward-looking statements are set forth under “Factors That Could Affect Future Results” beginning on page 17. The following discussion should also be read in conjunction with the Financial Statements and Notes thereto.

Overview

     We design, develop, market and service high-performance computer systems, commonly known as supercomputers. We presently market four computer systems, the Cray SV1ex, Cray T3E, Cray SX-6 and cluster solutions, and we provide maintenance services to the world wide installed base of these and earlier models of Cray computers. We are developing two new computer systems, the MTA-2, a scalable uniform shared memory, latency tolerant system that utilizes a multithreaded architecture and

11

high bandwidth interconnection system, and the SV2 (code-named), which incorporates in its design both vector processing capabilities from our long line of Cray Research vector systems and highly parallel capabilities analogous to those of our T3E system. We recently have commenced offering professional services to leverage our reputation and skills for services and industry technical knowledge.

     We have experienced net losses in each year of our operations. We incurred net losses of approximately $35.2 million in 2001, $25.4 million in 2000, and $34.5 million in 1999. For the three months ended March 31, 2002, we had net income of $749,000.

     We recognize revenue from sales of our computer systems upon acceptance by the customer, although in limited circumstances, depending on sales contract terms, revenue may be recognized when title passes upon shipment or may be delayed until funding is certain. We recognize service revenue from the maintenance of our computer systems ratably over the term of each maintenance agreement. Funds from maintenance contracts that are paid in advance are recorded as deferred revenue. We recognize service revenue from our professional services activities as services are rendered.

     Factors that should be considered in evaluating our business, operations and prospects and that could affect our future results and financial condition are set forth beginning on page 17.

Critical Accounting Policies and Estimates

     This discussion as well as disclosures included elsewhere in this Form 10-Q are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an ongoing basis, we evaluate the estimates used, including those related to estimates of warranty liabilities, valuation of inventory at the lower of cost or market and impairment of goodwill. We base our estimates on historical experience, current conditions and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of the consolidated financial statements:

     T90 Reserve. We acquired service contracts in the Cray Research acquisition for T90 vector computers. Some of the components in the T90 vector computers, which were sold prior to the acquisition, have an unusually high failure rate. At the date of the acquisition, we recorded a warranty reserve of $47.5 million to reflect our estimate of the amount by which the cost of servicing the T90 vector computers would exceed the revenue generated from servicing them until they were no longer in use by our customers. As we incur costs to service these computers, we reduce the amount of the warranty reserve. As of March 31, 2002, our total warranty reserve balance is $12.4 million, of which $11.9 million relates to the T90 vector computers. We continually monitor the reasonableness of our estimate of the warranty reserve. This involves analysis of our assumptions with regard to the length of time the T90 vector computers will be in use by our customers, the failure rate of modules in the computers considering actual historical failure rates, and personnel and resources, including service spares, that will be required to correct failures that occur in the future. To date, our estimates of the

12

costs incurred to service the T90 vector computers have approximated the actual costs we have incurred. We believe that the warranty reserve balance at March 31, 2002 is a reasonable estimate of the extent to which our costs to service these computers will exceed the revenue generated from existing service contracts. It is possible, however, that our estimates may prove to be inaccurate and that our actual costs may differ materially from our estimates.

     Inventories. We record our inventories at the lower of cost or market. We regularly evaluate the technological usefulness of various inventory components. When it is discovered that previously inventoried components do not function as intended in a fully operational system, the costs associated with these components are expensed. Due to rapid changes in technology and the increasing demands of our customers, we are continually developing new products. As a result, it is possible that older products we have developed may become obsolete or we may be required to sell these products below cost. When we determine that we will likely not recover the cost of inventory items through future sales, we write down the related inventory to our estimate of its market value. As of March 31, 2002, we had an allowance for excess and obsolete inventory of $9.0 million applied against our gross inventory balance of $31.3 million. 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 may have future sales of inventory previously written down to zero. We may also 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.

     Goodwill. Approximately 17% of our assets as of March 31, 2002, consist of goodwill resulting from our acquisition of the Cray Research business unit from Silicon Graphics in 2000. As discussed above in the “Recent Accounting Pronouncements” section, we adopted SFAS No. 142 on January 1, 2002, and no longer amortize goodwill associated with the acquisition, but we will be required to conduct ongoing analyses of the recorded amount of goodwill in comparison to its estimated fair value. These ongoing analyses of whether the fair value of recorded goodwill is impaired will involve a substantial amount of judgment. Future charges related to impairment of goodwill could be material depending on future developments and changes in technology and our business.

Results of Operations

Three Months Ended March 31, 2001 and 2002

     Product Revenue. We had product revenue of $15.1 million for the three months ended March 31, 2002, compared to $27.6 million for the respective 2001 period. Product revenue for 2002 consisted of $8.5 million for our SV1ex product line, $4.1 million for our T90 product line, $1.8 million for our T3E product line, and $652,000 for our MTA-2 product line. The first quarter 2001 results were higher due to a $21.3 million T3E sale in March 2001. We expect our product revenue to vary quarterly. See “Factors That Could Affect Our Future Results — Our Quarterly Performance May Vary Significantly and Could Cause Our Stock Price To Be Volatile.”

Cray is a federally registered trademark of Cray Inc., and Cray T90, Cray T3E, Cray SV1, Cray SV1ex, Cray SV2, Cray MTA, and Cray MTA-2 are trademarks of Cray Inc

13

     Product revenue represented 43% and 57% of total revenue for the three months ended March 31, 2002 and 2001, respectively.

     Service Revenue. We had service revenue, which includes revenue from maintenance services and, beginning in 2002, from professional services, of $20.1 million for the three months ended March 31, 2002, compared to $21.2 million for the respective 2001 period; the 2002 results include $1.6 million from professional services. Maintenance services are provided under separate maintenance contracts with our customers.

     These contracts generally provide for maintenance services for one year, although some are for multi-year periods, and are renewable upon expiration at the customer’s election. We expect maintenance service revenue to decline slowly over the next year or so as older systems are withdrawn from service and then to stabilize as our new systems are placed in service. Professional services are provided under separate contracts for a particular activity, such as deinstalling a computer system, porting a certain application to one of our platforms or use of our computer resources for a particular period, and we expect contracts to vary greatly in size. We received our first revenue from professional services in the first quarter of 2002, and expect that our professional services revenue will increase.

     Service revenue represented 57% and 43% of total revenue for the three months ended March 31, 2002 and 2001, respectively.

     Operating Expenses. We had cost of product revenue of $4.6 million for the three months ended March 31, 2002, compared to $14.4 million for the respective 2001 period. Our cost of product represented 31% of product revenue for the three months ended March 31, 2002, compared to 52% for the corresponding 2001 period. The decrease reflects unusually high margins from sales of our T90, T3E and SV1ex products during the quarter, as we were able to sell inventory that had been previously expensed or partially or wholly written off. We expect our cost of product revenue to range from 50% to 60% as a percentage of product revenue for the rest of 2002.

     We had cost of service revenue of $10.9 million for the three months ended March 31, 2002, including $9.5 million for maintenance services and $1.4 million for professional services, compared to $8.1 million for the corresponding 2001 period. Our cost of service revenue represented 54% of service revenue for the three months ended March 31, 2002, compared to 38% for the corresponding 2001 period. The increase was primarily due to high costs associated with professional services in the first quarter of 2002 and favorable cost variances in the first quarter of 2001. We expect our overall cost of service revenue to range from 50% to 55% of service revenue for the rest of the year.

     Research and development expenses reflect our costs associated with the enhancements to the SV1 and T3E systems in the 2001 period and the development of the MTA-2 and SV2 systems in both the 2001 and 2002 periods, including related software development. These costs also include personnel expenses, allocated overhead and operating expenses, software, materials and engineering expenses, including payments to third parties. These costs are offset in part by governmental development funding. Net research and development expenses were $10.6 million for the three months ended March 31, 2002, compared to $13.0 million for the respective 2001 period. Government developmental funding was $2.9 million and $3.2 million for the three months ended March 31, 2002 and 2001, respectively. Net research and development expenditures represented 30% and 27% of total revenue for the three months ended March 31, 2002 and 2001, respectively. We expect that research and development expenses will decrease in 2002, due to reductions in third-party non-recurring engineering

14

expenses as we complete development of the MTA-2 and SV2 systems, reductions in personnel and increased governmental funding. Over time, with receipt of increased revenue from products currently under development, sales of the Cray SX-6 series of computers and cluster systems and more professional services engagements, we expect research and development expenses to decrease as a percentage of overall revenue.

     Marketing and sales expenses were $4.9 million for the three months ended March 31, 2002, compared to $4.7 million for the respective 2001 period. We expect quarterly marketing and sales expenses to remain relatively constant for the remaining 2002 quarters.

     General and administrative expenses were $2.0 million for the three months ended March 31, 2002, compared to $2.1 million for the respective 2001 period. We expect quarterly general and administrative expenses to remain relatively constant for the remaining 2002 quarters.

     Restructuring charges were $1.9 million for the three months ended March 31, 2002 compared to none for the respective 2001 period and represent severance expenses related to the termination of employees in the first quarter of 2002.

     We incurred no amortization expense for the three months ended March 31, 2002, compared to $1.8 million for the respective 2001 period. Amortization expense relates to the goodwill resulting from the acquisition of the Cray Research business unit on April 1, 2000. Following the implementation of Statement of Financial Accounting Standard No. 142, we determined that there was no impairment related to goodwill and intangible assets, and we will not record any further amortization of goodwill in 2002. See “Recent Accounting Pronouncements” beginning on page 9 above.

     Other Income (Expense), net. Other income was $1.4 million for the three months ended March 31, 2002, compared to other expense of $424,000 for the respective 2001 period. The increase in other income consisted primarily of a negotiated settlement of a accrued cancellation charge on a purchase commitment.

     Interest Income (Expense), net. Interest income was $28,000 for the three months ended March 31, 2002, compared to $15,000 for the respective 2001 period. Interest expense was $571,000 for the three months ended March 31, 2002, compared to $1.1 million for the respective 2001 period. The higher interest expense for 2001 was largely due to a non-cash charge of $747,000 associated with the value of the conversion feature of certain investor promissory notes, and a $225,000 non-cash charge for the value of options issued in conjunction with certain investor promissory notes, compared to a non-cash charge of $145,000 in the first quarter of 2002 associated with the financing completed in November 2001. We expect to incur additional non-cash interest charges associated with the financing completed in November 2001, related to the discount recorded on convertible debt issued.

     Taxes. We recorded a provision of $385,000 for income taxes in foreign countries and certain states for the three months ended March 31, 2002, compared to $285,000 for the respective 2001 period. Due to continued losses from operations on an annual basis, there has been no provision for U.S. federal income taxes for any period.

15

Liquidity and Capital Resources

     Cash, cash equivalents and accounts receivable totaled $38.9 million at March 31, 2002, compared to $37.1 million at December 31, 2001. Over that period, cash decreased from $12.4 million to $5.9 million, while restricted cash balances, which serve as collateral for capital equipment loans and leases, decreased from $353,000 to $245,000. These decreases were more than offset by an increase of more than $8.2 million in accounts receivable, which was largely due to a $5.4 million receivable being paid in the first week after the end of the quarter.

     Net cash used by operating activities was $10.9 million for the three months ended March 31, 2002, compared to $8.0 million used in the corresponding 2001 period. For the three months ended March 31, 2002, net operating cash was used primarily by increases in accounts receivable and inventory, offset by an increase in accrued payroll and related expenses.

     Net cash used by investing activities was $3.5 million for the three months ended March 31, 2002, compared to $3.6 million for the corresponding 2001 period. Net cash used by investing activities for the 2002 period consisted primarily of $3.2 million spent on additional property, plant and equipment used primarily for computers and electronic test equipment, computer software and furniture and fixtures and $352,000 for service spares.

     Net cash provided by financing activities was $8.3 million for the three months ended March 31, 2002, compared to $10.2 million for the corresponding 2001 period. For the three months ended March 31, 2002, we raised $3.6 million through the sale of common stock to one institutional investor, and raised $1.8 million through the exercise of warrants. We also received $3.5 million from a draw on our line of credit during March 2002.

     Over the next twelve months our significant cash requirements will relate to operational expenses, consisting primarily of personnel costs, costs of inventory and third-party engineering expenses, and acquisition of property and equipment. These expenses include our commitments to acquire components and manufacturing and engineering services. We expect that anticipated product sales, professional services, maintenance services and government funding of research and development expenses, coupled with limitations on operating expenses and capital expenditures, over the next twelve months will generate overall positive cash flow.

     At any particular time, given the high average selling price of our products, our cash position is affected by the timing of payment of product sales, receipt of prepaid maintenance revenue and receipt of government funding of research and development activities. In addition, delays in the development of the MTA-2, or the SV2 system, may require additional capital earlier than planned. While we believe our cash resources will be adequate for the next 12 months, we may need to raise additional equity and/or debt capital if we experience lower than anticipated product sales due to delays in product development, product availability and general economic conditions. In addition, we may raise additional capital to enhance our cash position and working capital position. Financings may not be available to us when needed or, if available, may not be available on satisfactory terms and may be dilutive to our shareholders.

16

Factors That Could Affect Future Results

     The following factors should be considered in evaluating our business, operations and prospects and may affect our future results and financial condition.

OUR INABILITY TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT OF OUR SYSTEMS COULD CAUSE OUR BUSINESS TO FAIL. We expect that our success in the remainder of 2002 and following years will depend upon completing the development of the SV2 and MTA-2 systems. These development efforts are lengthy and technically challenging processes, and require a significant investment of capital, engineering and other resources. Delays in completing the design of the hardware components or software of these systems or in integrating the full systems would make it difficult for us to develop and market these systems. We are dependent on our vendors to manufacture components for our systems, and few companies can meet our design requirements. If our vendors are unable to manufacture our components to our design specifications on a timely basis, the completion of our products will be delayed. During the development process we have had, and in the future we may have, to redesign components because of previously unforeseen design flaws. We also may find flaws in our system software, which require correction. Redesign work may be costly and cause delays in the development of these systems, and could make it more difficult for these systems to be successful as commercial products.

LACK OF CUSTOMER ORDERS FOR OUR EXISTING PRODUCTS AND OUR INABILITY TO SELL OUR PRODUCTS AT EXPECTED PRICES WOULD LIMIT OUR REVENUE AND OUR ABILITY TO BE PROFITABLE. We will depend on sales of our current products — the Cray SV1ex series, T3E systems, Cray SX-6 and cluster systems — for significant product revenue in 2002. To obtain these sales, we need to assure our customers of product performance and cost effectiveness and overcome market difficulties applicable to each system. Most of our potential customers already own or lease very high-performance computer systems. Some of our competitors may offer trade-in allowances or substantial discounts to potential customers, and we may not be able to match these sales incentives. We may be required to provide discounts to make sales or to provide lease financing for our products, which would result in a deferral of our receipt of cash for these systems. These developments would limit our revenue and resources and would reduce our ability to be profitable.

LACK OF SALES OF THE SX-6 SYSTEM COULD DECREASE OUR REVENUE AND DELAY PROFITABILITY. Cray SX-6 systems from Japan first became available for delivery in North America in the first quarter of 2002, which has delayed our sales efforts. These sales would be adversely affected if NEC does not develop a follow-on product to the SX-6. Supercomputers from Japan have not been available for sale in the United States since 1997, and there may be reluctance among traditional customers, such as governmental agencies and research organizations and industrial users, to purchase supercomputers from non-U.S. sources. In addition, we must appropriately place the SX-6 system within our own product line to avoid customer and market confusion. If we do not obtain certain volumes of sales of Cray SX-6 systems through March 2003, we may lose our North American exclusive distribution rights for this product. Competing successfully with NEC with respect to sales of the SX-6 system outside of North America is difficult.

WE MAY NOT BE SUCCESSFUL IN CONTRACTING TO PROVIDE OUR PROFESSIONAL SERVICES, WHICH WOULD DECREASE REVENUE AND AFFECT PROFITABILITY. Our entry into the professional services market is new. We will be using our employees with subject matter expertise, led by experienced professional service leaders we have recently hired, to staff professional services projects on a project-by-project basis. We need to refine our approach and develop

17

methodologies that change the way we have conducted business in the past. We compete with companies with larger staffs and more experience in the marketing and provision of professional services. For these reasons our entry into the professional services market may not be successful.

LACK OF SALES OF CLUSTER SYSTEMS WOULD REDUCE OUR REVENUE AND DELAY PROFITABILITY. We expect that sales of cluster systems will begin in the second half of 2002. There are many competitive cluster solutions, and pressure on margins is severe. We expect to compete based on increasingly differentiated software, pre-sales integration services, our reputation for excellent post-sales maintenance and support services and our professional services assisting cluster customers finding solutions for their problems. If we cannot develop commercially acceptable software solutions or our services are not sufficiently well-received, then we will have difficulty selling cluster solutions at prices that generate appropriate margins.

GENERAL ECONOMIC AND MARKET CONDITIONS COULD DECREASE OUR REVENUE, INCREASE OUR NEED FOR CASH AND DELAY PROFITABILITY. While most of our business is related to the government sector, which is less affected by short-term economic cycles, a slow-down in the overall U.S. and global economy and resultant decreases in capital expenditures has affected sales to our industrial customers and may continue to do so. Cancellations or delays in purchases would decrease our revenue, increase our need for working capital and delay profitability.

LACK OF GOVERNMENT SUPPORT FOR SUPERCOMPUTER SYSTEMS WOULD INCREASE OUR CAPITAL REQUIREMENTS AND DECREASE OUR ABILITY TO CONDUCT RESEARCH AND DEVELOPMENT. We have targeted U.S. and foreign government agencies and research laboratories as important sales prospects for all of our products. A few of these agencies fund a portion of our development efforts. The U.S. government historically has facilitated the development of, and has constituted a market for, new and enhanced very high-performance computer systems. Congressional action with respect to the 2002 budget was delayed due to the events of September 11, 2001. The failure of U.S. and foreign government agencies to continue to fund these development efforts, due to lack of funding, change of priorities or for any other reason, or continued delays in funding, would cause us to increase our need for capital and reduce our research and development expenditures.

PROPOSALS AND PURCHASES BASED ON THEORETICAL PEAK PERFORMANCE REDUCE OUR ABILITY TO MARKET OUR SYSTEMS. Our high-performance systems are designed to provide high actual sustained performance on difficult computational problems. Many of our competitors offer systems with higher theoretical peak performance numbers, although their actual sustained performance frequently is a small fraction of their theoretical peak performance. Nevertheless, many requests for proposals, primarily from governmental agencies in the U.S. and elsewhere, have criteria based on theoretical peak performance. Until these criteria are changed, we are foreclosed from bidding or proposing our systems on such proposals, which will limit our revenue potential.

IF THE U.S. GOVERNMENT PURCHASES FEWER SUPERCOMPUTERS, OUR REVENUE WOULD BE REDUCED. Historically, sales to the U.S. government have been a significant market for supercomputers. In the twelve months ended December 31, 2001, approximately 85% of our revenue was derived from sales to various agencies and departments of the U.S. government. Sales to the U.S. government may be affected by factors outside our control, such as changes in procurement

18

policies and budget considerations. If the U.S. government were to stop or reduce its use and purchases of supercomputers, our revenue would be reduced.

OUR RELIANCE ON THIRD-PARTY SUPPLIERS POSES SIGNIFICANT RISKS TO OUR BUSINESS AND PROSPECTS. We subcontract the manufacture of substantially all of our hardware components for all of our products, including integrated circuits, printed circuit boards, flex circuits and power supplies, on a sole or limited source basis to third-party suppliers. We also use a contract manufacturer to assemble our SV1ex and T3E components, and plan to do so for our MTA-2 and SV2 systems also. We are exposed to substantial risks because of our reliance on these and other limited or sole source suppliers. For example:

• if a reduction or an interruption of supply of our components occurred, it could take us a considerable period of time to identify and qualify alternative suppliers to redesign our products as necessary and to begin manufacture of the redesigned components;

• if we were ever unable to locate a supplier for a component, we would be unable to assemble and deliver our products;

• one or more suppliers may make strategic changes in their product lines, which may result in the delay or suspension of manufacture of our components or systems; and

• some of our key suppliers are small companies with limited financial and other resources, and consequently may be more likely to experience financial difficulties than larger, well-established companies.

     We have experienced delays in obtaining circuit boards, integrated circuits and flex circuits on a timely basis from our suppliers, which have resulted in delays in the development of our products.

     OUR QUARTERLY PERFORMANCE MAY VARY SIGNIFICANTLY AND COULD CAUSE OUR STOCK PRICE TO BE VOLATILE. One or a few system sales may account for a substantial percentage of our quarterly and annual revenue. This is due to the high average sales price of our products, particularly the Cray T3E system, and the expected high average sales prices for our MTA-2, SX-6 and SV2 systems, and the timing of purchase orders and product acceptances. Because a number of our prospective customers receive funding from the U.S. or foreign governments, the timing of orders from such customers may be subject to the appropriation and funding schedules of the relevant government agencies. The timing of orders and shipments also could be affected by other events outside our control, such as:

• changes in levels of customer capital spending;

• the introduction or announcement of competitive products;

• the availability of components;

• timing of the receipt of necessary export licenses; or

• currency fluctuations and international conflicts or economic crises.

     Because of these factors, revenue, net income or loss and cash flow are likely to fluctuate significantly from quarter to quarter.

ADDITIONAL FINANCINGS MAY BE DILUTIVE TO EXISTING SHAREHOLDERS. Over the next twelve months our significant cash requirements relate to operational expenses, primarily for personnel, inventory and third-party engineering services, and acquisition of capital goods. We expect to have positive cash flow from our anticipated product sales, professional services, maintenance

19

services and government funding of research and development expenses over the next twelve months. At any time, given the high average selling price of our products, our cash position is impacted by the timing of product sales, receipt of prepaid maintenance and receipt of government funding of research and development activities. Delays in the development of either the MTA-2 or SV2 systems may require additional capital earlier than planned. While we believe our cash resources will be adequate for the next twelve months, we may need to raise additional equity and/or debt capital if we experience lower than anticipated product sales due to delays in product availability, general economic conditions and/or failure to receive sufficient governmental support for our products and research activities. In addition, we may raise additional funds to enhance our working capital position. Financings may not be available to us when needed or, if available, may not be available on satisfactory terms and may be dilutive to our shareholders.

OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD CAUSE OUR STOCK PRICE TO DECLINE. While we have had a substantial increase in revenue with the acquisition of the business operations of Cray Research at the end of March 2000, and have had three profitable quarters since that acquisition, whether we will achieve earnings on a consistent basis will depend on a number of factors, including:

• our ability to market and sell the SV1ex, T3E, SX-6 and cluster systems, engage professional services clients and complete the development of the MTA-2 and SV2 systems;

• the level of revenue in any given period;

• the cost of servicing the T90 installed base;

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

• our expense levels, particularly for research and development and manufacturing and service costs.

FAILURE TO OBTAIN RENEWAL OF MAINTENANCE SERVICE CONTRACTS WILL REDUCE OUR REVENUE AND EARNINGS. High-performance computer systems are typically sold with maintenance service contracts. These contracts generally are for annual periods, although some are for multi-year periods. In 2000 and 2001 we performed maintenance services under existing SGI maintenance contracts as a subcontractor to SGI; we now have been successful in having almost all of these contracts assigned to us. As these contracts expire, however, we need to sell new maintenance service contracts to these customers. Revenue from maintenance service contracts has declined from approximately $125 million in 1999 to approximately $83 million in 2001 and is expected to further decline until we develop, sell and install new products. If customers do not renew their maintenance service contracts with us, our revenue and earnings will be reduced.

THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE COULD MAKE IT MORE DIFFICULT FOR US TO SELL OUR SYSTEMS TO COMMERCIAL CUSTOMERS. To make sales in the automotive, aerospace, chemistry and other engineering and commercial markets, we must be able to attract independent software vendors to port their software application programs so that they will run on our systems. The relatively low volume of supercomputer sales makes it difficult for us to attract these vendors. We also modify and rewrite third-party software applications to run on our systems and so facilitate the expansion of our potential markets. There can be no assurance that we will be able to induce independent software vendors to rewrite their applications, or that we will successfully rewrite third-party applications for use on our systems.

FAILURE TO OBTAIN CREDIT FACILITIES MAY RESTRICT OUR OPERATIONS. While we have obtained a $15 million secured credit facility based on domestic accounts receivables and maintenance revenue, we are seeking additional credit facilities of up to approximately $4 million, such as bank lines of credit, vendor credit and capitalized equipment lease lines. The absence of a consistent

20

record of revenue and earnings makes obtaining such facilities more difficult; if we obtain such facilities, they may have high interest rates, contain restrictions on our operations and require security. Failure to obtain such credit facilities may limit our planned operations and our ability to acquire needed infrastructure and other capital items would reduce or eliminate our cash reserves and increase our need for capital.

THE COST OF SERVICE OF THE T90 INSTALLED BASE WILL REDUCE OUR EARNINGS. Some of the components in the T90 vector computers sold by SGI before our acquisition of the operations of Cray Research have an unusually high failure rate. The cost of servicing the T90 computers exceeds the related service revenue. We are continuing to take action that commenced before the acquisition to address this problem, and have recorded a warranty reserve, with a balance of $11.9 million as of March 31, 2002, to provide for anticipated future losses on the T90 maintenance service contracts.

IF WE ARE NOT ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, OUR PRODUCTS WILL NOT BE COMPETITIVE. Our market is characterized by rapidly changing technology, accelerated product obsolescence and continuously evolving industry standards. Our success will depend upon our ability to sell our current products, to complete development of the MTA-2 and the SV2 systems and to develop successor systems in the future. We will need to introduce new products and features in a timely manner to meet evolving customer requirements. We may not succeed in these efforts. Even if we succeed, products or technologies developed by others may render our products or technologies noncompetitive or obsolete. If we incur delays in developing our products or if such products do not gain broad market acceptance or become obsolete, our ability to develop and market our products will be reduced.

IF WE CANNOT ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL, WE MAY BE UNABLE TO IMPLEMENT EFFECTIVELY OUR BUSINESS PLAN. Our success also depends in large part upon our ability to attract, retain and motivate highly skilled management, technical and marketing and sales personnel. Competition for highly skilled management, technical, marketing and sales personnel is intense, and we may not be successful in attracting and retaining such personnel. We have no employment contracts with any of our employees.

A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND COULD DEPRESS MARKET PRICES OF OUR STOCK AND HINDER OUR ABILITY TO OBTAIN ADDITIONAL FINANCING. Sale of a substantial number of our shares of common stock in the public market or the prospect of sales could cause the market price of our common stock to decline. As of March 31, 2002, we had outstanding:

• 45,127,474 shares of common stock;

• 3,125,000 shares of Series A preferred stock convertible into 3,136,763 shares of common stock;

• warrants to purchase 14,111,441 shares of common stock;

• debentures convertible into an indeterminable number of shares of common stock (a minimum of 3,957,447 shares); and

• stock options to purchase an aggregate of 10,984,772 shares of common stock, of which 5,896,928 options were then exercisable.

Almost all of our outstanding shares of common stock may be sold without substantial restrictions. All of the shares purchased under the warrants and exercisable options are available for sale in the public market, subject in some cases to volume and other limitations. The shares of common stock underlying

21

the Series A preferred stock are not available for public sale until May 2003. Sales in the public market of substantial amounts of our common stock, including sales of common stock issuable upon the exercise of warrants, debentures and options, could depress prevailing market prices for the common stock. Even the perception that sales could occur may impact market prices. The existence of outstanding warrants and options may prove to be a hindrance to our future equity financings. Further, the holders of the warrants and options may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us. Such factors could impair our ability to meet our capital needs.

THE CONVERSION OF THE DEBENTURES AND THE EXERCISE OF THE WARRANTS MAY SUBSTANTIALLY DILUTE OUR COMMON SHAREHOLDERS. In November 2001, we issued 5% convertible subordinated debentures in the aggregate original principal amount of $9,300,000, convertible into shares of our common stock as described below, and common stock purchase warrants for an aggregate of 367,590 shares of our common stock at an initial exercise price of $4.4275 per share, exercisable until November 6, 2004. The holders of the debentures can choose to convert all or a portion of the principal amount outstanding into shares of our common stock at any time before the maturity date of November 6, 2004. The debentures are convertible into common stock at a fixed conversion price of $2.35 per share from the date of issuance until maturity. In addition, during each three-month period beginning on February 6, 2002, each holder may convert on a cumulative basis up to 25% of the original principal amount of each holder’s debenture at a floating conversion price. The floating conversion price is equal to 94% of the average of the 7 lowest daily volume weighted average prices during the 20 trading days immediately prior to the date upon which the debenture is converted.

     The following table outlines the number of shares of common stock that would be issuable upon conversion in full of the debentures at several hypothetical conversion prices. The table also sets forth the total number of shares the investors would beneficially own at such hypothetical adjustment prices, and assuming exercise in full of the warrants, and the percentage that such shares would constitute of our resulting outstanding common stock, assuming the investors had not purchased or sold any of our securities.

     During calendar year 2001, the closing price of our common stock has ranged from a low of $1.53 to a high of $3.45 per share, and in the first quarter of 2002, the closing prices ranged from a low of $1.82 to a high of $2.66 per share.

	Shares Issuable
	Under		Shares Issuable		Total Shares		Total Shares as a
Hypothetical	Convertible		Under		Issuable to		Percent of
Conversion Price (1)	Debentures (1)		Warrants		Investors		Outstanding Stock (2)
$1.00		9,300,000		367,590		9,667,590		17.6	%
$1.25		7,440,000		367,590		7,807,590		14.7	%
$1.50		6,200,000		367,590		6,567,590		12.7	%
$1.75		5,314,286		367,590		5,681,876		11.2	%
$2.00		4,650,000		367,590		5,017,590		10.0	%
$2.25		4,133,333		367,590		4,500,923		9.1	%
$2.35(3)		3,957,447		367,590		4,325,037		8.7	%

22

(1)	Assumes conversion in full of all debentures at the hypothetical conversion price set forth above. Assumes interest is paid in cash and not in shares of common stock.
(2)	Based on 45,127,474 shares of common stock outstanding on March 31, 2002, plus the shares issuable to the investors under the debentures and the warrants shown above.
(3)	At floating conversion prices above $2.35 per share, the investors would convert at the fixed conversion price of $2.35 per share.

     The conversion prices of the debentures and the exercise price of the warrants could be lower than the trading price of our common stock from time to time. The debentures are convertible into common stock at a fixed conversion price of $2.35 per share from the date of issuance until maturity, and a floating conversion price as described earlier. The floating conversion price generally ensures that the debentures can be converted at a discount from the market price of our common stock at the time of conversion. For that reason, we expect the investors ultimately to convert the entire principal amount of the debentures and to resell the common stock issued to them. The potential or actual issuance of shares under the debentures and upon exercise of the warrants could have a substantial dilutive impact on the holders of our common stock.

THE SALES OF MATERIAL AMOUNTS OF OUR COMMON STOCK UPON CONVERSION OF THE DEBENTURES, OR THE PROSPECT OF SUCH SALES, COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND ENCOURAGE SHORT SALES. Our common stock price may decrease if the holders of the debentures elect to convert and resell their shares of common stock. In particular, as the price of our common stock decreases, if the holders of the debentures elect to convert, we will be required to issue more shares of our common stock, based on the floating conversion price, for any given dollar amount invested by the holders of the debentures. See the table above under “The Conversion of the Debentures and the Exercise of the Warrants May Substantially Dilute Our Common Shareholders.” Any future issuance of a significant number of common shares, or any future sales by the investors of a significant number of common shares, or the prospect of such issuances or sales, could reduce the market price of our common stock. This may encourage short sales by third parties, which could place further downward pressure on the price of our common stock.

OUR ABILITY TO OBTAIN FUTURE FINANCING MAY BE HINDERED BY THE UNCERTAIN AND POTENTIALLY SUBSTANTIAL NUMBER OF SHARES ISSUABLE UNDER THE DEBENTURES. The shares issuable upon conversion of the debentures are linked to a percentage discount to the market price of our common stock at the time of the conversion. We cannot predict the number of shares of common stock that may be issued upon conversion. The lower the price of our common stock at the time of conversion, the more shares of common stock that we will be required to issue upon conversion, which will further dilute holders of our other securities. See the table above under “The Conversion of the Debentures and the Exercise of the Warrants May Substantially Dilute Our Common Shareholders.” This uncertain and potentially substantial number of shares issuable upon conversion of the debentures may hinder our ability to obtain additional financing.

23

OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common stock is subject to significant fluctuations in response to:

• changes in analysts’ estimates;

• our future capital raising activities;

• announcements of technological innovations by us or our competitors; and

• general conditions in our industry.

     The stock market has been and is subject to price and volume fluctuations that particularly affect the market prices for small capitalization, high technology companies like ourselves.

IF WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGH-PERFORMANCE COMPUTER MARKET, OUR REVENUE WILL DECLINE. The performance of our products may not be competitive with the computer systems offered by our competitors, and we may not compete successfully over time against new entrants or innovative competitors at the lower end of the market. Periodic announcements by our competitors of new high-performance computer systems and price adjustments may reduce customer demand for our products. Our competitors are established companies that are well known in the high-performance computer market, including IBM, Sun Microsystems, Compaq Computer, Hewlett-Packard, Silicon Graphics, NEC Corporation (outside of North America), Fujitsu and Hitachi. Each of these competitors has broader product lines and substantially greater research, engineering, manufacturing, marketing and financial resources than we do. We also compete with new entrants capitalizing on developments in parallel processing and increased computer performance through networking and clustering systems. Currently, these products are limited in applicability and scalability and can be difficult to program. A breakthrough in architecture or software technology could make parallel systems more attractive to potential customers. Such a breakthrough would impair our ability to sell our products and reduce our revenue.

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, non-disclosure 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 protect adequately 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. Third parties may assert intellectual property claims against us and claims, if proved, could require us to pay substantial damages or redesign our existing products. Even meritless claims would require management attention and would cause us to incur significant expense to defend. 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. Although we continue to implement protective measures and intend to defend our proprietary rights vigorously, these efforts may not be successful.

OUR ABILITY TO BUILD SOME PRODUCTS IS LIMITED BY OUR AGREEMENT WITH SILICON GRAPHICS, WHICH MAY LIMIT OUR ABILITY TO COMPETE WITH SILICON GRAPHICS AND OTHER COMPANIES. The technology agreement through which we acquired and licensed patent, know-how and other intellectual property rights from Silicon Graphics contains restrictions on our ability to develop some products, including specified successors to the T3E system, and restrictions on the use of other technology, such as SGI’s IRIX operating system to the SV2.

24

IT MAY BECOME MORE DIFFICULT TO SELL OUR STOCK IN THE PUBLIC MARKET. Our common stock is listed for quotation on the Nasdaq National Market. To keep our listing on this market, Cray must meet Nasdaq’s listing maintenance standards. If the bid price of our common stock falls below $1.00 for an extended period, or we are unable to continue to meet Nasdaq’s listing maintenance standards for any other reason, our common stock could be delisted from the Nasdaq National Market. If our common stock were delisted, we likely would seek to list the common stock on the Nasdaq SmallCap Market, the American Stock Exchange or on a regional stock exchange. Listing on such other market or exchange could reduce the liquidity for our common stock. If our common stock were not listed on the SmallCap Market or an exchange, trading of our common stock would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities or directly through market makers in our common stock. If our common stock were to trade in the over-the-counter market, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common stock. A delisting from the Nasdaq National Market and failure to obtain listing on such other market or exchange would subject our securities to so-called penny stock rules that impose additional sales practice and market-making requirements on broker-dealers who sell or make a market in such securities. Consequently, removal from the Nasdaq National Market and failure to obtain listing on another market or exchange could affect the ability or willingness of broker-dealers to sell or make a market in our common stock and the ability of purchasers of our common stock to sell their securities in the secondary market. In addition, when the market price of our common stock is less than $5.00 per share, we become subject to penny stock rules even if our common stock is still listed on the Nasdaq National Market. While the penny stock rules should not affect the quotation of our common stock on the Nasdaq National Market, these rules may further limit the market liquidity of our common stock and the ability of investors to sell our common stock in the secondary market.

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 high-performance computer systems such as our products. Occasionally we have experienced delays in receiving appropriate approvals necessary for certain sales, which has 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 foreign customers, eliminating an important source of potential revenue.

PROVISIONS IN OUR AGREEMENT WITH SILICON GRAPHICS MAKE IT MORE DIFFICULT FOR SPECIFIED COMPANIES TO ACQUIRE US. The terms of our purchase of the assets of Cray Research contain provisions restricting our ability to transfer the assets of Cray Research. Sales of these assets to Hewlett-Packard, Sun Microsystems, IBM, Compaq Computer, NEC or Gores Technology Group, or their affiliates, are prohibited until the earlier of March 31, 2003, or if Silicon Graphics were sold.

PROVISIONS OF OUR ARTICLES AND BYLAWS COULD MAKE A PROPOSED ACQUISITION THAT IS NOT APPROVED BY OUR MANAGEMENT MORE DIFFICULT. Provisions of our restated articles of incorporation 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 articles of incorporation and bylaws provide for:

• a staggered board of directors, so that only two or three of eight directors are elected each year;

• 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;

25

• the issuance of preferred stock, without shareholder approval, with rights senior to those of the common stock;

• no cumulative voting of shares;

• calling 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;

• amendments to our restated articles of incorporation require the affirmative vote of not less than two-thirds of the outstanding shares entitled to vote on the 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 must be followed to bring matters before our shareholders at our annual shareholders’ meeting; and

• special procedures must be followed in order for nominating members for election to our board of directors.

WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have never paid any dividends on our common stock and we intend to continue our policy of retaining any earnings to finance the development and expansion of our business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     For the quarter ended March 31, 2002, substantially all of our cash equivalents and marketable securities are held in money market funds or commercial paper of less than 90 days that is held to maturity. Accordingly, we believe that the market risk arising from our holdings of these financial instruments is minimal. 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 in U.S. dollars, and a strengthening of the dollar could make our products less competitive in foreign markets. While we commonly sell products with payments in U.S. dollars, our product sales contracts occasionally call for payment in foreign currencies and to the extent we do so, we are subject to foreign currency exchange risks. We plan on using forward currency contracts to minimize these risks. Our foreign maintenance contracts are paid in local currencies and provide a natural hedge against local expenses. To the extent that we wish to repatriate any of these funds to the United States, however, we are subject to foreign exchange risks. We do not hold any derivative instruments and have not engaged in hedging transactions. At March 30, 2002, we had fixed rate convertible debentures of $9.3 million and a variable rate term loan of $5.5 million that are both due in 2004. Our minimum payment commitment on the term loan is fixed during the term. Interest payments on our term loan fluctuate with movements of interest rates, increasing in periods of rising rates of interest and declining in periods of decreasing rates of interest.

26

Part II. Other Information

Item 2. Changes in Securities

     On February 15, 2002, we sold 1,950,000 shares of common stock to Riverview Group, LLC for cash consideration of $3,900,000, in a privately-negotiated transaction in which no party acted as an underwriter. The offer and sale to Riverview Group, LLC was under our shelf registration statement on Form S-3.

     On February 15, 2002, we sold 2,919,548 shares of common stock to Banca del Gottardo for cash consideration of $5,839,000 in a private placement. These shares were issued pursuant to an exercise of warrants issued on June 21, 1999, which had had their exercise price reduced to $2.00 per share. In addition, we extended the exercise period of outstanding June 21, 1999, warrants for 1,454,321 shares from June 21, 2002 to June 21, 2004 and changed the exercise price to $3.00 per share. No party acted as an underwriter in this transaction. The issuance of the shares and warrants were exempt from the registration provisions of the Securities Act under Sections 4(2) and 4(6) of the Securities Act and the rules and regulations thereunder because of the nature of the investor and the manner in which the offering was conducted.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

3.1	Restated Bylaws, as amended through March 1, 2002
10.1	First Amendment to Loan and Security Agreement, dated as of March 20, 2002, by and among Foothill Capital Corporation, Cray Inc. and Cray Federal Inc.

(b) Reports on Form 8-K

     A report on Form 8-K for an event of March 4, 2002, was filed on March 5, 2002, reporting the resignation of Michael P. Haydock as President and Chief Executive Officer of the Company under Item 5, “Other Events.”

     A report on Form 8-K for an event of February 15, 2002, was filed on February 20, 2002, reporting a sale of common stock under Item 5, “Other Events.”

Items 1, 3, 4 and 5 of Part II are not applicable and have been omitted.

27

SIGNATURES

     In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CRAY INC.
May 14, 2002	By:	/s/ JAMES E. ROTTSOLK
		James E. Rottsolk President and Chief Executive Officer

By:	/s/ DOUGLAS C. RALPHS
	Douglas C. Ralphs Chief Financial and Accounting Officer

28 EX-3.1 3 v81482ex3-1.txt EXHIBIT 3.1 Exhibit 3.1 AMENDED AND RESTATED BYLAWS OF CRAY INC. SECTION 1 SHAREHOLDERS AND SHAREHOLDERS' MEETINGS 1.1 Annual Meeting. The annual meeting of the shareholders of this corporation (the "Corporation") for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year at the principal office of the Corporation, or at some other place either within or without the State of Washington as designated by the Board of Directors, on the day and at the time specified in Exhibit A, which is attached hereto and incorporated herein by this reference, or on such other day and time as may be set by the Board of Directors. If the specified day is a Sunday or a legal holiday, then the meeting will take place on the next business day at the same time or on such other day and time as may be set by the Board of Directors. 1.2 Special Meetings. Special meetings of the shareholders for any purpose or purposes may be called at any time by the Chairman of the Board, the President or a majority of the Board of Directors. Further, for so long as the Corporation is a "public company" under Title 23B RCW, a special meeting of the shareholders shall be held if the holders of not less than 30% of all the votes entitled to be cast on the issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary one or more written demands for such meeting, describing the purpose or purposes for which it is to be held; provided, however, that if the Corporation is not a "public company" under Title 23B RCW, the percentage of votes required to call a special meeting shall be 25%. The meetings shall be held at such time and place as the Board of Directors may prescribe, or, if not held upon the request of the Board of Directors, at such time and place as may be established by the Chairman of the Board or the President, as applicable, or by the Secretary in the absence of the Chairman and President. 1.3 Notice of Meetings. Written notice of the place, date and time of the annual shareholders' meeting and written notice of the place, date, time and purpose or purposes of special shareholders' meetings shall be delivered not less than 10 (or, if required by Washington law, 20) or more than 60 days before the date of the meeting, either personally, by facsimile, or by mail, or in any other manner approved by law, by or at the direction of the Chairman, the President or the Secretary, to each shareholder of record entitled to notice of such meeting. Mailed notices shall be deemed to be delivered when deposited in the mail, first-class postage prepaid, correctly addressed to the shareholder's address shown in the Corporation's current record of shareholders. Notice given in any other manner -1- shall be deemed effective when dispatched to the shareholder's address, telephone number or other number appearing on the records of the Corporation. 1.4 Waiver of Notice. Except where expressly prohibited by law or the Restated Articles of Incorporation, notice of the place, date, time and purpose or purposes of any shareholders' meeting may be waived in a signed writing delivered to the Corporation by any shareholder at any time, either before or after the meeting. Attendance at the meeting in person or by proxy waives objection to lack of notice or defective notice of the meeting unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. A shareholder waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 1.5 Shareholders' Action Without a Meeting. The shareholders may take any action without a meeting that they could properly take at a meeting, if one or more written consents setting forth the action so taken are signed by all of the shareholders entitled to vote with respect to the subject matter and are delivered to the Corporation for inclusion in the minutes or filing with the corporate records. If required by Washington law, all nonvoting shareholders must be given written notice of the proposed action at least 10 days before the action is taken, unless such notice is waived in a manner consistent with these Bylaws. Actions taken under this section are effective when all consents are in the possession of the Corporation, unless otherwise specified in the consent. A shareholder may withdraw consent only by delivering a written notice of withdrawal to the Corporation prior to the time that all consents are in the possession of the Corporation. 1.6 Telephone Meetings. Shareholders may participate in a meeting of shareholders by means of a conference telephone or any similar communications equipment that enables all persons participating in the meeting to hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 1.7 List of Shareholders. At least 10 days before any shareholders' meeting, the Secretary of the Corporation or the agent having charge of the stock transfer books of the Corporation shall have prepared an alphabetical list of the names of the shareholders on the record date who are entitled to notice of a shareholders' meeting, arranged by voting group, and within each voting group, by class or series of shares, and showing the address of and number of shares held by each shareholder. 1.8 Quorum and Voting. The presence in person or by proxy of the holders of a majority of the votes entitled to be cast on a matter at a meeting shall constitute a quorum of shareholders for that matter. If a quorum exists, action on a matter shall be approved by a voting group if the votes cast within a voting group favoring the action exceed the votes cast within the voting group opposing the action, unless a greater number of affirmative votes is required by the Restated -2- Articles of Incorporation or by Washington law. If the Restated Articles of Incorporation or Washington law provide for voting by two or more voting groups on a matter, action on a matter is taken only when voted upon by each of those voting groups counted separately. Action may be taken by one voting group on a matter even though no action is taken by another voting group. 1.9 Adjourned Meetings. If a shareholders' meeting is adjourned to a different place, date or time, whether for failure to achieve a quorum or otherwise, notice need not be given of the new place, date or time if the new place, date or time is announced at the meeting before adjournment. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in these Bylaws, that determination shall apply to any adjournment thereof, unless Washington law requires fixing a new record date. If Washington law requires that a new record date be set for the adjourned meeting, notice of the adjourned meeting must be given to shareholders as of the new record date. Any business may be transacted at an adjourned meeting that could have been transacted at the meeting as originally called. 1.10 Proxies. A shareholder may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, either personally or by an agent. No appointment shall be valid after 11 months from the date of its execution unless the appointment form expressly so provides. An appointment of a proxy is revocable unless the appointment is coupled with an interest. No revocation shall be effective until written notice thereof has actually been received by the Secretary of the Corporation or any other person authorized to tabulate votes. 1.11 Business for Shareholders' Meetings. 1.11.1 Business at Annual Meetings. (a) In addition to the election of directors, other proper business may be transacted at an annual meeting of shareholders, provided that such business is properly brought before such meeting. To be properly brought before an annual meeting business must be (i) brought by or at the direction of the Board or (ii) brought before the meeting by a shareholder by inclusion in the Corporation's proxy statement pursuant to the provisions of Rule 14a-8 under Section 14 of the Securities Exchange Act of 1934, as amended, or any successor provision, when and if such Rule is applicable thereto, or if such business is not so included in the Corporation's proxy statement, only pursuant to written notice thereof in accordance with subsection 1.12 hereof, and received by the Secretary not fewer than 60 nor more than 90 days prior to the date of such annual meeting (or, if less than 60 days' notice or prior public disclosure of the date of the annual meeting is given or made to the shareholders, not later than the close of business on the tenth business day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs). (b) Any such shareholder notice shall set forth (i) the -3- name and address of the shareholder proposing such business; (ii) a representation that the shareholder is entitled to vote at such meeting; (iii) a statement of the number of shares of the Corporation which are beneficially owned by the shareholder and the date upon which such shares were acquired; (iv) a representation that the shareholder intends to appear in person or by proxy at the meeting to propose such business; and (v) as to each matter the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the language of the proposal (if appropriate), and any material interest of the shareholder in such business. (c) No business shall be conducted at any annual meeting of shareholders except in accordance with this subsection 1.11.1. If the facts warrant, the Board, or the chairman of an annual meeting of shareholders, may determine and declare that (i) a proposal does not constitute proper business to be transacted at the meeting or (ii) the business was not properly brought before the meeting in accordance with the provisions of this subsection 1.11.1 and if, in either case, it is so determined, any such business shall not be transacted. 1.11.2 Business at Special Meetings. At any special meeting of the shareholders, only business within the purpose or purposes described in the meeting notice required by Section 1.3 may be conducted. 1.12 Notice to Corporation. Any written notice required to be delivered by a shareholder to the Corporation pursuant to section 1.2 or section 1.11 hereof must be given, either by personal delivery or by registered or certified mail, postage prepaid, to the Secretary at the Corporation's principal office. SECTION 2 BOARD OF DIRECTORS 2.1 Number and Qualification. The business affairs and property of the Corporation shall be managed under the direction of a Board of Directors, the number of members of which is hereby set at eight (8) A member of the Board of Directors does not need to be a shareholder of the Corporation or a Washington resident. 2.2 Election--Term of Office. 2.2.1 The directors shall be elected by the shareholders at each annual shareholders' meeting or at a special shareholders' meeting called for such purpose. 2.2.2 The Board of Directors shall be divided into three classes of directors, with said classes to be as equal in number as may be possible. Initially, two directors shall be assigned to Class 1, two directors shall be assigned to Class 2, -4- and two directors shall be assigned to Class 3. Any director or directors in excess of the number divisible by three shall be first assigned to Class 1 and any additional director shall be assigned to Class 2, as the case may be. (For example, if there are eight directors, the seventh director shall be in Class 1 and the eighth director in Class 2.) At the first election of directors to such classified Board of Directors, each Class 1 Director shall be elected to serve until the next ensuing annual meeting of shareholders, each Class 2 Director shall be elected to serve until the second ensuing annual meeting of shareholders and each Class 3 Director shall be elected to serve until the third ensuing annual meeting of shareholders. At each annual meeting of shareholders following the meeting at which the Board of Directors is initially classified, the number of directors equal to the number of directors in the class whose term expires at the time of such meeting shall be elected to serve until the third ensuing annual meeting of shareholders. Notwithstanding any of the foregoing provisions of this Section 2, directors shall serve until their successors are elected and qualified or until their earlier death, resignation or removal from office, or until there is a decrease in the number of directors; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. 2.2.3 The term of office of a director shall commence effective immediately upon election, unless otherwise specified in a resolution approved by the shareholders in connection with the election of such director. Directors shall serve until their successors are elected and qualified or until their earlier death, resignation or removal from office, or until there is a decrease in the authorized number of directors; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. 2.3 Nominations. 2.3.1 Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors by the shareholders. Nominations for the election of directors may be made (a) by or at the direction of the Board or (b) by any shareholder of record entitled to vote for the election of directors at such meeting; provided, however, that a shareholder may nominate persons for election as directors only if written notice (in accordance with section 1.12 hereof) of such shareholder's intention to make such nominations is received by the Secretary not later than (i) with respect to an election to be held at an annual meeting of the shareholders, not fewer than 60 nor more than 90 days prior to the date of such annual meeting (or, if less than 60 days' notice or prior public disclosure of the date of the annual meeting is given or made to the shareholders, not later than the close of business on the tenth business day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs) and (ii) with respect to an election to be held at a special meeting of the shareholders for the election of directors, the close of business on the tenth business day following the date on which notice of such meeting is first mailed to shareholders. -5- 2.3.2 Any such shareholder's notice shall set forth (a) the name and address of the shareholder who intends to make a nomination; (b) a representation that the shareholder is entitled to vote at such meeting; (c) a statement of the number of shares of the Corporation which are beneficially owned by the shareholder and the dates upon which such shares were acquired; (d) a representation that the shareholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (e) as to each person the shareholder proposes to nominate for election or reelection as a director, the name and address of such person and such other information regarding such nominee as would be required in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had such nominee been nominated by the Board, and a description of any arrangements or understandings, between the shareholder and such nominee and any other persons (including their names), pursuant to which the nomination is to be made; and (f) the consent of each such nominee to serve as a director if elected. 2.3.3 If the facts warrant, the Board, or the chairman of a shareholders' meeting at which directors are to be elected, shall determine and declare that a nomination was not made in accordance with the foregoing procedure and, if it is so determined, the defective nomination shall be disregarded. The right of shareholders to make nominations pursuant to the foregoing procedure is subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation. The procedures set forth in this section 2.3 for nomination for the election of directors by shareholders are in addition to, and not in limitation of, any procedures now in effect or hereafter adopted by or at the direction of the Board or any committee thereof. 2.4 Removal. 2.4.1 Any director or the entire Board of Directors may be removed only for cause and only by the holders of not less than two-thirds of the shares entitled to elect the director or directors whose removal is sought. Such action may only be taken at a special meeting of the shareholders called expressly for that purpose, provided that notice of the proposed removal, which shall include a statement of the charges alleged against the director, shall have been duly given to the shareholders together with or as a part of the notice of the meeting. 2.4.2 The vacancy created by the removal of a director under this section 2.4 shall be filled only by a vote of the holders of two-thirds of the shares then entitled to elect the director removed. Such vote may be taken at the same meeting at which the removal of such director was accomplished, or at such later meeting, annual or special, as the shareholders may decide. 2.5 Vacancies. Subject to the provisions of section 2.4 hereof and unless the Restated Articles of Incorporation provide otherwise, vacancies in the Board of Directors, whether caused by resignation, death, retirement, disqualification, increase in the number of directors, or otherwise, may be filled for -6- the remainder of the term by the Board of Directors, by the shareholders, or, if the directors in office constitute less than a quorum of the Board of Directors, by an affirmative vote of a majority of the remaining directors. The term of a director elected to fill a vacancy expires upon the election and qualification of his or her successor. A vacancy that will occur at a specific later date may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. 2.6 Quorum and Voting. At any meeting of the Board of Directors, the presence in person (including presence by electronic means such as a telephone conference call) of a majority of the number of directors presently in office shall constitute a quorum for the transaction of business. Notwithstanding the foregoing, in no case shall a quorum be less than one-third of the authorized number of directors. If a quorum is present at the time of a vote, the affirmative vote of a majority of the directors present at the time of the vote shall be the act of the Board of Directors and of the Corporation except as may be otherwise specifically provided by the Restated Articles of Incorporation, by these Bylaws, or by law. A director who is present at a meeting of the Board of Directors when action is taken is deemed to have assented to the action taken unless: (a) the director objects at the beginning of the meeting, or promptly upon his or her arrival, to holding it or to transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation within a reasonable time after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. 2.7 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place, date and time as shall from time to time be fixed by resolution of the Board. 2.8 Special Meetings. Special meetings of the Board of Directors may be held at any place and at any time and may be called by the Chairman of the Board, the President, Vice President, Secretary or Treasurer, or any two or more directors. 2.9 Notice of Meetings. 2.9.1 Unless the Restated Articles of Incorporation provide otherwise, any regular meeting of the Board of Directors may be held without notice of the date, time, place, or purpose of the meeting. Any special meeting of the Board of Directors must be preceded by at least two days' notice of the date, time, and place of the meeting, but not of its purpose, unless the Restated Articles of Incorporation or these Bylaws require otherwise. Each director shall have a mailing address, telephone number and facsimile number on record with the Corporation for purposes of receiving notice. 2.9.2 Notice may be given personally, by facsimile, by mail, or -7- in any other manner allowed by law. Oral notice shall be sufficient only if a written record of such notice is included in the Corporation's minute book. Notice shall be deemed effective at the earliest of: (a) receipt; (b) delivery to the proper address or telephone number of the director as shown in the Corporation's records; or (c) three days after its deposit in the United States mail, as evidenced by the postmark, if correctly addressed and mailed with first-class postage prepaid. 2.9.3 Notice of any meeting of the Board of Directors may be waived by any director at any time, by a signed writing, delivered to the Corporation for inclusion in the minutes, either before or after the meeting. Attendance or participation by a director at a meeting shall constitute a waiver of any required notice of the meeting unless the director promptly objects to holding the meeting or to the transaction of any business on the grounds that the meeting was not lawfully convened and the director does not thereafter vote for or assent to action taken at the meeting. 2.10 Directors' Action Without A Meeting. The Board of Directors or a committee thereof may take any action without a meeting that it could properly take at a meeting if one or more written consents setting forth the action are signed by all of the directors, or all of the members of the committee, as the case may be, either before or after the action is taken, and if the consents are delivered to the Corporation for inclusion in the minutes or filing with the corporate records. Such action shall be effective upon the signing of a consent by the last director to sign, unless the consent specifies a later effective date. 2.11 Committees of the Board of Directors. The Board of Directors, by resolutions adopted by a majority of the members of the Board of Directors in office, may create from among its members one or more committees and shall appoint the members thereof. Each such committee must have two or more members, who shall be directors and who shall serve at the pleasure of the Board of Directors. Each committee of the Board of Directors may exercise the authority of the Board of Directors to the extent provided in its enabling resolution and any pertinent subsequent resolutions adopted in like manner, provided that the authority of each such committee shall be subject to applicable law. Each committee of the Board of Directors shall keep regular minutes of its proceedings and shall report to the Board of Directors when requested to do so. 2.12 Telephone Meetings. Members of the Board of Directors or of any committee appointed by the Board of Directors may participate in a meeting of the Board of Directors or committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 2.13 Compensation of Directors. The Board of Directors may fix the compensation of directors as such and may authorize the reimbursement of their expenses. -8- SECTION 3 OFFICERS 3.1 Officers Enumerated--Election. The officers of the Corporation shall consist of such officers and assistant officers as may be designated by resolution of the Board of Directors. The officers may include a Chairman, President, a Chief Scientist, one or more Vice Presidents, a Secretary, a Treasurer, and any assistant officers. The officers shall hold office at the pleasure of the Board of Directors. Unless otherwise restricted by the Board of Directors, the President may appoint any assistant officer, the Secretary may appoint one or more Assistant Secretaries, and the Treasurer may appoint one or more Assistant Treasurers; provided that any such appointments shall be recorded in writing in the corporate records. 3.2 Qualifications. None of the officers of the Corporation, other than the Chairman, need be a director. Any two or more corporate offices may be held by the same person. 3.3 Duties of the Officers. Unless otherwise prescribed by the Board of Directors, the duties of the officers shall be as follows: 3.3.1 Chairman of the Board. The Chairman of the Board shall preside at meetings of the Board of Directors and of the shareholders, shall be responsible for carrying out the plans and directives of the Board of Directors, and shall report to and consult with the Board of Directors. The Chairman of the Board shall have the usual executive powers pertaining to an executive officer of the Corporation and such other powers and duties as the Board of Directors may from time to time prescribe. 3.3.2 President. The President shall be the chief executive officer of the Corporation, unless some other officer is so designated by the Board of Directors, and shall exercise the usual executive powers pertaining to the office of President. In the absence of the Chairman of the Board, the President shall preside at meetings of the Board of Directors and of the shareholders, perform the other duties of the Chairman of the Board prescribed in this section, and perform such other duties as the Board of Directors may from time to time designate. 3.3.3 Chief Scientist. The Chief Scientist, if one is appointed by the Board, shall be responsible for the scientific and technical activities of the Corporation, and shall have such other duties as the Board of Directors or President may from time to time designate. 3.3.4 Vice President. Each Vice President shall perform such duties as the Board of Directors may from time to time designate. In addition, in the absence or disability of the President, the Vice President (or if there is more than one -9- Vice President, then in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all restrictions upon the President. 3.3.5 Secretary. The Secretary shall be responsible for and shall keep, personally or with the assistance of others, records of the proceedings of the directors and shareholders; authenticate records of the Corporation; attest all certificates of stock in the name of the Corporation; keep the corporate seal, if any, and affix the same to certificates of stock and other proper documents; keep a record of the issuance of certificates of stock and the transfers of the same; and perform such other duties as the Board of Directors may from time to time designate. 3.3.6 Treasurer. The Treasurer shall have the care and custody of, and be responsible for, all funds and securities of the Corporation and shall cause to be kept regular books of account. The Treasurer shall cause to be deposited all funds and other valuable effects in the name of the Corporation in such depositories as may be designated by the Board of Directors. In general, the Treasurer shall perform all of the duties incident to the office of Treasurer, and such other duties as from time to time may be assigned by the Board of Directors. 3.3.7 Assistant Officers. Assistant officers may consist of one or more Assistant Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers. Each assistant officer shall perform those duties assigned to him or her from time to time by the Board of Directors, the President, or the officer who appointed him or her. 3.4 Vacancies. Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting. 3.5 Removal. Any officer or agent may be removed by action of the Board of Directors with or without cause, but any removal shall be without prejudice to the contract rights, if any, of the person removed. Election or appointment of an officer or agent shall not of itself create any contract rights. 3.6 Compensation. The compensation of all officers of the Corporation shall be fixed by the Board of Directors. -10- SECTION 4 SHARES AND CERTIFICATES OF SHARES 4.1 Share Certificates. Share certificates shall be issued in numerical order, and each shareholder shall be entitled to a certificate signed by two officers of the Corporation, including the Chairman, the President, the Chief Scientist, any Vice President, the Secretary and the Treasurer. Share certificates may be sealed with the corporate seal, if any. Facsimiles of the signatures and seal may be used as permitted by law. Every share certificate shall state: (a) the name of the Corporation; (b) that the Corporation is organized under the laws of the State of Washington; (c) the name of the person to whom the share certificate is issued; (d) the number, class and series (if any) of shares that the certificate represents; and (e) if the Corporation is authorized to issue shares of more than one class or series, that upon written request and without charge, the Corporation will furnish any shareholder with a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series, and the authority of the Board of Directors to determine variations for future series. 4.2 Consideration for Shares. Shares of the Corporation may be issued for such consideration as shall be determined by the Board of Directors to be adequate. The consideration for the issuance of shares may be paid in whole or in part in cash, or in any tangible or intangible property or benefit to the Corporation, including but not limited to promissory notes, services performed, contracts for services to be performed, or other securities of the Corporation. Establishment by the Board of Directors of the amount of consideration received or to be received for shares of the Corporation shall be deemed to be a determination that the consideration so established is adequate. 4.3 Transfers. Shares may be transferred by delivery of the certificate, accompanied either by an assignment in writing on the back of the certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the record holder of the certificate. Except as otherwise specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the Corporation until the outstanding certificate therefor has been surrendered to the Corporation. -11- 4.4 Loss or Destruction of Certificates. In the event of the loss or destruction of any certificate, a new certificate may be issued in lieu thereof upon satisfactory proof of such loss or destruction, and upon the giving of security against loss to the Corporation by bond, indemnity or otherwise, to the extent deemed necessary by the Board of Directors, the Secretary, or the Treasurer. 4.5 Fixing Record Date. The Board of Directors may fix in advance a date as the record date for determining shareholders entitled: (a) to notice of or to vote at any shareholders' meeting or any adjournment thereof; (b) to receive payment of any share dividend; or (c) to receive payment of any distribution. The Board of Directors may in addition fix record dates with respect to any allotment of rights or conversion or exchange of any securities by their terms, or for any other proper purpose, as determined by the Board of Directors and by law. The record date shall be not more than 70 days and, in case of a meeting of shareholders, not less than 10 days (or such longer period as may be required by Washington law) prior to the date on which the particular action requiring determination of shareholders is to be taken. If no record date is fixed for determining the shareholders entitled to notice of or to vote at a meeting of shareholders, the record date shall be the date before the day on which notice of the meeting is mailed. If no record date is fixed for the determination of shareholders entitled to a distribution (other than one involving a purchase, redemption, or other acquisition of the Corporation's own shares), the record date shall be the date on which the Board adopted the resolution declaring the distribution. If no record date is fixed for determining shareholders entitled to a share dividend, the record date shall be the date on which the Board of Directors authorized the dividend. SECTION 5 BOOKS, RECORDS AND REPORTS 5.1 Records of Corporate Meetings, Accounting Records and Share Registers. 5.1.1 The Corporation shall keep, as permanent records, minutes of all meetings of the Board of Directors and shareholders, and all actions taken without a meeting, and all actions taken by a committee exercising the authority of the Board of Directors. The Corporation or its agent shall maintain, in a form that permits preparation of a list, a list of the names and addresses of its shareholders, in alphabetical order by class of shares, showing the number, class, and series, if any, of shares held by each. 5.1.2 The Corporation shall also maintain appropriate accounting records, and at its principal place of business shall keep copies of: (a) its Articles of Incorporation or restated Articles of Incorporation and all amendments in effect; (b) its Bylaws or restated Bylaws and all amendments in effect; (c) minutes of all shareholders' meetings and records of all actions taken without meetings for the past three years; (d) the year-end balance sheets and income statements for the past three fiscal years, -12- prepared as required by Washington law; (e) all written communications to shareholders generally in the past three years; (f) a list of the names and business addresses of its current officers and directors; and (g) its most recent annual report to the Secretary of State. 5.2 Copies of Corporate Records. Any person dealing with the Corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors or shareholders, when certified by the Chairman of the Board, the President, the Chief Scientist, any Vice President, the Secretary or the Assistant Secretary. 5.3 Examination of Records. 5.3.1 A shareholder shall have the right to inspect and copy, during regular business hours at the principal office of the Corporation, in person or by his or her attorney or agent, the corporate records referred to in subsection 5.1.2 hereof if the shareholder gives the Corporation written notice of the demand at least five business days before the date on which the shareholder wishes to make such inspection. 5.3.2 In addition, if a shareholder's demand is made in good faith and for a proper purpose, a shareholder may inspect and copy, during regular business hours at a reasonable location specified by the Corporation, excerpts from minutes of any meeting of the Board of Directors, records of any action of a committee of the Board of Directors, minutes of any meeting of the shareholders, and records of actions taken by the shareholders or the Board of Directors without a meeting, to the extent not subject to inspection under subsection 5.3.1, accounting records of the Corporation, or the record of shareholders; provided that the shareholder shall have made a demand describing with reasonable particularity the shareholder's purpose and the records the shareholder desires to inspect, and provided further that the records are directly connected to the shareholder's purpose. 5.3.3 This section shall not affect any right of shareholders to inspect records of the Corporation that may be otherwise granted to the shareholders by law. 5.4 Financial Statements. Not later than four months after the end of each fiscal year, or in any event prior to its annual meeting of shareholders, the Corporation shall prepare a balance sheet and income statement in accordance with Washington law. The Corporation shall furnish a copy of each to any shareholder upon written request. SECTION 6 FISCAL YEAR The fiscal year of the Corporation shall be as set forth in Exhibit A. -13- SECTION 7 CORPORATE SEAL The corporate seal of the Corporation, if any, shall be in the form shown on Exhibit A. SECTION 8 MISCELLANEOUS PROCEDURAL PROVISIONS The Board of Directors may adopt rules of procedure to govern any meetings of shareholders or directors to the extent not inconsistent with law, the Corporation's Restated Articles of Incorporation, or these Bylaws, as they are in effect from time to time. In the absence of any rules of procedure adopted by the Board of Directors, the chairman of the meeting shall make all decisions regarding the procedures for any meeting. SECTION 9 AMENDMENT OF BYLAWS The Board of Directors is expressly authorized to adopt, amend and repeal the Bylaws of the Corporation subject to approval by a majority of the Continuing Directors (as defined below); provided, however, the Board of Directors may not repeal or amend any bylaw that the shareholders have expressly provided may not be amended or repealed by the Board of Directors. The shareholders of the Corporation also have the power to adopt, amend or repeal the Bylaws of the Corporation by the affirmative vote of the holders of not less than two-thirds of the outstanding shares and, to the extent, if any, provided by resolution adopted by the Board of Directors authorizing the issuance of a class or series of Preferred Stock, by the affirmative vote of the holders of not less than two-thirds of the outstanding shares of Common Stock and/or of such class or series of Preferred Stock, voting as separate voting groups. "Continuing Directors" means any member of the Board of Directors (i) who was a member of the Board of Directors on August 31, 1995, or (ii) who is elected to the Board of Directors after August 31, 1995 after being nominated by a majority of the Continuing Directors voting separately and as a subclass of directors on such nomination. -14- SECTION 10 INDEMNIFICATION OF DIRECTORS AND OTHERS 10.1 Grant of Indemnification. Subject to section 10.2, each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending, or completed action, suit or proceeding, whether formal or informal, civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director of the Corporation or who, while a director of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of this or another corporation or of a partnership, joint venture, trust, other enterprise, or employee benefit plan, whether the basis of such proceeding is alleged action in an official capacity as a director or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by applicable law, as then in effect, against all expense, liability and loss (including attorneys' fees, costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director and shall inure to the benefit of his or her heirs, executors and administrators. 10.2 Limitations on Indemnification. Notwithstanding section 10.1, no indemnification shall be provided hereunder to any such person to the extent that such indemnification would be prohibited by the Washington Business Corporation Act or other applicable law as then in effect, nor, except as provided in section 10.4 with respect to proceedings seeking to enforce rights to indemnification, shall the Corporation indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person except where such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. 10.3 Advancement of Expenses. The right to indemnification conferred in this section shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, except where the Board of Directors shall have adopted a resolution expressly disapproving such advancement of expenses. 10.4 Right to Enforce Indemnification. If a claim under section 10.1 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, or if a claim for expenses incurred in defending a proceeding in advance of its final disposition authorized under section 10.3 is not paid within 60 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification hereunder upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance -15- of its final disposition, where the required undertaking has been tendered to the Corporation), and thereafter the Corporation shall have the burden of proof to overcome the presumption that the claimant is so entitled. It shall be a defense to any such action (other than an action with respect to expenses authorized under section 10.3) that the claimant has not met the standards of conduct which make it permissible hereunder or under the Washington Business Corporation Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. 10.5 Alternate Procedures. Pursuant to RCW 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this section are in lieu of the procedures required by RCW 23B.08.550 or any successor provision of the Washington Business Corporation Act. 10.6 Nonexclusivity. The right to indemnification and the advancement of expenses conferred in this section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restated Articles of Incorporation or the Bylaws of the Corporation, general or specific action of the Board, contract or otherwise. 10.7 Indemnification of Officers, Employees and Agents. The Corporation, by action of its Board of Directors from time to time, may provide indemnification and pay expenses in advance of the final disposition of a proceeding to officers, employees and agents of the Corporation on the same terms and with the same scope and effect as the provisions of this section with respect to the indemnification and advancement of expenses of directors of the Corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or on such other terms as the Board may deem proper. 10.8 Insurance and Other Security. The Corporation may maintain insurance, at its expense, to protect itself and any individual who is or was a director, officer, employee or agent of the Corporation or another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against or incurred by the individual in that capacity or arising from his or her status as an officer, director, agent, or employee, whether or not the Corporation would have the power to indemnify such person against the same liability under the Washington Business Corporation Act. The Corporation may enter into contracts with any director or officer of the Corporation in furtherance of the provisions of this section and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this section. 10.9 Amendment or Modification. This section may be altered or amended at any time as provided in these Bylaws, but no such amendment shall have the effect of diminishing the rights of any person who is or was an officer or director as to any acts or omissions taken or omitted to be taken prior to the effective date of such amendment. -16- 10.10 Effect of Section. The rights conferred by this section shall be deemed to be contract rights between the Corporation and each person who is or was a director or officer. The Corporation expressly intends each such person to rely on the rights conferred hereby in performing his or her respective duties on behalf of the Corporation. SECTION 11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS Unless otherwise restricted by the Board of Directors, the Chairman, the President, the Chief Scientist and any Vice President of the Corporation are each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of other corporations standing in the name of the Corporation. This authority may be exercised by such officers either in person or by a duly executed proxy or power of attorney. -17- EXHIBIT A Section 1.1. Date and time of annual shareholders' meeting: First Wednesday in May at such time as the Board of Directors shall direct. Section 6. Fiscal year: December 31 Section 7. Corporate Seal: None Date Restated Bylaws Adopted: July 31, 1995, as amended on June 25, 1999, December 14, 1999, January 14, 2000, April 3, 2000, October 1, 2001 and March 1, 2002. -18- EX-10.1 4 v81482ex10-1.txt EXHIBIT 10.1 Exhibit 10.1 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "First Amendment") is made as of March 20, 2002, by and among FOOTHILL CAPITAL CORPORATION, a California corporation ("Lender"), and CRAY INC., a Washington corporation ("Parent"), and CRAY FEDERAL INC., a Washington corporation ("Cray Federal," and together with Parent, collectively, "Borrowers"), with reference to the following facts: A. The parties hereto have entered into that certain Loan and Security Agreement, dated as of March 28, 2001, as amended (the "Loan Agreement"), and other Loan Documents. (Capitalized terms, which are used herein but not defined herein, shall have the meanings ascribed to them in the Loan Agreement.) B. On or about November 6, 2001, Parent issued $9,300,000 in debentures. C. The parties wish to make certain modifications to the Loan Documents, all on the terms and conditions set forth herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Amendments to Loan Agreement. Effective as of the Effective Date (as hereinafter defined), the Loan Agreement shall be amended as follows: 1.1 The following definitions are added to Section 1.1 of the Loan Agreement: "'Debenture Documents' means, collectively, the following: (a) The Debentures Purchase Agreement; (b) The Debentures; (c) the Warrants issued pursuant to the Debentures Purchase Agreement; and (d) the Registration Rights Agreement." "'Debentures' means the 5% Convertible Subordinate Debentures issued by Parent pursuant to the Debentures Purchase Agreement." 1 "'Debentures Purchase Agreement' means that certain Convertible Subordinated Debentures and Warrant Purchase Agreement, dated November 6, 2001, between Parent and the investors signatory thereto." "'Eligible Domestic Accounts' means those Accounts created by one of Borrowers in the ordinary course of its business, that arise out of its sale of goods (and that do not arise out of the rendition of services that lead to Service/Maintenance Revenues) that comply with each of the representations and warranties respecting Eligible Domestic Accounts made by Borrowers under the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the criteria set forth below; provided, however, that such criteria may be fixed and revised from time to time by Lender in Lender's Permitted Discretion to address the results of any audit performed by Lender from time to time after the Closing Date. In determining the amount to be included, Eligible Domestic Accounts shall be calculated net of customer deposits and unapplied cash remitted to Borrowers. Eligible Domestic Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within 75 days of original invoice date or within 45 days of the date the payment was due under the original invoice, (b) Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above, (c) Accounts with respect to which the Account Debtor is an employee or Affiliate of any Borrower, (d) Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional, (e) Accounts that are not payable in Dollars, (f) Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States or Canada, or (ii) is not organized under the laws of the United States or any state thereof or Canada or any Canadian province thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Lender (as to form, substance, and issuer or domestic confirming 2 bank) that has been delivered to Lender and is directly drawable by Lender, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, satisfactory to Lender, (g) [INTENTIONALLY OMITTED], (h) Accounts with respect to which the Account Debtor is a creditor of any Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, to the extent of such claim, right of setoff, or dispute, (i) [INTENTIONALLY OMITTED], (j) Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which a Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, (k) [INTENTIONALLY OMITTED], (l) Accounts, the collection of which, Lender, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor's financial condition, (m) Accounts that are not subject to a valid and perfected first priority Lender's Lien, (n) Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor, or (o) Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services." "'Eligible Foreign Accounts' means Accounts of a Borrower: (I) acceptable to Lender in its Permitted Discretion, and (II) as to which each of the following is applicable: (a) such Account does not qualify as an Eligible Domestic Account solely because the Account Debtor with respect to such Account maintains its chief executive office in a jurisdiction other than the United States or is organized under the laws of a jurisdiction (or a political subdivision thereof) other than the United States, and (b) Lender has a valid and perfected first priority security interest in such Account." 3 "'Eligible Government Accounts' means Accounts of a Borrower: (I) acceptable to Lender in its sole and absolute discretion, and (II) as to which each of the following is applicable: (a) the Account Debtor with respect to such Account is the United States or any department, agency or instrumentality of the United States, (b) such Account does not qualify as an Eligible Domestic Account solely because services give rise to the Account and such services are research and development services rendered in the ordinary course of such Borrower's business; and (c) Lender has a valid and perfected first priority security interest in such Account." "'Eligible Professional Services Accounts' means Accounts of a Borrower: (I) acceptable to Lender in its sole and absolute discretion, (II) if otherwise qualifying as an Eligible Professional Services Account, shall be included in the Borrowing Base commencing August 1, 2002, and (III) as to which each of the following is applicable: (a) such Account does not qualify as an Eligible Domestic Account solely because services give rise to the Account and such services are Professional Services rendered in the ordinary course of such Borrower's business, and (b) Lender has a valid and perfected first priority security interest in such Account." "Excess Availability' means the amount, as of the date any determination thereof is to be made, equal to the Availability minus the aggregate amount, if any, of all trade payables of Borrowers in excess of 60 days past the payment due date with respect thereto and all book overdrafts, in each case as determined by Lender in its Permitted Discretion." "'Holder' shall have the meaning set forth in the Debenture." "'Professional Services' means fee-based services on a defined project pursuant to which the applicable Account Debtor has entered into a written professional services agreement, acceptable to Lender, that specifies specific deliverables to be provided by one of the Borrowers in the related statement of work." "'Registration Rights Agreement' means that certain Registration Rights Agreement, dated November 6, 2001, between Parent and the investors signatory thereto." 1.2 The following definitions in Section 1.1 of the Loan Agreement are hereby deleted and replaced by the following: "'Eligible Accounts' means, collectively, Eligible Domestic Accounts, Eligible Professional Services Accounts, Eligible Foreign Accounts and Eligible Government Accounts." "'Tangible Net Worth' means, as of any date of determination, the result of (a) the total consolidated stockholder's equity of Parent and its Subsidiaries, minus (b) the sum of (i) all 4 Intangible Assets of Parent and its Subsidiaries, (ii) all of Parent's prepaid expenses, and (iii) other assets which are classified as "other assets" on Borrowers' financial statements, plus (c) the aggregate outstanding principal balance of the Debentures." 1.3 Section 2.1(a)(y) of the Loan Agreement is deleted and replaced by the following: "(y) 80% of the difference between (i) the amount of Eligible Accounts, and (ii) the amount, if any, of the Dilution Reserve, minus" 1.4 Section 2.1(b) of the Loan Agreement is deleted and replaced by the following: "(b) Anything to the contrary in this Section 2.1 notwithstanding, Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender in its Permitted Discretion shall deem necessary or appropriate, against the Borrowing Base, including reserves with respect to (i) sums that Borrowers are required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and has failed to pay under any Section of this Agreement or any other Loan Document, (ii) amounts owing by Borrowers to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on Schedule P-1 which is specifically identified thereon as entitled to have priority over the Lender's Liens), which Lien or trust, in the Permitted Discretion of Lender likely would have a priority superior to the Lender's Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral, and (iii) and in an amount equal to all late charges and liquidated damages payable by Parent pursuant to the Debenture Documents." 1.5 The following is added as a new subsection (e) to Section 2.11 of the Loan Agreement: "(e) FEES ARISING FROM CHARGES UNDER DEBENTURE DOCUMENTS. Fees equal to all late charges and liquidated damages payable by Parent pursuant to the Debenture Documents, which fees shall be fully earned and payable when the applicable late charges and liquidated damages are payable by Parent pursuant to the Debenture Documents." 1.6 The first sentence and the beginning of the second sentence of Section 5.2(b) of the Loan Agreement are hereby deleted and replaced by the following: "(b) The Eligible Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account 5 Debtors in the ordinary course of Borrowers' business, owed to Borrowers without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. As to each Eligible Account, such Account is not:" 1.7 Schedule 5.8(b) is deleted and replaced by Schedule 5.8.(b) attached to this First Amendment. 1.8 Schedule 5.20 is deleted and replaced by Schedule 5.20 attached to this First Amendment. 1.9 Schedule C-1 is deleted and replaced by Schedule C-1 attached to this First Amendment. 1.10 Schedule P-1 is deleted and replaced by Schedule P-1 attached to this First Amendment. 1.11 Section 6.3 of the Loan Agreement is deleted and replaced by the following: "6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Lender: (a) as soon as available, but in any event within 30 days (50 days in the case of a month that is the end of one of the first 3 fiscal quarters in a fiscal year) after the end of each month during each of Parent's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Parent's and its Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Parent to the effect that: A. the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Parent and its Subsidiaries, B. the representations and warranties of Borrowers contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though 6 made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and C. there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrowers have taken, are taking, or propose to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section 7.20; and (b) as soon as available, but in any event within 90 days after the end of each of Parent's fiscal years, (i) financial statements of Parent and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Lender and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Lender stating that such accountants do not have knowledge of the existence of any Default or Event of Default under Section 7.20, (c) as soon as available, but in any event within 30 days prior to the start of each of Parent's fiscal years, (i) copies of Borrowers' Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Lender, in its sole discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of Parent as being such officer's good faith best estimate of the financial performance of Parent and its Subsidiaries during the period covered thereby, (d) if and within 5 days of the date filed by any Borrower, 7 (i) Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by any Borrower with the SEC, (iii) copies of Borrowers' federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by Parent to its shareholders generally, (e) if and when filed by any Borrower and as requested by Lender, satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which (i) any Borrower conducts business or is required to pay any such excise tax, (ii) where any Borrower's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of any Borrower, or (iii) where any Borrower's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change (f) as soon as a Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrowers propose to take with respect thereto, (g) no later than 5 days prior to payment of each semi-annual interest payment required under the Debentures, a certificate signed by the chief financial officer of Parent indicating Parent's election as to whether to pay such interest in cash or Stock of Parent, and if Parent elects to pay in cash, that, after making and giving effect to such payment, Borrowers shall be in compliance with the covenant set forth in section (c) of Schedule 7.20, and (h) upon the request of Lender, any other report reasonably requested relating to the financial condition of Borrowers. "In addition to the financial statements referred to above, Borrowers agree to deliver financial statements prepared on both a consolidated and consolidating basis and that no Borrower, or any Subsidiary of a Borrower, will have a fiscal year different from that of Parent. Borrowers agree that their independent certified public accountants are authorized to communicate with Lender and to release to Lender whatever financial information concerning Borrowers that Lender reasonably may request. Each Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information 8 requested by Lender pursuant to or in accordance with this Agreement, and agree that Lender may contact directly any such accounting firm or service bureau in order to obtain such information. (i) as soon as Borrower receives notice of conversion for the Debentures or a request to register the shares underlying the Debentures by the holders thereof pursuant to the Debenture Documents, notice thereof and a statement of the dates when conversion of such Debentures or registration of the shares underlying such Debentures are due." 1.12 The following is added as a new Section 6.16: "6.16 DEBENTURE DOCUMENTS. At all times comply with its obligations under the Debenture Documents, including the following: (a) Maintain the effectiveness under the Securities Act of 1933, as amended, of its Registration Statement on Form S-3 (Reg. No. 333-74100) for the time periods required pursuant to the Registration Rights Agreement; and (b) If required under Section 2(b) of the Registration Rights Agreement, promptly file and prosecute to effectiveness such further registration statements within the time limits set forth in Section 2(b) thereof." 1.13 Schedule 7.20 is deleted and replaced by Schedule 7.20 attached to this First Amendment. 1.14 Section 8.2 of the Loan Agreement is deleted and replaced by the following: "8.2 (a) If Borrowers fail or neglect to perform, keep, or observe any covenant or other provision contained in Sections 6.2, 6.3 or 6.16 hereof and such failure or neglect continues for a period of 5 days after the date on which such failure or neglect first occurs, or (b) if Borrower fails or neglects to perform, keep, or observe any covenant or other provision contained in Sections 6.1, 6.7 or 6.11 hereof and such failure or neglect is not cured within 15 days after the date on which such failure or neglect first occurs, or (c) if Borrower fails or neglects to perform, keep, or observe any other covenant or other provision contained in any Section of this Agreement (other than a Section that is expressly dealt with elsewhere in this Section 8) or the other Loan Documents (other than a Section of such other Loan Document dealt with elsewhere in this Section 8); provided that, during any period of time that any such failure or neglect of Borrower referred to in this paragraph exists, even if such failure or neglect is not yet an Event of Default by virtue of the existence of a grace or 9 cure period or the pre-condition of the giving of a notice, Lender shall be relieved of its obligation to extend credit hereunder;" 2. Limited One-Time Waivers. 2.1 Pursuant to section (a)(i) of Schedule 7.20 of the Loan Agreement, Borrowers have failed to maintain minimum EBITDA of each Borrower and its Subsidiaries, determined on a consolidated basis, of no less than (i) $3,000,000 for the 12-month period ending September 30, 2001, and (ii) $10,000,000 for the 12-month period ending December 31, 2001. 2.2 Pursuant to section (a)(ii) of Schedule 7.20 of the Loan Agreement, Borrower has failed to maintain minimum Tangible Net Worth of each Borrower and its Subsidiaries, determined on a consolidated basis, of no less than $29,000,000 as of September 30, 2001 and December 31, 2001. 2.3 Lender waives any Event of Default arising from (i) Borrower's failure to maintain minimum EBITDA in an amount equal to or greater than the amounts and for the periods described in Section 2.1 hereof and (ii) Borrower's failure to maintain Tangible Net Worth in an amount equal to or greater than $29,000,000 for the periods described in Section 2.2 hereof. 2.4 This First Amendment does not constitute a waiver of any other provision of the Loan Documents or of the provisions of the Loan Agreement referenced in Sections 2.1 and 2.2 hereof in any other instance. 3. Conditions to Effectiveness. The effectiveness of this First Amendment is subject to the receipt by Lender or the completion by Borrower of the following, and the date on which Lender receives or Borrower completes all of the following shall be the "Effective Date:" 3.1 Counterparts of this First Amendment, executed by each of the parties hereto; and 3.2 Borrower has paid Lender a waiver and consent fee of $60,000 and all of Lender's attorneys' fees and costs as described in Section 4.8 hereof. 4. Miscellaneous. 4.1 Loan Documents Confirmed. Except as expressly amended hereby, the Loan Agreement and the other Loan Documents shall remain unchanged and in full force and effect. This First Amendment is hereby incorporated into the Loan Agreement. 10 4.2 Choice of Law. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED, THIS FIRST AMENDMENT AND ALL OTHER DOCUMENTS BEING EXECUTED CONCURRENTLY HEREWITH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. 4.3 Sole Parties. This First Amendment is made exclusively for the benefit of and solely for the protection of the parties hereto, and no other person or persons shall have the right to enforce the provisions hereof by action or legal proceedings or otherwise. 4.4 Interpretation. Whenever the context so requires, all words used in the singular will be construed to have been used in the plural, and vice versa, and each gender will include any other gender. The headings used in this First Amendment are inserted solely for the convenience of reference and are not part of, nor intended to govern, limit or aid in the construction of, any term or provision hereof. 4.5 Counterparts. This First Amendment may be executed in one or more counterparts, each of which shall be an original but all of which shall constitute one and the same instrument. 4.6 Further Assurances. From time to time, each party will execute and deliver in recordable form, if necessary, such further instruments and will take such other action as the other party reasonably may request in order to discharge and perform their obligations and agreements under this First Amendment. 4.7 Time of Essence. Time is of the essence in this First Amendment. 4.8 Attorneys' Fees and Costs. The Borrower agrees that all of Lender's attorneys' fees and costs in drafting and negotiating this First Amendment are part of the Obligations and are payable on demand. 11 IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first written above. CRAY INC., a Washington corporation /s/ Kenneth W. Johnson By: Kenneth W. Johnson Title: Vice President - Legal and General Counsel CRAY FEDERAL, INC. a Washington corporation /s/ Charles A. Weidenfeller, Jr. By: Charles A. Weidenfeller, Jr. Title: President FOOTHILL CAPITAL CORPORATION, a California corporation /s/ Kurt Duerfeldt By: Kurt Duerfeldt Title: Senior Vice President 12 EXHIBITS AND SCHEDULES Exhibit C-1 Form of Compliance Exhibit Schedule P-1 Permitted Liens Schedule 5.8(b) Capitalization of Borrowers Schedule 5.20 Permitted Indebtedness Schedule 7.20 Financial Covenants 13 EXHIBIT C-1 FORM OF COMPLIANCE CERTIFICATE [on Borrower's letterhead] To: Foothill Capital Corporation 2450 Colorado Avenue, Suite 3000 West Santa Monica, California 90404 Attn: Business Finance Division Manager Re: Compliance Certificate dated Ladies and Gentlemen: Reference is made to that certain Loan and Security Agreement, dated as of March 28, 2001, as amended (the "Loan Agreement") among Cray Inc., a Washington corporation ("Administrative Borrower"), Cray Federal Inc., a Washington corporation (together with Administrative Borrower, "Borrowers"), and Foothill Capital Corporation, a California corporation ("Lender"). Capitalized terms used in this Compliance Certificate have the meanings set forth in the Loan Agreement unless specifically defined herein. Pursuant to Section 6.3 of the Loan Agreement, the undersigned officer of Administrative Borrower hereby certifies that: 1. The financial information of Borrowers furnished in Schedule 1 attached hereto has been prepared in accordance with GAAP (except for year-end adjustments and the lack of footnotes, in the case of financial statements delivered under Section 6.3(a) of the Loan Agreement) and fairly presents the financial condition of Borrowers. 2. Such officer has reviewed the terms of the Loan Agreement and has made, or caused to be made under his/her supervision, a review in reasonable detail of the transactions and condition of Borrowers during the accounting period covered by the financial statements delivered pursuant to Section 6.3 of the Loan Agreement. 3. Such review has not disclosed the existence on and as of the date hereof, and the undersigned does not have knowledge of the existence as of the date hereof, of any event or condition that constitutes a Default or Event of Default, except for such conditions or events listed on Schedule 2 attached hereto, specifying the nature and period of existence thereof and what action Borrowers have taken, are taking, or propose to take with respect thereto. 4. Borrowers are in timely compliance with all representations, warranties, and covenants set forth in the Loan Agreement and the other Loan Documents, except as set forth on Schedule 2 attached hereto. Without limiting the generality of the foregoing, Borrowers are in compliance with the covenants contained in Schedule 7.20 of the Loan Agreement as demonstrated on Schedule 3 hereof. IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned this _____ day of ____________, 200_. CRAY INC., a Washington corporation, as Administrative Borrower By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ SCHEDULE 1 SCHEDULE 2 SCHEDULE 3 1. MINIMUM EBITDA. Borrowers' EBITDA for the _________ ending _________, ________ is $______________, which amount [IS/IS NOT] greater than or equal to the amount set forth in Section (a)(i) of Schedule 7.20 to the Loan Agreement for the corresponding period. 2. MINIMUM TANGIBLE NET WORTH. Borrowers' Tangible Net Worth as of __________ was $__________, which amount [IS/IS NOT] greater than or equal to the amount set forth in Section (a)(ii) of Schedule 7.20 to the Loan Agreement for the corresponding date. 3. MINIMUM DOMESTIC SERVICE/MAINTENANCE REVENUES. Borrowers' Domestic Service/Maintenance Revenues for the twelve-month period ending __________, 200___ was $_____, which amount [IS/IS NOT] greater than or equal to the amount set forth in Section (a)(iii) of Schedule 7.20 to the Loan Agreement for the corresponding period. 4. MAXIMUM CAPITAL EXPENDITURES. (a) The aggregate amount of capital expenditures made or committed to be made to date in the current fiscal year is $________________. (b) The aggregate amount set forth above [IS/IS NOT] less than or equal to the amount set forth in Section (b)(i) of Schedule 7.20 to the Loan Agreement for the current fiscal year. 5. PAYMENTS UNDER THE DEBENTURE DOCUMENTS. (a) Check applicable line: (i) ____ Administrative Borrower proposes to make a payment (other than in stock of Administrative Borrower) on the Indebtedness evidenced by the Debenture Documents. (ii) ____ Administrative Borrower does not propose to make a payment (other than in stock of Administrative Borrower) on the Indebtedness evidenced by the Debenture Documents. (b) The payment set forth in Section 5(a)(i) above [WOULD/WOULD NOT] breach section (c) of Schedule 7.20 to the Loan Agreement because: ______________________________________. Schedule P-1 Permitted Liens 1. The Borrower owes U.S. Bank N.A., as of February 28, 2002, the sum of $198,332. This loan is secured by (i) a certificate of deposit, dated as of February 28, 2002, in the amount of $353,000 and (ii) specific computer equipment financed by such loan. 2. The Borrower owes Presidential Bank, as of February 28, 2002, the sum of $409,292. Presidential Bank is the assignee of DRKB, Inc. This loan is secured by specific computer equipment financed by this loan. Schedule 5.8(b) Capitalization of Borrowers Cray Inc. has authorized capital of 100,000,000 shares of Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par value. As of March 12, 2002, Cray Inc. had outstanding: (i) 45,096,820 shares of Common Stock, (ii) warrants exercisable for 14,111,441 shares of Common Stock, (iii) $9,300,000 convertible subordinated debentures convertible into a minimum of 3,957,447 shares, and (iv) stock options exercisable for 10,441,771 shares of Common Stock. Cray Inc. has reserved 4,000,000 shares for issuance pursuant to an employee stock purchase plan. In addition, Cray Inc. has issued to NEC Corporation 3,125,000 shares of Series A Convertible Preferred Stock, $.01 par value, which are convertible into 3,136,763 shares of Common Stock. Cray Federal Inc. has authorized capital of 1,000 shares of Common Stock, $1.00 par value. All shares of Common Stock are issued and outstanding and are held by Cray Inc. Schedule 5.20 Permitted Indebtedness 1. The Borrower owes $9,300,000, plus accrued interest, on its convertible subordinated debentures. 2. As of February 28, 2002, the Borrower owes U.S. Bank the sum of $198,332.38 which is secured by a certificate of deposit and by equipment purchased with the loan. See Schedule P-1. 3. As of February 28, 2002, the Borrower owes Presidential Bank the sum of $409,292.13, which is secured by equipment purchased with this loan. Presidential Bank is the assignee of DRKB Inc. See Schedule P-1. 4. The Borrower has various capital leases outstanding. At December 31, 2001, the principal balance of capital leases outstanding was $768,000, including interest. SCHEDULE 7.20 FINANCIAL COVENANTS (a) Fail to maintain: (i) MINIMUM EBITDA. EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto;

Applicable Amount Applicable Period ----------------- ----------------- -$5,000,000 For the 12-month period ending June 30, 2001 $3,000,000 For the 12-month period ending September 30, 2001 -$12,000,000 For the 12-month period ending December 31, 2001 -$24,000,000 For the 12-month period ending March 31, 2002 -$10,000,000 For the 12-month period ending June 30, 2002 $0 For the 12-month period ending September 30, 2002 $15,000,000 For the 12-month period ending each fiscal quarter thereafter

(ii) TANGIBLE NET WORTH. Tangible Net Worth of at least the required amount set forth in the following table as of the applicable date set forth opposite thereto:

Applicable Amount Applicable Date ----------------- --------------- $23,000,000 June 30, 2001 $29,000,000 September 30, 2001 $18,000,000 December 31, 2001 $11,200,000 March 31, 2002 $17,900,000 June 30, 2002 $15,900,000 September 30, 2002 $14,700,000 December 31, 2002 $23,800,000 the first date of each calendar quarter thereafter

(iii) MINIMUM DOMESTIC SERVICE/MAINTENANCE REVENUES. Domestic Service/Maintenance Revenues of no less than $34,000,000 for the immediately preceding 12 calendar months, tested quarterly. (b) Make: (i) CAPITAL EXPENDITURES. Capital expenditures in any fiscal year in excess of $10,000,000. (c) PAYMENTS UNDER THE DEBENTURE DOCUMENTS. If an Event of Default has occurred and is continuing or if there is Excess Availability of less than $1,000,000 after giving effect to any payment made in respect of the Indebtedness evidenced by the Debentures, make any payment (other than in stock of Parent) by the Parent or any application of funds with respect to the principal of or interest on the Indebtedness evidenced by the Debenture Documents, or any other payment of funds under the Debentures or under any of the Debenture Documents; provided, however, that any Holder may demand and the Parent may pay at any time and from time to time, liquidated damages and late fees pursuant to Sections 4(a)(iii), 4(c)(iii) and 4(c)(iv) of the Debentures and Section 2(f) of the Registration Rights Agreement even if an Event of Default has occurred and is continuing and/or there is Excess Availability of less than $1,000,000 at the time of such payments, but only so long as, of the date of such payment by the Parent, the Holder has not declared that an event of default exists under Section 3 of Holder's Debenture or such other Debenture Documents, and provided, further, that Lender has not declared the Obligations immediately due and payable. -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.1

                                                                     Exhibit 3.1

                           AMENDED AND RESTATED BYLAWS
                                       OF
                                    CRAY INC.

                                    SECTION 1

                     SHAREHOLDERS AND SHAREHOLDERS' MEETINGS

        1.1 Annual Meeting. The annual meeting of the shareholders of this
corporation (the "Corporation") for the election of directors and for the
transaction of such other business as may properly come before the meeting shall
be held each year at the principal office of the Corporation, or at some other
place either within or without the State of Washington as designated by the
Board of Directors, on the day and at the time specified in Exhibit A, which is
attached hereto and incorporated herein by this reference, or on such other day
and time as may be set by the Board of Directors. If the specified day is a
Sunday or a legal holiday, then the meeting will take place on the next business
day at the same time or on such other day and time as may be set by the Board of
Directors.

        1.2 Special Meetings. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President or a majority of the Board of Directors. Further, for so long as the
Corporation is a "public company" under Title 23B RCW, a special meeting of the
shareholders shall be held if the holders of not less than 30% of all the votes
entitled to be cast on the issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held; provided, however, that if the Corporation is not a "public company"
under Title 23B RCW, the percentage of votes required to call a special meeting
shall be 25%. The meetings shall be held at such time and place as the Board of
Directors may prescribe, or, if not held upon the request of the Board of
Directors, at such time and place as may be established by the Chairman of the
Board or the President, as applicable, or by the Secretary in the absence of the
Chairman and President.

        1.3 Notice of Meetings. Written notice of the place, date and time of
the annual shareholders' meeting and written notice of the place, date, time and
purpose or purposes of special shareholders' meetings shall be delivered not
less than 10 (or, if required by Washington law, 20) or more than 60 days before
the date of the meeting, either personally, by facsimile, or by mail, or in any
other manner approved by law, by or at the direction of the Chairman, the
President or the Secretary, to each shareholder of record entitled to notice of
such meeting. Mailed notices shall be deemed to be delivered when deposited in
the mail, first-class postage prepaid, correctly addressed to the shareholder's
address shown in the Corporation's current record of shareholders. Notice given
in any other manner



                                      -1-


shall be deemed effective when dispatched to the shareholder's address,
telephone number or other number appearing on the records of the Corporation.

        1.4 Waiver of Notice. Except where expressly prohibited by law or the
Restated Articles of Incorporation, notice of the place, date, time and purpose
or purposes of any shareholders' meeting may be waived in a signed writing
delivered to the Corporation by any shareholder at any time, either before or
after the meeting. Attendance at the meeting in person or by proxy waives
objection to lack of notice or defective notice of the meeting unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting. A shareholder waives objection to
consideration of a particular matter at a meeting that is not within the purpose
or purposes described in the meeting notice, unless the shareholder objects to
considering the matter when it is presented.

        1.5 Shareholders' Action Without a Meeting. The shareholders may take
any action without a meeting that they could properly take at a meeting, if one
or more written consents setting forth the action so taken are signed by all of
the shareholders entitled to vote with respect to the subject matter and are
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. If required by Washington law, all nonvoting shareholders
must be given written notice of the proposed action at least 10 days before the
action is taken, unless such notice is waived in a manner consistent with these
Bylaws. Actions taken under this section are effective when all consents are in
the possession of the Corporation, unless otherwise specified in the consent. A
shareholder may withdraw consent only by delivering a written notice of
withdrawal to the Corporation prior to the time that all consents are in the
possession of the Corporation.

        1.6 Telephone Meetings. Shareholders may participate in a meeting of
shareholders by means of a conference telephone or any similar communications
equipment that enables all persons participating in the meeting to hear each
other during the meeting. Participation by such means shall constitute presence
in person at a meeting.

        1.7 List of Shareholders. At least 10 days before any shareholders'
meeting, the Secretary of the Corporation or the agent having charge of the
stock transfer books of the Corporation shall have prepared an alphabetical list
of the names of the shareholders on the record date who are entitled to notice
of a shareholders' meeting, arranged by voting group, and within each voting
group, by class or series of shares, and showing the address of and number of
shares held by each shareholder.

        1.8 Quorum and Voting. The presence in person or by proxy of the holders
of a majority of the votes entitled to be cast on a matter at a meeting shall
constitute a quorum of shareholders for that matter. If a quorum exists, action
on a matter shall be approved by a voting group if the votes cast within a
voting group favoring the action exceed the votes cast within the voting group
opposing the action, unless a greater number of affirmative votes is required by
the Restated



                                      -2-


Articles of Incorporation or by Washington law. If the Restated Articles of
Incorporation or Washington law provide for voting by two or more voting groups
on a matter, action on a matter is taken only when voted upon by each of those
voting groups counted separately. Action may be taken by one voting group on a
matter even though no action is taken by another voting group.

        1.9 Adjourned Meetings. If a shareholders' meeting is adjourned to a
different place, date or time, whether for failure to achieve a quorum or
otherwise, notice need not be given of the new place, date or time if the new
place, date or time is announced at the meeting before adjournment. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in these Bylaws, that determination shall apply to any
adjournment thereof, unless Washington law requires fixing a new record date. If
Washington law requires that a new record date be set for the adjourned meeting,
notice of the adjourned meeting must be given to shareholders as of the new
record date. Any business may be transacted at an adjourned meeting that could
have been transacted at the meeting as originally called.

        1.10 Proxies. A shareholder may appoint a proxy to vote or otherwise act
for the shareholder by signing an appointment form, either personally or by an
agent. No appointment shall be valid after 11 months from the date of its
execution unless the appointment form expressly so provides. An appointment of a
proxy is revocable unless the appointment is coupled with an interest. No
revocation shall be effective until written notice thereof has actually been
received by the Secretary of the Corporation or any other person authorized to
tabulate votes.

        1.11 Business for Shareholders' Meetings.

                1.11.1 Business at Annual Meetings.

                        (a) In addition to the election of directors, other
proper business may be transacted at an annual meeting of shareholders, provided
that such business is properly brought before such meeting. To be properly
brought before an annual meeting business must be (i) brought by or at the
direction of the Board or (ii) brought before the meeting by a shareholder by
inclusion in the Corporation's proxy statement pursuant to the provisions of
Rule 14a-8 under Section 14 of the Securities Exchange Act of 1934, as amended,
or any successor provision, when and if such Rule is applicable thereto, or if
such business is not so included in the Corporation's proxy statement, only
pursuant to written notice thereof in accordance with subsection 1.12 hereof,
and received by the Secretary not fewer than 60 nor more than 90 days prior to
the date of such annual meeting (or, if less than 60 days' notice or prior
public disclosure of the date of the annual meeting is given or made to the
shareholders, not later than the close of business on the tenth business day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made, whichever first occurs).

                        (b) Any such shareholder notice shall set forth (i) the



                                      -3-


name and address of the shareholder proposing such business; (ii) a
representation that the shareholder is entitled to vote at such meeting; (iii) a
statement of the number of shares of the Corporation which are beneficially
owned by the shareholder and the date upon which such shares were acquired; (iv)
a representation that the shareholder intends to appear in person or by proxy at
the meeting to propose such business; and (v) as to each matter the shareholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting, the language of the proposal (if appropriate), and any
material interest of the shareholder in such business.

                        (c) No business shall be conducted at any annual meeting
of shareholders except in accordance with this subsection 1.11.1. If the facts
warrant, the Board, or the chairman of an annual meeting of shareholders, may
determine and declare that (i) a proposal does not constitute proper business to
be transacted at the meeting or (ii) the business was not properly brought
before the meeting in accordance with the provisions of this subsection 1.11.1
and if, in either case, it is so determined, any such business shall not be
transacted.

                1.11.2 Business at Special Meetings. At any special meeting of
the shareholders, only business within the purpose or purposes described in the
meeting notice required by Section 1.3 may be conducted.

        1.12 Notice to Corporation. Any written notice required to be delivered
by a shareholder to the Corporation pursuant to section 1.2 or section 1.11
hereof must be given, either by personal delivery or by registered or certified
mail, postage prepaid, to the Secretary at the Corporation's principal office.

                                   SECTION 2

                               BOARD OF DIRECTORS

        2.1 Number and Qualification. The business affairs and property of the
Corporation shall be managed under the direction of a Board of Directors, the
number of members of which is hereby set at eight (8) A member of the Board of
Directors does not need to be a shareholder of the Corporation or a Washington
resident.

        2.2 Election--Term of Office.

                2.2.1 The directors shall be elected by the shareholders at each
annual shareholders' meeting or at a special shareholders' meeting called for
such purpose.

                2.2.2 The Board of Directors shall be divided into three classes
of directors, with said classes to be as equal in number as may be possible.
Initially, two directors shall be assigned to Class 1, two directors shall be
assigned to Class 2,



                                      -4-


and two directors shall be assigned to Class 3. Any director or directors in
excess of the number divisible by three shall be first assigned to Class 1 and
any additional director shall be assigned to Class 2, as the case may be. (For
example, if there are eight directors, the seventh director shall be in Class 1
and the eighth director in Class 2.) At the first election of directors to such
classified Board of Directors, each Class 1 Director shall be elected to serve
until the next ensuing annual meeting of shareholders, each Class 2 Director
shall be elected to serve until the second ensuing annual meeting of
shareholders and each Class 3 Director shall be elected to serve until the third
ensuing annual meeting of shareholders. At each annual meeting of shareholders
following the meeting at which the Board of Directors is initially classified,
the number of directors equal to the number of directors in the class whose term
expires at the time of such meeting shall be elected to serve until the third
ensuing annual meeting of shareholders. Notwithstanding any of the foregoing
provisions of this Section 2, directors shall serve until their successors are
elected and qualified or until their earlier death, resignation or removal from
office, or until there is a decrease in the number of directors; provided,
however, that no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director.

                2.2.3 The term of office of a director shall commence effective
immediately upon election, unless otherwise specified in a resolution approved
by the shareholders in connection with the election of such director. Directors
shall serve until their successors are elected and qualified or until their
earlier death, resignation or removal from office, or until there is a decrease
in the authorized number of directors; provided, however, that no decrease in
the number of directors shall have the effect of shortening the term of any
incumbent director.

        2.3 Nominations.

                2.3.1 Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors by the
shareholders. Nominations for the election of directors may be made (a) by or at
the direction of the Board or (b) by any shareholder of record entitled to vote
for the election of directors at such meeting; provided, however, that a
shareholder may nominate persons for election as directors only if written
notice (in accordance with section 1.12 hereof) of such shareholder's intention
to make such nominations is received by the Secretary not later than (i) with
respect to an election to be held at an annual meeting of the shareholders, not
fewer than 60 nor more than 90 days prior to the date of such annual meeting
(or, if less than 60 days' notice or prior public disclosure of the date of the
annual meeting is given or made to the shareholders, not later than the close of
business on the tenth business day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made,
whichever first occurs) and (ii) with respect to an election to be held at a
special meeting of the shareholders for the election of directors, the close of
business on the tenth business day following the date on which notice of such
meeting is first mailed to shareholders.



                                      -5-


                2.3.2 Any such shareholder's notice shall set forth (a) the name
and address of the shareholder who intends to make a nomination; (b) a
representation that the shareholder is entitled to vote at such meeting; (c) a
statement of the number of shares of the Corporation which are beneficially
owned by the shareholder and the dates upon which such shares were acquired; (d)
a representation that the shareholder intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (e) as to
each person the shareholder proposes to nominate for election or reelection as a
director, the name and address of such person and such other information
regarding such nominee as would be required in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission had such nominee
been nominated by the Board, and a description of any arrangements or
understandings, between the shareholder and such nominee and any other persons
(including their names), pursuant to which the nomination is to be made; and (f)
the consent of each such nominee to serve as a director if elected.

                2.3.3 If the facts warrant, the Board, or the chairman of a
shareholders' meeting at which directors are to be elected, shall determine and
declare that a nomination was not made in accordance with the foregoing
procedure and, if it is so determined, the defective nomination shall be
disregarded. The right of shareholders to make nominations pursuant to the
foregoing procedure is subject to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation. The procedures set forth in this section 2.3 for nomination
for the election of directors by shareholders are in addition to, and not in
limitation of, any procedures now in effect or hereafter adopted by or at the
direction of the Board or any committee thereof.

        2.4 Removal.

                2.4.1 Any director or the entire Board of Directors may be
removed only for cause and only by the holders of not less than two-thirds of
the shares entitled to elect the director or directors whose removal is sought.
Such action may only be taken at a special meeting of the shareholders called
expressly for that purpose, provided that notice of the proposed removal, which
shall include a statement of the charges alleged against the director, shall
have been duly given to the shareholders together with or as a part of the
notice of the meeting.

                2.4.2 The vacancy created by the removal of a director under
this section 2.4 shall be filled only by a vote of the holders of two-thirds of
the shares then entitled to elect the director removed. Such vote may be taken
at the same meeting at which the removal of such director was accomplished, or
at such later meeting, annual or special, as the shareholders may decide.

        2.5 Vacancies. Subject to the provisions of section 2.4 hereof and
unless the Restated Articles of Incorporation provide otherwise, vacancies in
the Board of Directors, whether caused by resignation, death, retirement,
disqualification, increase in the number of directors, or otherwise, may be
filled for



                                      -6-


the remainder of the term by the Board of Directors, by the shareholders, or, if
the directors in office constitute less than a quorum of the Board of Directors,
by an affirmative vote of a majority of the remaining directors. The term of a
director elected to fill a vacancy expires upon the election and qualification
of his or her successor. A vacancy that will occur at a specific later date may
be filled before the vacancy occurs, but the new director may not take office
until the vacancy occurs.

        2.6 Quorum and Voting. At any meeting of the Board of Directors, the
presence in person (including presence by electronic means such as a telephone
conference call) of a majority of the number of directors presently in office
shall constitute a quorum for the transaction of business. Notwithstanding the
foregoing, in no case shall a quorum be less than one-third of the authorized
number of directors. If a quorum is present at the time of a vote, the
affirmative vote of a majority of the directors present at the time of the vote
shall be the act of the Board of Directors and of the Corporation except as may
be otherwise specifically provided by the Restated Articles of Incorporation, by
these Bylaws, or by law. A director who is present at a meeting of the Board of
Directors when action is taken is deemed to have assented to the action taken
unless: (a) the director objects at the beginning of the meeting, or promptly
upon his or her arrival, to holding it or to transacting business at the
meeting; (b) the director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or (c) the director delivers written
notice of his or her dissent or abstention to the presiding officer of the
meeting before its adjournment or to the Corporation within a reasonable time
after adjournment of the meeting. The right of dissent or abstention is not
available to a director who votes in favor of the action taken.

        2.7 Regular Meetings. Regular meetings of the Board of Directors shall
be held at such place, date and time as shall from time to time be fixed by
resolution of the Board.

        2.8 Special Meetings. Special meetings of the Board of Directors may be
held at any place and at any time and may be called by the Chairman of the
Board, the President, Vice President, Secretary or Treasurer, or any two or more
directors.

        2.9 Notice of Meetings.

                2.9.1 Unless the Restated Articles of Incorporation provide
otherwise, any regular meeting of the Board of Directors may be held without
notice of the date, time, place, or purpose of the meeting. Any special meeting
of the Board of Directors must be preceded by at least two days' notice of the
date, time, and place of the meeting, but not of its purpose, unless the
Restated Articles of Incorporation or these Bylaws require otherwise. Each
director shall have a mailing address, telephone number and facsimile number on
record with the Corporation for purposes of receiving notice.

                2.9.2 Notice may be given personally, by facsimile, by mail, or



                                      -7-


in any other manner allowed by law. Oral notice shall be sufficient only if a
written record of such notice is included in the Corporation's minute book.
Notice shall be deemed effective at the earliest of: (a) receipt; (b) delivery
to the proper address or telephone number of the director as shown in the
Corporation's records; or (c) three days after its deposit in the United States
mail, as evidenced by the postmark, if correctly addressed and mailed with
first-class postage prepaid.

                2.9.3 Notice of any meeting of the Board of Directors may be
waived by any director at any time, by a signed writing, delivered to the
Corporation for inclusion in the minutes, either before or after the meeting.
Attendance or participation by a director at a meeting shall constitute a waiver
of any required notice of the meeting unless the director promptly objects to
holding the meeting or to the transaction of any business on the grounds that
the meeting was not lawfully convened and the director does not thereafter vote
for or assent to action taken at the meeting.

        2.10 Directors' Action Without A Meeting. The Board of Directors or a
committee thereof may take any action without a meeting that it could properly
take at a meeting if one or more written consents setting forth the action are
signed by all of the directors, or all of the members of the committee, as the
case may be, either before or after the action is taken, and if the consents are
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. Such action shall be effective upon the signing of a consent
by the last director to sign, unless the consent specifies a later effective
date.

        2.11 Committees of the Board of Directors. The Board of Directors, by
resolutions adopted by a majority of the members of the Board of Directors in
office, may create from among its members one or more committees and shall
appoint the members thereof. Each such committee must have two or more members,
who shall be directors and who shall serve at the pleasure of the Board of
Directors. Each committee of the Board of Directors may exercise the authority
of the Board of Directors to the extent provided in its enabling resolution and
any pertinent subsequent resolutions adopted in like manner, provided that the
authority of each such committee shall be subject to applicable law. Each
committee of the Board of Directors shall keep regular minutes of its
proceedings and shall report to the Board of Directors when requested to do so.

        2.12 Telephone Meetings. Members of the Board of Directors or of any
committee appointed by the Board of Directors may participate in a meeting of
the Board of Directors or committee by means of a conference telephone or
similar communications equipment that enables all persons participating in the
meeting to hear each other during the meeting. Participation by such means shall
constitute presence in person at a meeting.

        2.13 Compensation of Directors. The Board of Directors may fix the
compensation of directors as such and may authorize the reimbursement of their
expenses.



                                      -8-


                                    SECTION 3

                                    OFFICERS

        3.1 Officers Enumerated--Election. The officers of the Corporation shall
consist of such officers and assistant officers as may be designated by
resolution of the Board of Directors. The officers may include a Chairman,
President, a Chief Scientist, one or more Vice Presidents, a Secretary, a
Treasurer, and any assistant officers. The officers shall hold office at the
pleasure of the Board of Directors. Unless otherwise restricted by the Board of
Directors, the President may appoint any assistant officer, the Secretary may
appoint one or more Assistant Secretaries, and the Treasurer may appoint one or
more Assistant Treasurers; provided that any such appointments shall be recorded
in writing in the corporate records.

        3.2 Qualifications. None of the officers of the Corporation, other than
the Chairman, need be a director. Any two or more corporate offices may be held
by the same person.

        3.3 Duties of the Officers. Unless otherwise prescribed by the Board of
Directors, the duties of the officers shall be as follows:

                3.3.1 Chairman of the Board. The Chairman of the Board shall
preside at meetings of the Board of Directors and of the shareholders, shall be
responsible for carrying out the plans and directives of the Board of Directors,
and shall report to and consult with the Board of Directors. The Chairman of the
Board shall have the usual executive powers pertaining to an executive officer
of the Corporation and such other powers and duties as the Board of Directors
may from time to time prescribe.

                3.3.2 President. The President shall be the chief executive
officer of the Corporation, unless some other officer is so designated by the
Board of Directors, and shall exercise the usual executive powers pertaining to
the office of President. In the absence of the Chairman of the Board, the
President shall preside at meetings of the Board of Directors and of the
shareholders, perform the other duties of the Chairman of the Board prescribed
in this section, and perform such other duties as the Board of Directors may
from time to time designate.

                3.3.3 Chief Scientist. The Chief Scientist, if one is appointed
by the Board, shall be responsible for the scientific and technical activities
of the Corporation, and shall have such other duties as the Board of Directors
or President may from time to time designate.

                3.3.4 Vice President. Each Vice President shall perform such
duties as the Board of Directors may from time to time designate. In addition,
in the absence or disability of the President, the Vice President (or if there
is more than one



                                      -9-


Vice President, then in the order designated by the Board of Directors) shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all restrictions upon the President.

                3.3.5 Secretary. The Secretary shall be responsible for and
shall keep, personally or with the assistance of others, records of the
proceedings of the directors and shareholders; authenticate records of the
Corporation; attest all certificates of stock in the name of the Corporation;
keep the corporate seal, if any, and affix the same to certificates of stock and
other proper documents; keep a record of the issuance of certificates of stock
and the transfers of the same; and perform such other duties as the Board of
Directors may from time to time designate.

                3.3.6 Treasurer. The Treasurer shall have the care and custody
of, and be responsible for, all funds and securities of the Corporation and
shall cause to be kept regular books of account. The Treasurer shall cause to be
deposited all funds and other valuable effects in the name of the Corporation in
such depositories as may be designated by the Board of Directors. In general,
the Treasurer shall perform all of the duties incident to the office of
Treasurer, and such other duties as from time to time may be assigned by the
Board of Directors.

                3.3.7 Assistant Officers. Assistant officers may consist of one
or more Assistant Vice Presidents, one or more Assistant Secretaries, and one or
more Assistant Treasurers. Each assistant officer shall perform those duties
assigned to him or her from time to time by the Board of Directors, the
President, or the officer who appointed him or her.

        3.4 Vacancies. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting.

        3.5 Removal. Any officer or agent may be removed by action of the Board
of Directors with or without cause, but any removal shall be without prejudice
to the contract rights, if any, of the person removed. Election or appointment
of an officer or agent shall not of itself create any contract rights.

        3.6 Compensation. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors.



                                      -10-


                                    SECTION 4

                        SHARES AND CERTIFICATES OF SHARES

        4.1 Share Certificates. Share certificates shall be issued in numerical
order, and each shareholder shall be entitled to a certificate signed by two
officers of the Corporation, including the Chairman, the President, the Chief
Scientist, any Vice President, the Secretary and the Treasurer. Share
certificates may be sealed with the corporate seal, if any. Facsimiles of the
signatures and seal may be used as permitted by law. Every share certificate
shall state:

        (a)     the name of the Corporation;

        (b)     that the Corporation is organized under the laws of the State of
                Washington;

        (c)     the name of the person to whom the share certificate is issued;

        (d)     the number, class and series (if any) of shares that the
                certificate represents; and

        (e)     if the Corporation is authorized to issue shares of more than
                one class or series, that upon written request and without
                charge, the Corporation will furnish any shareholder with a full
                statement of the designations, preferences, limitations and
                relative rights of the shares of each class or series, and the
                authority of the Board of Directors to determine variations for
                future series.

        4.2 Consideration for Shares. Shares of the Corporation may be issued
for such consideration as shall be determined by the Board of Directors to be
adequate. The consideration for the issuance of shares may be paid in whole or
in part in cash, or in any tangible or intangible property or benefit to the
Corporation, including but not limited to promissory notes, services performed,
contracts for services to be performed, or other securities of the Corporation.
Establishment by the Board of Directors of the amount of consideration received
or to be received for shares of the Corporation shall be deemed to be a
determination that the consideration so established is adequate.

        4.3 Transfers. Shares may be transferred by delivery of the certificate,
accompanied either by an assignment in writing on the back of the certificate,
or by a written power of attorney to sell, assign and transfer the same, signed
by the record holder of the certificate. Except as otherwise specifically
provided in these Bylaws, no shares of stock shall be transferred on the books
of the Corporation until the outstanding certificate therefor has been
surrendered to the Corporation.



                                      -11-


        4.4 Loss or Destruction of Certificates. In the event of the loss or
destruction of any certificate, a new certificate may be issued in lieu thereof
upon satisfactory proof of such loss or destruction, and upon the giving of
security against loss to the Corporation by bond, indemnity or otherwise, to the
extent deemed necessary by the Board of Directors, the Secretary, or the
Treasurer.

        4.5 Fixing Record Date. The Board of Directors may fix in advance a date
as the record date for determining shareholders entitled: (a) to notice of or to
vote at any shareholders' meeting or any adjournment thereof; (b) to receive
payment of any share dividend; or (c) to receive payment of any distribution.
The Board of Directors may in addition fix record dates with respect to any
allotment of rights or conversion or exchange of any securities by their terms,
or for any other proper purpose, as determined by the Board of Directors and by
law. The record date shall be not more than 70 days and, in case of a meeting of
shareholders, not less than 10 days (or such longer period as may be required by
Washington law) prior to the date on which the particular action requiring
determination of shareholders is to be taken. If no record date is fixed for
determining the shareholders entitled to notice of or to vote at a meeting of
shareholders, the record date shall be the date before the day on which notice
of the meeting is mailed. If no record date is fixed for the determination of
shareholders entitled to a distribution (other than one involving a purchase,
redemption, or other acquisition of the Corporation's own shares), the record
date shall be the date on which the Board adopted the resolution declaring the
distribution. If no record date is fixed for determining shareholders entitled
to a share dividend, the record date shall be the date on which the Board of
Directors authorized the dividend.

                                    SECTION 5

                           BOOKS, RECORDS AND REPORTS

        5.1 Records of Corporate Meetings, Accounting Records and Share
Registers.

                5.1.1 The Corporation shall keep, as permanent records, minutes
of all meetings of the Board of Directors and shareholders, and all actions
taken without a meeting, and all actions taken by a committee exercising the
authority of the Board of Directors. The Corporation or its agent shall
maintain, in a form that permits preparation of a list, a list of the names and
addresses of its shareholders, in alphabetical order by class of shares, showing
the number, class, and series, if any, of shares held by each.

                5.1.2 The Corporation shall also maintain appropriate accounting
records, and at its principal place of business shall keep copies of: (a) its
Articles of Incorporation or restated Articles of Incorporation and all
amendments in effect; (b) its Bylaws or restated Bylaws and all amendments in
effect; (c) minutes of all shareholders' meetings and records of all actions
taken without meetings for the past three years; (d) the year-end balance sheets
and income statements for the past three fiscal years,



                                      -12-


prepared as required by Washington law; (e) all written communications to
shareholders generally in the past three years; (f) a list of the names and
business addresses of its current officers and directors; and (g) its most
recent annual report to the Secretary of State.

        5.2 Copies of Corporate Records. Any person dealing with the Corporation
may rely upon a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors or shareholders, when certified by the Chairman
of the Board, the President, the Chief Scientist, any Vice President, the
Secretary or the Assistant Secretary.

        5.3 Examination of Records.

                5.3.1 A shareholder shall have the right to inspect and copy,
during regular business hours at the principal office of the Corporation, in
person or by his or her attorney or agent, the corporate records referred to in
subsection 5.1.2 hereof if the shareholder gives the Corporation written notice
of the demand at least five business days before the date on which the
shareholder wishes to make such inspection.

                5.3.2 In addition, if a shareholder's demand is made in good
faith and for a proper purpose, a shareholder may inspect and copy, during
regular business hours at a reasonable location specified by the Corporation,
excerpts from minutes of any meeting of the Board of Directors, records of any
action of a committee of the Board of Directors, minutes of any meeting of the
shareholders, and records of actions taken by the shareholders or the Board of
Directors without a meeting, to the extent not subject to inspection under
subsection 5.3.1, accounting records of the Corporation, or the record of
shareholders; provided that the shareholder shall have made a demand describing
with reasonable particularity the shareholder's purpose and the records the
shareholder desires to inspect, and provided further that the records are
directly connected to the shareholder's purpose.

                5.3.3 This section shall not affect any right of shareholders to
inspect records of the Corporation that may be otherwise granted to the
shareholders by law.

        5.4 Financial Statements. Not later than four months after the end of
each fiscal year, or in any event prior to its annual meeting of shareholders,
the Corporation shall prepare a balance sheet and income statement in accordance
with Washington law. The Corporation shall furnish a copy of each to any
shareholder upon written request.

                                    SECTION 6

                                   FISCAL YEAR

        The fiscal year of the Corporation shall be as set forth in Exhibit A.



                                      -13-


                                    SECTION 7

                                 CORPORATE SEAL

        The corporate seal of the Corporation, if any, shall be in the form
shown on Exhibit A.

                                    SECTION 8

                       MISCELLANEOUS PROCEDURAL PROVISIONS

        The Board of Directors may adopt rules of procedure to govern any
meetings of shareholders or directors to the extent not inconsistent with law,
the Corporation's Restated Articles of Incorporation, or these Bylaws, as they
are in effect from time to time. In the absence of any rules of procedure
adopted by the Board of Directors, the chairman of the meeting shall make all
decisions regarding the procedures for any meeting.

                                    SECTION 9

                               AMENDMENT OF BYLAWS

        The Board of Directors is expressly authorized to adopt, amend and
repeal the Bylaws of the Corporation subject to approval by a majority of the
Continuing Directors (as defined below); provided, however, the Board of
Directors may not repeal or amend any bylaw that the shareholders have expressly
provided may not be amended or repealed by the Board of Directors. The
shareholders of the Corporation also have the power to adopt, amend or repeal
the Bylaws of the Corporation by the affirmative vote of the holders of not less
than two-thirds of the outstanding shares and, to the extent, if any, provided
by resolution adopted by the Board of Directors authorizing the issuance of a
class or series of Preferred Stock, by the affirmative vote of the holders of
not less than two-thirds of the outstanding shares of Common Stock and/or of
such class or series of Preferred Stock, voting as separate voting groups.
"Continuing Directors" means any member of the Board of Directors (i) who was a
member of the Board of Directors on August 31, 1995, or (ii) who is elected to
the Board of Directors after August 31, 1995 after being nominated by a majority
of the Continuing Directors voting separately and as a subclass of directors on
such nomination.



                                      -14-


                                   SECTION 10

                     INDEMNIFICATION OF DIRECTORS AND OTHERS

        10.1 Grant of Indemnification. Subject to section 10.2, each person who
was or is made a party or is threatened to be made a party to or is involved
(including, without limitation, as a witness) in any threatened, pending, or
completed action, suit or proceeding, whether formal or informal, civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director of the Corporation or
who, while a director of the Corporation, is or was serving at the request of
the Corporation as a director, officer, employee or agent of this or another
corporation or of a partnership, joint venture, trust, other enterprise, or
employee benefit plan, whether the basis of such proceeding is alleged action in
an official capacity as a director or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent permitted by applicable law, as then in
effect, against all expense, liability and loss (including attorneys' fees,
costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director and shall inure to the benefit of his or her heirs, executors
and administrators.

        10.2 Limitations on Indemnification. Notwithstanding section 10.1, no
indemnification shall be provided hereunder to any such person to the extent
that such indemnification would be prohibited by the Washington Business
Corporation Act or other applicable law as then in effect, nor, except as
provided in section 10.4 with respect to proceedings seeking to enforce rights
to indemnification, shall the Corporation indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person except where such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation.

        10.3 Advancement of Expenses. The right to indemnification conferred in
this section shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition,
except where the Board of Directors shall have adopted a resolution expressly
disapproving such advancement of expenses.

        10.4 Right to Enforce Indemnification. If a claim under section 10.1 is
not paid in full by the Corporation within 60 days after a written claim has
been received by the Corporation, or if a claim for expenses incurred in
defending a proceeding in advance of its final disposition authorized under
section 10.3 is not paid within 60 days after a written claim has been received
by the Corporation, the claimant may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim and, to the extent
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. The claimant shall be presumed to be
entitled to indemnification hereunder upon submission of a written claim (and,
in an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance



                                      -15-


of its final disposition, where the required undertaking has been tendered to
the Corporation), and thereafter the Corporation shall have the burden of proof
to overcome the presumption that the claimant is so entitled. It shall be a
defense to any such action (other than an action with respect to expenses
authorized under section 10.3) that the claimant has not met the standards of
conduct which make it permissible hereunder or under the Washington Business
Corporation Act for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.

        10.5 Alternate Procedures. Pursuant to RCW 23B.08.560(2) or any
successor provision of the Washington Business Corporation Act, the procedures
for indemnification and advancement of expenses set forth in this section are in
lieu of the procedures required by RCW 23B.08.550 or any successor provision of
the Washington Business Corporation Act.

        10.6 Nonexclusivity. The right to indemnification and the advancement of
expenses conferred in this section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Restated Articles of Incorporation or the Bylaws of the Corporation, general
or specific action of the Board, contract or otherwise.

        10.7 Indemnification of Officers, Employees and Agents. The Corporation,
by action of its Board of Directors from time to time, may provide
indemnification and pay expenses in advance of the final disposition of a
proceeding to officers, employees and agents of the Corporation on the same
terms and with the same scope and effect as the provisions of this section with
respect to the indemnification and advancement of expenses of directors of the
Corporation or pursuant to rights granted pursuant to, or provided by, the
Washington Business Corporation Act or on such other terms as the Board may deem
proper.

        10.8 Insurance and Other Security. The Corporation may maintain
insurance, at its expense, to protect itself and any individual who is or was a
director, officer, employee or agent of the Corporation or another Corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against or incurred by the individual in that capacity or arising from
his or her status as an officer, director, agent, or employee, whether or not
the Corporation would have the power to indemnify such person against the same
liability under the Washington Business Corporation Act. The Corporation may
enter into contracts with any director or officer of the Corporation in
furtherance of the provisions of this section and may create a trust fund, grant
a security interest or use other means (including, without limitation, a letter
of credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this section.

        10.9 Amendment or Modification. This section may be altered or amended
at any time as provided in these Bylaws, but no such amendment shall have the
effect of diminishing the rights of any person who is or was an officer or
director as to any acts or omissions taken or omitted to be taken prior to the
effective date of such amendment.



                                      -16-


        10.10 Effect of Section. The rights conferred by this section shall be
deemed to be contract rights between the Corporation and each person who is or
was a director or officer. The Corporation expressly intends each such person to
rely on the rights conferred hereby in performing his or her respective duties
on behalf of the Corporation.

                                   SECTION 11

                 REPRESENTATION OF SHARES OF OTHER CORPORATIONS

        Unless otherwise restricted by the Board of Directors, the Chairman, the
President, the Chief Scientist and any Vice President of the Corporation are
each authorized to vote, represent and exercise on behalf of the Corporation all
rights incident to any and all shares of other corporations standing in the name
of the Corporation. This authority may be exercised by such officers either in
person or by a duly executed proxy or power of attorney.



                                      -17-


                                    EXHIBIT A


Section 1.1.    Date and time of annual shareholders' meeting: First Wednesday
                in May at such time as the Board of Directors shall direct.

Section 6.      Fiscal year: December 31


Section 7.      Corporate Seal: None

Date Restated Bylaws Adopted: July 31, 1995, as amended on June 25, 1999,
December 14, 1999, January 14, 2000, April 3, 2000, October 1, 2001 and March 1,
2002.



                                      -18-

EX-10.1

                                                                    Exhibit 10.1

                                 FIRST AMENDMENT
                         TO LOAN AND SECURITY AGREEMENT

                THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "First
Amendment") is made as of March 20, 2002, by and among FOOTHILL CAPITAL
CORPORATION, a California corporation ("Lender"), and CRAY INC., a Washington
corporation ("Parent"), and CRAY FEDERAL INC., a Washington corporation ("Cray
Federal," and together with Parent, collectively, "Borrowers"), with reference
to the following facts:

        A. The parties hereto have entered into that certain Loan and Security
Agreement, dated as of March 28, 2001, as amended (the "Loan Agreement"), and
other Loan Documents. (Capitalized terms, which are used herein but not defined
herein, shall have the meanings ascribed to them in the Loan Agreement.)

        B. On or about November 6, 2001, Parent issued $9,300,000 in debentures.

        C. The parties wish to make certain modifications to the Loan Documents,
all on the terms and conditions set forth herein.

                NOW, THEREFORE, the parties hereto agree as follows:

        1. Amendments to Loan Agreement. Effective as of the Effective Date (as
hereinafter defined), the Loan Agreement shall be amended as follows:

                1.1 The following definitions are added to Section 1.1 of the
Loan Agreement:

        "'Debenture Documents' means, collectively, the following:

                (a) The Debentures Purchase Agreement;

                (b) The Debentures;

                (c) the Warrants issued pursuant to the Debentures Purchase
                Agreement; and

                (d) the Registration Rights Agreement."

        "'Debentures' means the 5% Convertible Subordinate Debentures issued by
        Parent pursuant to the Debentures Purchase Agreement."



                                       1


        "'Debentures Purchase Agreement' means that certain Convertible
        Subordinated Debentures and Warrant Purchase Agreement, dated November
        6, 2001, between Parent and the investors signatory thereto."

        "'Eligible Domestic Accounts' means those Accounts created by one of
        Borrowers in the ordinary course of its business, that arise out of its
        sale of goods (and that do not arise out of the rendition of services
        that lead to Service/Maintenance Revenues) that comply with each of the
        representations and warranties respecting Eligible Domestic Accounts
        made by Borrowers under the Loan Documents, and that are not excluded as
        ineligible by virtue of one or more of the criteria set forth below;
        provided, however, that such criteria may be fixed and revised from time
        to time by Lender in Lender's Permitted Discretion to address the
        results of any audit performed by Lender from time to time after the
        Closing Date. In determining the amount to be included, Eligible
        Domestic Accounts shall be calculated net of customer deposits and
        unapplied cash remitted to Borrowers. Eligible Domestic Accounts shall
        not include the following:

                        (a) Accounts that the Account Debtor has failed to pay
                within 75 days of original invoice date or within 45 days of the
                date the payment was due under the original invoice,

                        (b) Accounts owed by an Account Debtor (or its
                Affiliates) where 50% or more of all Accounts owed by that
                Account Debtor (or its Affiliates) are deemed ineligible under
                clause (a) above,

                        (c) Accounts with respect to which the Account Debtor is
                an employee or Affiliate of any Borrower,

                        (d) Accounts arising in a transaction wherein goods are
                placed on consignment or are sold pursuant to a guaranteed sale,
                a sale or return, a sale on approval, a bill and hold, or any
                other terms by reason of which the payment by the Account Debtor
                may be conditional,

                        (e) Accounts that are not payable in Dollars,

                        (f) Accounts with respect to which the Account Debtor
                either (i) does not maintain its chief executive office in the
                United States or Canada, or (ii) is not organized under the laws
                of the United States or any state thereof or Canada or any
                Canadian province thereof, or (iii) is the government of any
                foreign country or sovereign state, or of any state, province,
                municipality, or other political subdivision thereof, or of any
                department, agency, public corporation, or other instrumentality
                thereof, unless (y) the Account is supported by an irrevocable
                letter of credit satisfactory to Lender (as to form, substance,
                and issuer or domestic confirming



                                       2


                bank) that has been delivered to Lender and is directly drawable
                by Lender, or (z) the Account is covered by credit insurance in
                form, substance, and amount, and by an insurer, satisfactory to
                Lender,

                        (g) [INTENTIONALLY OMITTED],

                        (h) Accounts with respect to which the Account Debtor is
                a creditor of any Borrower, has or has asserted a right of
                setoff, has disputed its liability, or has made any claim with
                respect to its obligation to pay the Account, to the extent of
                such claim, right of setoff, or dispute,

                        (i) [INTENTIONALLY OMITTED],

                        (j) Accounts with respect to which the Account Debtor is
                subject to an Insolvency Proceeding, is not Solvent, has gone
                out of business, or as to which a Borrower has received notice
                of an imminent Insolvency Proceeding or a material impairment of
                the financial condition of such Account Debtor,

                        (k) [INTENTIONALLY OMITTED],

                        (l) Accounts, the collection of which, Lender, in its
                Permitted Discretion, believes to be doubtful by reason of the
                Account Debtor's financial condition,

                        (m) Accounts that are not subject to a valid and
                perfected first priority Lender's Lien,

                        (n) Accounts with respect to which (i) the goods giving
                rise to such Account have not been shipped and billed to the
                Account Debtor, or (ii) the services giving rise to such Account
                have not been performed and billed to the Account Debtor, or

                        (o) Accounts that represent the right to receive
                progress payments or other advance billings that are due prior
                to the completion of performance by the applicable Borrower of
                the subject contract for goods or services."

        "'Eligible Foreign Accounts' means Accounts of a Borrower: (I)
        acceptable to Lender in its Permitted Discretion, and (II) as to which
        each of the following is applicable: (a) such Account does not qualify
        as an Eligible Domestic Account solely because the Account Debtor with
        respect to such Account maintains its chief executive office in a
        jurisdiction other than the United States or is organized under the laws
        of a jurisdiction (or a political subdivision thereof) other than the
        United States, and (b) Lender has a valid and perfected first priority
        security interest in such Account."



                                       3


        "'Eligible Government Accounts' means Accounts of a Borrower: (I)
        acceptable to Lender in its sole and absolute discretion, and (II) as to
        which each of the following is applicable: (a) the Account Debtor with
        respect to such Account is the United States or any department, agency
        or instrumentality of the United States, (b) such Account does not
        qualify as an Eligible Domestic Account solely because services give
        rise to the Account and such services are research and development
        services rendered in the ordinary course of such Borrower's business;
        and (c) Lender has a valid and perfected first priority security
        interest in such Account."

        "'Eligible Professional Services Accounts' means Accounts of a Borrower:
        (I) acceptable to Lender in its sole and absolute discretion, (II) if
        otherwise qualifying as an Eligible Professional Services Account, shall
        be included in the Borrowing Base commencing August 1, 2002, and (III)
        as to which each of the following is applicable: (a) such Account does
        not qualify as an Eligible Domestic Account solely because services give
        rise to the Account and such services are Professional Services rendered
        in the ordinary course of such Borrower's business, and (b) Lender has a
        valid and perfected first priority security interest in such Account."

        "Excess Availability' means the amount, as of the date any determination
        thereof is to be made, equal to the Availability minus the aggregate
        amount, if any, of all trade payables of Borrowers in excess of 60 days
        past the payment due date with respect thereto and all book overdrafts,
        in each case as determined by Lender in its Permitted Discretion."

        "'Holder' shall have the meaning set forth in the Debenture."

        "'Professional Services' means fee-based services on a defined project
        pursuant to which the applicable Account Debtor has entered into a
        written professional services agreement, acceptable to Lender, that
        specifies specific deliverables to be provided by one of the Borrowers
        in the related statement of work."

        "'Registration Rights Agreement' means that certain Registration Rights
        Agreement, dated November 6, 2001, between Parent and the investors
        signatory thereto."

                1.2 The following definitions in Section 1.1 of the Loan
Agreement are hereby deleted and replaced by the following:

        "'Eligible Accounts' means, collectively, Eligible Domestic Accounts,
        Eligible Professional Services Accounts, Eligible Foreign Accounts and
        Eligible Government Accounts."

        "'Tangible Net Worth' means, as of any date of determination, the result
        of (a) the total consolidated stockholder's equity of Parent and its
        Subsidiaries, minus (b) the sum of (i) all



                                       4


        Intangible Assets of Parent and its Subsidiaries, (ii) all of Parent's
        prepaid expenses, and (iii) other assets which are classified as "other
        assets" on Borrowers' financial statements, plus (c) the aggregate
        outstanding principal balance of the Debentures."

                1.3 Section 2.1(a)(y) of the Loan Agreement is deleted and
replaced by the following:

        "(y) 80% of the difference between (i) the amount of Eligible Accounts,
        and (ii) the amount, if any, of the Dilution Reserve, minus"

                1.4 Section 2.1(b) of the Loan Agreement is deleted and replaced
by the following:

        "(b) Anything to the contrary in this Section 2.1 notwithstanding,
        Lender shall have the right to establish reserves in such amounts, and
        with respect to such matters, as Lender in its Permitted Discretion
        shall deem necessary or appropriate, against the Borrowing Base,
        including reserves with respect to (i) sums that Borrowers are required
        to pay (such as taxes, assessments, insurance premiums, or, in the case
        of leased assets, rents or other amounts payable under such leases) and
        has failed to pay under any Section of this Agreement or any other Loan
        Document, (ii) amounts owing by Borrowers to any Person to the extent
        secured by a Lien on, or trust over, any of the Collateral (other than
        any existing Permitted Lien set forth on Schedule P-1 which is
        specifically identified thereon as entitled to have priority over the
        Lender's Liens), which Lien or trust, in the Permitted Discretion of
        Lender likely would have a priority superior to the Lender's Liens (such
        as Liens or trusts in favor of landlords, warehousemen, carriers,
        mechanics, materialmen, laborers, or suppliers, or Liens or trusts for
        ad valorem, excise, sales, or other taxes where given priority under
        applicable law) in and to such item of the Collateral, and (iii) and in
        an amount equal to all late charges and liquidated damages payable by
        Parent pursuant to the Debenture Documents."

                1.5 The following is added as a new subsection (e) to Section
2.11 of the Loan Agreement:

        "(e) FEES ARISING FROM CHARGES UNDER DEBENTURE DOCUMENTS. Fees equal to
        all late charges and liquidated damages payable by Parent pursuant to
        the Debenture Documents, which fees shall be fully earned and payable
        when the applicable late charges and liquidated damages are payable by
        Parent pursuant to the Debenture Documents."

                1.6 The first sentence and the beginning of the second sentence
of Section 5.2(b) of the Loan Agreement are hereby deleted and replaced by the
following:

        "(b) The Eligible Accounts are bona fide existing payment obligations of
        Account Debtors created by the sale and delivery of Inventory or the
        rendition of services to such Account



                                       5


        Debtors in the ordinary course of Borrowers' business, owed to Borrowers
        without defenses, disputes, offsets, counterclaims, or rights of return
        or cancellation. As to each Eligible Account, such Account is not:"

                1.7 Schedule 5.8(b) is deleted and replaced by Schedule 5.8.(b)
attached to this First Amendment.

                1.8 Schedule 5.20 is deleted and replaced by Schedule 5.20
attached to this First Amendment.

                1.9 Schedule C-1 is deleted and replaced by Schedule C-1
attached to this First Amendment.

                1.10 Schedule P-1 is deleted and replaced by Schedule P-1
attached to this First Amendment.

                1.11 Section 6.3 of the Loan Agreement is deleted and replaced
by the following:

        "6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Lender:

                (a) as soon as available, but in any event within 30 days (50
                days in the case of a month that is the end of one of the first
                3 fiscal quarters in a fiscal year) after the end of each month
                during each of Parent's fiscal years,

                        (i) a company prepared consolidated balance sheet,
                        income statement, and statement of cash flow covering
                        Parent's and its Subsidiaries' operations during such
                        period,

                        (ii) a certificate signed by the chief financial officer
                        of Parent to the effect that:

                                A. the financial statements delivered hereunder
                                have been prepared in accordance with GAAP
                                (except for the lack of footnotes and being
                                subject to year-end audit adjustments) and
                                fairly present in all material respects the
                                financial condition of Parent and its
                                Subsidiaries,

                                B. the representations and warranties of
                                Borrowers contained in this Agreement and the
                                other Loan Documents are true and correct in all
                                material respects on and as of the date of such
                                certificate, as though



                                       6


                                made on and as of such date (except to the
                                extent that such representations and warranties
                                relate solely to an earlier date), and

                                C. there does not exist any condition or event
                                that constitutes a Default or Event of Default
                                (or, to the extent of any non-compliance,
                                describing such non-compliance as to which he or
                                she may have knowledge and what action Borrowers
                                have taken, are taking, or propose to take with
                                respect thereto), and

                        (iii) for each month that is the date on which a
                        financial covenant in Section 7.20 is to be tested, a
                        Compliance Certificate demonstrating, in reasonable
                        detail, compliance at the end of such period with the
                        applicable financial covenants contained in Section
                        7.20; and

                (b) as soon as available, but in any event within 90 days after
                the end of each of Parent's fiscal years,

                        (i) financial statements of Parent and its Subsidiaries
                        for each such fiscal year, audited by independent
                        certified public accountants reasonably acceptable to
                        Lender and certified, without any qualifications, by
                        such accountants to have been prepared in accordance
                        with GAAP (such audited financial statements to include
                        a balance sheet, income statement, and statement of cash
                        flow and, if prepared, such accountants' letter to
                        management),

                        (ii) a certificate of such accountants addressed to
                        Lender stating that such accountants do not have
                        knowledge of the existence of any Default or Event of
                        Default under Section 7.20,

                (c) as soon as available, but in any event within 30 days prior
                to the start of each of Parent's fiscal years,

                        (i) copies of Borrowers' Projections, in form and
                        substance (including as to scope and underlying
                        assumptions) satisfactory to Lender, in its sole
                        discretion, for the forthcoming 3 years, year by year,
                        and for the forthcoming fiscal year, month by month,
                        certified by the chief financial officer of Parent as
                        being such officer's good faith best estimate of the
                        financial performance of Parent and its Subsidiaries
                        during the period covered thereby,

                (d) if and within 5 days of the date filed by any Borrower,



                                       7


                        (i) Form 10-Q quarterly reports, Form 10-K annual
                        reports, and Form 8-K current reports,

                        (ii) any other filings made by any Borrower with the
                        SEC,

                        (iii) copies of Borrowers' federal income tax returns,
                        and any amendments thereto, filed with the Internal
                        Revenue Service, and

                        (iv) any other information that is provided by Parent to
                        its shareholders generally,

                (e) if and when filed by any Borrower and as requested by
                Lender, satisfactory evidence of payment of applicable excise
                taxes in each jurisdictions in which (i) any Borrower conducts
                business or is required to pay any such excise tax, (ii) where
                any Borrower's failure to pay any such applicable excise tax
                would result in a Lien on the properties or assets of any
                Borrower, or (iii) where any Borrower's failure to pay any such
                applicable excise tax reasonably could be expected to result in
                a Material Adverse Change

                (f) as soon as a Borrower has knowledge of any event or
                condition that constitutes a Default or an Event of Default,
                notice thereof and a statement of the curative action that
                Borrowers propose to take with respect thereto,

                (g) no later than 5 days prior to payment of each semi-annual
                interest payment required under the Debentures, a certificate
                signed by the chief financial officer of Parent indicating
                Parent's election as to whether to pay such interest in cash or
                Stock of Parent, and if Parent elects to pay in cash, that,
                after making and giving effect to such payment, Borrowers shall
                be in compliance with the covenant set forth in section (c) of
                Schedule 7.20, and

                (h) upon the request of Lender, any other report reasonably
                requested relating to the financial condition of Borrowers.

                        "In addition to the financial statements referred to
                        above, Borrowers agree to deliver financial statements
                        prepared on both a consolidated and consolidating basis
                        and that no Borrower, or any Subsidiary of a Borrower,
                        will have a fiscal year different from that of Parent.
                        Borrowers agree that their independent certified public
                        accountants are authorized to communicate with Lender
                        and to release to Lender whatever financial information
                        concerning Borrowers that Lender reasonably may request.
                        Each Borrower waives the right to assert a confidential
                        relationship, if any, it may have with any accounting
                        firm or service bureau in connection with any
                        information



                                       8


                        requested by Lender pursuant to or in accordance with
                        this Agreement, and agree that Lender may contact
                        directly any such accounting firm or service bureau in
                        order to obtain such information.

                (i) as soon as Borrower receives notice of conversion for the
                Debentures or a request to register the shares underlying the
                Debentures by the holders thereof pursuant to the Debenture
                Documents, notice thereof and a statement of the dates when
                conversion of such Debentures or registration of the shares
                underlying such Debentures are due."

                1.12 The following is added as a new Section 6.16:

        "6.16 DEBENTURE DOCUMENTS. At all times comply with its obligations
        under the Debenture Documents, including the following:

                (a) Maintain the effectiveness under the Securities Act of 1933,
        as amended, of its Registration Statement on Form S-3 (Reg. No.
        333-74100) for the time periods required pursuant to the Registration
        Rights Agreement; and

                (b) If required under Section 2(b) of the Registration Rights
        Agreement, promptly file and prosecute to effectiveness such further
        registration statements within the time limits set forth in Section 2(b)
        thereof."

                1.13 Schedule 7.20 is deleted and replaced by Schedule 7.20
attached to this First Amendment.

                1.14 Section 8.2 of the Loan Agreement is deleted and replaced
by the following:

        "8.2 (a) If Borrowers fail or neglect to perform, keep, or observe any
        covenant or other provision contained in Sections 6.2, 6.3 or 6.16
        hereof and such failure or neglect continues for a period of 5 days
        after the date on which such failure or neglect first occurs, or (b) if
        Borrower fails or neglects to perform, keep, or observe any covenant or
        other provision contained in Sections 6.1, 6.7 or 6.11 hereof and such
        failure or neglect is not cured within 15 days after the date on which
        such failure or neglect first occurs, or (c) if Borrower fails or
        neglects to perform, keep, or observe any other covenant or other
        provision contained in any Section of this Agreement (other than a
        Section that is expressly dealt with elsewhere in this Section 8) or the
        other Loan Documents (other than a Section of such other Loan Document
        dealt with elsewhere in this Section 8); provided that, during any
        period of time that any such failure or neglect of Borrower referred to
        in this paragraph exists, even if such failure or neglect is not yet an
        Event of Default by virtue of the existence of a grace or



                                       9


        cure period or the pre-condition of the giving of a notice, Lender shall
        be relieved of its obligation to extend credit hereunder;"

        2. Limited One-Time Waivers.

                2.1 Pursuant to section (a)(i) of Schedule 7.20 of the Loan
Agreement, Borrowers have failed to maintain minimum EBITDA of each Borrower and
its Subsidiaries, determined on a consolidated basis, of no less than (i)
$3,000,000 for the 12-month period ending September 30, 2001, and (ii)
$10,000,000 for the 12-month period ending December 31, 2001.

                2.2 Pursuant to section (a)(ii) of Schedule 7.20 of the Loan
Agreement, Borrower has failed to maintain minimum Tangible Net Worth of each
Borrower and its Subsidiaries, determined on a consolidated basis, of no less
than $29,000,000 as of September 30, 2001 and December 31, 2001.

                2.3 Lender waives any Event of Default arising from (i)
Borrower's failure to maintain minimum EBITDA in an amount equal to or greater
than the amounts and for the periods described in Section 2.1 hereof and (ii)
Borrower's failure to maintain Tangible Net Worth in an amount equal to or
greater than $29,000,000 for the periods described in Section 2.2 hereof.

                2.4 This First Amendment does not constitute a waiver of any
other provision of the Loan Documents or of the provisions of the Loan Agreement
referenced in Sections 2.1 and 2.2 hereof in any other instance.

        3. Conditions to Effectiveness. The effectiveness of this First
Amendment is subject to the receipt by Lender or the completion by Borrower of
the following, and the date on which Lender receives or Borrower completes all
of the following shall be the "Effective Date:"

                3.1 Counterparts of this First Amendment, executed by each of
the parties hereto; and

                3.2 Borrower has paid Lender a waiver and consent fee of $60,000
and all of Lender's attorneys' fees and costs as described in Section 4.8
hereof.

        4. Miscellaneous.

                4.1 Loan Documents Confirmed. Except as expressly amended
hereby, the Loan Agreement and the other Loan Documents shall remain unchanged
and in full force and effect. This First Amendment is hereby incorporated into
the Loan Agreement.



                                       10


                4.2 Choice of Law. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED, THIS
FIRST AMENDMENT AND ALL OTHER DOCUMENTS BEING EXECUTED CONCURRENTLY HEREWITH
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

                4.3 Sole Parties. This First Amendment is made exclusively for
the benefit of and solely for the protection of the parties hereto, and no other
person or persons shall have the right to enforce the provisions hereof by
action or legal proceedings or otherwise.

                4.4 Interpretation. Whenever the context so requires, all words
used in the singular will be construed to have been used in the plural, and vice
versa, and each gender will include any other gender. The headings used in this
First Amendment are inserted solely for the convenience of reference and are not
part of, nor intended to govern, limit or aid in the construction of, any term
or provision hereof.

                4.5 Counterparts. This First Amendment may be executed in one or
more counterparts, each of which shall be an original but all of which shall
constitute one and the same instrument.

                4.6 Further Assurances. From time to time, each party will
execute and deliver in recordable form, if necessary, such further instruments
and will take such other action as the other party reasonably may request in
order to discharge and perform their obligations and agreements under this First
Amendment.

                4.7 Time of Essence. Time is of the essence in this First
Amendment.

                4.8 Attorneys' Fees and Costs. The Borrower agrees that all of
Lender's attorneys' fees and costs in drafting and negotiating this First
Amendment are part of the Obligations and are payable on demand.



                                       11


IN WITNESS WHEREOF, the parties have executed this First Amendment as of the
date first written above.


                                CRAY INC.,
                                a Washington corporation
                                /s/ Kenneth W. Johnson
                                By: Kenneth W. Johnson
                                Title: Vice President - Legal and
                                       General Counsel

                                CRAY FEDERAL, INC.
                                a Washington corporation
                                /s/ Charles A. Weidenfeller, Jr.
                                By: Charles A. Weidenfeller, Jr.
                                Title: President

                                FOOTHILL CAPITAL CORPORATION,
                                a California corporation
                                /s/ Kurt Duerfeldt
                                By: Kurt Duerfeldt
                                Title: Senior Vice President



                                       12


                             EXHIBITS AND SCHEDULES

Exhibit C-1           Form of Compliance Exhibit
Schedule P-1          Permitted Liens
Schedule 5.8(b)       Capitalization of Borrowers
Schedule 5.20         Permitted Indebtedness
Schedule 7.20         Financial Covenants



                                       13


                                   EXHIBIT C-1

                         FORM OF COMPLIANCE CERTIFICATE

                           [on Borrower's letterhead]

To:     Foothill Capital Corporation
        2450 Colorado Avenue, Suite 3000 West
        Santa Monica, California  90404
        Attn: Business Finance Division Manager

                Re: Compliance Certificate dated

Ladies and Gentlemen:

                Reference is made to that certain Loan and Security Agreement,
dated as of March 28, 2001, as amended (the "Loan Agreement") among Cray Inc., a
Washington corporation ("Administrative Borrower"), Cray Federal Inc., a
Washington corporation (together with Administrative Borrower, "Borrowers"), and
Foothill Capital Corporation, a California corporation ("Lender"). Capitalized
terms used in this Compliance Certificate have the meanings set forth in the
Loan Agreement unless specifically defined herein.

                Pursuant to Section 6.3 of the Loan Agreement, the undersigned
officer of Administrative Borrower hereby certifies that:

                1. The financial information of Borrowers furnished in Schedule
1 attached hereto has been prepared in accordance with GAAP (except for year-end
adjustments and the lack of footnotes, in the case of financial statements
delivered under Section 6.3(a) of the Loan Agreement) and fairly presents the
financial condition of Borrowers.

                2. Such officer has reviewed the terms of the Loan Agreement and
has made, or caused to be made under his/her supervision, a review in reasonable
detail of the transactions and condition of Borrowers during the accounting
period covered by the financial statements delivered pursuant to Section 6.3 of
the Loan Agreement.

                3. Such review has not disclosed the existence on and as of the
date hereof, and the undersigned does not have knowledge of the existence as of
the date hereof, of any event or condition that constitutes a Default or Event
of Default, except for such conditions or events listed on Schedule 2 attached
hereto, specifying the nature and period of existence thereof and what action
Borrowers have taken, are taking, or propose to take with respect thereto.





                4. Borrowers are in timely compliance with all representations,
warranties, and covenants set forth in the Loan Agreement and the other Loan
Documents, except as set forth on Schedule 2 attached hereto. Without limiting
the generality of the foregoing, Borrowers are in compliance with the covenants
contained in Schedule 7.20 of the Loan Agreement as demonstrated on Schedule 3
hereof.

                IN WITNESS WHEREOF, this Compliance Certificate is executed by
the undersigned this _____ day of ____________, 200_.


                                CRAY INC., a Washington corporation,
                                as Administrative Borrower

                                By:
                                   ---------------------------------------------
                                Name:
                                     -------------------------------------------
                                Title:
                                      ------------------------------------------



                                   SCHEDULE 1





                                   SCHEDULE 2





                                   SCHEDULE 3

1. MINIMUM EBITDA.

        Borrowers' EBITDA for the _________ ending _________, ________ is
$______________, which amount [IS/IS NOT] greater than or equal to the amount
set forth in Section (a)(i) of Schedule 7.20 to the Loan Agreement for the
corresponding period.

2. MINIMUM TANGIBLE NET WORTH.

        Borrowers' Tangible Net Worth as of __________ was $__________, which
amount [IS/IS NOT] greater than or equal to the amount set forth in Section
(a)(ii) of Schedule 7.20 to the Loan Agreement for the corresponding date.

3. MINIMUM DOMESTIC SERVICE/MAINTENANCE REVENUES.

        Borrowers' Domestic Service/Maintenance Revenues for the twelve-month
period ending __________, 200___ was $_____, which amount [IS/IS NOT] greater
than or equal to the amount set forth in Section (a)(iii) of Schedule 7.20 to
the Loan Agreement for the corresponding period.

4. MAXIMUM CAPITAL EXPENDITURES.

                (a) The aggregate amount of capital expenditures made or
committed to be made to date in the current fiscal year is $________________.

                (b) The aggregate amount set forth above [IS/IS NOT] less than
or equal to the amount set forth in Section (b)(i) of Schedule 7.20 to the Loan
Agreement for the current fiscal year.

5. PAYMENTS UNDER THE DEBENTURE DOCUMENTS.

                (a) Check applicable line:

                        (i) ____ Administrative Borrower proposes to make a
                payment (other than in stock of Administrative Borrower) on the
                Indebtedness evidenced by the Debenture Documents.

                        (ii) ____ Administrative Borrower does not propose to
                make a payment (other than in stock of Administrative Borrower)
                on the Indebtedness evidenced by the Debenture Documents.





                (b) The payment set forth in Section 5(a)(i) above [WOULD/WOULD
NOT] breach section (c) of Schedule 7.20 to the Loan Agreement because:
______________________________________.





                                  Schedule P-1

                                 Permitted Liens

1.      The Borrower owes U.S. Bank N.A., as of February 28, 2002, the sum of
        $198,332. This loan is secured by (i) a certificate of deposit, dated as
        of February 28, 2002, in the amount of $353,000 and (ii) specific
        computer equipment financed by such loan.

2.      The Borrower owes Presidential Bank, as of February 28, 2002, the sum of
        $409,292. Presidential Bank is the assignee of DRKB, Inc. This loan is
        secured by specific computer equipment financed by this loan.





                                Schedule 5.8(b)

                           Capitalization of Borrowers

Cray Inc. has authorized capital of 100,000,000 shares of Common Stock, $.01 par
value, and 5,000,000 shares of Preferred Stock, $.01 par value.

As of March 12, 2002, Cray Inc. had outstanding: (i) 45,096,820 shares of Common
Stock, (ii) warrants exercisable for 14,111,441 shares of Common Stock, (iii)
$9,300,000 convertible subordinated debentures convertible into a minimum of
3,957,447 shares, and (iv) stock options exercisable for 10,441,771 shares of
Common Stock. Cray Inc. has reserved 4,000,000 shares for issuance pursuant to
an employee stock purchase plan. In addition, Cray Inc. has issued to NEC
Corporation 3,125,000 shares of Series A Convertible Preferred Stock, $.01 par
value, which are convertible into 3,136,763 shares of Common Stock.

Cray Federal Inc. has authorized capital of 1,000 shares of Common Stock, $1.00
par value. All shares of Common Stock are issued and outstanding and are held by
Cray Inc.





                                  Schedule 5.20

                             Permitted Indebtedness

1.      The Borrower owes $9,300,000, plus accrued interest, on its convertible
        subordinated debentures.

2.      As of February 28, 2002, the Borrower owes U.S. Bank the sum of
        $198,332.38 which is secured by a certificate of deposit and by
        equipment purchased with the loan. See Schedule P-1.

3.      As of February 28, 2002, the Borrower owes Presidential Bank the sum of
        $409,292.13, which is secured by equipment purchased with this loan.
        Presidential Bank is the assignee of DRKB Inc. See Schedule P-1.

4.      The Borrower has various capital leases outstanding. At December 31,
        2001, the principal balance of capital leases outstanding was $768,000,
        including interest.





                                  SCHEDULE 7.20

                               FINANCIAL COVENANTS

                (a) Fail to maintain:

                (i) MINIMUM EBITDA. EBITDA, measured on a fiscal quarter-end
                basis, of not less than the required amount set forth in the
                following table for the applicable period set forth opposite
                thereto;




        Applicable Amount                                 Applicable Period
        -----------------                                 -----------------
                                                    
         -$5,000,000                                    For the 12-month period
                                                          ending June 30, 2001

         $3,000,000                                     For the 12-month period
                                                       ending September 30, 2001

         -$12,000,000                                   For the 12-month period
                                                        ending December 31, 2001

         -$24,000,000                                   For the 12-month period
                                                         ending March 31, 2002

         -$10,000,000                                   For the 12-month period
                                                          ending June 30, 2002

         $0                                             For the 12-month period
                                                       ending September 30, 2002

         $15,000,000                                    For the 12-month period
                                                 ending each fiscal quarter thereafter






                (ii) TANGIBLE NET WORTH. Tangible Net Worth of at least the
                required amount set forth in the following table as of the
                applicable date set forth opposite thereto:



               Applicable Amount                            Applicable Date
               -----------------                            ---------------
                                        
                  $23,000,000                                June 30, 2001
                  $29,000,000                              September 30, 2001
                  $18,000,000                              December 31, 2001
                  $11,200,000                                March 31, 2002
                  $17,900,000                                June 30, 2002
                  $15,900,000                              September 30, 2002
                  $14,700,000                              December 31, 2002
                  $23,800,000              the first date of each calendar quarter thereafter


                (iii) MINIMUM DOMESTIC SERVICE/MAINTENANCE REVENUES. Domestic
                Service/Maintenance Revenues of no less than $34,000,000 for the
                immediately preceding 12 calendar months, tested quarterly.

                (b) Make:

                (i) CAPITAL EXPENDITURES. Capital expenditures in any fiscal
                year in excess of $10,000,000.

                (c) PAYMENTS UNDER THE DEBENTURE DOCUMENTS. If an Event of
                Default has occurred and is continuing or if there is Excess
                Availability of less than $1,000,000 after giving effect to any
                payment made in respect of the Indebtedness evidenced by the
                Debentures, make any payment (other than in stock of Parent) by
                the Parent or any application of funds with respect to the
                principal of or interest on the Indebtedness evidenced by the
                Debenture Documents, or any other payment of funds under the
                Debentures or under any of the Debenture Documents; provided,
                however, that any Holder may demand and the Parent may pay at
                any time and from time to time, liquidated damages and late fees
                pursuant to Sections 4(a)(iii), 4(c)(iii) and 4(c)(iv) of the
                Debentures and Section 2(f) of the Registration Rights Agreement
                even if an Event of Default has occurred and is continuing
                and/or there is Excess Availability of less than $1,000,000 at
                the time of such payments, but only so long as, of the date of
                such payment by the Parent, the Holder has not declared that an
                event of default exists under Section 3 of Holder's Debenture or
                such other Debenture Documents, and provided, further, that
                Lender has not declared the Obligations immediately due and
                payable.