SecProbe.io

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(CRAY LOGO)

EDGAR CORRESPONDENCE

                                                              September 12, 2005

Ms. Kathleen Collins
Accounting Branch Chief
United States Securities and Exchange Commission
100 F Street, N.E.
Washington D.C. 20549

Re:      Cray Inc. - File No. 000-26820

Dear Ms. Collins:

         This letter responds to your comment letter dated August 18, 2005. Our
numbered responses correspond to the numbering of your comments and questions.

1.       Goodwill.

         We operate in one business segment and have one reporting unit: global
sales and service of high performance computers (See Note 16 to our Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2004 ("2004 Form 10-K"), page F-22). We do not have any other
operating segment or reporting unit. Our products are designed to provide
homogeneous solutions to a similar customer base worldwide and our design,
development, manufacturing, sales, marketing and services are integrated.
Operating results by geographical region, product line or services have not been
prepared and they are not reviewed by our chief operating decision maker (our
chief executive officer) to allocate resources or to assess performance. For
further analysis regarding our segment reporting, based upon Statement of
Financial Accounting Standard ("SFAS") No. 131, Disclosures about Segments of an
Enterprise and Related Information, see our response to Question 5 below.

         As we have one reporting unit we do not allocate goodwill among
separate reporting units. We had approximately $55.6 million of goodwill
recorded on our December 31, 2004, balance sheet, including the approximately
$38 million of goodwill you noted relating to the OctigaBay Systems Corporation
April 2004 acquisition. As stated above, this goodwill was not allocated. The
technology from this acquisition is being integrated together with our existing
technology across our Company product road map, and the sales, marketing,
manufacturing and administrative functions are common and integrated.

         In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
we test goodwill for impairment on an annual basis (as of January 1 of each
year) and between annual

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tests under certain circumstances, as described fully in Paragraph 28 of SFAS
No. 142. We use the two-step approach prescribed in SFAS No. 142: first, to
screen for potential impairment, and, secondly, if there is potential
impairment, to measure the amount of any impairment.

         Pursuant to Paragraphs 19 and 23 of SFAS No. 142, our market
capitalization on December 31, 2004, of approximately $417 million exceeded our
carrying amount (shareholders' equity) of approximately $125 million by several
times, and we concluded therefore that there was no potential impairment of
goodwill.

         While we incurred significant losses and had negative cash flows from
operations during the year ended December 31, 2004, and the quarter ended March
31, 2005, we did not consider these factors to be overriding indicators of
impairment, that is, not deemed an adverse change in the business climate (as
described in Paragraph 28 of SFAS No. 142). The other factors described as
indicators in Paragraph 28 also do not apply to us from January 1, 2005, our
annual measurement date, through May 10, 2005. Although we did not complete
another impairment test as of the quarter end, we note that our market
capitalization on March 31, 2005, of nearly $223 million was more than double
our shareholders' equity of approximately $106 million on that date.

         We acknowledge the significant decrease in our market capitalization
from $553 million at June 30, 2004 to approximately $184 million on May 3, 2005,
and $129 million at May 10, 2005, but we do not consider this decrease to
indicate that an impairment has occurred as these amounts are still greater that
our shareholders' equity as of March 31, 2005, and June 30, 2005. In accordance
with Paragraph 23 of SFAS No. 142, a decline in the quoted market price of an
entity's equity securities, and thus its market capitalization, creates a
requirement to test goodwill for impairment only if the decline is determined to
represent an event or change in circumstance that would more likely than not
reduce the fair value of the reporting unit below its carrying amount. We do not
believe the decline in the value of our equity securities during this period met
that requirement or is indicative of an impairment of goodwill. We note that
equity securities prices fluctuate constantly and while our market value has
declined over the past 9 to 12 months, we believe it is reasonable to expect
that our market value may increase in the future as we focus on improving our
financial results. We will continue to review our goodwill and possible
impairment as appropriate under this guidance.

         We believe that our position on goodwill impairment is not inconsistent
with the decision to record a valuation allowance on deferred taxes in 2004. As
described more fully in our response to Question 4, there are different criteria
required under SFAS No. 109, Accounting for Income Taxes - "a demonstrated
turnaround to operating profitability." In practice generally this turnaround is
not demonstrated if cumulative net loss exceeds cumulative net earnings over the
most recent three-year period. That criteria, based on a cumulative loss
comparison, are not the same in determining whether we believe we will be
profitable in the future for purposes of goodwill impairment under Paragraphs 19
through 23 and 28 of SFAS 142.

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2.       Revenue Recognition.

         In the past three fiscal years, over 70% of our revenue for product
sales, development contracts (for which we record revenue) and system
maintenance services has been from U.S. government agencies or commercial
customers primarily servicing the U. S. government. See Note 16 to our 2004 Form
10-K, page F-23.

          In addition, we receive government funding for a portion of contracted
research and development which is passed-through or netted against our gross
research and development spending pursuant to the AICPA Federal Contractors
Audit Guide, Paragraphs 3.53 and 3.54. The "government funding pass-through"
line in Note 4, Accounts Receivable, Net on page F-13 of our 2004 Form 10-K, for
example, reflects the amount of billed but unpaid government reimbursement of
contracted research and development. See Note 2, Accounts Receivables, on page
F-6 of our 2004 Form 10-K for the description of our related accounting
policies.

         Our policy is to consider fiscal funding clauses or other contract
contingencies as contingencies in the recognition of revenue until the funding
is assured and we have been notified of that fact. We follow the guidelines set
forth in Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, as
modified by SAB No. 104, Revenue Recognition in Financial Statements. We plan to
provide additional disclosure in future filings regarding our government funding
pass-through accounting policies.

         Pursuant to our policy, we limit the recognition of revenue and
receivables, as appropriate, to the amount funded by the applicable agency. For
product sales, government funding is not an issue as we recognize product
revenue upon receipt of a notice of acceptance, which government agencies cannot
provide unless the acquisition is funded. For our revenue development contracts,
our recorded revenue has not exceeded the agency's authorized funding. Most of
our government system maintenance service contracts have been in place for
multiple years and are billed and paid for within a government fiscal year. In
those cases, funding is evidenced by an annual purchase order for the fiscal
year of the respective agency. Once the purchase order is issued, the funds for
the service are committed. There are no funding contingency clauses applicable
once the annual purchase order is issued. Certain governmental customers pay the
annual maintenance charges in advance pursuant to their authorized funding. In
such cases, we invoice the annual amount and record deferred revenue. For system
maintenance service agreements we recognize the revenue and associated expenses
as the services are performed.

         In a limited number of instances we have accrued revenue for system
maintenance service contracts with government agencies before we received the
purchase order. At December 31, 2004, this accrual was $200,000 related to one
customer. In these instances the receipt of the purchase order was delayed by
late Congressional budget approvals and inter-departmental allocations or
extended process. In those cases we considered, as appropriate, factors such as
the fiscal funding clauses, Congressional continuing budget resolutions, the
status of the budget before Congress, the renewal discussions with the agency
and the agency's plans for continued use of the associated supercomputer system.
Our computer systems are significant in size and the end of use and removal of a
system from a site is a significant and planned event, known to all parties
months in advance. We have had long

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experience in providing system maintenance services to government agencies and
believed based on these factors the probability of non-renewal and failure to
receive the purchase order to be very remote. In these situations we continued
to provide the system maintenance services as requested by the government agency
under the existing contract's terms and conditions as continued use of the
supercomputer system was vital to the agency's mission critical programs. In all
these instances, we in fact received a purchase order covering our services from
the beginning of the government fiscal year.

         U.S. government funding pass-through contracts for research and
development, generally covering a percentage less than 100% of our expenses, are
funded incrementally. Invoices and credits to expense are limited to the
approved funding. Invoices are issued after work is complete or contracted
milestones are reached against a funded research and development contract. Thus
there is no fiscal funding contingency for invoices issued, or credits to
research and development expense, since neither event occurs without a full
funding of the invoices prior to their issuance. There also is no repayment
obligation, future discounts or shared rights obligations that would give rise
to a liability or accounting treatment pursuant to SFAS No. 68, Research and
Development Arrangements.

3.       Multi-Element Revenue Recognition.

         Due to the complexity of most supercomputer system sales transactions,
often with deliveries of multiple systems, post-sale maintenance and
implementation services, virtually all system sales are multiple element sales
within the definition of EITF No. 00-21.

         We develop and include the system software (operating systems and
programming environment) as an integral aspect of our supercomputer systems. Our
system software is not more than incidental to the sale of the supercomputer
system under the guidelines of footnote 2 to AICPA Statement of Position ("SOP")
No. 97-2, Software Revenue Recognition, as we do not market or sell the system
software separately from the hardware but, as stated above, integrate both into
one system. In the vast majority of our sales of supercomputer systems, the
revenue for a sale of a computer system is recognized upon acceptance by the
customer and when we have no unfulfilled contractual obligations, in accordance
with SAB No. 104. With smaller versions of our Cray XD1 system, the system
software is also an integral aspect of the smaller system but we recognize
revenue, absent a customer specific contractual acceptance requirement, upon
shipment or delivery in accordance with SAB No. 104.

         We do not develop, market or sell software application programs; our
customers use their own internally developed application programs and/or
purchase third-party software application programs from other vendors.

         We occasionally sell, as a reseller, third-party software products to
customers that require such products. These products augment the usability of
the system software, such as a scheduler or file system, for example. The
revenue associated with these arrangements has been immaterial, well below 1% of
total product revenue in any one year. Almost always these products are integral
to the computer system and revenue is recognized, as above, upon acceptance of
the complete supercomputer system. Whether or not integral, the third-party
software products

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are not more than incidental to the sale of the supercomputer system, as defined
in footnote 2 to SOP No. 97-2, as their revenue is immaterial, they are not a
focus of our marketing efforts, we do not provide post-sale maintenance for
these products and we do not incur significant costs associated with these
products.

         Pursuant to SOP No. 97-2, software that is incidental to the products
or services as a whole are not required to be accounted for separately, and
therefore EITF Issue No. 03-05, Applicability of AICPA SOP 97-2 to Non-Software
Deliverables in an Arrangement Containing More than Incidental Software, is not
applicable.

         If we were to sell software, whether ours or a third-party's, that was
material and not incidental, we would recognize the revenue from such a software
sale pursuant to SOP No. 97-2.

4.       Income Taxes.

         At the end of 2003, we reversed a valuation allowance for deferred tax
assets. At that time we had enjoyed eight consecutive profitable quarters and
had cumulative pretax income over the past three years, excluding unusual items
and goodwill amortization. We then forecasted a profitable 2004, based upon
continuing sales of our Cray X1 system, particularly to our U.S. government
customers, and the successful introduction of new products expected to be
launched in the second half of 2004.

         We instead reported losses for each quarter in 2004. At the end of the
third quarter of 2004, the nine-month net loss exceeded our cumulative net
income in 2002 and 2003 (we had only losses before 2002), and we faced a likely
further loss in the fourth quarter. Because cumulative losses are a form of
evidence that is among the most objectively verifiable form of negative evidence
available, they carry more weight than other evidence that embodies some degree
of subjectivity. SFAS No. 109, Paragraph 10 states that the most common period
to consider in evaluating whether a company has accumulated net operating losses
is over a three-year period - the current year and the two preceding years. If a
cumulative net operating loss over this period exists, realization of a deferred
tax asset is difficult to support if assertions of future profitability are
based on forecasts of future profitable results without a demonstrated
turnaround to operating profitability. See SFAS No. 109, Paragraphs 23, 25 and
103. Although we believed we would return to profitability, we could not
demonstrate the likelihood of such profitability to the extent required under
SFAS No. 109, Paragraph 23. Therefore, we recorded the valuation allowance at
the end of the third quarter of 2004.

5.       Segment Information.

         Paragraph 10 of SFAS No. 131 requires that three criteria must be met
in order for a unit to be considered an operating segment:

     o   It engages in business activities to earn revenue and incur expenses;

     o   The operating results are regularly reviewed by the en