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Cray Inc – ‘DEF 14A’ for 5/12/04

On:  Tuesday, 3/23/04, at 7:41pm ET   ·   As of:  3/24/04   ·   Effective:  3/24/04   ·   For:  5/12/04   ·   Accession #:  891020-4-339   ·   File #:  0-26820

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/24/04  Cray Inc                          DEF 14A     5/12/04    1:380K                                   Bowne - Seattle/FA

Document/Exhibit                   Description                      Pages   Size 

 1: DEF 14A     Definitive Proxy Statement                          HTML    364K 

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SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934

(AMENDMENT NO.___)

Filed by the Registrant [X]

Filed by a Party other than the Registrant [   ]

Check the appropriate box:

Cray Inc.

Payment of Filing Fee (Check the appropriate box):

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Dear Cray Inc. Shareholder:

      You are cordially invited to attend the Annual Meeting of Shareholders of Cray Inc. which will be held on the 7th floor of our corporate headquarter offices, located at Merrill Place, 411 First Avenue South, Seattle, Washington 98104-2860, on May 12, 2004, at 2:00 p.m.

      At the Annual Meeting, shareholders will have the opportunity to vote on the following matters:

      If you were a shareholder of record on March 12, 2004, the record date for the Annual Meeting, you are entitled to vote on these matters.

      At the Annual Meeting, we will review our performance during the past year and comment on our outlook. You will have an opportunity to ask questions about Cray and our operations.

      Regardless of the number of shares you own, your vote is important. You may vote in one of the following methods:

      Voting by the Internet or by telephone is fast, convenient and your vote is immediately confirmed and tabulated. You also help us reduce postage and proxy tabulation costs. Or you may sign and return the proxy card in the enclosed envelope. Even if you plan to attend the Annual Meeting, we urge you to vote at your earliest convenience so we avoid further solicitation costs. Any shareholder attending the meeting may vote in person even if he or she has voted previously.

      Details of the business to be conducted at the Annual Meeting are more fully described in the accompanying Proxy Statement.

      We look forward to seeing you. Thank you for your ongoing support of and interest in Cray.

	Sincerely,
	JAMES E. ROTTSOLK
	Chairman, Chief Executive
	Officer and President

Seattle, Washington

PROXY STATEMENT

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CRAY INC.

PROXY STATEMENT FOR

INFORMATION ABOUT THE ANNUAL MEETING AND VOTING

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OUR COMMON STOCK OWNERSHIP

      The following table shows, as of March 12, 2004, the number of shares of our common stock beneficially owned by the following persons: (a) all persons we know to be beneficial owners of at least 5% of our common stock, (b) our directors, (c) the executive officers named in the Summary Compensation Table and (d) all directors and executive officers as a group. As of March 12, 2004, there were 73,198,108 shares of our common stock outstanding.

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      Section 16(a) of the Securities Exchange Act of 1934 requires that our directors, executive officers and greater-than-10% shareholders file reports with the SEC on their initial beneficial ownership of our common stock and any subsequent changes. They must also provide us with copies of the reports.

      We are required to tell you in this Proxy Statement if we know about any failure to report as required. We reviewed copies of all reports furnished to us and obtained written representations that no other reports were required. Based on this, we believe that all of these reporting persons complied with their filing requirements for 2003, except that the initial Form 3 in connection with the hiring of Peter J. Ungaro and the initial Form 4 reporting the award of stock options and restricted stock granted to him upon joining us were filed late.

CORPORATE GOVERNANCE

      The goals of our Board of Directors are to build long-term value for our shareholders and to assure our vitality for our customers, employees and others that depend on us. Our Board has adopted and follows corporate governance practices that our Board and our senior management believe promote these purposes, are sound and represent best practices. To this end we have adopted revised charters for each of our Board committees, guidelines for our corporate governance and a Code of Business Conduct that applies to all of our directors, officers and employees. We periodically review these governance practices against requirements of the Securities and Exchange Commission, the listing standards of the Nasdaq National Market System, the laws of the State of Washington and practices suggested by recognized corporate governance authorities.

The Board of Directors

      The Board of Directors oversees our business and affairs and monitors the performance of management. In accordance with corporate governance principles, the Board does not involve itself in day-to-day operations. The directors keep themselves informed through discussions with the Chief Executive Officer, other key executives and our principal external advisers (legal counsel and outside auditors), by reading the reports and other materials that we send them regularly and by participating in Board and committee meetings.

      Currently our Board has eight members. The Board has determined that six directors, identified on the Common Stock Ownership table above, meet the Nasdaq National Market System standards for independence. Only independent directors serve on our Audit, Compensation and Corporate Governance Committees.

      The Board met four times and the Board committees held a total of nine meetings during 2003. Each director attended at least 85% of the meetings of the Board and relevant committees and the average attendance for all directors at Board and committee meetings was over 98%.

      The Board has established an Audit Committee, a Compensation Committee and a Corporate Governance Committee. In May 2003, the former Nominating Committee was dissolved and its duties assumed by the Corporate Governance Committee. At the same time, the Executive Committee was also dissolved. None of the Directors who serve as members of these committees is, or has ever been, one of our employees except that Mr. Rottsolk and Mr. Smith served on the Nominating Committee and on the Executive Committee until the dissolution of those committees in May 2003.

      Audit Committee. The members of the Audit Committee are: Daniel C. Regis (chair), Daniel J. Evans and William A. Owens. The Audit Committee had five meetings during 2003. The Committee and the Board have determined that each member of the Audit Committee is “independent,” as that term is defined in SEC and Nasdaq National Market rules and regulations, and that Mr. Regis is an “audit committee financial

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      The Audit Committee is directly and solely responsible for appointing, determining the compensation payable to, overseeing, terminating and replacing any independent auditor engaged by us for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us.

      The Audit Committee has revised its charter and the Board of Directors has approved the revised charter. The current Audit Committee Charter, as so revised, is attached as Appendix A. The Audit Committee also adopted a Code of Business Conduct applicable to all directors, officers and employees. The Audit Committee charter and the Code of Business Conduct are available on our web site: www.cray.com under Investors-Corporate Governance-Overview and Charters. The report of the Audit Committee regarding its review of the financial statements and other matters is set forth below on page 15.

      Compensation Committee. The members of the Compensation Committee are: Stephen C. Kiely (chair), David N. Cutler and Kenneth W. Kennedy, Jr. The Committee and the Board have determined that each member of the Compensation Committee is “independent,” as that term is defined in Nasdaq National Market rules and regulations. The Compensation Committee had two meetings in 2003. The Compensation Committee assists the Board of Directors in fulfilling its responsibilities for the oversight of:

      Our compensation policies, plans and programs are to be designed to attract and retain the best personnel to allow us to achieve our goals and maintain our competitive posture. We seek to foster an environment that rewards superior performance and aligns the interests of our employees to the long-term interests of our shareholders through equity incentives.

      The Compensation Committee adopted a charter that has been approved by the Board of Directors. The Compensation Committee charter is available on our web site: www.cray.com under Investors-Corporate Governance-Overview and Charters. Each year, the Compensation Committee reports to you on executive compensation. The Compensation Committee’s Report on Executive Compensation for 2003 is set forth below beginning on page 12.

      Corporate Governance Committee. The members of the Corporate Governance Committee are: Stephen C. Kiely, Daniel J. Evans and Daniel C. Regis. The Committee and the Board have determined that each member of the Corporate Governance Committee is “independent,” as that term is defined in Nasdaq National Market rules and regulations. The Corporate Governance Committee was established in May 2003 and held one meeting in 2003. The Corporate Governance Committee assumed the duties of the former Nominating Committee, which held one meeting in 2003 prior to its dissolution. The Corporate Governance Committee has the responsibility to:

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      The Corporate Governance Committee has adopted a charter and Corporate Governance Guidelines, both of which have been approved by the Board of Directors. The Corporate Governance Committee charter and the Corporate Governance Guidelines are available on our web site: www.cray.com under Investors-Corporate Governance-Overview and Charters.

      Executive Committee. The Executive Committee, which met or took written action in lieu of a meeting or action by the full Board, was eliminated in May 2003. Messrs. Rottsolk and Smith served on the Executive Committee until its elimination, with Mr. Smith serving as Chairman. The Executive Committee did not meet in 2003.

      Communications. The Corporate Governance Committee has established a procedure for our shareholders to communicate with the Board. Communications should be in writing, addressed to: Corporate Secretary, Cray Inc., 411 First Avenue South, Suite 600, Seattle, WA 98104-2860, and marked to the attention of the Board or any of its individual committees. Copies of all communications so addressed will be promptly forwarded to the chairman of the committee involved or, in the case of the communications addressed to the Board as a whole, to the Corporate Governance Committee.

      Director Candidates. The Corporate Governance Committee will consider candidates for director recommended by shareholders. The Board membership criteria adopted by the Board include a person’s integrity, knowledge, judgment, skills, expertise, collegiality, diversity of experience and other time commitments (including positions on other company boards) in the context of the then-current composition of the Board. The Corporate Governance Committee is responsible for assessing the appropriate balance of criteria required of Board members. Recommendations for director candidates should include the candidate’s name and qualifications and evidence that the candidate is willing to serve as one of our directors, and may be submitted in writing to: Corporate Secretary, Cray Inc., 411 First Avenue South, Suite 600, Seattle, WA 98104-2860, marked to the attention of the Corporate Governance Committee.

      In addition, our Bylaws permit shareholders to nominate directors at a shareholders’ meeting. In order to nominate a director at a shareholders’ meeting, you must notify us not fewer than 60 nor more than 90 days in advance of the meeting or, if later, by the 10th business day following the first public announcement of the meeting. In addition, the proposal must contain the information required in our Bylaws for director nominations, including:

      The Chairman of the Board, in his discretion, may determine that a proposed nomination was not made in accordance with the required procedures and, if so, disregard the nomination.

      Shareholder Proposals. In order for a shareholder proposal to be considered for inclusion in our proxy statement for the 2005 Annual Meeting, we must receive the written proposal no later than November 25, 2004. Such proposals also must comply with Securities and Exchange Commission regulations regarding the inclusion of shareholder proposals in company sponsored proxy materials.

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      In order for a shareholder proposal to be raised from the floor during the 2005 Annual Meeting, written notice of the proposal must be received by us not less than 60 nor more than 90 days prior to the meeting or, if later, by the 10th business day following the first public announcement of the meeting. The proposal must also contain the information required in our Bylaws for shareholder proposals, including:

      The Chairman of the Board, if the facts so warrant, may direct that any business was not properly brought before the meeting in accordance with our Bylaws.

      If you wish to obtain a free copy of our Bylaws, please contact Kenneth W. Johnson, Corporate Secretary, Cray Inc., 411 First Avenue South, Suite 600, Seattle, WA 98104-2860. The Bylaws are available on our web site: www.cray.com under Investors-Corporate Governance-Overview and Charters.

      Until 2003, we did not provide cash compensation to directors for serving on the Board or committees. We reimbursed the directors for travel and related expenses incurred in attending shareholder, Board and committee meetings and granted stock options. In light of the Sarbanes-Oxley Act of 2002 and subsequent regulatory rulemaking, we changed our Board compensation in May 2003 to compensate our directors as set forth below.

      Cash. Each non-employee Director receives an annual retainer of $10,000, paid quarterly, and a fee of $2,500 for each meeting of the Board attended in person or $1,000 if attended telephonically. Each committee chair receives an annual fee of $2,000, paid quarterly, and each director receives a fee of $1,000 for each committee meeting attended, whether in person or telephonically. We continue to reimburse all expenses related to participation in meetings of the shareholders, Board and committees.

      Stock Option Awards. Each non-employee director, on the date of the Annual Meeting, is granted a non-qualified option for 20,000 shares of our common stock, vesting monthly over the next twelve months and with an exercise price equal to the fair market value of our common stock on the date of the Annual Meeting. In addition, each non-employee director, upon his or her first election to the Board, is granted an option for 20,000 shares, vesting immediately, and with an exercise price equal to the fair market value of our common stock on the date of such first election.

      We do not compensate employee directors for their service on the Board.

      We encourage but do not require our directors to attend the Annual Meeting of Shareholders. We schedule a regular Board meeting for the morning before the Annual Meeting. Five of our directors attended the 2003 Annual Meeting.

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The Executive Officers

      The tables and text on pages 10 and 11 describe the salaries, bonuses and other compensation paid during the last three years, options granted and exercised in 2003, and option values as of year-end 2003 for our President and Chief Executive Officer and our next four most highly compensated executive officers.

Summary Compensation Table

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Option Grants in 2003

      No executive officer named in the Summary Compensation Table was granted a stock option in 2003.

Aggregated Option Exercises in 2003 and Values as of Year-End 2003

      The following table provides information, with respect to each of the executive officers named in the Summary Compensation Table, regarding stock options exercised by such officers during 2003 and the value of unexercised options held by them at December 31, 2003.

      We have entered into Management Continuation Agreements with certain of our employees, including our current executive officers named in the Summary Compensation Table. Pursuant to these agreements, each such officer or employee is eligible to receive, in the event that his or her employment is terminated within three years following a change of control, other than for just cause, death, disability, retirement or resignation other than for good reason, as such terms are defined in the agreement, an amount equal to two times his or her annual compensation, continuation of health benefits and group term life insurance for twenty-four months thereafter and the acceleration of vesting for all options held. If these severance payments were to constitute “excess parachute payments” for federal income tax purposes, we have agreed to pay any excise taxes due with respect to those “excess parachute payments,” and any further excise taxes and federal and state income taxes due with respect to these additional payments, so that the employee receives the same after-tax compensation the employee would have received if no excise tax were imposed.

      Under the Management Continuation Agreements, “annual compensation” means the wages, salary and incentive compensation the employee received in the calendar year immediately prior to the termination. A “change of control” includes a 50% or greater change in voting power immediately following a merger or acquisition and certain changes in the composition of the Board of Directors during a thirty-six month period not initiated by our Board of Directors.

      In October 2002, the Board adopted an Executive Severance Policy that covers our officers, including the executive officers named in the Summary Compensation Table. This policy primarily applies to terminations of employment without cause or resignations for good reason (as such terms are defined in the policy); this policy does not apply if the Management Continuation Agreements described above are applicable and does not apply to terminations due to death, disability or retirement. If applicable, this policy provides for continuation of base salary, exclusive of bonus, for varying periods. For the Chief Executive Officer, the period is twelve months plus one month for each year of service as an officer up to a maximum of fifteen months; for

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      In 1997, we loaned Mr. Loe $147,273 in connection with his exercises of stock options. Mr. Loe gave us a promissory note due in December 2004; this note bears interest at a compounded rate of 2.5% per year. On March 21, 2002, we entered into an agreement with Mr. Loe that we would forgive 50% of that loan on December 31, 2002, 25% on December 31, 2003, and the remaining 25% on December 31, 2004, if Mr. Loe continued to be employed by us on those dates. On January 1, 2003, Mr. Loe’s loan balance was $91,040. Pursuant to our agreement, we forgave 25% of his loan balance on December 31, 2003, leaving him with a balance due on the note as of that date of $47,796.

      After this loan was extended and we entered into the forgiveness agreement, the Sarbanes-Oxley Act of 2002 was enacted; this legislation prohibits such extensions of credit to executive officers and, accordingly, we will make no other such extensions of credit.

      The members of the Compensation Committee during 2003 were Stephen C. Kiely, David N. Cutler and Kenneth W. Kennedy, Jr. No member of the Compensation Committee was an officer or employee of Cray Inc. or any of our subsidiaries in 2003 or formerly. In addition, none of our executive officers served on the board of directors of any entity whose executive officers included one of our directors.

      The Compensation Committee of the Board of Directors is responsible for reviewing and approving our compensation philosophy and reviewing on a periodic basis the competitiveness of our compensation plans and benefits programs to ensure that we attract and retain highly qualified executive officers and other employees, motivate our executive officers and other employees to achieve our business objectives and align the interests of the executive officers and other employees with the long-term interests of the shareholders. The Committee is composed exclusively of independent directors who are neither our employees nor our former employees nor eligible to participate in any of our executive compensation programs other than as directors under our 2003 Stock Option Plan and the 2004 Long-Term Equity Compensation Plan, if approved by the shareholders.

      The Compensation Committee has the authority to determine the compensation of our executive officers other than the Chief Executive Officer. The Board (acting in executive session without the presence of the Chief Executive Officer) determines the compensation of the Chief Executive Officer based on the recommendation of the Committee.

      Philosophy. Our philosophy is to provide compensation policies, plans and programs designed to attract and retain the best personnel to allow us to achieve our goals and maintain our competitive posture. We seek to foster an environment that rewards superior performance and aligns the interests of our employees to the long-term interests of our shareholders through equity incentives.

      Annual Salary and Bonus Plan. The Committee determines an annual compensation plan for our executive officers, other than for the Chief Executive Officer, after soliciting the recommendations of the Chief Executive Officer. In making individual base salary decisions, the Committee considers each officer’s duties, the quality of the individual’s performance, the individual’s potential, market compensation practices, the contribution the officer has made to our overall performance, our financial status and salary levels in

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      Our management bonus plan is a material element of the annual compensation program for our executive officers and other key employees. The 2003 management bonus plan provided for bonuses as a percentage of salary based on our achieving certain specified goals regarding net operating income and, with respect to each executive officer, the officer meeting certain individual performance goals. For 2003, the Committee granted bonuses to each of our executive officers, including the executive officers named in the Summary Compensation Table, based on the level of the Company’s net operating income in 2003 and each officer meeting his or her individual performance goals. The 2004 management bonus plan is similar to the 2003 plan and is based on revenue and net operating income, other objective targets and each officer meeting certain individual performance goals.

      Equity. In determining the amount of equity compensation to be awarded to executive officers in any fiscal year, the Committee considers the current stock ownership of the officer, relevant industry experience, the impact of the officer’s contribution, the number of years each officer has been employed by us, the possibility of future promotions, the extent and frequency of prior option grants and the officer’s unvested stock option position. Options have been granted subject to four-year vesting periods to encourage the officers and key employees to remain in the employ of the Company. In 2003, no stock option grants were issued to executive officers except for one option granted in connection with the hiring of Peter J. Ungaro. In connection with considering the bonuses to be granted to officers for 2003, the Committee determined that, subject to the approval of the 2004 Long-Term Equity Compensation Plan by shareholders, an amount equal to one-third of the bonus should be paid in shares of common stock with restrictions against transfer for one year. The Committee believed the payment of both cash and restricted stock was appropriate for the officers and further aligned their interests to the long-term interests of our shareholders.

      Chief Executive Officer. The Committee recommends to the Board the compensation of Mr. Rottsolk, the Chief Executive Officer, including base salary and bonus plan. In recommending Mr. Rottsolk’s compensation, the Committee considers such multiple factors as its deems appropriate, including our performance and relative shareholder return, the value of similar incentive awards to chief executive officers at comparable companies, other relevant market data and prior awards, as well as the factors used in determining the compensation of the other executive officers. Mr. Rottsolk participates in the bonus and stock option plans on the same basis as with the other executive officers.

      Section 162(m). Section 162(m) of the Internal Revenue Code limits to $1 million per person the amount that we may deduct for compensation paid to any of our most highly compensated officers in any year. We do not expect the levels of salary and bonus paid by us to exceed this limit. Under IRS regulations, the $1 million limit on deductibility does not apply to compensation received through the exercise of stock options that meet certain requirements. It is our current policy generally to grant options that meet those requirements.

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INDEPENDENT PUBLIC ACCOUNTANTS

Information Regarding our Independent Public Accountants

      Deloitte & Touche LLP has served as our independent auditors since 1987 and audited our 2003 financial statements. Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting, and will have the opportunity to make a statement and to respond to appropriate questions. The Audit Committee has not selected a firm to serve as our auditors for 2004 yet, pending an engagement proposal from Deloitte & Touche LLP.

      The following table lists the fees for services rendered by Deloitte & Touche LLP for 2003 and 2002:

      The Audit Committee has determined that the provision by Deloitte & Touche LLP of non-audit services for us in 2003 is compatible with Deloitte & Touche LLP’s maintaining its independence.

      The Audit Committee has approved Deloitte & Touche LLP to perform the following non-audit services for us during 2004:

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      All audit, tax and other services to be performed by Deloitte & Touche LLP for us must be pre-approved by the Audit Committee. The Audit Committee reviews the description of the services and an estimate of the anticipated costs of performing those services. Services not previously approved cannot commence until such approval has been granted. Pre-approval is granted usually at regularly scheduled meetings. If unanticipated items arise between meetings of the Audit Committee, the Audit Committee has delegated approval authority to the Chairman of the Audit Committee, in which case the Chairman communicates such pre-approvals to the full Committee at its next meeting. During 2003, all services performed by Deloitte & Touche LLP were pre-approved by the Audit Committee in accordance with this policy.

Report on the 2003 Financial Statements and Independent Public Accountants by the Audit Committee

      The Audit Committee of the Board of Directors has furnished the following report:

      Our management has the responsibility for the financial statements and for their integrity and objectivity. To help fulfill this responsibility, management maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that transactions are executed in accordance with management’s authorizations and are reflected accurately in our records. The Audit Committee oversees the fulfillment by management of its responsibilities over financial controls and the preparation of the financial statements. The Audit Committee has reviewed the Company’s audited financial statements for the fiscal year ended December 31, 2003, and discussed such statements with management and the Company’s independent auditors, Deloitte & Touche LLP, including discussions concerning the quality of accounting principles, reasonableness of significant judgments and disclosures in the financial statements.

      The Audit Committee also has discussed with the Company’s independent auditors such matters relating to the performance of the audit as are required to be discussed by Statements of Auditing Standards No. 61 (Communications with Audit and Finance Committees, as amended). Additionally, the Committee has discussed with the independent auditors their independence with respect to the Company and considered whether their provision of non-audit services is compatible with maintaining that independence. In this consideration, the Committee reviewed the fees billed by the independent auditors as disclosed above. The Company has received the written disclosures and the letter from the independent auditors required by the Independence Standards Board Standard No. 1.

      In reliance on the reviews and discussions referred to above, the Committee has recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2003, for filing with the Securities and Exchange Commission.

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STOCK PERFORMANCE GRAPH

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

      The graph assumes that a shareholder invested $100 in our common stock on December 31, 1998, and that all dividends were reinvested. We have never paid cash dividends on our common stock. All return information is historical and is not necessarily indicative of future performance.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG OUR COMMON STOCK,

DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD

Proposal 1:     To Elect Two Directors

      Our Bylaws fix the number of members of our Board at eight. Eight directors, divided into three classes, presently serve on our Board of Directors for three-year terms. Five of these eight directors will continue to serve according to their previous elections. The Board has nominated Messrs. Evans and Regis for reelection to the Board, each to hold office until the Annual Meeting in 2005, or if Proposal 2 is not approved, each to hold office until the Annual Meeting in 2007.

      We know of no reason why any nominee may be unable to serve as a director. If any nominee is unable to serve, your proxy may vote for another nominee proposed by the Board, or the Board may reduce the number of directors to be elected. If any director resigns, dies or is otherwise unable to serve out his term, or the Board increases the number of directors, the Board may fill the vacancy.

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      David N. Cutler has informed us that he will retire from the Board effective at the 2004 Annual Meeting. Mr. Cutler joined our Board in 1993 and has provided invaluable assistance and guidance to us for eleven years. We thank him for his many contributions to Cray.

      The Corporate Governance Committee is in the process of reviewing candidates to replace Mr. Cutler and as possible additions to the Board. At this time, the Corporate Governance Committee has not completed its process and the Board does not have a nominee or nominees for consideration by the shareholders. The Board has the authority to appoint directors if there is a vacancy or to increase the size of the Board and add directors for terms expiring at the next Annual Meeting of Shareholders.

      Board Recommendation: The Board of Directors recommends that you vote “for” the election of all nominees for director.

     Daniel J. Evans

      Mr. Evans, 78, joined our Board in 1990. Since 1989, Mr. Evans has been Chairman of Daniel J. Evans Associates, a consulting firm. He served as United States Senator from the State of Washington from 1983 to 1989; Chairman of the Pacific Northwest Power and Conservation Planning Council from 1981 to 1983; President of the Evergreen State College in Olympia, Washington from 1977 to 1983; and for three terms as Governor of the State of Washington from 1965 to 1977. Mr. Evans is a director of Flow International Corporation, Western Wireless, Inc., Archimedes Technology Group, Costco Wholesale Corporation and the National Information Consortium, and a member of the Board of Regents of the University of Washington. Mr. Evans received his M.S. degree in civil engineering from the University of Washington.

     Daniel C. Regis

      Mr. Regis, 64, joined our Board in April 2003. He currently is Managing Director of Digital Partners, a venture capital fund specializing in Northwest emerging technology companies, which he co-founded in 2000. From 1996 to 1999, he was President of Kirlan Venture Capital, Inc., where he managed similarly focused technology funds. Prior to that, Mr. Regis spent thirty-two years with Price Waterhouse LLP, including serving as managing partner of the Seattle office and previously of the Northwest and Portland, Oregon offices. He is a director of Columbia Banking System, Inc., and Primus Knowledge Systems, Inc. He received his B.S. from Seattle University.

     Continuing Directors

      Information about each of our continuing directors is set forth below.

     Directors whose Terms Expire in 2005

          Kenneth W. Kennedy, Jr.

      Professor Kennedy, 58, joined our Board in 1989. He is the John and Ann Doerr Professor of Computational Engineering at Rice University and also is currently Director of the Center for High Performance Software at Rice University. He directed the National Science Foundation Center for Research on Parallel Computation from 1989 to January 2000. From 1997 to 1999, Professor Kennedy served as Co-Chair of the President’s Information Technology Advisory Committee and currently remains a member of that committee. He is a Fellow of the Institute of Electrical and Electronics Engineers, the Association for Computing Machinery, and the American Association for the Advancement of Science and has been a member of the National Academy of Engineering since 1990. In 1999, he was named recipient of the ACM SIGPLAN Programming Languages Achievement Award, the third time this award was given. He received his M.S. and Ph.D. degrees from New York University.

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          James E. Rottsolk

      Mr. Rottsolk, 59, is one of our co-founders and serves as Chairman, Chief Executive Officer and President. He served as our Chief Executive Officer and President from our inception in 1987 through September 2001, and was reappointed to those positions in March 2002. He has served as Chairman of the Board since December 2000. Prior to 1987, Mr. Rottsolk served as an executive officer with several high technology companies. Mr. Rottsolk received his B.A. from St. Olaf College and his A.M. and J.D. degrees from the University of Chicago.

          Stephen C. Kiely

      Mr. Kiely, 58, joined our Board in December 1999. He is Executive Chairman of Stratus Technologies Inc., headquartered in Maynard, Massachusetts. Mr. Kiely has served in his present position at Stratus Technologies since 1999 when Stratus was purchased from Ascend Communications and he served as Chief Executive Officer of Stratus Technologies from 1999 through June 2003. Mr. Kiely joined Stratus in 1994 and held various executive positions with Stratus, becoming President of the Stratus Enterprise Computer division in 1998. Prior to joining Stratus, Mr. Kiely held a number of executive positions with several information technology companies, including EON Corporation, Bull Information Systems, Prisma, Inc., Prime Computer and IBM. Mr. Kiely is a past member of the Advisory Council for the School of Engineering at Rice University, has served as a board member of the Massachusetts Technology Park Corporation and was a member of an advisory board to the President of the State University of New York at New Paltz. Mr. Kiely received his B.A. in Mathematics at Fairfield University and his M.S. in Management at the Stanford University Graduate School of Business.

          William A. Owens

      Mr. Owens, 63, joined our Board in February 2001. Mr. Owens is Chairman and Chief Executive Officer of Teledesic LLC. Previously, he was President, Chief Operating Officer and Vice-Chairman of Science Applications International Corporation (SAIC). He also served as Vice-Chairman of the Joint Chiefs of Staff; Deputy Chief of Naval Operations for Resources, Warfare Requirements and Assessments; commander of the U.S. Sixth Fleet; senior military assistant to Secretaries of Defense Frank Carlucci and Dick Cheney; and director of the Office of Program Appraisal for the Secretary of the Navy. Mr. Owens serves on the boards of Teledesic LLC, Symantec, Inc., Polycom, Inc., TIBCO Inc., British American Tobacco Industries, p.l.c., Nortel Networks Corporation, Telstra Corporation Limited, Daimler Chrysler AG, ViaSat, Inc., BIOLASE Technology, Inc., Wireless Facilities, Inc. and Metal Storm LLC. In addition, he is a director of the Carnegie Foundation and the Department of Defense’s Defense Policy Board. He is a graduate of the U.S. Naval Academy, with a bachelor’s degree in mathematics. He also holds bachelor’s and master’s degrees in politics, philosophy and economics from Oxford University and a master’s in management from George Washington University.

          Burton J. Smith

      Mr. Smith, 63, is one of our co-founders and has been our Chief Scientist and a director since early 1988. He served as Chairman from 1988 to 1999. Mr. Smith is a recognized authority on high performance computer architecture and programming languages for parallel computers. He is the principal architect of the Cray MTA^TM system and heads our Cascade project. Mr. Smith was a Fellow of the Supercomputing Research Center (now the Center for Computing Sciences), a division of the Institute for Defense Analyses, from 1985 to 1988. In 2003, he received the Seymour Cray Computing Engineering Award from the IEEE Computer Society and was elected as a member of the National Academy of Engineering. He was honored in 1990 with the Eckert-Mauchly Award given jointly by the Institute for Electrical and Electronic Engineers and the Association for Computing Machinery, and was elected a Fellow of both organizations in 1994. Mr. Smith received his S.M., E.E. and Sc.D. degrees from the Massachusetts Institute of Technology.

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      We propose to amend Article V(B) of our Restated Articles of Incorporation to eliminate the current classified Board of Directors, so that all directors will stand for election annually, beginning with the 2005 Annual Meeting. The proposed amendment replaces paragraph B of Article V in its entirety. As amended, Article V(B) of our Restated Articles would read:

      “B. Term. The terms of all directors expire at the next annual shareholders’ meeting following their election, provided that a director continues to serve until the director’s successor is elected and qualified or until there is a decrease in the number of directors.”

      Classified or staggered boards have been widely adopted and have a long history in corporate law. Proponents of classified boards assert they promote the independence of directors because directors elected for multi-year terms are less subject to outside influence. Proponents also believe classification provides continuity and stability in the management of the business and affairs of a company because a majority of directors always have prior experience as directors of the company. This continuity and long-term focus is particularly important to companies such as ours, where product and technology development is complex and long-term. Proponents further assert that classified boards may enhance shareholder value by forcing an entity seeking control of a target company to initiate arms-length discussions with the board of a target company because the entity is unable to replace the entire board in a single election.

      On the other hand, some investors view classified boards as having the effect of reducing the accountability of directors to shareholders because classified boards limit the ability of shareholders to evaluate and elect all directors on an annual basis. The election of directors is a primary means for shareholders to influence corporate governance policies and to hold management accountable for implementing those policies. In addition, opponents of classified boards assert that a staggered structure for the election of directors may discourage proxy contests in which shareholders have an opportunity to vote for a competing slate of nominees and therefore may erode shareholder value.

      The Board has given due consideration to the various arguments for and against a classified board. After this review, the Board of Directors, upon the recommendation of the Corporate Governance Committee, has decided that it is an appropriate time to propose declassifying the Board. This determination by the Board furthers its goal of ensuring that our corporate governance policies maximize management accountability to shareholders and would, if adopted, allow shareholders the opportunity each year to register their views on the performance of the full Board of Directors.

      The Board of Directors has unanimously approved the proposed amendment declassifying the Board of Directors. If approved by the shareholders, the proposed amendment will become effective upon the filing of Articles of Amendment to our Restated Articles of Incorporation with the Secretary of State of the State of Washington, which we would do promptly after the Annual Meeting.

      If the proposed amendment were approved by our shareholders, the terms for all of our directors would end at our 2005 Annual Meeting. Messrs. Kiely, Owens and Smith, who were each elected to three-year terms at the 2003 Annual Meeting, have agreed to stand for re-election at the 2005 Annual Meeting if this proposal is approved. Beginning with the 2005 Annual Meeting, all directors would be elected for one-year terms at each Annual Meeting.

      If this proposal is adopted, any director appointed by the Board as a result of the newly created directorship or to fill a vacancy on the Board of Directors would hold office until the next Annual Meeting.

      The Board of Directors has already approved amendments to our by-laws that, upon approval of this proposal, would make them consistent with the amendment to the Restated Articles of Incorporation.

      Our by-laws currently provide for eight Directors. This proposal would not change the present number of Directors and the Directors will retain the authority to change that number and to fill any vacancies or newly created directorships.

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Board Recommendation: The Board of Directors recommends a vote “for” the proposal to amend the Restated Articles of Incorporation to declassify the Board of Directors.

      We propose to amend Article II (A) of our Restated Articles of Incorporation to increase the number of authorized shares of common stock from 120,000,000 to 150,000,000 shares.

      As amended, Article II(A) of our Restated Articles of Incorporation would read:

      As of March 12, 2004, we had no shares of preferred stock issued and outstanding of an authorized 5,000,000 shares of preferred stock and approximately 73.2 million shares of common stock issued and outstanding and had reserved approximately 23.6 million shares of common stock for issuance under existing warrants, stock options and other employee benefit plans. In our acquisition agreement with OctigaBay Systems Corporation, which is expected to close before the Annual Meeting, we have agreed to issue approximately 12.7 million shares of common stock and reserve an additional 1.6 million shares of common stock for issuance pursuant to an assumed stock option plan and assumed outstanding stock options. Assuming the closing of the OctigaBay Systems Corporation acquisition and shareholder approval of the 2004 Long-Term Equity Compensation Plan, we will have an aggregate of approximately 116.6 million shares of common stock issued and reserved for issuance at the time of the Annual Meeting.

      Our preferred stock is undesignated. The Board of Directors, without shareholder approval, may issue the preferred stock with voting and conversion rights that could materially and adversely affect the voting power of the holders of common stock, and could also decrease the amount of earnings and assets available for distribution to the holders of common stock.

      The rights of additional authorized shares of common stock would be identical to shares now authorized.

      The authorization of common stock will not, in itself, have any effect on your rights as a shareholder. If the Board were to issue additional shares of common stock for other than a stock split or dividend, however, it could have a dilutive effect on our earnings per share and on your voting power in us.

      We believe that the proposed increase in the number of authorized shares of common stock is in the best interests of our shareholders. It is important for the Board to have the flexibility to act promptly to meet future business needs as they arise. Sufficient shares should be readily available to maintain our financing and capital raising flexibility, fund acquisitions and mergers, enable employee benefit plans such as the 2003 Stock Option Plan and 2004 Long-Term Equity Compensation Plan, provide for matching contributions under our 401(k) Plan, enable stock splits and dividends and for other proper business purposes. Having a limited number of shares available severely limits our flexibility and hinders our ability to raise capital, move quickly with respect to acquisition opportunities and attract employees.

      By having additional shares readily available for issuance, we will be able to act expeditiously without spending the time and incurring the expense of soliciting proxies and holding special meetings of shareholders. We have no present plans, agreements, commitments or understandings for the issuance or use of these proposed additional shares of common stock.

      The Board may issue additional shares of common stock without action on your part only if the action is permissible under Washington corporate law and the rules of the Nasdaq National Market System, on which

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      The future issuance of additional shares of common stock also could be used to block an unsolicited acquisition through the issuance of large blocks of stock to persons or entities considered by our officers and directors to be opposed to such acquisition, which might be deemed to have an anti-takeover effect (i.e., might impede the completion of a merger, tender offer or other takeover attempt). Our management and Board could use the additional shares to resist or frustrate a third-party transaction providing an above-market premium that is favored by a majority of our independent shareholders. In fact, the mere existence of such a block of authorized but unissued shares, and the Board’s ability to issue such shares without shareholder approval, might deter a bidder from seeking to acquire our shares on an unfriendly basis. We have other provisions in our restated articles of incorporation, restated bylaws and credit agreements that could make it more difficult for a third party to acquire us. For example, our articles of incorporation and bylaws provide, even assuming the classified board is eliminated, limitations on removing a director, the ability of the Board to issue preferred stock with such voting, dividend, liquidation and other terms as the Board determines, no cumulative voting for directors, special voting requirements for certain mergers and other business combinations and special procedures for calling special meetings of the shareholders, proposing matters for shareholder approval and nominating directors.

      While the authorization of additional shares of common stock alone or together with the preceding provisions may have an anti-takeover effect, the Board does not intend or view the proposed increase in authorized common stock as an anti-takeover measure, nor are we aware of any proposed transactions of this type. We have no present plans or proposals to adopt any other provisions or enter into any other arrangements that may have material anti-takeover consequences.

      Board Recommendation: The Board of Directors recommends that you vote “for” approval of the amendment to our Restated Articles of Incorporation to increase the number of authorized shares of common stock from 120,000,000 to 150,000,000 shares.

      On March 5, 2004, the Board of Directors approved the adoption of the 2004 Long-Term Equity Compensation Plan (the “2004 Plan”), subject to shareholder approval. The 2004 Plan authorizes the issuance of up to 5,500,000 shares of common stock pursuant to stock options; 4,000,000 of these shares may instead be granted as stock bonus awards and grants of restricted stock.

      The complete text of the 2004 Plan is set forth as Appendix B to this proxy statement. The following summary description is qualified in its entirety to reference to the full text of the 2004 Plan.

      We believe that the approval of the 2004 Plan is in the best interest of our shareholders. Stock options remain a key factor in attracting, rewarding and retaining employees, including officers. Stock options serve to align the interest of optionees with the long-term interests of our shareholders. Our options are granted at fair market value on the day of grant and generally vest over four years, with no vesting for the first year. Thus an optionee realizes an economic gain in connection with his or her stock options only if there is a long-term appreciation in the market price for our common stock. Having insufficient options available for grant would adversely affect our ability to attract and retain employees, officers, directors, agents and consultants.

      We are mindful of the current controversies surrounding stock options, and the proposals that would require expensing of stock options on our financial statements. If these proposals were adopted, we likely could no longer afford to grant stock options to all of our employees. In some circumstances the use of stock bonus grants and/or restricted stock grants, either alone or in combination with stock options, may provide an

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      We currently have one stock option plan with options available for grant: the 2003 Stock Option Plan covering a total of 4,000,000 shares of common stock. Under the 2003 Stock Option Plan, options covering 1,475,785 shares remain available for grant as of March 12, 2004. If the acquisition of OctigaBay Systems Corporation closes, we will assume its stock option plan for Canadian employees and will issue our common stock upon exercise of options granted under that plan. That plan, on a post-acquisition basis, authorizes a total of 1,597,009 shares of common stock, of which options covering 408,253 shares will have been issued, leaving options covering 856,297 shares available for grant for Canadian employees.

      Purposes of the Plan. The purposes of the 2004 Plan are to provide a means for us to attract, reward and retain the services and advice of our employees, officers, directors, agents and consultants, and to provide them with added incentives by encouraging ownership of our common stock.

      Maximum Number of Shares. The 2004 Plan provides that up to 5,500,000 shares of common stock may be issued pursuant to the Plan with up to 4,000,000 of these shares available for grant as stock bonuses and restricted stock awards. These numbers would be adjusted for changes in our capital structure, such as a stock split. If any option or award expires or is surrendered, cancelled or terminated for any reason without having been exercised or awarded in full, the unpurchased or unearned shares subject to such option or award shall again be available for grant under the 2004 Plan.

      Types of Options. The options granted may be either incentive stock options (“ISOs”) or nonqualified stock options, although ISOs may be granted only to employees. The Board determines the term of each option and when options are exercisable. The Board’s practice has been to have options become exercisable over a four-year period, with 25% becoming exercisable one year after grant and then ratably monthly over the next 36 months. Options granted to directors generally vest over a twelve-month period, ratably per month. Options expire no later than ten years from the date of grant, although the Board may grant options that expire earlier.

      Stock Awards. The Board may award up to 4,000,000 of the shares of common stock as stock bonuses and restricted stock awards. The Board may determine the number of shares to be awarded, the period of time for the award, and the terms, conditions (including performance conditions) and restrictions applicable to each award. If less than 4,000,000 shares are granted as stock bonuses and restricted stock awards, the remaining shares may be granted as stock options.

      Eligible Participants. Eligible participants include current or future employees (including employees who are directors), officers, independent directors, agents and consultants. The Board has the authority to select the persons to whom awards are given.

      Our practice is to grant options to all new employees upon employment and to grant additional options to all employees as part of their annual reviews. We had approximately 910 employees as of March 1, 2004.

      If the 2004 Plan is approved by the shareholders, our officers will receive stock bonuses, as part of their 2003 compensation, including the officers named in the Summary Compensation table, as follows:

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      The stock bonuses would be restricted against transfer for 12 months following the 2004 Annual Meeting. Continued employment with us is not a condition to retaining the stock bonus, and there are no conditions that would cause a forfeiture of the stock bonus. If we were to pay dividends on our common stock, the holders of these shares would receive such dividends. We have not paid any dividends on our common stock, and have no present plans to do so.

      Exercise Prices. The Board determines the exercise price of options. The exercise price for both incentive stock options (“ISOs”) and nonqualified options may not be less than 100% of the fair market value on the date of grant. For any grant of ISOs to employees who own more than 10% of our voting stock, the exercise price must be not less than 110% of the fair market value on the date of grant and the term of the ISO cannot exceed five years.

      Maximum Size of Grants. No one individual may receive options and awards aggregating more than 1,000,000 shares in any one year.

      Transferability. Recent changes to the Internal Revenue Code and SEC rules now permit nonqualified options to be transferable. While generally such options remain nontransferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order, the Board, in its discretion and subject to such terms and conditions as it shall specify, may permit the transfer of a nonqualified option to an optionee’s family members or to one or more trusts or partnerships established for the benefit of such family members. ISOs remain nontransferable other than by will or the laws of descent and distribution. The Board also may impose restrictions on the transferability of shares of stock received pursuant to other types of awards.

      Termination of Service. Unless otherwise determined by the Board or specified in a particular option agreement, if an optionee’s employment or service with us terminates, other than for cause, death or disability, the optionee may exercise the portion of his or her option exercisable at the time of termination for a period of three months after termination, or, if earlier, until the option expires. If the optionee is terminated for “cause” or “resigns in lieu of dismissal” (as such terms are defined in the Plan), the option is deemed to have terminated at the time of the first act which led to such termination. If an optionee dies while employed by or providing services to us, or an optionee’s employment or other relationship with us terminates due to permanent and total disability, the optionee or his or her successor has 12 months from such event to exercise the option (including any unvested portion), or, if earlier, until the option expires. The Board has the authority to extend those three-month and 12-month periods, but not beyond the expiration date of any option, and to increase the portion of an option that is exercisable.

      Foreign Qualified Grants. The Board may adopt such supplements to the 2004 Plan as may be necessary to comply with the applicable laws of foreign jurisdictions and to afford participants favorable treatment under such laws, provided that no award shall be granted under any such supplement with terms that are more beneficial to the participants than the terms permitted under the 2004 Plan.

      Change in Control Provisions. In order to maintain the rights of participants in the event of a merger, consolidation or plan of exchange, other than in which the holders of our voting securities hold at least 50% of the voting securities of the surviving corporation or its parent corporation, or a sale of all or substantially all of the our assets, or our liquidation or dissolution, then, unless the existing options and restrictions on awards are continued or assumed by the successor entity, with appropriate adjustments, then the 2004 Plan and existing options and restrictions on awards shall terminate upon the effective date of the transaction. In such event, each optionee would have the opportunity to exercise his or her options in full, including any portion not then vested, and the restrictions and conditions to outstanding stock awards would lapse, all prior to the effective date of the transaction.

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      Term of the Plan and Amendments. Unless sooner terminated by the Board, the 2004 Plan will terminate ten years from the date of its adoption by the Board. The Board has the power to suspend or terminate the 2004 Plan at any time. The Board is authorized to amend the 2004 Plan, except that shareholder approval is required for any amendment that would:

      The Board, in its discretion, may include further provisions and limitations in any option agreement as it deems equitable and in our best interests. The Board, subject to the terms of the 2004 Plan and applicable law, may also amend outstanding options and awards, except that no amendment may be made which impairs or diminishes the rights of an option or award holder without such holder’s consent. The Board expressly does not have the right to reduce the exercise price of outstanding options.

      Stock Options. Under U.S. federal tax laws, the grant of a stock option will not result in taxable income at the time of the grant for us or the optionee. The optionee will have no taxable income upon exercising an ISO (except that the alternative minimum tax may apply), and we will receive no deduction when an ISO is exercised. Upon exercising a nonqualified stock option, the optionee will recognize ordinary income in the amount by which the fair market value of the common stock at the time of exercise exceeds the exercise price; we will be entitled to a deduction for the same amount. Such income is subject to withholding tax as “wages.” We have the right to withhold such tax in the form of cash or shares. Currently withholding and employment taxes do not apply to the exercise of an ISO or the disposition of shares acquired upon the exercise of an ISO. The Treasury Department and the Internal Revenue Service are considering whether to apply such taxes to such exercises and dispositions. Future changes in or clarifications of the tax laws may cause us to conclude that such taxes are required.

      The tax treatment of an optionee for a disposition of shares acquired through the exercise of an option is dependent upon the length of time the shares have been held and on whether such shares were acquired by exercising an ISO or a nonqualified stock option. Generally upon the sale of shares obtained by exercising a nonqualified option, the optionee will treat any gain or loss recognized on the sale, calculated as the difference between the amount realized on the sale and the market value of our common stock on the exercise, as a capital gain or loss. If an employee exercises an ISO and holds the shares for two years from the date of grant and one year after exercise, then the optionee will recognize long-term capital gain or loss equal to the difference between the sale price and the option exercise price. Shares obtained by an exercise of an ISO that are sold without satisfying these holding periods will be treated as shares received from the exercise of a nonqualified option.

      Generally, there will be no tax consequence to us in connection with the disposition of shares acquired under an option except that we may be entitled to a deduction in the case of a disposition of shares acquired upon exercise of an ISO before the applicable ISO holding periods have been satisfied.

      Stock Bonuses and Other Grants of Stock. An employee who receives a stock bonus or a grant of stock in connection with the performance of services generally will realize taxable income at the time of receipt. An employee will not recognize income at the time of receipt, however, if the shares are subject to a substantial risk of forfeiture for purposes of Section 83 of the Internal Revenue Code, unless the employee elects under Section 83(b) of the Internal Revenue Code within 30 days after the original transfer to recognize income at the time of the original transfer. Restrictions on transferability, by themselves, do not constitute a substantial risk of forfeiture for Section 83 purposes. If the shares are subject to a substantial risk of forfeiture at the time of receipt and the employee has not made a Section 83(b) election within 30 days after the original transfer, the employee will recognize taxable income in the year the substantial risk of forfeiture lapses. We generally will be entitled to a tax deduction equal to the amount includable as income by the employee at the same time or times as the employee recognizes income with respect to the shares. Such income is subject to withholding

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      Section 162(m) of the Internal Revenue Code limits to $1 million per person the amount we may deduct for compensation paid to certain officers and certain of our most highly compensated employees. Compensation received through the exercise of stock options is not subject to this $1 million limit if the option and plan meet certain requirements, including options granted with an exercise price at not less than fair market value. Our policy is to grant options meeting the requirements of Section 162(m) and applicable regulations.

      Stock Price Information. The last sales price of our common stock as reported on the Nasdaq National Market System on March 12, 2004, was $6.80 per share.

      Equity Compensation Plan Information. The following table provides information as of December 31, 2003, with respect to compensation plans under which shares of our common stock are authorized for issuance, separated into two categories: plans previously approved by our shareholders and plans not previously approved by our shareholders.

Board Recommendation: The Board of Directors recommends that you vote “for” the approval of the 2004 Long-Term Equity Compensation Plan.

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OTHER BUSINESS

      The Board knows of no other matters to be brought before the Annual Meeting of Shareholders. If, however, other matters are properly presented at the meeting, the individuals designated on the proxy card will vote your shares according to their judgment on those matters.

      Our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, including financial statements and schedules, forms a part of our 2003 Annual Report that was mailed to shareholders with this Proxy Statement. The Annual Report is available on our web site: www.cray.com under Investors — SEC Filings. Additional copies of the 2003 Annual Report on Form 10-K may be obtained without charge by writing to Kenneth W. Johnson, Corporate Secretary, Cray Inc., 411 First Avenue South, Suite 600, Seattle, WA 98104-2860.

	By order of the Board of Directors,
	KENNETH W. JOHNSON
	Corporate Secretary

Seattle, Washington

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Appendix A

CRAY INC.

AUDIT COMMITTEE

CHARTER

      I.     Purpose

      The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of:

      The Committee shall provide an open avenue of communication among the independent auditors, the financial and senior management of the Company and the Board of Directors.

      The Committee does not prepare financial statements or perform audits, and its members are not auditors or certifiers of the Company’s financial statements. Management and the independent auditors are responsible for conducting the audits and determining that the Company’s financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable laws, rules and regulations.

      II.     Composition

      The Committee shall consist of at least three directors, each of whom shall be an independent director, shall be free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee, and shall have the necessary understanding of financial statements and financial sophistication required under applicable laws, rules and regulations, including the listing standards of the Nasdaq National Market System. The Committee shall have at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. Committee members may not receive any consulting, advisory or other compensation from the Company except for Board and committee services.

      The members of the Committee shall be appointed by the Board at the annual meeting of the Board. Unless a Chair is designated by the Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership. Members may be removed by the Board at any time.

      III.     Responsibilities

      The Committee shall:

      Independent Auditor Oversight

      1.     Be directly and solely responsible for appointing, determining the compensation payable to, overseeing, terminating and replacing any independent auditor engaged by the Company for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. Each independent auditor shall report directly to the Committee. The Committee shall instruct the independent

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      2.     Meet with the independent auditor prior to the audit and discuss the planning and staffing of the audit.

      3.     Approve in advance the engagement of the independent auditor for all audit services and all non-audit services and approve the fees and other terms of any such engagement. The Committee may delegate authority to its Chair to grant pre-approvals of permitted non-audit services, provided that any such pre-approvals are to be presented to the full Committee at its next meeting.

      4.     Evaluate annually the qualifications, performance and independence of the independent auditor, including reviewing permissible non-audit services, receive and review the formal written statement from the auditors consistent with Independence Standards Board Standard No. 1, and discuss with the auditor any disclosed relationships or services that may affect the objectivity and independence of the auditor.

      5.     Review with management the potential hiring of employees or former employees of the independent auditor, taking into account the impact of such policies on auditor independence.

      6.     Review with the independent auditor all material written communications between the auditor and management and the conduct of each audit, including any difficulties, substantial delays, management’s cooperation, communications with the auditor’s national office and the quality of the Company’s accounting principles, processes and judgments.

      Financial Information Oversight

      1.     Review and discuss with management and the independent auditor:

      2.     Review in advance and approve all filings with the SEC containing (or incorporating by reference) the Company’s financial statements, including the Quarterly Reports on Form 10-Q and the Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in such filings.

      3.     Oversee the resolution of any disagreements between management and the auditors regarding financial reporting.

      4.     Recommend to the Board whether the audited financial statements should be included in the Company’s Annual Report on Form 10-K.

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      Controls Oversight

      1.     Review with the auditor and management the integrity of the Company’s financial reporting processes (internal and external) and the internal control structure, including disclosure controls.

      2.     Consider whether any changes to the internal controls or disclosure controls processes and procedures are appropriate in light of management’s assessment and the independent auditor’s report.

      3.     Review the internal audit scope, audit plans and relevant process, and the results of internal audits, including the auditor’s attestation report on management’s assessment of internal control over financial reporting.

      Legal Compliance and Code of Business Conduct

      1.     Review and approve all related-party transactions after reviewing each such transaction for potential conflicts of interests and improprieties.

      2.     Establish procedures for receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls and auditing matters, and the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

      3.     Develop and recommend to the Board a Code of Business Conduct for the Company’s directors, officers and employees that complies with all applicable rules and regulations. The Committee annually will review the Code and recommend any proposed changes to the Board for approval. The Committee will monitor the reporting procedures described in the Code.

      4.     Review management’s monitoring of compliance with the Foreign Corrupt Practices Act.

      5.     Review with the Company’s legal counsel legal compliance matters and any legal matter that could have a significant impact on the Company’s financial statements.

      Other Matters

      1.     Review the process by which risk assessment and management is handled and major financial risk exposure is monitored and controlled.

      2.     Discuss with management the Company’s practices pertaining to foreign exchange, investments and derivatives.

      3.     Prepare the Committee’s report required to be included in the Company’s annual proxy statement.

      4.     Regularly report to the Board on the Committee’s activities, recommendations and conclusions.

      5.     Annually review its own performance and this Charter and recommend to the Board any proposed changes to this Charter or to the Committee.

      The Committee is authorized to form and delegate authority to subcommittees as appropriate. The Committee may delegate such authority to one or more of its members as appropriate.

      The Committee shall perform such other functions and activities as required by law or the Company’s bylaws or assigned to it by the Board of Directors.

      IV.     Resources and Authority; Company’s Responsibilities

      The Committee shall have the resources and authority necessary to discharge its duties and responsibilities, including the authority to obtain advice and assistance from internal or external accounting, legal and other advisors.

      The Committee may request any officer or employee of the Company or the Company’s outside counsel or independent auditor to attend a Committee meeting or to meet with any members of, or consultants to, the Committee. The Committee has the power to conduct or authorize investigations into any matters with the Committee’s scope of responsibilities.

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      The Company shall provide the Committee with sufficient funding to the extent that the Committee deems necessary or appropriate to exercise its authority and responsibilities, including compensation for the independent auditor and any accounting, legal or other advisors to the Committee and for other ordinary administrative expenses that the Committee determines are necessary or appropriate to carry out its duties. No Board approval shall be required to authorize such funding.

      The Company is responsible for providing the Committee with educational resources related to accounting principles and procedures, current accounting topics pertinent to the Company and other material as may be requested by the Committee. The Company will assist the Committee in maintaining appropriate financial literacy.

      V.     Meetings

      The Committee shall meet at least quarterly and more often as necessary to enable it to fulfill its responsibilities and duties. The Committee Chair (or his or her designee) shall prepare and/or approve an agenda in advance of each meeting. The Committee shall meet privately in executive session at least quarterly with management, the independent auditors and as a committee to discuss any matters that the Committee or any of these groups believe should be discussed.

      The Committee shall report its actions to the Board and keep written minutes of its meetings, which shall be maintained with the books and records of the Company.

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Appendix B

CRAY INC.

2004 LONG-TERM EQUITY COMPENSATION PLAN

Table of Contents

TABLE OF CONTENTS

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