Company Expects Strong Second Half Revenue -- Cray announced financial results for the second quarter ended June 30, 2006. Total revenue for the quarter was $38.5 million compared to $53.4 million in the same period of the prior year. Net loss for the quarter improved year-over-year to ($7.2 million) or ($0.32) per share compared to ($23.8 million) or ($1.08) per share in the second quarter of 2005. Cray reported total gross margin of 32.5 percent for the second quarter of 2006, a significant improvement compared to 8.8 percent in the prior year period. Product margin, which improved to 26.6 percent, was the principal driver. Service gross margin of 43.0 percent for the quarter was in line with the prior year. Research and development and selling, general and administrative expenses in the second quarter were 35 percent lower than a year ago at $16.7 million compared to $25.6 million in the second quarter of 2005. Second quarter loss from operations decreased 79% to ($4.7 million) compared to ($22.9) million in the prior year period. Included in the second quarter 2006 loss from operations was $0.5 million for restructuring and severance expense, and non-cash items of $0.5 million related to stock compensation and $4.1 million for depreciation and amortization. For the first half of 2006, Cray reported total revenue of $87.0 million compared to $91.1 million in the prior year. On slightly lower revenue, net loss improved 72% year-over-year to ($12.5 million) in the first half of 2006 compared to ($44.9 million) in the first half of 2005. Net loss for the second quarter and the first half of 2006 was adversely affected by a $1.6 million loss on a foreign currency cash flow hedge associated with a product sale -- this loss was included as other expense. The Company expects the impact of this foreign currency loss will be recovered when the revenue on the related product sale is recognized. Cash and cash equivalents as of June 30, 2006 were $43.4 million, compared to $69.9 million reported in the first quarter and $46.0 million as of December 31, 2005. Second quarter cash usage was driven primarily by an increase in inventory to $78.6 million from $60.1 million at the end of the first quarter, and recoverable value added tax payments associated with a large international product delivery. Included in inventory as of June 30, 2006 was $54.0 million of inventory at customer sites, up from $38.5 million at the end of the prior quarter. To date, the Company has not drawn upon the credit facility established in the second quarter of 2005. "One year ago we began a major turnaround effort and we are pleased with our progress to date and the momentum we have in the market," said Peter Ungaro, president and CEO of Cray. "On the strength of our second quarter bookings, gross margin improvements and reduced operating expenses, we are on track to improve our 2006 results from top to bottom. The second quarter brought us one of the biggest wins in supercomputing history in the form of a $200 million multi-year contract with the Department of Energy's Oak Ridge National Laboratory to deliver a petaflops (1,000 trillion floating point operations per second) supercomputer -- the first petaflops supercomputer contract signed worldwide. We followed this up by announcing that we are in negotiations with the UK's Engineering and Physical Sciences Research Council to provide the supercomputer for their future academic and scientific research." Ungaro added, "Though we are pleased with the improved results to date, we are not done yet and remain focused on key initiatives around customer acceptances and execution. Our longer-term goals continue to be achieving supercomputing market leadership and sustained profitability -- we believe by accomplishing these goals, improved shareholder value will result." Outlook Cray continues to anticipate annual revenue for 2006 will be higher than 2005 levels. Due to the size of a few large orders and the difficulty in predicting the timing of customer acceptances, there remains a large range of potential revenue results in 2006, ranging from modest to potentially 20 percent growth. The Company expects that the second half of 2006 will be stronger than the first half, with a possibility for 60 percent of 2006 product revenue being recognized in the fourth quarter. Operating expenses will increase in the second half of the year primarily due to higher research and development expenses associated with the Cascade program and sales and marketing costs associated with higher anticipated revenue. The Company is likely to use cash in the second half of the year, largely to support working capital requirements, but does not expect to borrow under its credit facility. In the second quarter of 2006, Cray submitted a proposal to participate in the third phase of the Defense Advanced Research Projects Agency (DARPA) High Productivity Computing Systems (HPCS) initiative. Phase III participants may receive up to $250 million of research and development co-funding through 2010 with the goal of enabling a breakthrough in the capability of the next generation of supercomputers, providing for sustained petaflops levels of performance on real applications and dramatically improving user productivity. The outcome and timing of this award will affect Cray's operating results in the second half of 2006, specifically in the form of increased research and development expense associated with the Cascade program -- third quarter research and development expense could now be double second quarter levels, with fourth quarter levels dependent upon the status of the award. The Company expects the outcome to be announced within the next few months and can give no assurance as to whether it will participate in Phase III of the DARPA HPCS program. Recent Highlights -- In June, Cray announced a $200 million multi-year contract with the Department of Energy's Oak Ridge National Laboratory (ORNL) to deliver the world's largest supercomputer. Initial deliveries are scheduled in 2006, with a planned upgrade in late 2007 or early 2008, culminating in a petaflops system to be installed in late 2008. The ORNL system will be based on current and next generation Cray XT3 supercomputers and will utilize current and future versions of the AMD Opteron™ processor. -- In June, Cray announced that the UK's Engineering and Physical Sciences Research Council selected Cray as the preferred bidder to provide the computing hardware for the Council's next generation national high performance computing service for the UK academic community. This multi- phase project is expected to operate for up to six years and to have an initial theoretical peak capability of over 50 teraflops (trillion floating point operations per second), with customer options for additional capability in the future. Contract negotiations are ongoing and are not expected to be complete until late 2006. -- In May, Cray announced an order from the Swiss National Computing Lab to increase the size of their Cray XT3 supercomputer to more than 8.6 teraflops. Cray also announced that a Cray XT3 supercomputer shattered the previous performance mark on the widely used Himeno benchmark test measuring computational fluid analysis capabilities. -- In June, Cray announced that the Board of Directors elected William C. Blake to the Board. Blake is a 25-year veteran of the High Performance Computing industry and currently serves as Senior Vice President, Product Development of Netezza Corporation, which develops, markets and sells data warehouse appliances.