APPLICATIONS

Cray Inc. announced financial results for the first quarter ended March 31, 2006. Net loss for the quarter improved significantly to ($5.3 million) or ($0.06) per share compared to ($21.0 million) or ($0.24) in the first quarter of 2005. On a sequential basis, net loss improved by over 40 percent, down from ($9.2 million) or ($0.10) per share in the fourth quarter of 2005. Total revenue for the first quarter of 2006 was $48.5 million compared to $37.6 million in the same period of the prior year. For comparison, total revenue for the fourth quarter 2005 was approximately $65 million. The Company reported total gross margin of 29.2 percent for the first quarter of 2006 compared to 9.9 percent in the prior year period and 24.4 percent in the fourth quarter of 2005. Product margin improved, both year-over-year and sequentially, to 22.2 percent in the first quarter of 2006 compared to (0.2) percent in the same period of the prior year and 17.9 percent in the fourth quarter of 2005. Service gross margin for the first quarter of 2006 was 46.0 percent compared to 33.1 percent in the first quarter of 2005 and 50.8 percent in the fourth quarter of 2005. Operating expenses in the first quarter, excluding restructuring, severance and impairment, were $17.8 million, down year-over-year from $23.9 million in the first quarter of 2005, and slightly lower on a sequential basis compared to $18.3 million in the fourth quarter of 2005. A contract delay associated with a co-funded research and development project negatively affected first quarter 2006 operating expense by $0.6 million; the Company still anticipates that the contract will be signed within the next few months. Included in the reported loss from operations of ($4.4 million) for the first quarter of 2006 was $0.7 million for restructuring and severance expense, $1.0 million related to the 2004 restatement and the securities litigation defense, and non-cash items of $0.5 million related to stock compensation and $4.6 million for depreciation and amortization. Cash and short-term investments as of March 31, 2006 increased for the third straight quarter to $69.9 million, up from $46.0 million reported in the fourth quarter of 2005. This was driven by a sharp reduction in accounts receivable, which declined from $55.1 million as of December 31, 2005 to $30.3 million as of March 31, 2006. Inventory also decreased sequentially to $60.1 million, which includes $38.5 million of inventory at customer sites, at the end of the first quarter, down from $67.7 million at the prior quarter-end. To date, the Company has not drawn upon the credit facility put in place in the second quarter of 2005. "We are quite pleased with the progress we have made over the past three quarters," said Peter Ungaro, President and CEO of Cray. "In a relatively short period of time, we have significantly improved the bottom line and balance sheet by focusing efforts on key initiatives around improved efficiency and execution. At the same time, we have refined our product roadmap to address near and longer-term customer demand around our Adaptive Supercomputing vision; our expectation is that these efforts will be well received by the market. Our goal is to leverage these efforts and ultimately drive both profitability and shareholder value," Ungaro stated. Added Ungaro, "While we are executing well to our plan, the first quarter was light in terms of bookings, primarily due to procurement timing issues. That said, I am very excited about the size and quality of our sales pipeline and I believe we are very well positioned in a number of large opportunities, both domestically and internationally." Outlook Consistent with previous guidance, Cray anticipates annual revenue for 2006 will be higher than 2005 levels, likely growing between 5 and 15 percent. The Company expects that the second half of 2006 will be stronger than the first half, with the potential for 60 percent of product revenue being recognized in the fourth quarter. The Company expects revenue in the second quarter, and possibly third quarter, to be down significantly compared to the first quarter and expects to report a net loss for these periods. Operating expenses, excluding any restructuring costs, should be down slightly in the second quarter and increase modestly in the second half, with a heavy weighting to the fourth quarter due primarily to higher anticipated revenue. The Company expects to use cash over the remainder of the year, but does not expect to borrow under its credit facility. Recent Highlights -- In March, Cray announced its Adaptive Supercomputing vision in which a new supercomputing platform integrates not one but multiple processing technologies into a single, highly-scalable system that can adapt to the unique needs of each application, providing superior performance and enhanced user productivity. -- The United Kingdom's AWE plc awarded Cray with a $35 million contract, including $9 million of future maintenance, to build one of the world's most powerful supercomputers. When completed, the Cray XT3™ system will have a peak performance of over 40 teraflops (trillions of calculations per second). -- Major acceptances in the first quarter included a large Cray XT3 system at the Engineer Research and Development Center for the U.S. Army Corp of Engineers, and large Cray XD1™ systems at the Naval Research Laboratory and Rice University. -- Cray added several new customers in the Asia Pacific region. In Japan, these included Toyota Auto Body, Sony Information Technologies Laboratories, Japan Science and Technology Agency; in India, Cray's partner, Hinditron Cray Supercomputers (India) Private Limited, secured orders with India's National Centre for Medium Range Weather Forecasting and India's Institute for Plasma Research; and in Australia, the University of Western Australia installed a Cray XT3 system. -- Cray reported that all material weaknesses reported in its 2004 Annual Report have been remediated and that the Company's disclosure controls and procedures and its internal control over financial reporting were effective as of December 31, 2005; the Company's independent registered public accounting firm rendered an unqualified opinion on both management's assessment and the effectiveness of internal control over financial reporting. -- Cray recently announced that Judge Thomas S. Zilly of the U.S. District Court for the Western District of Washington dismissed both the consolidated class action litigation filed against the Company and certain of the Company's present and former officers and directors, and the consolidated derivative litigation filed against the Company's present and former officers and directors, subject to the right of the plaintiffs to file amended complaints.