APPLICATIONS

Cray today announced that the Company's management, its audit committee and its auditors are reviewing an issue, identified by management, to determine if revenue recognized in 2004 under one of the Company's product development contracts was appropriately recorded. As a consequence, the Company has delayed filing its 2005 Form 10-K until this review is completed. Although no resolution has been reached yet, the issue currently identified could reduce previously reported 2004 revenue and increase previously reported loss from operations and net loss by up to $3.3 million. There is no impact on the Company's cash or short-term investment position during 2004 or 2005. The identified issue represents approximately 2.2% of the Company's 2004 revenue, 2.3% of its 2004 loss from operations and 1.6% of its 2004 net loss and net loss per share. The issue does not affect the Company's financial results for any period prior to 2004. As currently understood, if an adjustment were required in 2004, the issue would not affect 2005 operating results. The Company will file a Form 12b-25 with the Securities and Exchange Commission to extend the filing date for its 2005 Form 10-K to March 31, 2006. Cray also reported preliminary financial highlights for the fourth quarter and full-year ended December 31, 2005. On a preliminary basis, total revenue for the fourth quarter 2005 was approximately $65 million, with a net loss for the quarter of about ($9 million) or ($0.10) per share. For the year ended December 31, 2005, the Company reported revenue of approximately $201 million and a net loss of about ($64 million) or ($0.73) per share. Financial results for the fourth quarter included the following: a $4.9 million write-down for impairment of core technology, $2 million for restructuring and severance, partially off-set by a $2 million income tax benefit. Additionally, a contract delay associated with a co-funded research and development project negatively affected the quarter by about $2 million. The Company anticipates that the contract will be signed later this year. Financial results for the fourth quarter also include just over $5 million of expense for depreciation, amortization, and non-cash stock compensation expense. Operating expenses in the fourth quarter, excluding restructuring, severance and impairment, were about $18 million compared to $16 million in the third quarter of 2005 and $26 million in the second quarter of 2005. Fourth quarter operating expenses were higher sequentially primarily due to the research and development contract delay and the return to full employee pay following the temporary pay reductions instituted during the second half of 2005. Gross margin for the fourth quarter improved to just over 24 percent compared to 18 percent in the previous quarter. Product margin improvements were driven primarily by increased manufacturing efficiencies and product mix, with the Cray XT3 making up over half of fourth quarter product revenue. Service margin improvements were driven primarily by a combination of expense reduction and a higher than usual mix of professional services. Cash and short-term investments as of December 31, 2005 were approximately $46 million, up sharply from $23 million reported in the third quarter of 2005. Accounts receivable, however, remained flat with the third quarter at $56 million. Inventory decreased sequentially to about $68 million from $95 million at the end of the third quarter due to product acceptances. To date, the Company has not drawn upon the credit facility put in place in the second quarter of 2005. Net product bookings for the fourth quarter, though slightly below total product shipments, were quite strong, buoyed by a large order with the United Kingdom's AWE plc. The Company does not expect to recognize revenue from this contract until late 2006. "Nine months ago we identified and began to act on the key financial and operating priorities we believed necessary to turn the Company around -- during the second half of the year, we began to see positive results," said Peter Ungaro, President and CEO of Cray. "We clearly improved operating results across our key financial measures, while at the same time, securing the majority of outstanding customer acceptances and increasing Cray's market share on a worldwide basis. In 2006, we plan to further advance the Company with continued focus on execution, sales growth and profitability. Though we certainly face many challenges, with the recently announced international wins and a strong outlook for domestic spending, we are off to a strong start."