APPLICATIONS

Cray announced financial results for the third quarter and nine months ended September 30, 2005. Total revenue for the third quarter 2005 was $44.7 million compared to $45.9 million in the same period last year. Net loss for the third quarter 2005 was ($10.3) million, or ($0.12) per share, versus a net loss of ($111.0) million, or ($1.27) per share reported in the third quarter of 2004. Financial results for the comparable quarter last year were adversely affected by a number of unusual charges, the most significant related to recognition of a valuation allowance against a deferred tax asset of ($69.8) million. Third quarter 2005 operating costs for research and development, sales and marketing and general and administrative expenses declined substantially to $15.9 million from $27.0 million last year, and $25.6 million reported in the second quarter 2005. The 38 percent decrease in expenses from the second quarter of 2005 benefited from increased government co-funding, workforce reductions and temporary pay reductions implemented in June 2005. Product gross margin in the third quarter 2005 was 13 percent and included the negative impact of inventory adjustments and technology amortization of $1.1 million. Service margin during the third quarter 2005 was 34 percent. Included in the loss from operations in the third quarter 2005 were expenses of $4.9 million for depreciation and amortization, $0.8 million for non-cash stock compensation and $1.2 million for restructuring and severance. Cash and short-term investments as of September 30, 2005 increased to approximately $22.7 million, much higher than the $8.5 million reported at the end of the second quarter 2005. To date, the Company has not drawn upon the credit facility put in place in the second quarter. Inventory decreased sequentially to $95.5 million from $106.6 million at the end of the second quarter. Equally important, finished goods including inventory located at customer sites was $73.7 million, up from $58.8 million at the end of the second quarter. "We are pleased to see that the initiatives we launched in the prior quarter are beginning to produce results. We made considerable progress during the quarter to reduce expenses, narrow Cray's operating loss and strengthen the balance sheet," commented Peter Ungaro, Chief Executive Officer. "We also received a number of important Cray X1E and Cray XD1 acceptances and we continue to make headway on the remaining large Cray XT3 installations. For example, we recently received an acceptance for one of our largest Cray XT3 systems located at the Pittsburgh Supercomputing Center," he said. "We still have a lot of work to do to improve Cray's operating and financial results, but the progress we made in the third quarter gives us confidence that we are on the right course." For the nine month period ended September 30, 2005, Cray reported total revenue of $135.8 million compared to $109.8 million reported in the first nine months of 2004. Net loss for the first nine months of 2005 was ($55.1) million, or ($0.62) cents per share. Net loss for the comparable nine month period in 2004 was ($169.3) million, or a loss of ($2.06) per share. New product bookings during the third quarter were below second quarter bookings as well as third quarter revenues. Bookings were adversely affected by seasonal government funding cycles, but total product backlog remains substantial. Recent Highlights -- In August, Cray announced the appointment of Peter J. Ungaro as Chief Executive Officer. -- On November 2nd, Cray appointed industry veteran Jan Silverman as Senior Vice President, Corporate Strategy and Business Development. -- Cray made considerable progress with the Sandia Red Storm project and achieved a series of critical milestones. The Company collected $8.8 million in milestone payments and clarified the path to acceptance. Additionally, Sandia ordered a separate four-cabinet Cray XT3 system. -- Last week Cray received acceptance on one of its largest Cray XT3 installations, located at the Pittsburgh Supercomputing Center. This system, known as "Big Ben," is currently running a number of important scientific applications on more than 2,000 processors. -- Oak Ridge National Laboratory (ORNL) accepted a Cray X1E system with 1,024 processors, the largest Cray X1E accepted to date, with a peak performance of over 18 teraflops. Scientists are using the ORNL system for research in five different "grand challenge" areas including combustion simulation and plasma energy research. -- In the third quarter, the Maui High Performance Computer Center accepted the largest Cray XD1 system to date. Additionally, the Cray XD1 system had its best ever quarter for orders, including announced orders for the largest Cray XD1 systems yet, one for the Naval Research Laboratory and another for Rice University. Cray also announced partnerships with a number of software companies to assist customers in taking advantage of the applications acceleration features of the Cray XD1 system. -- Cray announced in October that it has launched the Earth System Research Center (ESRC), a cooperative venture between Cray and the Korea Meteorological Administration. The ESRC is being established to advance the science of earth-system modeling over the East-Asia Pacific region. Outlook Cray reaffirms guidance that operating results in the second half of 2005 should be better than results in the first half of the year. Cray anticipates that fourth quarter results are likely to show improvement over third quarter and that the Company could achieve profitability from operations in the fourth quarter 2005. This outlook assumes that Cray secures expected key outstanding customer acceptances and new research and development contracts. Based on current outlook, total annual revenue for 2005 could be in the range of $195 million. The Company expects to have available cash balances through year-end without utilizing its credit facility. "While it's still early to discuss the outlook for 2006, we are participating in a number of major HPC procurements that could result in orders for Cray systems over the next twelve months," commented Ungaro. "We continue our drive to return Cray to consistent profitability and market leadership. We are optimistic about the second half of 2006. However, we still face challenges in the timing of government funding cycles, planned product upgrades and customer orders and acceptances that could adversely affect financial and operating performance in the first half of 2006."