GOVERNMENT

Cray Inc. reported financial results for the quarter and year ended December 31, 2004. Revenue for the full-year 2004 was $148.9 million, compared to $237.0 million for 2003. GAAP operating loss for the year was ($144.3) million, compared to operating income of $19.1 million for the prior year. GAAP operating loss for 2004 includes $27.0 million of unusual items associated primarily with restructuring, write-down of excess inventory, and adjustments recognized on a fixed-price contract. Non-GAAP1 operating loss, which includes unusual items but excludes OctigaBay acquisition-related charges of $55.6 million, was ($88.8) million for the year. GAAP net loss for the year was ($206.3) million, compared to net income of $63.2 million for the prior year. Results for both years were significantly affected by changes in the treatment of a federal income tax net operating loss carry forward. Product gross margins for the year were significantly lower than 2003 due primarily to limited Cray X1 system sales, low margin engineering contract revenue, adjustments recognized on a fixed-price contract, and charges related to excess inventory and unabsorbed overhead. As planned, service revenue for the year was $49.7 million - compared to $62.0 million in 2003 - while service gross margins increased year-over-year to 38.9%, up from 34.2%. The Company reported operating expenses of $93.1 million for the year, compared to $75.7 million in the prior year. Operating expenses were higher than planned, particularly in the second half of the year, due to the cost of developing new products, the cost of implementing Sarbanes-Oxley compliance initiatives, and sales and marketing expenses associated with the ramp of three new products. The Company reported revenue for the fourth quarter of $39.2 million. GAAP net loss for the period, including unusual items, was ($36.9) million, or ($.42) per share. Non-GAAP net loss for the period, which also includes unusual items, but excludes charges related to the acquisition of OctigaBay, was ($29.7) million, or ($.34) per share. Unusual items in the quarter consisted of $4.2 million of additional adjustments to a fixed-price contract and $1.0 million of restructuring charges. In December, the Company announced the successful completion of an $80 million Rule 144A offering of 3% convertible senior subordinated notes - net proceeds were approximately $76.6 million. The Company ended the year with $87.4 million in cash and short-term investments. "Given limited Cray X1 system business, coupled with delays in new product introductions, 2004 was clearly a difficult year financially," said Jim Rottsolk, Chairman and CEO of Cray Inc. "Nevertheless, we achieved a number of important milestones critical to positioning Cray for long-term success. We introduced three new products, diversifying our product portfolio and significantly increasing our addressable market. We made major changes in the Company from top to bottom, with four new directors, important changes in senior management and a restructuring of our work force. We look to the challenges ahead with confidence." Outlook "We enter 2005 with the strongest High Performance Computing (HPC) portfolio in the industry. We have a real opportunity to grow the business and further demonstrate with customers the value of systems purpose-built for HPC" said Rottsolk. "We have set very aggressive targets for ourselves in 2005. While it is clear we will grow product revenue substantially over 2004, with several large opportunities currently in play, it is premature to provide specific guidance at this time. For example, today we received an order valued at over $30 million to continue building the Department of Energy's National Leadership Computing Facility at Oak Ridge National Laboratory. We are presently in the midst of a production ramp and are focused on getting our new products into and accepted by the market. Given the timing of deliveries and acceptances of large systems, we expect 2005 quarterly results to be uneven." Rottsolk continued, "Our near-term goal in 2005 is to drive top-line growth with our three new products and to execute operationally. We are working hard to improve product stability, increase margins, and keep operating expenses as low as possible." "We our confident we will achieve our long-term goal of top-line growth and sustained profitability. Critical to this strategy is continued progress on key new product development coupled with execution on the operating and sales fronts," added Rottsolk.