GOVERNMENT

Cray Inc. reported financial results for the third quarter ended September 30, 2004. The Company reported third quarter revenue of $45.9 million, compared to $63.8 million in the same period last year, up sequentially from $21.7 million in the second quarter 2004. GAAP net loss for the period, including unusual items, was ($111.0) million, or ($1.27) per share, compared to net income of $8.5 million, or $.10 per diluted share, in the third quarter of 2003. Unusual items for the third quarter totaled ($92.4) million, or ($1.06) per share. These items consisted of ($69.8) million related to recognition of a valuation allowance against a deferred tax asset, an ($8.0) million write-down of excess inventory, ($7.1) million of expense related to the previously announced restructuring, a ($5.3) million cost adjustment recognized on a fixed-price contract, ($1.3) million related to prepaid service, and the remainder related to supplier arrangement losses. Non-GAAP(1) net loss for the quarter was ($108.5) million, or ($1.24) per share. Non-GAAP net loss excludes $2.5 million in OctigaBay acquisition-related charges. Gross margins were unusually low, with approximately 60% of product sales in the quarter attributable to engineering contracts, including Red Storm and Cascade. Service revenue during the quarter was $11.1 million, with increased margins of 37.9%, up from 35.1% in third quarter 2003. Excluding the prepaid service charge noted above, operating expense of $23.5 million was up from $20.4 million in the same period last year, and flat sequentially. Operating expense is expected to trend down over the next two quarters. Despite the third quarter operating loss, the balance sheet remained strong, with $47.2 million of cash, cash equivalents and short-term investments at the end of the third quarter, up sequentially from $42.3 million in the second quarter; as well, the Company continues to carry no debt. "We have restructured the Company, including the executive team, to focus on execution with the goal of returning Cray to profitability as rapidly as possible -- the third quarter revenue improvement is a step in that direction," said Jim Rottsolk, CEO of Cray Inc. "We are particularly excited about delivering the first quarter of Sandia's Red Storm system and announcing general availability of both the Cray XT3 and Cray XD1 systems. With these two new products, we have considerably expanded our addressable market and overall market opportunity - we have already announced a number of important wins around the world." Additionally, the Company announced that full-year 2004 revenue is now expected to be between $155 and $165 million, relative to the previously indicated 2004 revenue outlook of under $200 million. "While shipments of both the Cray XT3 and Cray X1E systems will start in this quarter, due to a parts availability issue with key components, we will not ship sufficient new systems in time to generate as much revenue as planned," said Rottsolk. "We are excited about Cray's relative position in the market and the growth opportunity we have going forward. With launches of the Cray XD1 and Cray XT3 systems, we are again building momentum in the market. With the addition of the Cray X1E system, we will enter 2005 with the strongest HPC portfolio in the industry," added Rottsolk.